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The OCC Clarifies Authority to Provide Cryptocurrency Custody Services For Customers

Both national and state banks have offered safekeeping and custody services consisting of both electronic assets and physical objects. The Office of the Comptroller of the Currency (OCC) has highlighted the importance of virtual assets and the authority required for banks to provide safekeeping for these types of assets. 
As the financial markets are moving towards digitalisation, banks and other service providers will be required to provide new technology and innovative ways to serve their customer’s needs. By providing these services banks can continue to provide the financial intermediation function they have historically played in offering payment, lending and deposit services.
Cryptocurrencies do not exist in any physical form, but instead on the distributed ledger that they are recorded on. Cryptocurrency is assigned to a party by using a set of unique cryptographic keys that will allow that party to transfer to another party. If a key is lost, the party will generally be unable to access its cryptocurrency. If a third-party gains access to those keys, that third party can use the keys to transfer the cryptocurrency to themselves.
Cryptocurrencies have been used for a variation of payment and investment activities. Bitcoin continues to be the most widely used and valued crypto currency and has a current market capitalisation of approximately $170 billion. Bitcoin is now accepted worldwide by thousands of merchants. Contracts featuring Bitcoin futures have been established and options on Bitcoin futures are now trading, including a recent SEC approved Bitcoin futures fund. 
The National Bank has proposed to offer cryptocurrency custody services to its customers as part of their existing custody business. In order to hold unique cryptographic keys associated with cryptocurrencies, there is a growing demand for safe places such as banks to store these. These services are in demand for several reasons, including the following:
  1. The underlying keys to a unit of cryptocurrency are essentially irreplaceable, if lost and owners may lose access to their cryptocurrencies as a result of misplacing their keys, resulting in a significant loss of value
  2. Banks may offer services to secure storage services compared to existing options.
  3. Investment advisers may wish to manage cryptocurrencies on behalf of customers, and while doing so utilise national banks as custodians for the managed assets. 
Keys can be stored in “cold” or “hot” wallets. Cold wallets are offline, physical devices such as paper or hardware that can be stored in a physical vault. Hot wallets are connected to the internet, and while they are convenient to access, they are more susceptible to hacking. Presently, the most secure way of storing cryptographic keys is cold storage.
As financial markets continue to move towards a more technological model, the OCC recognises that there is an increasing demand for banks and other service providers to provide new technology and innovative ways to offer customers traditional services. By following this model, banks are capable of fulfilling the financial intermediation function they have traditionally played in providing banking services. 
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Tracey Walker
Tracey Walker

Tracey is a Chartered Certified Accountant, Certified Treasury Professional and investment manager with directorship experience. Virtual asset enthusiast with a Master of Science degree in FinTech and distributed ledger technologies.

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