OCC on US Banks Offering Crypto Custody

This week marks a significant achievement in mainstream cryptocurrency adoption. On July 22, the Office of the Comptroller of the Currency (OCC) released an interpretive letter, delineating their stand about authorizing the U.S. national banks to provide cryptocurrency custody services to their customers. The OCC charters, regulates and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks.

In the letter, the OCC clarifies that the national banks are allowed to offer cryptocurrency custody services to their customers. Banks can now provide services to any lawful business, including crypto firms, provided they manage the involved risks and abide by the laws.

Firstly, the letter talks about the uniqueness of cryptocurrencies and compares it with fiat money and the money backed by underlying assets. The merits of cryptography and decentralization and the drawbacks of losing cryptographic keys are also discussed. Adoption of bitcoins in several retail outlets, followed by SEC backed Bitcoin futures fund and other crypto futures and options available for trading, found its place in the letter. The letter also mentions the role of a centralized cryptocurrency exchange in trading a decentralized currency along with the increase in the individual and institutional adoption of digital currencies.

The proposal from the banks to offer crypto custody services considers the idea of being the custodians of their customers’ cryptographic keys as a part of their existing custodian services, which the OCC acknowledges. According to OCC, the idea of the banks offering custodian services would prove beneficial in mitigating the irreparable losses if the keys are lost. Banks can deliver highly secure custody options both to individual customers and to the investment advisors who manage cryptocurrencies on behalf of their customers.

Next, the OCC outlines how crypto custody services are different from other types of custody offerings. Holding the cryptocurrencies in wallets would essentially means storing the associated cryptographic keys with the related transactions recorded on Blockchain. Consequently, the physical possession of the crypto-assets is not possible, and their transfer would be by using the cryptographic keys. In the letter, the OCC also emphasizes the threats involved in storing these keys in ‘hot’ wallets.

Further, the OCC agrees that offering custodian services is a natural fit for national banks as they have for long rendered various custody services such as safety deposit boxes. The OCC also agrees that national banks can offer secure digital document storage, retrieval, and collaboration of documents containing sensitive information as they are custodian services of the digital age.

The OCC also describes the fiduciary and non-fiduciary services that the banks can offer in their role as custodians. A bank acting as custodians for crypto assets in a non-fiduciary capacity such as trade settlements and invest cash balances and collect income can hold the keys that allow them to control and also transfer the customer’s cryptocurrency. In most of the circumstances, providing custody does not entail physical possession of the crypto-assets. In fiduciary capacity, the banks would enjoy the same powers as they currently have for other instruments such as – a trustee or as an administrator of an estate or as an investment advisor – provided they comply with the applicable laws.

The OCC further states that they will not prohibit banks from offering similar services as crypto-custodians provided they are capable of holding the assets and the assets are not deemed illegal in their operating jurisdiction. The OCC also concurs that all the conclusions are also applicable to federal savings associations (FSAs).

Finally, the OCC provides guidelines on the governance model for the financial institutions that offer crypto custody services. They suggest that a national bank or an FSA involving in new activities should engage in sound risk management practices that are aligned with the bank’s business plans and OCC guidelines. The financial institution offering custody services should keep the custody account records separate from their assets. To ensure that an asset is not lost or destroyed, the OCC recommends that the crypto-assets are managed under joint custody. 

They advise that the controls related to the settlement of transactions, physical access, and security need to be tailored in the context of digital custody. They advocate stringent security measures to be implemented by banks to mitigate hacking, thefts, and fraud. The OCC also feels banks must be aware of the unique technical characteristics of various cryptocurrencies to tailor the risk management processes for each currency. 

In conclusion, this letter is the beginning of the mainstream crypto adoption process. When experienced players such as banks are involved, cryptocurrencies will garner more attention, this time even for most conservative investors.