This article was originally published by Bloomberg Law on August 20, 2020.
Federal banks and thrift institutions can now offer cryptocurrency custody services for customers, according to the Office of the Comptroller of the Currency. Withers attorneys break down key takeaways from the announcement, including how private clients with crypto assets will benefit when it comes to current and estate planning purposes.
Federally chartered financial institutions can begin offering cryptocurrency custody services for customers, an important change from the Office of the Comptroller of the Currency that will greatly impact what services federal financial institutions can offer in this rapidly evolving industry.
The OCC’s Interpretive Letter #1170 is a major development for the crypto industry. Previously, custody has been handled mainly by specialist firms, such as Coinbase, operating under a state license, like a trust charter, to offer these types of services to larger investors.
Now, mainstream, regulated financial companies can expand into this area, creating increased security for mainstream customers.
In announcing the change, Acting Comptroller Brian P. Brooks— formerly chief legal officer for Coinbase — said that 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.”
Providing cryptocurrency custody services is now considered a modern form of traditional bank activities arising out of custodial services.
Crypto custody services can now extend beyond passively holding keys and crypto wallets. The OCC has previously issued interpretive rulings concluding that banks may escrow encryption keys used in connection with digital certificates, but this new guidance extends prior guidance.
Importantly, providing custody services for cryptocurrency will now be permissible “in both fiduciary and non-fiduciary capacities.”
However, the OCC explained that providing custody for cryptocurrencies will differ in several ways from other custody activities.
A national bank holding cryptocurrencies in a fiduciary capacity—such as a trustee, an executor of a will, an administrator of an estate, a receiver, or as an investment advisor—would have authority to manage them in the same way banks can manage other assets they hold as fiduciaries, based upon the discretion granted by the client. Importantly, a trustee will still be subject to the terms of the original trust under which they operate.
A bank providing custody for cryptocurrency in a non-fiduciary capacity will provide safekeeping for the cryptographic key, allowing for the control and transfer of the customer’s cryptocurrency.
Fiduciary and Non-Fiduciary Capacities
Providing custody for cryptocurrency does not entail physical possession of the cryptocurrency. Instead, a bank “holding” digital currencies on behalf of a customer takes possession of the cryptographic access keys to that cryptocurrency unit. The bank authority to provide safekeeping services now extends to such digital activities.
Thus, national banks can escrow encryption keys used with digital certificates because a key escrow service is deemed the functional equivalent to physical safekeeping. Holding the cryptographic access key to a unit of cryptocurrency is an electronic equivalent of traditional safekeeping activities.
Since national banks are authorized to perform safekeeping and custody services for physical assets, national banks can now provide those same services via electronic means (i.e., custody of cryptocurrency).
Various Custody Service Models
Banks can now choose various ways of providing cryptocurrency custody services. Services they provide can include “facilitating the customer’s cryptocurrency and fiat currency exchange transactions, transaction settlement, trade execution, recording keeping, valuation, tax services, reporting, or other appropriate services,” according to the Interpretive Letter.
Banks can store copies of customers’ private keys while allowing their customers to keep a copy. Such services are similar to traditional safekeeping, in which the customer retains direct control over their own key.
In contrast, a bank could allow a customer to transfer cryptocurrencies directly to the control of the bank, generating new private keys held by the institution on behalf of the customer. Such services may be closer to traditional custody services in which the customer does not retain direct control.
Other possible custody models are also deemed allowable, though the letter does recommend that banks discuss initiatives with regulators before launching.
Overall, this clarification applies to national banks and federal savings associations regardless of size and is consistent with many state initiatives which already authorize state banks or trust companies to provide similar functions.
Banks Can Provide Services to Cryptocurrency Businesses
Further, national banks “may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.” Thus, crypto exchanges can now also establish relationships with federal, not just state, financial institutions.
Since taking the helm this summer, Brooks has proposed numerous reforms benefiting crypto companies, including a national payments charter that allows crypto startups to bypass a state-by-state approach of acquiring money transmission licenses when providing payment services.
The key to this new interpretive letter is that it allows federal financial institutions to provide fiduciary services for crypto assets, creating a more robust capability in the space. And, financial institutions as trustees can now include digital assets among those they oversee, providing better protection of crypto assets at the owner’s death. Individuals can now rely on federal banks to safeguard their crypto assets, both for current and estate planning purposes.