Expert Takes – US Banks Can Now Offer Crypto Custody Services

News, Opinion, Regulation | July 29, 2020 By:

The US regulator of national banks has issued an interpretative letter giving banks the all-clear to hold cryptocurrency assets on behalf of its customers. The letter clarifies the stance of the Office of the Comptroller of the Currency (OCC) that bank custody services, which have long been understood to include holding digital assets, can extend to cryptographic keys and other crypto-related assets.

The decision by the US Office of the Comptroller of the Currency to allow nationally chartered banks in the US to provide custody services for cryptocurrencies is another significant affirmation of the legitimacy of crypto, which is likely to spark a race among US financial institutions to build, or acquire secure custody solutions.

Below are some expert insights from the FinTech and crypto industry on the news and the preparedness of US regulators.

Dave Hodgson, Chief Investment Officer of NEM Group and Managing Director of NEM Ventures, said:

“The move by the US OCC is a positive one and Brian Brooks, Acting Comptroller of the Currency, was no doubt instrumental in this decision. While a lot of the current crypto community may not wish to custody assets with a traditional bank, it is a big step forward that Federal/National banks are now allowed to custody digital assets–as their State chartered counterparts have been able to for some time now. At a retail level, the mass market is more comfortable with traditional banking than with private keys and crypto exchanges, so this decision should further support growing levels of adoption.

The announcement is also likely to spur innovation in both new retail and institutional financial products and services, which may well lead to increased M&A activity. More importantly, it indicates a positive stance on cryptocurrency by the US government, it could even be viewed as the first step towards a Digital Dollar based on Blockchain/DLT.

From an institutional perspective, this decision helps to affirm the legitimacy of cryptocurrency and enables more traditional institutions to utilize their existing relationships, security processes, and management tools to gain exposure to the best performing asset class of the decade.

There are some potentially negative implications for surveillance and control by state actors, but on the whole, the step is a positive one for the space.”

Seamus Donoghue, VP Sales and Business Development at METACO said: 

“The announcement by the Office of the Comptroller of the Currency (OCC) that all nationally chartered banks can provide custody services for cryptocurrencies is the biggest news of the year in crypto markets and a complete game changer. With the stroke of a pen, the OCC has changed the landscape for crypto custody in the US and globally. Enabling US banks to offer crypto custody is another huge step towards mainstream institutionalization and retail access to cryptocurrencies.

This change will be equally groundbreaking for incumbent crypto custodians. They have so far been able to grow their market share and offering without the pressure of competition from incumbent regulated banks. These institutions possess the extensive client networks and robust balance sheets that are so critical to provide investors comfort that the custodian has the financial strength and sustainability to keep their assets safe come what may.

A large number of US banks have been experimenting with cryptocurrencies and digital assets without a clear roadmap about the business case or timing for productive deployment–due to the lack of regulatory clarity. That has now decisively changed and looks likely to set off a race among the banks, particularly given this week’s announcement that international Standard Chartered Bank has invested in and partnered with the Swiss technology company METACO and is building a Digital Asset Custodian, to launch crypto custody offerings.

As the race heats up, the question of speed to market and “build or buy” will no doubt be a subject of much focus. One can expect a significant increase in M&A, with a focus on the larger incumbent digital native custodians by banks that want to jump start their business, market share, and also acquire the technical know-how required to manage a digital custodian. For those crypto custodians that are not acquired and don’t have significant balance sheets, this is an existential change and will drive further vertical consolidation, as we have seen with trading firms acquiring custodians in an effort to survive and compete with the new challengers.

We are moving to an exciting phase for the markets as the foundation for digital asset markets moves from the fringes to become a core offering of financial markets. Overall it is great news for the crypto asset class and portends a major transformation of the crypto landscape.”

Nicholas Pelecanos, Head of Trading at NEM Ventures said:

“The news from the OCC is fundamentally bullish and should lay the groundwork for more development in the space and demand for crypto assets. Regulations may be frowned upon by some of the more traditional cryptocurrency participants, but in fact, for some time it has been the missing link required in building a healthy fast-growing ecosystem. The US has traditionally been the powerhouse for technical innovation over the last century but has largely been kept out of the crypto market by unclear regulation and almost no banking services. Now with clarity around the OCC’s position on national banks being able to provide custody services and banking services to cryptocurrency businesses the link between innovation and real word business may have been solved.

This is another significant development in the crypto industry while volumes are still below historical highs. In 2017, when the total market capitalization of the space approached 1 trillion USD the innovative ideas surrounding the space were bottlenecked by two primary factors: scalability and regulation. In 2020 it appears both of these inhibitors are close to being solved, so where does that leave the valuation of the space? In my mind, it’s very bullish.”

Ashish Singhal, CEO and Co-founder of CRUXPay and, said:

“This is a huge move, and it may position the US as more of a leader in this space. So far, Asian countries have taken the lead, and the focus was shifting more to that region, but this move may bring back a lot of investors and other stakeholder confidence into the US. It is also possible that this will spur an M&A boom as US banks acquire digital asset custodians, especially considering most of the banks’ growth over the years have come from M&A and it is generally their preferred mechanism of entering new businesses.

Overall and even with this development, US regulators are still in a tricky position. The mounting pressure from the other countries leading this space and the growth of the industry will push regulators to supervise crypto. Lack of regulation has been the most significant barrier to institutional adoption in the US, followed by a lack of tools that will help institutional investors track and operate their portfolios better. If regulation becomes clearer, then a large number of companies will focus on building tools for institutional investors.”

Patrick Campos, CSO at Securrency, said:

“We take a somewhat different view of the way in which US regulators have approached digital assets in that we see their approach as being highly supportive of innovation but with prudential emphasis on doing things the right way. The step taken here by Mr. Brooks and his staff at the OCC is very consistent with this philosophy: the custody of cryptocurrencies by banks will bring this activity within an appropriate regulatory structure, thereby serving to both promote the technology and mature the industry. These are good outcomes.

We can reasonably anticipate an enhanced institutional interest in acquiring technologies to support this business line, and, consistent with our view that this move by the OCC is well-calibrated to accelerate the maturation of this space, we expect that the winning technologies in this sweepstakes will be those that are most secure, robust, and institutional-grade, as well as the most convenient and responsive to the needs of the market.

On the question of the preparedness of US regulators to supervise crypto – we have never bought into the caricature of US securities and banking regulators as luddites with their heads in the sand. These regulators are not only quite deep in their understanding of the technology but are, even more importantly, intellectually-curious about these developments to a high degree. It goes beyond even just a willingness to listen to industry and learn – we know first-hand that many of these regulators dive deeply into the technology as individuals and have set up both internal and outward-facing programs to allow them to learn more. This is particularly true at the CFTC and the SEC, and the presence at the OCC of Mr. Brooks, a very sharp regulator who comes from the crypto-trading world, significantly underscores this point.

Both industry and the regulators need to continue to take real steps toward each other. While we encourage greater regulatory flexibility toward these new technologies, industry must also step up and present regulators with mature proposals that allow for important incremental steps to be taken toward this sort of regulatory transition. Far too often, industry has started the discussion with hard, exotic – and often irresponsible – schemes and compounded the problem by not being able to separate the wheat from the chaff in these discussions. The result of this is that the many good, responsible actors in this industry are being tarred with the same brush and have a difficult time clearing through some of the negative debris that has accumulated on the surface of the blockchain, crypto, and defi space. It might take a bit longer to engage early with regulators – the opposite of the “easier to ask forgiveness than permission” mentality – but the results turn out to be better for the players that take this patient approach, as well as for the industry as a whole.”

Konstantin Richter, CEO & Founder of Blockdaemon said: 

“The recent announcement by the Comptroller of the Currency (OCC) regarding national savings banks and federal savings associations’ ability to hold cryptocurrency and provide options to customers shows that major strides are being made in digital currency adoption. This is a critical step forward in being able to significantly broaden levels of adoption. The banking sector had been waiting for a signal from regulators on crypto assets, and this decision is likely to spur a race among financial institutions to offer the best possible crypto custody service.

Central banks are likely to be the next major player in drastically changing the options available to customers and will likely create a growing chasm between those that embrace the digital evolution and those that fail to adopt the technology.

Based on the progress of CBDCs in other countries, the US is lagging behind in rolling out a digital currency. Although they have been somewhat late to the game, this does provide some benefits in allowing the government to assess what has worked well and what hasn’t when implementing a digital currency.”