Recently, three of the United States’ federal agencies collectively released a document outlining potential risks for banks pondering offering crypto custody services to their clients. Despite the document not introducing any novel supervisory expectations, it might serve as a guideline for banks contemplating a dive into the cryptocurrency waters.
The document, labeled “Crypto-Asset Safekeeping by Banking Organizations,” details risk factors that banks need to consider, such as understanding the intricacies of a rapidly evolving asset class, potential legal liabilities if crypto assets are misplaced, and the legal and compliance obligations under the Bank Secrecy Act and Anti Money Laundering regulations.
The document further notes, “Providing crypto-asset safekeeping services may entail significant resources and attention.” The agencies behind this document are the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Board of Governors of the Federal Reserve System.
Banks often engage third-party services to handle their crypto asset custody. For example, asset manager BlackRock utilizes Coinbase and subsequently Anchorage for Bitcoin (BTC) custody. BNY Mellon, the oldest bank in the US, also provides digital asset custody services for its clients. However, the document emphasizes that banks remain answerable for the actions of their sub-custodian. This could have significant implications if a bank’s custodian is attacked, resulting in lost crypto assets.
The document underlines the necessity of audit programs, addressing the peculiarities of crypto assets, including key generation, transfer and settlement of assets control, and staff expertise. If such programs are lacking within the bank, it is advised that “management should engage appropriate external resources…to assess crypto-asset safekeeping operations.”
There have been recent hints that banks are considering branching out into crypto. The Wall Street Journal reported in May that a group of big banks was in “early talks” to issue a joint crypto stablecoin. The regulatory environment currently holds appeal, especially as governing bodies have eased the transition into crypto. For instance, the Federal Reserve has removed the “reputational risk” criteria from its bank oversight, which was previously criticized for unfairly targeting crypto businesses.
In contrast, some crypto-based companies are contemplating becoming banks themselves. On July 2, Ripple, the creator of XRP (XRP), applied for a banking license with the OCC. Circle, the creator of stablecoin USD Coin (USDC), has followed suit.
