American Regulators Allow US Banks To Offer Cryptocurrency Custodial Services

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    The United States Office of the Comptroller of the Currency (OCC) has swung open the doors to allow all nationally chartered American banks to provide custody services for cryptocurrencies — setting off a spectacular bull run in the markets.

    In a public letter dated July 22, Senior Deputy Comptroller and Senior Counsel Jonathan Gould wrote that any national bank can hold onto the unique cryptographic keys for a cryptocurrency wallet, clearing the way for national banks to hold digital assets for their clients.

    “As of June 2020, a majority of states have adopted laws and regulations pertaining to cryptocurrencies. Recent survey evidence suggests that almost 40 million Americans own cryptocurrencies and Institutional investors have also heavily invested in cryptocurrencies.”

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    “….we conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.”

    “These services are in demand for several reasons. First, because the underlying keys to a unit of cryptocurrency are essentially irreplaceable if lost, owners may lose access to their cryptocurrencies as a result of misplacing their keys, resulting in significant losses of value.”

    “Second, banks may offer more secure storage services compared to existing options. 19 Third, some investment advisers may wish to manage cryptocurrencies on behalf of customers and may wish to utilize national banks as custodians for the managed assets.”

    The OCC stated that they recognize that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers.

    And added that by offering such services, banks fulfil the financial intermediation function they have historically played in providing payment, loan and deposit services. Through intermediated exchanges of payments, banks facilitate the flow of funds within our economy and serve important financial risk management and other financial needs of bank customers.

    More from the letter:

    “Providing such services is permissible in both non-fiduciary and fiduciary capacities. A bank that provides custody for cryptocurrency in a non-fiduciary capacity would essentially provide safekeeping for the cryptographic key that allows for control and transfer of the customer’s cryptocurrency. In most, if not all, circumstances, providing custody for cryptocurrency will not entail any physical possession of the cryptocurrency. Rather, a bank “holding” digital currencies on behalf of a customer is actually taking possession of the cryptographic access keys to that unit of cryptocurrency.”

    “The OCC has found that the authority to provide safekeeping services extends to digital activities and, specifically, that national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”

    Holding the cryptographic access key to a unit of cryptocurrency is an electronic corollary of these traditional safekeeping activities. The OCC’s regulations explicitly authorize national banks to perform, provide or deliver through electronic means and facilities any activities that they are otherwise authorized to perform.

    “Because national banks are authorized to perform safekeeping and custody services for physical assets, national banks are likewise permitted to provide those same services via electronic means (i.e., custody of cryptocurrency).”

    One interesting caveat, however, as the OCC notes that different cryptocurrencies may also be subject to different OCC regulations and guidance outside of the custody context, as well as non-OCC regulations. And a national bank should consult with OCC supervisors as appropriate prior to engaging in cryptocurrency custody activities. The OCC will then review these activities as part of its ordinary supervisory processes.