Maryland Legal Alert for Financial Services

Banks have long provided safekeeping and custodial services to their customers. In a pre-digital age, this often took the form of the traditional safe deposit box. With the rise of digital assets, banks have sought the flexibility to adapt these core banking services to a changing landscape.

In recent years, cryptocurrencies, such as Bitcoin, have exploded in popularity as both an alternative payment system and as an asset class. Cryptocurrencies generally rely on blockchain technology and a series of distributed electronic ledgers that facilitate the exchange of data over a decentralized network of computers. This technology employs digital keys that must be used to process a transfer of the underlying virtual currency. Typically, holders of cryptocurrencies have relied on third-party cryptocurrency exchanges (e.g., Coinbase) to serve as the custodian of their virtual currency assets. Alternatively, some customers have acted as their own custodians using their own hardware. In either scenario, customers holding virtual currency must worry about the threat of hacks and security breaches or simply forgetting or misplacing their digital keys. Sensing this, many financial institutions have identified an opportunity to provide vital safekeeping and custodial services to the cryptocurrency sector.

Recently, the Office of the Comptroller of the Currency (OCC) issued a guidance letter for national banks and federal savings associations as to the provision of custodial services for cryptocurrency assets. In the letter, the OCC confirmed that national banks and federal savings associations may perform safekeeping and custodial services with respect to their customers’ cryptocurrency assets. The OCC cautions that an institution must remain mindful of safety and soundness concerns when it offers any new cryptocurrency custodial service.

The letter recognizes that the safekeeping services could take the form of “hot” or “cold” digital wallet storage of a customer’s access keys (i.e., either storing access keys online or offline, respectively). The OCC further noted that an institution could offer the same custodial services in connection with a cryptocurrency asset as it could for a traditional asset, including facilitating exchange transactions, settling trades, record keeping, tax services and reporting services.

Practice Point: The OCC letter is yet another sign of the growing adoption of cryptocurrency by traditional financial services participants. Recently, we reported on strategies that lenders are using to make loans secured by Bitcoin. The OCC letter may encourage traditional financial institutions to expand their services to the virtual currency space and, as a result, bolster the credibility of the cryptocurrency market.

Please contact Bryan M. Mull with any questions concerning this topic.

Bryan M. Mull
410-576-4227 • bmull@gfrlaw.com