by Thomas Trepanier
It’s official: banks can now earn a new revenue stream, after fresh guidance from the OCC clarifying that all nationally chartered U.S. banks may provide custody services for cryptocurrencies. While receiving a regulatory green light is good news, this raises a very big question for banks: How do we do this?
The OCC guidance provides direction and a higher comfort level for banks curious about the crypto sector. Those interested in moving forward can begin actively investigating exactly how secure methods of digitizing and modernizing traditional banking activities can be implemented.
An opportunity emerges
Virtual currencies are a complex product—while they serve as a payment mechanism for willing sides of a transaction, they are treated by the IRS as an asset, and their volatility can be high. Crypto holders often store their unique keys confirming their ownership of the currency in a physical format that requires custody to be kept safe.
As a payment platform, crypto represents a challenge to the payment system built and operated by banks. But as an asset, it presents a business opportunity. The OCC’s clarification that U.S. banks can hold a cryptocurrency’s unique cryptographic keys clears the way for them to custody their customers’ digital assets. In fact, this may turn the tables in banks’ favor, as they already have an established presence and loyal customer base, easing their onramp into cryptocurrency.
Banks that were previously merely intrigued by crypto custody now sense an opportunity. The hard work begins now, as banking management realizes that there are several stages before launching their first virtual vault. They must develop a full understanding of cryptocurrency, blockchain and digital assets, learn how to provide scalable custody services, as well as achieve deep expertise on all the related technology, security, and regulatory issues that come with reliably safeguarding crypto for both institutional and retail customers. It’s a big responsibility, but one that banks should inevitably accept to keep pace with market demands.
A roadmap for banks to become crypto custodians
The following questions represent a roadmap for banks on their journeys to becoming crypto custodians:
1. Many retail and professional investors are used to having established players from the crypto world, like Coinbase, serve as their custodian, or acting as their own custodians via hardware wallets. How quickly will they warm up to having banks serve as their crypto custodian?
While retail customers are accustomed to having exchanges like Coinbase serve as their custodian, seeing banks participate can only be positive as they could potentially provide a better and more economical service. The best service providers with the best pricing will win.
Similarly, institutional customers should find this to be welcome news since banks are a known and trusted commodity. Adding cryptocurrency custody to their menu of products and solutions would be an added benefit.
2. Blockchain technology has matured over the last decade, with many technology platforms to choose from. How does a bank determine who the best vendors are?
Banks must master many new technologies before they can launch their crypto custody offerings. They will have to either develop in house, hire or acquire infrastructure for systems including hot and cold wallets, trading, transaction monitoring, AML monitoring, cybersecurity, payments and staking.
They must also consider the best network to join. Global instant settlement networks are now emerging that empower banks to settle with maximum transparency, speed and security while making the transfer of digital assets between institutions far more cost-effective. Sophisticated clients will prefer to work with a custodian that ensures their assets can be used to instantly settle across execution platforms and makes the most efficient use of capital for their trading strategies.
3. Which customer base should banks target first for crypto custody?
With its decentralized design, cryptocurrency has the power to solve many of the bottlenecks that have built up in traditional finance. Businesses or entities with the need for secure and efficient international cash transfer at the end of each day, such as a foreign pension fund, are one example of an early candidate for conversion. Wealth management firms actively diversifying their clients’ portfolios are also strong candidates.
4. How will banks attract the right personnel to help manage crypto custody internally?
Here’s where the worlds of traditional finance and crypto collide. Since banks currently have little in-house crypto talent, they will have to start getting aggressive. If they intend to hire people away from crypto firms, that talent will require serious upside to make a move.
The other option is through acquisition. We may soon see significantly increased M&A activity in crypto, as banks bid to buy up blockchain’s established players or intriguing new innovators. In many cases, acquisition may be the only real option for adding crypto custody capabilities, since many potential vendors are also now competitors to the banks that will want to hire them.
5. How much will adding crypto custody as a business unit cost?
The banking industry historically makes conservative risk assessments, and banks must determine not only their risk tolerance but also the readiness of their customers and other regulators. Although the OCC’s opinion carries weight, the more protection banks feel they have from additional regulators, the more they’ll be inclined to spend on crypto custody.
Compared to banks’ current legacy infrastructure, some investments are relatively inexpensive. Many essential custody applications are not latency-sensitive or super high-throughput and run on cloud services with proven security and robust data analytics, such as Snowflake and Amazon Web Services. The big expense comes from the blockchain implementation and requisite talent.
Joining an instant global settlement network can not only improve performance in key areas but mitigate costs too. The right network provides one-to-many connectivity that vastly streamlines communications with the thousands of digital asset players worldwide, increases security and reduces points of failure.
Boosting the bottom line
Now that more traditional regulators are signaling approval, we could see cryptocurrency values increase. More regulation helps provide transparency, which many investors have been seeking. The OCC’s opinion provides legitimacy and moves crypto further away from the “Wild West.” This is great timing; investors need new growth areas as the global economy evolves. Smaller markets that embrace crypto could position themselves as an attractive investment venue. Making U.S. banks crypto-compatible can only move the industry forward.
Thomas Trepanier is director of business development for Roxe at Apifiny.
