US Regulator, OCC, Authorizes National Banks and Federal Saving Institutions as Crypto Custodians.
Updated: Jul 23
Financial crime is a constant worry for all financial institutions (FIs). A recent study found that more than one-quarter of malware attacks in 2019 targeted FIs, with hackers seeking banks’ and customers’ funds as well as personal data like account numbers, PINs, addresses and payment card information. Such crimes are on the rise, too, with a 212 percent year-over-year increase in compromised credit cards in 2019 and a 129 percent jump in leaked credentials.
U.S. regulator, the Office of the Comptroller of Currency (OCC), allows federal banks and national savings institutions to officially custody cryptocurrencies for their customers. The statement released on July 22, confirms that any national bank or savings facility can now hold on to unique cryptographic keys of cryptocurrencies in their vaults pertaining to custody services.
According to the statement, the decision to allow banks to offer crypto custodial services follows a growing demand by investors to safely store their cryptographic keys, which, if lost, capitulates the value of the assets. This news opens up the field to large banks to provide these services, relieving current state-chartered crypto custodians such as Coinbase and Gemini.
Nonetheless, crypto custodial services differ from the traditional custody services banks offer, the statement explained. Given that the digital assets are not physical, digital wallets will be required to safely store the cryptographic keys.
The release, which comes a month after the OCC asked for public input on Crypto and DLT, further states that the increasing technological innovations in the financial world call for “banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers.”
A modern form of traditional banking activities
Discussing the new regulation, the author of the statement, Jonathan V. Gould, the Senior Deputy Comptroller & Chief Counsel, claimed that cryptocurrency custodial services Is a new form of already existing asset custodian businesses of national banks.
The OCC permits national banks and savings to hold their customers’ cryptocurrencies in both a fiduciary and non-fiduciary role. Banks holding crypto in a fiduciary capacity will need to manage them in the same way as they manage other assets while non-fiduciary capacity targets holding cryptographic keys that control the actual transfer of the cryptocurrency.
Manage your cryptocurrency risk
Brian Brooks, the current head of OCC and a former executive at Coinbase, however, warns on the risk management of custody services across national banks. Focusing on customer assets protection, Brooks said,
“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.”
The statement concludes by warning custodians to focus on risk management techniques, due diligence, and KYC/AML compliance as they begin the operations on holding crypto assets. No specific recommendation of customers was provided in the statement with banks open to deal with crypto institutions, as recently seen with JPMorgan onboarding Coinbase and Gemini.
This, however, should be done with the thought that cryptocurrencies do hold their risks and challenges. It states,
“A national bank or FSA engaging in new activities should develop and implement those activities consistent with sound risk management practices and align them with the bank’s overall business plans and strategies as set forth in OCC guidance”.