The OCC Guidance for Cryptocurrencies

On July 22, 2020, the Office of the Comptroller of the Currency (OCC) established Interpretative Letter 1170, which clarifies the national banks’ authority to provide custody services of cryptocurrency for all of their customers. This recently published guidance is just one of the current expansions made by the OCC in the context of modernizing the regulation of national banks.

Cryptocurrency Solutions – Background

“Cryptocurrency custody solutions” include modern storage and security systems applied to hold a large number of tokens. Custody for cryptocurrencies differs significantly from custody of other assets in that the cryptocurrencies are entirely electronic – they never exist in physical form. Risks and controls differ significantly from custody services for more traditional assets. The custody solutions are one of the newest innovations derived from the crypto world. The main function of cryptocurrency custody solutions is to safeguard cryptocurrency assets. In order to conduct any transaction or to access the crypto assets, the users are currently using private keys, which are complicated combinations of codes. However, these keys are extremely difficult to remember and can easily be hacked or stolen. Online wallets can be a potential solution for cryptocurrency custody, yet they can be quite vulnerable to hackers.

Another solution, also available for users, is storing the private keys offline, on a hard disk, or another device which has no connection to the internet. On the other hand, the users could still lose these types of physical keys, and in that case, the recovery of cryptocurrency assets might be impossible.

For individual crypto investors, losing their private keys is a risk and for the organizational investors, they might have increased risk.

OCC Interpretative Letter 1170

In its latest guidance, the OCC has defined the safekeeping and custody services designed for a broad range of customers’ assets (physical and digital). In this letter, the OCC has also explained that most of the basic and fundamental bank activities have supported its finding that providing cryptocurrency custody services is a modern system of traditional bank activities. The agency has determined that custody services for cryptocurrencies are an extension of traditional banking services and not a departure from those services.

This OCC guidance has also highlighted how the current financial markets which have become increasingly digitized. For this reason, banks need to adopt and implement new technology as well as finding the most innovative ways to serve the needs of their customers.

While the focus of this interpretative letter is on the banks’ authorization to safeguard the cryptographic keys related with cryptocurrency, the OCC has also detailed that “crypto custody services may extend beyond passively holding ‘keys.’” The OCC might be willing to allow a national bank to actively manage keys. The next step may be to allow a bank to manage cryptocurrency holdings as a trustee with discretion.

This can unquestionably be interpreted that the nationally chartered banks are authorized to get the power in providing cryptocurrency services to their customers.

How Many Banks Access the Crypto World?

There is still a lack of a precise definition of cryptocurrency in the federal banking regulations. Hence, this creates some unsettled vagueness for banks to inspire them in providing their services related to crypto.

Responding to this, the OCC has explained that the authority is moving forward to the national banks for providing crypto custody services in both capacities (fiduciary and nonfiduciary). The OCC also has stated that these kinds of activities should be performed in strict compliance with applicable federal, state and other laws.

An important factor to note is if a bank is interested in taking part in new crypto activities, then it must develop and implement guidelines that are compliant with the OCC guidance. These activities include the practices of risk management along with the overall business plans or strategies of that bank itself, including IT systems and security.

A bank considering activities in cryptocurrency should undertake a legal analysis to ensure that it performs all the proposed activities in accordance with applicable laws and regulations.

Another point which the OCC has confirmed in Interpretive Letter 1170 is that a national bank is allowed to provide the banking service to any selected legal business, including crypto-related business, as long as it can effectively manage all the risks by applying the corresponding controls to those risks.

Banks seeking to provide crypto services must establish proper systems for recognizing, measuring, controlling and monitoring all the potential risks of these activities. Banks must establish appropriate policies and procedures and apply them in their internal controls. They must also develop the management information systems that govern crypto custody services. The OCC expects these complete custody activities to include dual controls, division of duties and adequate accounting controls.

In the end, the OCC interpretative letter has clarified that all the guidance and conclusions applying to national banks are also applied equally to the federal savings institutions.

The Benefits of the OCC Guidance

Without any doubt, the OCC guidance is promising some benefits for the world of cryptocurrency. Here are the benefits:

There Will Be a Regulatory Approval Stamp

The interpretative letter published by the OCC has displayed a great understanding of the cryptocurrency market, which includes the complexities of the crypto assets’ custody. This recognition is notwithstanding the fact that many crypto companies have historically experienced a tough time in getting traditional banking services.

Regulators are rarely willing to break new ground, as they typically find it more appropriate to follow past decisions. By establishing a pro-crypto decision, the agency has taken a big step forward. The OCC may have made it easier for other cautious regulators to follow the trend.

Welcoming the New Investors to the Crypto World

The OCC letter has given permission to traditional banks to access the crypto custody market. This step will definitely make crypto custody services more widely available, more reliable and of course, cost-effective. All these features are welcome to the new wave of investors in cryptocurrency. Further than swelling the number of competitors in the crypto custody market, this interpretive letter will also create a second regulatory framework for crypto custodians.

This cryptocurrency custody is a highly technical business with a steep learning curve. Hence, we surely expect those banks to move carefully into the crypto world by partnering with some experts or get the crypto-native custodians. This OCC interpretative letter should give banks some confidence to begin the process.

Reducing Fraud by Allowing Banks to Serve the Crypto Companies

Even though reducing fraud is not the main point of the interpretative letter, a notable fact is that the OCC has explicitly clarified that national banks are allowed to provide traditional banking services to the crypto companies.

As mentioned above, since crypto-focused companies have had a hard time securing traditional banking services, this authorization will be a great development.

By allowing national banks to provide the crypto banking services, this interpretative letter will enhance a growing industry by encouraging development of crypto assets, reducing the risks and pushing the industry to move forward.

Wrapping it Up

With the issuance of OCC Interpretative Letter 1170, cryptocurrency has obtained access to the banking world. No matter what a bank’s risk appetite for crypto is, bank management must remain informed of what is happening in the crypto world.

In conclusion, the crypto industry continues to grow at a rapid pace, and this interpretative letter published by the OCC is the latest milestone in regulatory clarity and authorization. It should provide the tailwind for further development of cryptocurrencies and banks’ services to the cryptocurrency market.