Forefront Communications

FinOps Report: National Banks as Digital Asset Custodians: Big Deal or Not?

Alexandra Hamer

Alexandra Hamer

When it comes to picking a custodian for cryptocurrencies and other digital assets, the US Office of the Comptroller’s decision to green light national and state banks might not be that much of a gamechanger for every fund manager. At least not in the short-term.

Currently, investors holding cryptocurrency can keep their cryptocurrency in a digital wallet, with an exchange, or with one of several firms which are licensed as state-chartered trust companies. In its interpretative letter late last month allowing banks to provide custodian services for digital assets and fiat bank accounts for cryptocurrency businesses, the OCC highlighted the distinction between custodial services for fiat money versus cryptocurrency. Because digital currencies exist only on the blockchain or distributed ledger, there is no physical possession of the investment. Therefore, a bank “holding” digital currencies will keep the cryptographic access key to that unit of cryptocurrency. If the bank loses the key or the key is stolen due to a cybersecurity breach, the fund manager is out of luck. Deposit-covering insurance from the Federal Deposit Insurance Corporation also doesn’t apply. The OCC cautioned banks to consider the risk factors before taking on the task of digital asset custody.

While the SEC has not challenged the claims of South Dakota or New York trust companies as qualified custodians, the threat of enforcement action has been a strong deterrent for registered investment advisers to test the cryptoasset waters. The OCC’s interpretative release might just be the catalyst. “Based on the SEC’s category of financial institutions that are qualified custodians, there is now no ambiguity that a national bank would fulfill the SEC’s definition of a qualified custodian,” says Kristin Boggiano, president and co-founder of Jersey City, New Jersey-based CrossTower, a digital asset exchange operator. When it comes to state-chartered trust companies, the answer remains far less certain despite the OCC’s interpretative release. Legal opinions differ widely. “The OCC’s guidance is likely going to provide comfort to fund managers already active in the cryptocurrency industry that state trust companies are qualified custodians and it may encourage other funds to consider exposure to the asset class,” says Boggiano, who is also the co-founder of the Digital Asset Regulatory and Legal Alliance (DARLA), a New York-based networking group focused on digital asset regulatory compliance.

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