Following ongoing efforts to promote the expansiveness of the national bank charter, on July 22, 2020, the Office of the Comptroller of the Currency (OCC) issued an interpretive letter confirming the authority of a national bank to provide cryptocurrency custody services for customers.1 Without leaving anything to chance, the OCC further clarified that so long as they are able to manage appropriate risks and comply with applicable law, national banks may provide permissible banking services to any lawful business.
In response to a request by a national bank for confirmation of its powers related to acting as custodian for cryptocurrencies, the OCC analyzed the history and use of cryptocurrencies for payment and investment activities. In particular, the OCC noted that Bitcoin is now an acceptable payment mechanism for thousands of merchants worldwide and that both state and other federal regulators have formally approved various businesses involved with cryptocurrency.
The OCC identified an ongoing need for customers to find “safe places” to store their cryptographic keys connected to cryptocurrencies and to provide related custody services (whether in a “hot wallet” connected to the Internet or a “cold wallet,” which is stored offline). Recognizing that the custody for cryptocurrencies differs from other traditional custody activities, the OCC highlighted the traditional power of national banks to facilitate the transfer of funds across the economy and to serve the financial needs of bank customers. Analogizing to providing customers with safe deposit boxes and other forms of electronic safekeeping services that it has previously approved, the OCC reasoned that providing custody services for cryptocurrency is, in reality, directly in line with its historical and long-standing position on the powers of national banks, and that a national bank may provide these safekeeping and custody services in both a fiduciary and a nonfiduciary capacity.
Balancing out its position on the permissibility of acting as a custodian, the OCC reminded national banks that these types of activities must always be conducted in compliance with all applicable federal and state laws, including its fiduciary activities regulations. In addition, the OCC emphasized that national banks engaged in these custodial activities must adopt and implement sound risk management practices that align them with the bank’s overall business plan and strategies, and ensure that the bank has effective internal controls in place to safeguard the assets including, as necessary, specialized audit procedures.
While this OCC interpretation confirms the broad authority of national banks, banks proposing to enter into these types of activities must ensure that they understand the risks associated with such custodial programs and also have anti-money laundering processes and procedures in place as part of their due diligence review of custodial customers.
Why it matters
The OCC’s position on national banks providing cryptocurrency custodial services was expansive and permissive, but national banks are cautioned that to the extent they engage in such activities, they will have to demonstrate to regulators in the course of ongoing examinations that their processes and procedures are sufficiently protective of the assets for which they are acting as custodian. In particular, a national bank’s management team must have a very high level of confidence in its internal controls, security infrastructure and risk management processes before entering into this line of business, and they must heed the OCC’s caution that before engaging in any cryptocurrency custody activities, they should consult with their OCC supervisors.
1 The OCC letter specifically applies to federal savings associations as well.