From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today. This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.
Over the last five years we’ve repeatedly argued that cryptocurrency key storage is clearly within the core banking activities defined in our banking laws and that banks should be free to enter that line of business. As we wrote in 2016:
Technically, digital currency private key safekeeping is nothing new as compared with the long practiced activities of digital certificate authorities and cryptographic key escrow providers, activities that the OCC has deemed within the core competency of banks.
Banks have long provided physical safekeeping services to customers in the form of safe deposit boxes and, since the advent of digital signatures for encrypted communications, banks have performed cryptographic key storage and safekeeping as well. Despite the non-controversial nature of these existing physical and digital safekeeping activities, there has been some reticence from banks and banking regulators to safekeep keys related to cryptocurrencies.
When the OCC went through its FinTech Charter Request for Comment process, the vast majority of discussion points and comments focused on marketplace lending and fintech pass-through vehicles like data aggregators; we felt strongly that a FinTech chartered bank should also be free to engage in what is arguably a more fundamental innovation within the larger umbrella of so-called financial technology: National banks should deal in truly digital money, holding and transacting in cryptocurrency itself.
It’s taken some time for that advocacy to bear fruit but, in part thanks to the tremendous leadership of the new Acting Comptroller Brian Brooks, we’ve finally got the clear statement of policy that we’ve been waiting for: banks can hold crypto.
Why is this good?
Cryptocurrencies are, of course, designed to be peer-to-peer payment networks that allow us to, as the saying goes, “be your own bank.” The ability to hold and transact crypto directly is core to the privacy and autonomy benefits of the tech; it’s why we call cryptocurrencies digital cash: it can be passed person to person without an intermediary who can surveil or censor transactions.
As with cash, however, it would be foolish to imagine a future where every person holds their entire life-savings directly in a wallet they personally control. There will always be a need for safekeeping of large amounts and there will always be a need for large, liquid marketplaces to exchange digital cash for other assets. Multi-sig wallets and decentralized exchanges may, one day, make these safekeeping and exchange services less dependent on centralized entities, but full decentralization is probably an unattainable utopia (and maybe even an undesirable one). Accepting that centralized entities for cryptocurrency safekeeping and storage are unavoidable and essential, then it is excellent news that, thanks to the OCC’s new policies, there will be even more competition for providing those services. National banks entering the game expands that competition and may also allow more traditional institutional investors to deal in cryptocurrencies. Several regulated entities are bound by financial regulatory laws to use and only use chartered banks for custodial services, and in a world where chartered banks are not holding crypto that can leave several investors with a defacto ban on large scale participation in crypto markets.
Aside from enhancing competition, allowing banks to handle crypto will likely have other benefits. As we wrote in 2016,
Approving digital currency companies to operate under a national bank charter will spur innovation, enhance American competitiveness within the global financial technology sector, improve protections for consumers of digital currency services, and promote the development of tools and platforms that can bolster financial inclusion.
A national charter can improve consumer protection by allowing for more unified national regulation of cryptocurrency custodians, in contrast to the inconsistent patchwork approach inherent in state money transmission licensing. It can bolster financial inclusion by better connecting banks to emerging cryptocurrency-based remittances services.
We’ll still need to see if these formal statements trickle down to the level of bank examinations. Risk aversion from banks in entering new product areas often has as much to do with avoiding conflict with the examiners who audit their books day-to-day as it does with obeying official policy decrees from agency heads. That caution aside, however, this is tremendous news for the cryptocurrency space and for sensible US policy towards these fundamental innovations in financial technology.