The Trump administration’s green light for national banks to offer custody services for cryptocurrency will likely drive a new wave of financial technology partnerships to tackle significant cybersecurity and operational challenges.
In a recent letter, the Office of the Comptroller of the Currency called virtual currency custody, including safekeeping, settlement and reporting, a modern form of “traditional banking activities.” The agency’s July 22 announcement is the latest move by acting Comptroller of the Currency Brian Brooks, formerly top lawyer at Coinbase Inc., to help the crypto industry integrate into banking’s mainstream.
Collaborations are most likely to occur via partnerships or white label services branded under a bank’s name but actually provided by a crypto custody company, said Kari Larsen, partner at Perkins Coie LLP in New York. Banks also may acquire crypto custody providers, she said.
“The door’s just been opened for funds, institutional players, and investment advisers” to expand their relationships to crypto, Larsen said.
There are a number of regulatory considerations that still need to be addressed for bitcoin or ethereum to be listed alongside stocks and bonds on a bank customer’s monthly statement, practitioners and industry executives said. Keeping cryptographic keys to digital assets secure from hacking, theft, fraud, or loss would be chief among those requirements.
“There’s a reason custody has emerged as its own segment of the crypto industry–safely storing digital assets is very hard to do,” said Jake Chervinsky, general counsel at Compound Labs, Inc., a San Francisco-based cryptocurrency company.
OCC Sees Demand
The OCC’s interpretive letter didn’t specify the cybersecurity measures banks should take to safeguard crypto keys, but said risk management procedures should take account of the “different technical characteristics” of various crypto assets. The agency also said banks should consult with their OCC supervisors before offering crypto custody services.
The agency’s decision to allow banks to hold crypto is “a recognition that tens of millions of Americans are invested in this asset,” Brooks said Thursday at a virtual conference hosted by the American Bankers Association.
The OCC has received questions from a number of banks about holding digital assets, which are owned by an estimated 30 to 40 million Americans, he said
Banks will first need to assess whether there’s enough customer demand to justify the operational and compliance costs that go along with custodial services, Chervinsky said. The stakes are high, too.
“A single mistake can result in customers’ funds being lost forever,” he said.
Crypto companies like Coinbase that offer a full suite of custody services to customers–including handling fiat currency–must obtain money transmitter licenses on a state-by-state basis.
New York-regulated crypto companies must meet requirements to securely store…