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Crypto Eyes Institutions Following OCC Letter Permitting Banks to Provide Custody to Digital Assets

Nov 10, 2020

The Office of the Comptroller of the Currency (OCC), the U.S. regulator and supervisor of all national banks and thrifts, recently issued an interpretive letter concluding that national banks may provide cryptocurrency custody services on behalf of customers. It further affirmed that “permissible” banking services may be provided to any lawful business, including fintechs and other businesses engaging in the crypto space.

In its letter, the OCC explains that banks have not been prohibited from providing safekeeping and custodial services to a specific asset class, physical or digital, so long as jurisdictional legal requirements are complied with and the provider has a sound infrastructure to provide the services. The OCC believes that custody of private cryptographic keys, through cold or hot wallets, falls within well established and extensively recognized permissible banking activities. Continued advancement of technology in the financial markets will motivate banks to leverage such new technology and employ innovative ways to provide traditional services on behalf of customers in order to fulfill the financial intermediation function they have historically played in providing payment, loan, and deposit services.  

We discussed the OCC letter with a few digital asset experts to gauge their views on the impact this development may have on spurring further institutional involvement in the crypto space.  Will this be the missing piece in the puzzle that the community has been waiting for to open the floodgates to institutional capital?

The question of custody has been at the forefront of the digital asset space since the beginning.  A number of custodians providing custody of digital assets have emerged to help solve the digital asset custody problem. One of these, Anchorage, welcomed the OCC letter.

“We are excited by the prospect of the traditional finance and the digital asset space merging together to advance financial services,” said Georgia Quinn, General Counsel, Anchorage. “For banks that might have been waiting on this kind of guidance before entering the space, the OCC’s stance gives them confidence to begin offering their clients exposure to digital assets in earnest.” 

Ilan Sterk, VP of Trading and Capital Markets at Orbs, a crypto startup, believes this clarity from the OCC will “increase the adoption of digital assets by institutional investors as… [they] feel more secured storing their assets with the traditional banks and brokers.” Indeed, over the past few weeks there have been murmurs that Tier 1 banks such as JPMorgan are actively exploring digital asset custody.

Jack McDonald, CEO of the blockchain infrastructure provider PolySign, expects an increase in “M&A activity with traditional banks looking to buy digital custodians to get an edge in the sector.”

The digital asset space in general is still in its infancy. Matt Stover, founder and CEO of MG Stover, a fund administrator in the digital asset space, does not see this as “the game changer that everyone is looking for but a continuation of chipping away to build and establish best practices.” 

This sentiment is shared by Karl Cole-Frieman and Bart Mallon of Cole-Frieman & Mallon, a fund formation law firm in the digital asset space.  “We have not seen a significant shift in the number of new funds being formed following this letter,” Cole-Frieman said.

Although this guidance from the OCC does not appear to be the action that will open the floodgates, this as well as recent news that mainstream firms like PayPal and Venmo will soon offer and accept cryptocurrency payments is a sign that the digital asset space is continuing to move forward.

The views and opinions expressed above are of the interviewees only, and do not/are not intended to reflect the views of EisnerAmper.

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Mr. Assaraf provides technical accounting and capital markets expertise. He is highly effective in analyzing complex transactions and enterprise-wide accounting and regulatory issues, structuring alternative solutions and implementing solutions.

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