OCC lets US banks off the leash for much needed crypto-custody services

An explanatory letter of the OCC clarifies that banks can offer custody services for cryptocurrencies. Banks and central depositories were not envisaged when Bitcoin was designed, but they are an important part of the crypto economy. The advantage of banks over other crypto-depositories is that they are insured against hacks and insolvencies.

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US banks may begin to offer crypto-custody services

Due to a legal grey area, banks in the USA have so far been hesitant in dealing with cryptocurrencies. This could now change. As Forbes reported, the Office of the Comptroller of the Currency (OCC) has issued a letter that defines how banks can hold cryptocurrencies for their customers.

This is a major development in a field that straddles highly regulated institutional oversight and complex technology. The fact that the OCC is engaging with the cryptocurrency trend reveals however the importance of the emerging sector. 

OCC letter clarifies key terms

A major problem so far has been that cryptocurrencies are not physical goods. Digital assets can therefore not be “owned” physically. This raises the question of how banks should hold currency units whose movements are recorded on a decentralized ledger.

The OCC has stated in its letter that a bank that wants to keep cryptocurrencies in custody must manage the private keys to the assets for this purpose.

OCC Chairman Brian P. Brooks said: “From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today […] This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”

Banks in the crypto economy – curse or blessing?

For many, banks and cryptocurrencies do not go together. Originally, Bitcoin was designed to provide an alternative to centralized banks. In principle this is still possible. All you have to do is keep your private keys yourself. However, many owners of cryptocurrencies, especially institutional investors, make a conscious decision to deposit their assets with a service provider.

Whether they do so with a trading platform, a bank or a custodian specializing in cryptocurrencies is not important. With banks, they can at least be confident that their money is insured against a possible insolvency of the custodian, similar to the case with ordinary account balances.

In addition, it is easier to hold a regulated bank liable if the crypto-credit balance is lost. In the past, there have been frequent hacker attacks on trading platforms, often leaving the customers of the exchanges on the losing side. Many crypto services such as trading platforms and card providers rely on custody services. Instead of storing their clients’ funds themselves, they can mitigate the risk of hacks by working with banks.

The OCC’s letter reflects an awareness of these concerns as the primary motivation for offering crypto-custodial services. Emphasising in particular the security offered, while also pointing out the emerging potential for overlap with traditional custodial services. Though from the letter it is also clear that this represents a desire to keep banks up to speed within a rapidly changing field. 

International examples paved the way for the US 

One example of this is Bitwala, the German provider of crypto debit cards. The company works closely with Berlin-based SolarisBank, which manages the accounts of Bitwala customers. After the German government implemented the Fifth EU Anti-Money Laundering Directive and allowed banks to handle cryptocurrencies with it, SolarisBank was one of the first financial institutions to apply for a license as crypto-depositary. The EU is considering further regulation on the question of crypto assets and is expected to deliver a report on the subject next quarter.

Further afield, in South Korea, their largest bank KB Kookmin Bank is gearing up to offer crypto-custody services as well. While the service is not available yet, the evidence is clear that major financial players are keen to seize this trend. Clearly the OCC is following on the path of progress in allowing US banks to follow suit. US Banks may even be able to benefit from the experience of these international competitors, hopefully ironing out some of the technical issues inherent in the complex cryptocurrency field. 

Starting down the path to an uncertain future

The next step is to observe to what extent and with what innovations the large national banks respond to this new regulatory clarification. The dynamic nature of the industry suggests we are likely to see high levels of innovation from banks competing to attract crypto-friendly customers, particularly businesses holding crypto assets. However, we are also likely to see mistakes and blunders as the field is still developing. 

In the meantime we are excited to keep a close eye on this emerging financial field.

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(Featured image by madartzgraphics via Pixabay)

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First published in BeInCrypto Deutschland, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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