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Banking Regulators Back Crypto


National Banks now have clear guidance on how to custody cryptocurrencies for its customers, paving the way for broader adoption of digital assets. The Office of the Comptroller published Interpretive Letter #1170 on July 2, 2020, in which the OCC concludes national banks may provide cryptocurrency custody services on behalf of customers by holding the unique cryptographic keys associated with cryptocurrency.

The OCC recognized the uptick in adoption of cryptocurrencies by the American public in recent years – a recent survey suggested that almost 40 million Americans own cryptocurrency – and banks are in a unique position to securely custody the private keys for digital assets which, if lost, can result in the total loss of one's crypto assets. While many view cryptocurrency as a means of disintermediation among financial service providers, the OCC guidance recognizes "safekeeping services are among the most fundamental and basic services provided by banks."

Anyone who has been involved in the cryptocurrency industry in recent years knows that custody has been a problematic for owners of digital assets. The OCC's guidance is a dramatic breakthrough for an industry striving to become more legitimate in recent years. Banks can now confidently offer custody to solutions everyone from an individual holding private keys for a fraction of a Bitcoin to investment managers managing millions in cryptocurrency investments.

The guidance also addresses instances in which banks hold assets as a fiduciary to its customers. In such instances, banks may custody cryptocurrency in a fiduciary capacity so long as they comply with established standards applicable to fiduciaries, including 12 CFR Part 9 and other applicable state and federal laws.

Banks providing services unique to cryptocurrencies will be required to evaluate their risk management policies and procedures, including its anti-money laundering polices and customer due diligence procedures. Also, robust information security infrastructure and controls to mitigate hacking, theft, and fraud will be necessities for all entities planning to custody digital assets. Since different cryptocurrencies may be subject to OCC-regulations and guidance, national banks are encouraged to consult with OCC supervisors prior to offering custody services for digital assets.

The OCC has brought few enforcement actions against banks for virtual currency activities, but one recent case serves to remind industry participants of the regulatory requirements applicable to entities conducting virtual currency activities. In the Matter of M.Y. Safra Bank, the OCC found Safra Bank failed to maintain sufficient AML procedures, including failing to (i) monitor customer activity flowing from high-risk jurisdictions, (2) continuously test its due diligence procedures; (iii) implement adequate controls for customers holding digital assets; (iv) address risks stemming from customers operating as money services businesses; and (v) notifying the OCC of the bank's deviations from its business plan.

The OCC's guidance provides much needed clarity to banks waiting on the sidelines offer cryptocurrency custody services to its clients, and should lead to broader adoption of major cryptocurrencies like Bitcoin and Ether, as well as other digital assets. Consumers accustomed to facing intense scrutiny from large national banks may soon experience less friction in opening business accounts for virtual currency activities and find new options for safeguarding their digital assets.

If your organization needs assistance in complying with state and federal regulations applicable to cryptocurrency activities, contact our attorneys today.

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