The relationship between banks and cryptocurrency in the United States has been as complicated as the concept of “money” itself. But today’s interpretive letter from the Office of the Comptroller of the Currency (OCC) may be changing all of that.
The OCC serves to charter, regulate and supervise national banks. Today’s OCC letter clarifies that national banks have the authority to provide fiat bank accounts and cryptocurrency custodial services to cryptocurrency businesses. This clarification from the OCC may open the doors for larger financial institutions to be more comfortable providing traditional bank accounts to cryptocurrency companies, as well as actually provide custodial services for customers’ private keys.
In its letter, the OCC acknowledged the difference between custodial services for fiat money versus cryptocurrency, noting that because digital currencies exist only on the blockchain or distributed ledger, there is no physical possession of the instrument. Therefore, a bank “holding” digital currencies on behalf of a customer will take possession of the cryptographic access keys to that unit of cryptocurrency.
“From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today,” said Acting Comptroller of the Currency Brian P. Brooks. “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.”
And while there are differences between fiat and cryptocurrency, the need to protect one’s financial wealth is the same. Currently those holding cryptocurrency can keep their cryptocurrency in a digital wallet, with an exchange or for higher net worth individuals, a Trust Company. The OCC’s statements are incredibly helpful in providing assurances to banks that they can pursue this line of cryptocurrency custodial service.
Industry players including Gemini, a regulated cryptocurrency exchange and Anchorage, a digital asset custodian, agree this can be good for the industry.
“Today’s forward thinking announcement by the OCC validates Gemini’s long standing approach to custody. Gemini has built an institutional-grade custody solution to address the unique challenges of storing digital assets, that’s regulated by the NYDFS, and serves many institutional partners. A regulated solution provides the best option for the safety and security of clients’ crypto assets,” said Noah Perlman, Chief Compliance Officer, Gemini.
Nathan McCauley, CEO of Anchorage, which provides digital asset custodian services for institutions said, “The OCC letter is a positive development for the entire crypto industry. A lack of regulatory clarity has been a big roadblock to more institutional activity in crypto, and major pronouncements like this help move the needle.”
However, McCauley cautioned, “Digital asset custody presents more than regulatory challenges. It is highly technical, often bespoke work with no easy corollary in traditional finance.”
In addition, while the OCC will permit national banks to custody cryptocurrency, for the time being, the letter does not expand FDIC insurance coverage to cryptocurrency.
The letter also reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”
Most cryptocurrency businesses and exchanges rely heavily on the banking rails for customers to fund their accounts with fiat to exchange for cryptocurrency. However, cryptocurrency companies have long struggled to find banking partners because of the “high risk” nature of cryptocurrency. In 2017, JPMorgan’s CEO Jamie Dimon even labeled bitcoin as a “fraud” but now JP Morgan banks major cryptocurrency companies including Gemini and Coinbase.
There is evidence that cryptocurrency is not actually used more often for money laundering or illicit crimes than fiat currency and many banks have already put the compliance and legal guardrails in place to safely bank cryptocurrency companies. Silvergate Bank, for example, was one of the first banks to provide fiat bank accounts to major cryptocurrency companies and exchanges. Cryptocurrency companies have routinely attempted to maintain multiple banking relationships to diversify the risk of losing an account.
In many ways cryptocurrency is actually better for fighting money laundering and illicit activity. Jonathan Levin, Co-Founder and Chief Strategy Officer of Chainalysis, a leading cryptocurrency tracing firm, explains this benefit. Levin stated “Every cryptocurrency transaction is recorded on a public ledger, making it inherently transparent. This enables us to quantify how much of all cryptocurrency activity is associated with crime…That just isn’t possible with cash and other traditional forms of value transfer.”
Interestingly, the letter notes that “Fiat money refers to instruments that do not have intrinsic value” and that “Government-issued currencies, including the U.S. dollar following abandonment of the gold standard, are traditional fiat money.”
The OCC’s comments may help give other banks the confidence they need to provide banking and custodial services to the often misunderstood cryptocurrency industry.