Final week, the Workplace of the Comptroller of the Forex (OCC), a department of the Treasury that supervises nationwide banks and thrift establishments, issued a daring interpretative letter outlining how US banks can work together with cryptoassets going ahead.
The letter, addressed to an unnamed bank, is outstanding in its progressive embrace of the crypto business, explicitly allowing banks to each custody cryptoassets for patrons and supply banking companies for crypto-oriented companies.
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.”
It is a large deal, for 3 causes:
Motive 1: A Regulatory Stamp Of Approval
It’s arduous to think about a extra optimistic and progressive letter being written by a serious US regulator. The OCC’s letter showcased a deep understanding of the crypto market, together with the intricacies of cryptoasset custody and the challenges that crypto firms have traditionally confronted in acquiring conventional banking companies.
Regulators hardly ever break new floor; they’re extra apt to observe the lead of others. By showcasing a pro-crypto stance and shifting the business one large step ahead, the OCC has made it simpler for different, extra cautious regulators to observe swimsuit.
Motive 2: It Will Deliver New Traders Into Crypto
It will permit conventional banks to enter the crypto custody market, which is able to make crypto custody extra broadly accessible, extra trusted, and lower-cost, in flip bringing a brand new wave of buyers into the house.
One no desk growth over the previous few years has been the wonderful traction that well-liked finance apps like Sq.’s CashApp have had from retail buyers searching for a simple technique to buy bitcoin. CashApp noticed $306 million in bitcoin gross sales prior to now quarter alone, making it one of many massive particular person sources of web inflows into the house.
This new regulatory readability from the OCC ought to permit massive numbers of nationwide banks to construct CashApp-style on-ramps for his or her clients to simply entry crypto.
Past rising the variety of opponents within the crypto custody market, this information additionally creates a second regulatory construction for crypto custodians. So far, crypto custodians have principally been structured as belief firms, however now they’ll additionally be capable to be structured as banks. As crypto knowledgeable Caitlin Lengthy highlighted, crypto custodians with a bank constitution may get pleasure from benefits reminiscent of direct connection to the US greenback cost programs, stricter regulatory oversight, and stronger capitalization necessities.
None of this may occur in a single day after all: Cryptocurrency custody is a extremely technical enterprise with a steep studying curve, and we count on banks to maneuver cautiously into the house, accomplice with specialists or purchase crypto-native custodians. However it would occur and that course of begins now.
Motive 3: It Will Enable Massive Banks To Service Crypto Corporations, Lowering Fraud
Though not the principle theme of the letter, one notable truth is that it explicitly clarifies that nationwide banks can present conventional banking companies to cryptocurrency companies. This seems like a minor growth, but it surely’s not.
Crypto-focused firms have historically had a really troublesome time procuring conventional banking companies. For years, area of interest supplier Silvergate Bank was successfully the one bank offering service to the crypto business, and it was very selective in its clientele.
The one massive bank to offer banking companies to cryptocurrency exchanges was JP Morgan, which started providing companies to only two crypto companies (Coinbase and Gemini Belief) and just some months in the past at that.
This banking problem has considerably slowed the expansion of the business. Extra importantly, it has compelled some crypto-focused companies to show to unregulated and generally shady offshore cost processors to deal with cash administration wants. The problems surrounding the under-collateralization of the stablecoin Tether (USDT), for example, started largely as a result of the issuing firm couldn’t safe a conventional banking relationship.
By normalizing crypto banking, this letter will foster a brand new stage of maturity for the fast-growing business build up across the crypotasset house, decreasing dangers, dashing development and pushing the business ahead.
The crypto business continues to mature quickly. This letter from the OCC is the newest milestone in regulatory readability and approval, and we’ll really feel the tailwind from its optimistic affect for months and years to return.
[My colleagues David Lawant and Hunter Horsley helped with this story.]