Market Commentary

OCC Issues Guidance on Custody of Digital Currency Assets by National Banks

By
Dan Hoover
on
September 10, 2020

The OCC has issued guidance to banks considering entering the custody market for digital currency assets. Is this a watershed moment for cryptocurrency investors, a welcome relief for investors paying high fees for mediocre service, or an impetus for further innovation in the space?

Recent news will be of significant interest for holders of digital assets. On July 22, 2020, the Office of the Comptroller of the Currency (OCC) issued Interpretive Letter No. 1170, seeking to clarify several points of ambiguity about the provision of custody services by a national bank. The decision to provide greater clarity may result in greater competition for the provision of custody services and help boost availability of product types to new investors, such as participants in 401(k) or other pooled savings plans.

For context, the OCC is an independent bureau within the Treasury Department and is the primary regulator for American banks with a national charter. This contrasts with entities that supervise state-chartered banks or credit unions. The OCC exercises continuous supervision of their banks, unlike other governmental regulators. They have acknowledged the role of banks in the storage of digital assets since 1998.

What is a "Custodian"?

In addition to storing assets, custodians manage physical and digital assets controls, assisting in the settlement of transactions. Although custody providers add little to the blockchain-driven settlement of digital currency transactions, they can help market participants by recording transactions and confirming balances as available for trading at a certain place and time. This allows for investors to more easily track their wealth, make investment decisions, and access multiple market centers.

Entry by Experienced Custodians is Good for Investors

The benefits of good custodial and record-keeping services are familiar to many investors, but early customers have been disappointed by high cost, slow reconciliation, and a limited range of services when it comes to digital assets. Investors should welcome the entry of new competitors into this field.

The OCC wrote this letter to clarify for banks their expectation for the controls needed should they enter the market. Specifically, banks should do the following:

  • Determine if the assets to be taken into custody are legal to hold by their customer in their jurisdiction;
  • Ensure compliance with anti-money-laundering (AML) and counter-terrorist-financing (CTF) regulations; and
  • Manage and track the impact of continuously changing regulations impacting digital currencies.

Improving Access beyond Custody

One potential area of improvement is the potential for banks with trustee powers over pooled assets (where investor assets are kept separate from bank capital) to dramatically change the manner in which digital currency investment products are brought to market. For example, the collective trust funds (CTFs) that provide millions of U.S. investors with cheap access to investing through their 401(k) and similar plans can only be offered by banks with trustee powers.

This is exciting for investors who can potentially benefit from both improved record-keeping and the addition of new digital asset strategies to a diversified retirement investment platform. We here at Castle stand ready to harness this opportunity and innovate through new investment ideas for investors of all types.

Notes / Credits

Dan Hoover is Director of Product Analytics for Castle Analytics, a manager of digital currency investment funds based in the San Francisco Bay Area.

Thanks to Sean Heiskell for editorial and research support.

For important disclosures regarding the above, please see https://castlefunds.com/disclaimer.

Photo by Clifford Photography on Unsplash