On July 22, the Office of the Comptroller of the Currency (OCC) authorized US national banks to operate custody services for digital assets. Jonathan Gould ─ Senior Deputy Comptroller for the Treasury bureau tasked with regulating national banks ─ wrote on Wednesday that US banks can now provide “cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.” This is groundbreaking news for an asset class that has traditionally lacked federal regulatory clarity regarding institutional custodial services.
Until now, custodial services for digital assets have been primarily regulated at a state level, requiring firms such as Fidelity and Coinbase to apply for unique BitLicences or trust charters to operate those services in New York. Obtaining these licenses is an arduous task, with some companies reporting upwards of $100,000 in related expenditures and years-long efforts to be approved. Other companies, such as the crypto exchanges Kraken and ShapeShift decided to forego operation in New York in its entirety because of the licensing requirement.
With Wednesday’s letter, the OCC effectively laid the groundwork for the integration of digital assets into traditional financial service offerings provided by institutional banks. In doing so, the bureau clarified that established national banks may offer a more secure digital asset custodial service when compared to existing options, and that investment advisers may wish to use these banks when managing cryptocurrencies on behalf of customers.
In addition to the safekeeping of assets, the OCC letter also mentions use cases where a national bank “settles trades, invests cash balances as directed, collects income, processes corporate actions, prices securities positions, and provides recordkeeping and reporting services.” Many of these processes today are expensive and cumbersome for traditional banks, with common delays in security settlements and high operations costs. If federal banks can custody and more easily exchange digital assets, there is potential for a broader push towards DLT-based infrastructure adoptions aimed at improving these processes.
Self-executing smart contracts between buyers and sellers with transaction terms and counterparty information written into their lines of code could provide a potentially automated settlement given certain transaction criteria are met. For example, token-based settlement infrastructure such as the Utility Settlement Coin initiative created between UBS and Clearmatics in 2015.
Giving banks the option to custody digital assets and cryptocurrencies could also provide benefits to retail clients looking to receive a better interest rate on their savings. Each cryptocurrency operates on a distributed network with protocols that allow participants to validate transactions without a central counterparty or intermediary.
Banks can custody cryptocurrencies that operate on Proof of Stake (PoS) consensus protocols, where a participant’s ability to validate transactions is proportional to their holdings of the underlying cryptocurrency. Banks could then provide optionality to their clients to convert portions of their cash savings into the cryptocurrency, in turn passing back to them transaction validation rewards in the form of higher interest rates on their holdings. Coinbase, in May of this year, announced a similar staking rewards program to its users, offering a five percent interest on savings converted into the Tezos coin.
This is an exciting development for the digital asset space and a clear show of support from the OCC. It is worth mentioning that the OCC’s Acting Comptroller, Brian Brooks, previously worked as the Chief Legal Officer for one of the largest digital asset platforms in the world, Coinbase. We expect more guidance to come from the OCC in the following months and look forward to what it means for digital asset adoption. Capco is experienced at providing impact assessments of new regulatory requirements on banks existing infrastructure, and we look forward to discussing these interesting developments with our clients.