Banks won’t rush to hold crypto, but OCC regulatory approval makes it harder to ignore

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

The OCC released an interpretative letter on Wednesday announcing that, in its view, nationally authorized banks can provide custodial services for cryptocurrencies, a move that the industry widely praised as one that could aid the overall adoption of crypto, although it is not clear if the banks will act immediately on the regulatory clarification.

This development is likely to be very positive for the digital asset space, but the major US banks will probably not have Bitcoin any time soon.

Congressman Darren Soto (D-Fla.) Told CoinDesk in a phone call that the letter was “an important step” to better integrate cryptocurrencies into the US financial system, although he warned that “the federal government it is still behind in incorporating “the cryptocurrency.

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

Across the aisle, Representative Tom Emmer (R-Minn.) Agreed and told CoinDesk in an email statement that providing custody is “a big step forward” for financial innovation.

Both representatives are members of the Caucus Blockchain of Congress.

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

Several aspects of the letter make it interesting, said a staff member of Congress, who advises a legislator on financial technology issues and asked that his name be withheld. The first was her fast pitch, given that Brooks just took the job in May. The staff member said several lawmakers will argue that the benefits or harms of the measure were not sufficiently investigated.

Even the optimistic Soto noted that the OCC announcement seemed rushed.

“We have seen some rushed things across the Trump administration, so this is not particularly surprising,” Soto said, although he added, “It has been a long time coming. This should have happened months or years ago.

The Congressional staff member added that the form of the letter is interesting, as it is not an announcement or a rule. “It appears to be an interpretative letter, which perhaps was requested by a specific bank … and that is quite normal practice if the regulations are a bit ambiguous, but generally … it is not issued in writing.”

Until now, the lack of regulatory clarity has meant that major financial firms like Fidelity have managed to get into crypto, but only by going down the road and creating a separate legal entity, like Fidelity Digital Assets. The OCC letter provides clarity for banks to approach crypto without worrying about regulatory uncertainty.

“People who support crypto and blockchain technology will see this as a very positive step, and the more skeptical crowd will further entrench their point of view,” said staff member of Congress. “I think there is a very large group of politicians who have never thought about this, so that is the real benefit of that discussion starting.”

Ron Hammond, a former assistant to Representative Warren Davidson (Republican of Ohio), agreed that the move could force a conversation around crypto, but noted that none of the major parties, Democrats or Republicans, currently has a platform on around financial technology or digital assets.

He expects Democrats as a party to oppose the measure, he told CoinDesk in a phone call.

“Democrats are already skeptical of banks [and] they are even more skeptical about digital assets, so they combine them and have a fairly large political storm of distrust in the system, “he said.

Concerns about money laundering and getting to know his clients may arise, along with the fact that Brian Brooks, the current Acting Comptroller of the Currency, has not been formally nominated or confirmed for his role.

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

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

There are still some barriers before nationally authorized banks can offer crypto custody services.

Hammond said that while the letter could provide coverage for smaller banks, larger ones would need more reassurance before they are willing to enter the space.

“I don’t expect them to see much change in the next three or four months, but then we might see some acceleration thereafter,” Batlin said. “I hope that after the summer this will happen as banks will hold investment committees to approve funds for next year.”

There are also questions about whether the letter can provide binding guidance. The Congressional staff member noted that the relevant statutes could be interpreted differently by another administration, meaning that a future letter or regulatory process could tell banks the opposite of Wednesday’s letter.

Still, OCC openings open the door to much less risky and cheaper routes to crypto for big banks, Batlin said. The way banks are likely to move their feet is by going the sub-custody route, he said, by partnering with small specialized organizations.

“That is exactly what a global custodian like BNY Mellon does anyway,” Batlin said. “Now that this activity is going to be regulated, I hope that the cheapest solution for the largest banks is to have some sort of semi-derisified proof of this is to use someone as a sub-depositary.”

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

The German Financial Supervisory Authority (BaFin) released a guide earlier this year that clarifies how companies based outside the nation can still provide custody services within Germany’s borders and comply with international law, such as the Fifth Directive against money laundering in the European Union.

“The United States is following Europe, and the use cases are unlikely to be cryptocurrencies,” said Phil Mochan, co-founder of Koine, a London-based post-trade escrow and settlement solution for digital assets. “All banks in Germany say they are not going to touch crypto currencies, but are interested in the primary issue of securities on behalf of their clients.”

Mochan noted that simply providing cryptographic key cold storage does not solve any of the post-trading activities necessary for the standard market infrastructure, implying the emergence of blockchain-enabled central securities deposits (CSDs).

Back in the US, the upcoming presidential election is a wild card that could determine whether or not the next Comptroller reverses the decision.

“I don’t see a situation where a [Republican President Donald] The Trump nominee, either Brooks or someone else, would revoke this, but I can see a situation in a [Democratic Presidential nominee Joe] Biden the administration where this is canceled, “he said.

That does not mean that a possible Biden administration will nullify the move, and it is unlikely to be a key priority, but uncertainty persists.

“There are no notices or comments, [no] entry [from] the industry, “Hammond said.” I can see that a Biden administration is more concerned about that and probably bringing down [letter]. ”

Soto said Congress needed to take steps to provide greater clarity, starting with the passage of the Token Taxonomy Act (which Hammond wrote while working for Davidson) and the Digital Taxonomy Act (which Soto sponsored).

“We need to pass both bills to establish basic definitions and jurisdiction so that the agencies don’t go too far and there is more certainty,” he said. “I remain concerned that many crypto startups have to spend [millions] because of the complex rules in the United States and that’s because we leave it exclusively to the agencies. ”