July 22, 2020 was a significant day for banks in the United States. On that day, the Office of the Comptroller of the Currency (OCC) noted in a letter that any national bank chartered in the United States can provide custody services for cryptocurrencies – finally clearing the way for banks to hold client’s digital assets as well as their traditional ones.
Before this time, only specialist firms could hold on to crypto keys and serve as crypto custodians for clients. Banks can now provide both fiduciary and non-fiduciary custodian services for clients. The OCC letter clarifies existing policy rather than creating brand-new policy but is nevertheless big news in the digital and crypto industry.
Many U.S. banks have been hesitant to dip their toes in the bitcoin and crypto water, citing compliance and regulations as reasons for not doing so as well as general lack of legal clarity. JPMorgan Chase was the rare example – offering banking services to crypto companies such as Coinbase and Gemini earlier in 2020.
This update, however, may heat up such activity in the United States. Abroad, more banks have launched crypto custody businesses based on greater regulatory clarity, and more will likely be expected to follow suit based on new activity in the United States.
Interestingly, the OCC is now led by Brian Brooks, a former executive at Coinbase, who as acting comptroller has already spearheaded several updates and reforms that would help crypto companies across the globe. For instance, a new national payments charter would allow start-ups in the crypto industry that provide payment service to bypass certain state licensing.
Pay attention to the fine print
Naturally, chartered banks will be required to implement “sound risk management practices” for cryptocurrency and encourages secure storage services, according to the OCC letter. In addition, the letter adds that both individuals and advisors should consider the use of a regulated custodian to prevent the loss of their private keys – not to mention critical access to crypto funds.
Any U.S. bank that chooses to enter into crypto custody will need to implement storage technology, which could spark smaller custodians that support the larger banks based on their customized, nimble technology. Ultimately, this could lead to more jobs and growth opportunities for banks and custodians alike – there may also be a number of mergers and acquisitions as banks purchase smaller companies based on their IT services alone.
Further, banks will be required to “effectively manage the risk and comply with applicable law” when providing crypto services, as with other services, according to the OCC letter.
Some questions remain
It remains to be seen how swiftly and fully change will take place. Banks will, for instance, need to determine how they will deliver crypto custodial services, as well as potential exchange transactions and execution, record keeping, tax services and more in relation to digital transactions. Risk management will certainly be a top priority.
All in all, the Office of the Comptroller of the Currency is recognizing the need for new technology, new ideas and new innovation as the financial markets continue to evolve. With the crypto industry’s market cap valued at about $285 billion, it is likely more and more banks will start clamoring for these customers.
Only time will tell, but a simple letter from the OCC has created a wealth of buzz already when it comes to the potential for new crypto custodians in the United States.