5 Highlights From The Comptroller’s Announcement Allowing Banks To Custody Cryptocurrency
On July 22nd, the Office of the Comptroller (the “OCC”) published a letter announcing that national banks’ and federal savings associations’ could provide cryptocurrency custody services for their customers:
It’s no coincidence that Bitcoin rallied 6%+ in the four days since the letter was released. It’s also no coincidence that the announcement comes less than two months after former Coinbase exec Brian Brooks was appointed as Acting Comptroller of the Currency.
The OCC recognized that financial markets are becoming increasingly digitized, and cryptocurrency is simply an innovative part of that trend. As such, banks should be able to hold cryptographic keys for cryptocurrency wallets. The 11 page letter made numerous observations of interest, five of which we highlight below:
1. The OCC Recognized That Cryptocurrency Custody Services We’re Already Being Provided By “Specialist Firms”
The OCC noted that firms like Coinbase were already providing custody services via state licenses such as a trust charter. So the announcement was simply enabling larger, regulated financial companies to enter the fray and provide the same safekeeping services they were already providing for other assets like stock certificates.
2. The OCC Defined “Fiat Money” As “instruments that do not have intrinsic value”
The OCC recognizes that, while fiat money has no intrinsic value, individuals and institutions are willing to use it for purposes of purchase and investment because they are issued by a government. The OCC further recognized that some cryptocurrencies have similar characteristics as fiat money, while others like stablecoins, are backed by assets like fiat money or commodities.
3. The OCC Recognizes That Cryptocurrency Is Defined By Two Technologies
The first defining technology of cryptocurrency is advanced cryptography, which is used to protect the information and make it unmutable. The second underlying technology is the distributed ledger database which stores the information across multiple computers, preventing fraud.
4. The OCC Recognizes That There Are Multiple Factors Driving Demand For The Custody Services
The first driver of demand is the fact that the underlying keys are irreplaceable, so custodying the assets protects the owner from losing access to their cryptocurrency due to misplacing their keys. Second, banks are more secure then many existing crypto exchanges which have proven vulnerable to hacking and theft. As such, investment advisers may prefer rnational banks to to existing custody options.
5. The Letter Ended By stating That “A national bank should consult with OCC supervisors as appropriate prior to engaging in cryptocurrency custody activities”.
While the OCC noted that “a key escrow service is a functional equivalent to physical safekeeping”, it also noted that there are differences that banks need to address in their custody agreement. Noted differences include “the treatment of forks..”, and the fact that “.. .different cryptocurrencies may have different technical characteristics and may therefore require risk management procedures specific to that particular currency.”
While the OCC letter allows banks to custody cryptocurrency, it also highlights numerous requirements that will take most banks a while to address. So while the long term impact of the announcement is highly positive, the short term impact is probably limited.
But to anyone paying attention, the OCC letter is clearly another notable step in the evolution of cryptocurrency as a new asset class embraced by the masses.