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The relationship between cryptocurrency and traditional banks isn’t exactly a smooth one, which is understandable considering that digital assets such as Bitcoin (BTC) and Ethereum (ETH) were once feared for their potential to disrupt traditional banking. However, it now appears that cryptos are slowly being integrated into the banking system with a U.S. regulator recently giving its nod for banks to offer cryptocurrency custodial services.
In a letter dated July 22, 2020, the Office of the Comptroller of the Currency (OCC) clarified that banks can provide fiat bank accounts and cryptocurrency custodial services to crypto-related businesses, according to Forbes. This clarification could spur further acceptance and adoption of cryptocurrencies as banks will now be able to open accounts for crypto-firms and even provide custodial services for digital assets for their clients.
“We conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency,” OCC’s senior deputy comptroller and chief counsel wrote Jonathan Gould wrote in the letter, according to AmericanBanker.
The letter also answers lingering doubts banks might have on whether they are allowed to offer service to those who engage in crypto-related businesses. “This letter also reaffirms the OCC’s position that 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,” Gould added.
The OCC’s letter reflects its stance on recent technological developments including digital currencies. “The OCC recognizes that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers,” Gould wrote. “By providing such services, banks can continue to fulfill the financial intermediation function they have historically played in providing payment, loan, and deposit services.”
However, the OCC is aware that custodial service for cryptocurrencies is a bit different compared to custodial service for traditional assets. For instance, the bank, as a custodian, might be in possession of the cryptocurrency key and not the actual crypto-asset itself. Given this variation, the OCC wants banks to put in place systems that provide adequate security to the digital assets they guard.
Those who offer custodial services for cryptocurrency “must conduct these activities in a safe and sound manner, including having adequate systems in place to identify, measure, monitor, and control the risks of its custody services,” Gould wrote. “A custodian’s accounting records and internal controls should ensure that assets of each custody account are kept separate from the assets of the custodian and maintained under joint control to ensure that an asset is not lost, destroyed or misappropriated by internal or external parties.”
