July 31, 2020
Authored by: Benjamin Saul and Samantha Goldberg-Seder
On Wednesday, July 22, 2020, Acting Comptroller of the Currency Brian Brooks reaffirmed his interest in being seen as an agent of modernization in a letter clarifying the authority of national banks and federal savings associations to provide cryptocurrency services for customers.
The letter from the Office of the Comptroller of the Currency (“OCC”) discusses the increasing acceptance of cryptocurrency, and especially Bitcoin, as a method of payment and form of investment. It acknowledges a correlating growing demand for “safe places, such as banks, to hold unique cryptographic keys associated with cryptocurrencies on behalf of customers and to provide related custody services.” Three reasons – a safe way to hold cryptocurrency keys; a secure storage service; and custodian services for assets managed by investment advisors – are cited in the letter as driving the demand for cryptocurrency custody services.
The safekeeping services are described as a modernization of special deposit and safe deposit boxes, falling within “longstanding authorities to engage in safekeeping and custody activities.” Thus, “the authority to provide safekeeping services extends to digital activities and, specifically, that national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”
The letter additionally notes that such activities should be implemented “consistent with sound risk management practices and align them with the bank’s overall business plans and strategies as set forth in OCC guidance.” Any cryptocurrency custody services must be conducted in a safe and sound manner, as with all other activities performed by national banks and federal savings associations, and such activities will be reviewed by the OCC as part of its ordinary supervisory processes. The OCC also acknowledges that certain products, customers, and systems will present different risks and the financial institution should consider these risks in context.
While the OCC letter is targeted at federal financial institutions regulated by the OCC, efforts continue in various states. New York recently announced a proposal to push a streamlined version of its BitLicense cryptocurrency licensing option targeted at startups and other early-to-mid-stage companies; Wyoming has passed legislation allowing state-chartered banks to opt-in to providing digital asset custody services; Hawaii has proposed legislation regulating digital assets and authorizing banks to hold digital assets in custody; and Rhode Island has also proposed legislation that would regulate virtual and digital assets and establish depository banks for those purposes. We expect major financial institutions and startups alike will capitalize on these recent announcements and look forward to learning about new innovations in the crypto space.