Banks Won't Rush to Hold Crypto – But OCC's Regulatory Approval Makes It Harder to Ignore

The Office of the Comptroller of the Currency (OCC), a federal banking regulator in the U.S., is rapidly expanding crypto awareness on Capitol Hill.

The OCC published an interpretive letter Wednesday announcing that in its view, nationally chartered banks are able to provide custody services for cryptocurrencies, a move that the industry widely praised as one that could help mainstream adoption of crypto, even though it’s unclear as to whether banks will immediately act  on the regulatory clarification. 

This development is likely to be very positive for the digital assets space, but major U.S. banks probably won’t be holding Bitcoin any time soon.

Congressman Darren Soto (D-Fla.) told CoinDesk in a phone call the letter was “an important step” to better integrate cryptocurrencies into the U.S. financial system, though he cautioned that “the federal government is still behind in incorporating” cryptocurrency.

“We support further integration of cryptocurrency into the financial system, including allowing the major financial institutions to hold this currency. It’ll lead to further legitimization of crypto,” he said.

Across the aisle, Rep. Tom Emmer (R-Minn.) agreed, telling CoinDesk in an emailed statement that providing custody is “a big step forward” for financial innovation. 

Both representatives are members of the Congressional Blockchain Caucus.

“[Acting Comptroller] Brian Brook’s work should serve as a guiding light forward for the rest of our patchwork of financial regulators,” Emmer said.

Read more: Don’t Expect Banks to Jump on the OCC Crypto Custody News

A number of aspects of the letter make it interesting, said a Congressional staffer, who advises a lawmaker on fintech issues and asked for their name to be withheld. The first was its rapid release, given Brooks just took the job in May. The staffer said a number of lawmakers will claim that insufficient research was put into the benefits or detriments of the move.

Even the bullish Soto noted the OCC’s announcement seemed hurried.

“We’ve seen some things rushed throughout the Trump administration so this isn’t particularly surprising,” Soto said, though he added, “it’s been a long time coming. This should have happened months or years ago.”

The congressional staffer added that the form of the letter is interesting, in that it’s not an announcement or a rule. “It looks like it’s an interpretive letter, which maybe a specific bank asked for … and that’s fairly normal practice if regulations are a little ambiguous but usually … you don’t issue it writ large.” 

Up until now, the lack of regulatory clarity has meant mainstream financial firms like Fidelity have managed to get into crypto, but only by going the long way around and creating a separate legal entity, such as Fidelity Digital Assets. The OCC letter provides clarity so that banks can get closer to crypto without worrying about regulatory uncertainty. 

“People who are supportive of crypto and blockchain technology will see this as a very positive step, and the more skeptical crowd, this’ll further entrench their viewpoint,” the Congressional staffer said. “I think there’s a very large group of politicians who have never thought about this, so that’s the real benefit is it’ll start that discussion.”

Ron Hammond, a former aide to Rep. Warren Davidson (R-Ohio), agreed the move might force a conversation around crypto, but noted that neither major party – Democrats or Republicans – currently have a platform around financial technology or digital assets. 

He expects Democrats as a party to come out against the move, he told CoinDesk in a phone call.

“Democrats already are skeptical of banks [and] they’re even more skeptical of digital assets, so you put those two together and you have a pretty big policy storm of mistrust in the system,” he said. 

Read more: Coinbase’s Ex-Lead Lawyer Sold $4.6M in Stock to Head US Banking Watchdog

Anti-money laundering and know-your-customer concerns may be brought up, along with the fact that Brian Brooks, the current Acting Comptroller of the Currency, has been neither formally nominated nor confirmed to his role. 

The conversation about crypto will not be limited to Capitol Hill. 

Alex Batlin, CEO of digital asset custody provider Trustology, and a former blockchain lead at BNY Mellon and UBS, told CoinDesk he expects there to be “a lot more conversations” about crypto in various company boardrooms this coming fall.

A number of barriers still remain before any nationally chartered banks are able to actually offer crypto custody services.

Hammond said that while the letter might provide cover for smaller banks, major ones would need more reassurance before they’d be willing to enter the space.

“I don’t expect you will see much change in the next three to four months, but then we might see some acceleration thereafter,” Batlin said. “I expect that after the summer this will come up as banks will be holding investment committees for funding approvals for the next year.”

There are also concerns around whether the letter can provide binding guidance. The congressional staffer noted that the relevant statutes could be interpreted differently by another administration, meaning a future letter or rulemaking process could tell banks the opposite of Wednesday’s missive. 

Still, the OCC’s overtures open the door for much less risky and cheaper routes into crypto for big banks, said Batlin. The way banks are likely to dip their toes in is by going the sub-custody route, he said, by partnering with small specialist organizations.

“That’s exactly what a global custodian like BNY Mellon does anyway,” Batlin said. “Now that this activity is going to be regulated, I expect the cheapest solution for bigger banks is to have some kind of semi-derisked trial of this is to use someone as a sub-custodian.”

The OCC letter brings the U.S. closer to the situation in Germany, where lawmakers provided clarity that essentially eased restrictions on banks providing custody of crypto assets.

Germany's Financial Supervisory Authority (BaFin) released guidance earlier this year clarifying how firms based outside the nation could still provide custody services within Germany's borders and remain in compliance with international law, such as the European Union's Fifth Anti-Money Laundering Directive.

“The U.S. is following Europe, and the use cases are unlikely to be crypto coins,” said Phil Mochan, co-founder of Koine, a London-based custody and post-trade settlement solution for digital assets. “The banks in Germany are all saying they are not going to touch crypto coins, but are interested in primary issuance of securities on behalf of their clients.”

Mochan pointed out that simply providing cold storage of crypto keys does not resolve any of the post-trade activities needed for standard market infrastructure, which involves the emergence of blockchain-enabled central securities depositories (CSDs). 

Back in the U.S., the upcoming presidential election is one wild card that might determine whether the next Comptroller reverses the decision or not.

“I don’t see a situation where a [Republican President Donald] Trump nominee, whether he be Brooks or someone else, would overturn this but I can see a situation in a [Democratic Presidential nominee Joe] Biden administration where this gets overturned,” he said. 

That’s not to say a potential Biden administration would for sure overturn the move, and it’s unlikely to be a key priority, but the uncertainty remains. 

“There’s no notice or comments, [no] input [from] the industry,” Hammond said. “I can see a Biden administration being more concerned about that and probably striking down the [letter].”

Soto said Congress needed to take action to bring further clarity, starting with passing the Token Taxonomy Act (which Hammond wrote while working for Davidson) and the Digital Taxonomy Act (which Soto sponsored).

“We need to pass both those bills to establish basic definitions and jurisdiction so there's no overreach by agencies and there’s more certainty,” he said. “I continue to be troubled by the fact that many new cryptocurrency firms have to spend [millions] due to the complex rules in the United States and that’s because we’ve left it solely to the agencies.”