Last week, the Office of the Comptroller of the Currency (OCC), a branch of the Treasury that supervises national banks and thrift institutions, issued a bold interpretative letter outlining how US banks can interact with cryptoassets going forward.
The letter, addressed to an unnamed bank, is remarkable in its progressive embrace of the crypto industry, explicitly permitting banks to both custody cryptoassets for customers and provide banking services for crypto-oriented businesses.
The letter detailed:
“We conclude a national bank may provide … cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency. This letter also reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”
This is a big deal, for three reasons:
Reason 1: A Regulatory Stamp Of Approval
It is hard to imagine a more positive and progressive letter being written by a major US regulator. The OCC’s letter showcased a deep understanding of the crypto market, including the intricacies of cryptoasset custody and the challenges that crypto companies have historically faced in obtaining traditional banking services.
Regulators rarely break new ground; they are more apt to follow the lead of others. By showcasing a pro-crypto stance and moving the industry one big step forward, the OCC has made it easier for other, more cautious regulators to follow suit.
Reason 2: It Will Bring New Investors Into Crypto
This will allow traditional banks to enter the crypto custody market, which will make crypto custody more widely available, more trusted, and lower-cost, in turn bringing a new wave of investors into the space.
One no table development over the past few years has been the amazing traction that popular finance apps like Square’s CashApp have had from retail investors looking for an easy way to purchase bitcoin. CashApp saw $306 million in bitcoin sales in the past quarter alone, making it one of the large individual sources of net inflows into the space.
This new regulatory clarity from the OCC should allow large numbers of national banks to build CashApp-style on-ramps for their customers to easily access crypto.
Beyond increasing the number of competitors in the crypto custody market, this news also creates a second regulatory structure for crypto custodians. To date, crypto custodians have mostly been structured as trust companies, but now they’ll also be able to be structured as banks. As crypto expert Caitlin Long highlighted, crypto custodians with a bank charter could enjoy advantages such as direct connection to the US dollar payment systems, stricter regulatory oversight, and stronger capitalization requirements.
None of this will happen overnight of course: Cryptocurrency custody is a highly technical business with a steep learning curve, and we expect banks to move cautiously into the space, partner with experts or acquire crypto-native custodians. But it will happen and that process begins now.
Reason 3: It Will Allow Big Banks To Service Crypto Companies, Reducing Fraud
Although not the main theme of the letter, one notable fact is that it explicitly clarifies that national banks can provide traditional banking services to cryptocurrency businesses. This sounds like a minor development, but it’s not.
Crypto-focused companies have traditionally had a very difficult time procuring traditional banking services. For years, niche provider Silvergate Bank was effectively the only bank providing service to the crypto industry, and it was very selective in its clientele.
The only large bank to provide banking services to cryptocurrency exchanges was JP Morgan, which began offering services to just two crypto firms (Coinbase and Gemini Trust) and just a few months ago at that.
This banking challenge has significantly slowed the growth of the industry. More importantly, it has forced some crypto-focused firms to turn to unregulated and sometimes shady offshore payment processors to handle cash management needs. The issues surrounding the under-collateralization of the stablecoin Tether (USDT), for instance, began largely because the issuing company could not secure a traditional banking relationship.
By normalizing crypto banking, this letter will foster a new level of maturity for the fast-growing industry building up around the crypotasset space, reducing risks, speeding growth and pushing the industry forward.
The crypto industry continues to mature rapidly. This letter from the OCC is the latest milestone in regulatory clarity and approval, and we will feel the tailwind from its positive impact for months and years to come.[My colleagues David Lawant and Hunter Horsley helped with this story.]