National banks may provide cryptocurrency custody services – exchanges will soon face competition

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On July 22, the Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1170 concluding that national banks and Federal savings associations have the authority to provide cryptocurrency custody services for their customers, including holding the unique cryptographic keys associated with the cryptocurrency. The bank or savings association must still implement appropriate controls and systems to mitigate risk, and otherwise comply with applicable law.

The OCC concluded that providing cryptocurrency custody services “is a modern form of … traditional bank activities,”[1] specifically “an electronic corollary of … traditional safekeeping activities”.[2] The OCC’s interpretation came as a logical extension of the the OCC’s prior approval of bank services concerning electronic safekeeping activities. These activities include  escrowing encryption keys used in connection with digital certificates,[3] and providing secure web-based document storage, retrieval and collaboration of documents and files including acting as a custodian for transferable records[4] and electronic chattel paper,[5] as codified in 12 CFR Part 7.[6] 

Analogizing cryptocurrency custody services to traditional asset custody services, the OCC explained that such services may range from simple holding of copies of the cryptographic keys enabling transfer of the customer’s cryptocurrency to related services such as those currently provided by cryptocurrency exchanges - facilitating the customer's cryptocurrency and fiat currency exchange transactions, transaction settlement, trade execution, recording keeping, valuation, tax services, reporting or other appropriate services.[7]

The OCC further noted that bank cryptocurrency custody services may be offered, like traditional custody services, in either a fiduciary or non-fiduciary capacity.[8] Additionally, the OCC stated that banks, as regulated entities, may offer more secure storage services compared to cryptocurrency exchanges and other available options.[9] Each of these services offerings may make banks more attractive to institutional investors in cryptocurrency.

Cryptocurrencies – also known as “digital currencies” or “virtual currencies” – are designed to work as a medium of exchange and are created and stored electronically. Depending on the type of cryptocurrency, it may have characteristics of either fiat money or money backed by some underlying asset(s) or claim(s).  Furthermore, the OCC also contemplates that “cryptocurrency” may include digital assets “not broadly used as currencies” but did not elaborate further.[10]

In the Letter, the OCC reminded banks that they must address the risks associated with the account and customer, including compliance with anti-money laundering rules.[11] Moreover, the unique aspects of cryptocurrency may require the development and implementation of additional controls and processes not utilized with traditional custody services, such as specialized audit procedures to ensure the bank’s controls are effective for digital custody activities.[12] Additionally, banks must address considerations for different types of cryptocurrency which are subject to other regulations, such as those of the SEC or the CFTC, with respect to those cryptocurrencies considered to be securities or commodities, respectively. These additional regulations may require other procedures, processes or reporting.

The OCC notably did not discuss the details of  an approval process for banks seeking to undertake cryptocurrency custody services.  Communication with OCC examination staff is likely advisable, and the profile of each bank will determine the level of OCC review and support needed. The OCC expects bank management and the board to have experience and knowledge to support the activity, which is the case for OCC-chartered banks offering other new products as well. Further, formal approval of business plan revisions may be triggered if new cryptocurrency custody activity represents a material deviation for banks operating under a formal business plan.

To assist and direct banks seeking to adopt cryptocurrency custody services, the OCC advises that “[b]anks seeking to engage in these activities should also conduct legal analysis to ensure that the activities are conducted consistent with all applicable laws”.[13]

[1] See OCC Interpretive Letter #1170 (July 22, 2020) (“Letter 1170”) pg. 6.

[2] See Letter 1170 pg. 8.

[3] See id. (OCC Conditional Approval 267 (Jan. 12, 1998)).

[4] Transferable records are the electronic equivalent Article 3 paper promissory notes and are authorized under Title II of the federal Electronic Signatures in Global and National Commerce Act and Section 16 of the Uniform Electronic Transactions Act.  In addition, electronic chattel paper, which a records or records evidencing a money obligation secured by specific goods or a lease of specific goods, such as equipment or automobile loans or leases, and authorized under Article 9, Section 9-15 of the Uniform Commercial Code.

[5] See Letter 1170 pg. 6 (OCC Conditional Approval 479 (July 27, 2001).

[6] See 12 CFR §§ 7.5002et seq.

[7] See Letter 1170 pg. 8 FN 39.

[8] See Letter 1170 pg. 7. Fiduciary capacities would include serving as a trustee, an executor of a will, an administrator of an estate, a receiver or an investment advisor. Such conduct is permitted if performed in compliance with 12 CFR Part 9.

[9] See Letter 1170 pgs. 4-5.

[10] See Letter 1170 pg.1 FN3. However, the OCC specifically did not address whether cryptocurrency may be “exchange” for purposes of 12USC 24 (Seventh) regarding the powers of a national bank to discount and negotiate bills of exchange. See Letter 1170 pg. 3.

[11] See Letter 1170 pg. 10.

[12] See id.

[13] Id.