The year 2020 has seen an increase in banks embracing cryptocurrency services and positioning itself in this disruptive space.

Crypto custody solutions are one of the latest innovations to come out of the cryptocurrency ecosystem. Put simply, they are independent storage and security systems that are used to hold large quantities of tokens.

These emerging asset class has been attractive to various client segments including alternative hedge fund managers, endowment funds, among others. Institutional clients are looking to established custodians to secure these assets for various reasons, one being regulatory compliance.

Pursuant to, the US Department of the Treasury’s Office of the Comptroller of the Currency (OCC) recently received response from various banks after seeking comments on potential rules and regulations on bank digital activities.

This is to ensure that banks and financial institutions have a regulatory and supervisory framework that enable them to adapt to rapidly changing trends and technology developments to meet customer needs.

“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,” Acting Comptroller of the Currency Brian P. Brooks, said in the OCC’s statement.

What it Means to US Banks?

The OCC’s custody letter clarifies that financial institutions, that offer crypto custody solutions, need to abide by certain responsibilities.

According to the OCC’s interpretive letter, those banks that wish to offer crypto asset custody services, must “include a review for compliance with anti-money laundering rules.” Also, banks should have “effective information security infrastructure” to curb hacking, banking fraud and theft.

OCC noted that banks must know that different cryptocurrencies may have different technical characteristics. Reply from various banks indicated their framework for adhering to AML/CFT requirements.

For example, Silvergate Bank, a California-based Federal Reserve member bank, is one among those to submit letter in response to OCC’s public comment request.

In its response letter, the bank stated that, it complies by providing infrastructure solutions and services to the cryptocurrency industry with “specialized compliance capabilities” and a skilled management team.

“We recognize friction is necessary to achieve compliance and regulatory obligations as it exists to provide for the safe and sound movement of funds and to attempt to limit illicit behavior including, for example, Know Your Customer/Anti-Money Laundering and fraud checks,” the bank said.

The letter by the US regulator is a more positive and progressive move by showcasing pro-crypto stance, as most regulators rarely break new ground. This has made it easier for other regulators to follow the suit.

This has become a big deal for US banks as:

It will bring-in new crypto investors

Traditional banks can enter the crypto custody market, making the service available to wider custodians. Cryptocurrency custody services will bring a new wave of investors into the space for the reason that it is more trusted, and low-cost.

It reduces fraud by allowing big banks to service cryptocurrency firms

It solves the problem for crypto-focused companies that have a difficult time procuring traditional banking services. JP Morgan has been the only large bank providing banking services to crypto exchanges – Coinbase and Gemini.

The letter clarifies a new level of maturity for the fast-growing industry, reducing frauds, speeding-up the growth and pushing the crypto industry forward.

Foreseeing The Future

The letter from OCC has been a latest milestone in the cryptocurrency industry providing with regulatory clarity and approval.

Also, institutional investors have viewed cryptocurrency custody solutions as a bridge between the traditional institutional investment and shifting cryptocurrency space.

Regulatory clarity and risk compliance are some of the uncertainties and issues that pose a challenge for custodians looking to develop a proposition in this market.

Given the market interest, custodians must look to collectively overcome these issues and consider their capabilities related to cryptocurrency servicing.

Sources: Regulations.gov, OCCLetter, SilvergateBank.

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About the author

Sujha Sundararajan

Contributing Author

Sujha has been writing and reporting on cryptocurrencies and blockchain technology developments since 2014. Her work has appeared in CoinDesk, CCN, EconoTimes and Fintech News Malaysia. She is also an accomplished Indian classical singer and loves baking cakes.