By now, most of us have at least heard of cryptocurrency. We know that it is a digital or virtual currency that is secured by cryptography, making it nearly impossible to counterfeit or double-spend. One of the most defining features of cryptocurrencies is the fact that it is decentralized, rendering it theoretically immune to interference or manipulation by the federal government. Afterall, it is hard to regulate something that only exists electronically on the distributed ledger in which it is recorded, rather than in any physical form such as real currency. Last year, clarification was released relating to national banks and federal saving associations and their ability to provide custody services for crypto assets. Was this a change from previous policy and what does this mean for banks?
The OCC issued a public letter on July 22, 2020, clarifying that national banks and federal saving associations have the right to take custody of cryptocurrency assets. The important thing to keep in mind here is that this isn’t really new information or a change in policy. Cryptocurrencies such as Bitcoin are simply a newer version to an existing concept when it comes to safekeeping and custody services. Cryptocurrency is a new playing field for many financial institutions so it’s no surprise that uncertainty surrounded this topic. The OCC released the public letter in response to requests for clarification on the matter. In fact, according to the OCC, banks have had the ability to take custody of digital assets since 1988.
While providing safekeeping and custody services is not an unusual service among national banks providing such services for cryptocurrency left many banks unsure and reluctant. If we’ve learned one thing in the world of compliance, it is to never assumer. So, the OCC clarified that financial institutions providing custody services, even for cryptocurrency, is perfectly acceptable and should be consider nothing more than a modern method to a traditional service. When custody services are provided for cryptocurrency, it involves holding unique cryptographic keys which can be used by the customer to access units of cryptocurrency in crypto wallets. It also involves providing other related services such as enabling a customer to engage in currency exchange transactions, transaction settlements, trade execution, record keeping, valuation, tax services, and reporting. Although custody services for cryptocurrency is not a change in policy, the challenges surrounding cryptocurrency and cryptocurrency-related services can be unique. Therefore, it is crucial that banks understand the guidance and expectations when dealing with cryptocurrency. Banks should begin with an evaluation of risk and engage in practices that align with their overall business plan and strategy. This includes developing and implementing a program for cryptocurrency custody services that will ensure consistency between the bank’s overall risk profile and the bank’s sound risk management practices. Developing and maintaining internal controls is another step which will contribute to successfully complying with not only the bank’s internal requirements, but also all applicable laws and regulations.
Reference: Interpretive Letter 1170, Authority of a National Bank to Provide Cryptocurrency Custody Services for Customers (occ.gov)