Blockchain and banking have, since the former’s inception, operated almost entirely at odds. Cryptocurrencies, after all, were invented as a decentralized method to store value, designed to operate outside of the intermediaries and custodial third parties that make up the traditional, regulated financial system.
The original bitcoin whitepaper’s very first sentence talks about the goal of allowing “online payments to be sent directly from one party to another without going through a financial institution.”
But on Friday (March 7), Office of the Comptroller of the Currency (OCC) reclarified certain crypto banking permissions, publishing Interpretive Letter 1183 to confirm that crypto-asset custody, certain stablecoin activities and participation in independent node verification networks such as distributed ledger are permissible for national banks and federal savings associations.
“The OCC expects banks to have the same strong risk management controls in place to support novel bank activities as they do for traditional ones,” said Acting Comptroller of the Currency Rodney E. Hood in a release. “Today’s action will reduce the burden on banks to engage in crypto-related activities and ensure that these bank activities are treated consistently by the OCC, regardless of the underlying technology.”
The letter also rescinds the requirement for OCC-supervised institutions to receive supervisory nonobjection and demonstrate that they have adequate controls in place before they can engage in these cryptocurrency activities. It could have a significant impact in mitigating one of the longest standing problems with integrating digital assets into the broader financial services ecosystem: the question of custody and risk.
Read more: Crypto and FinTech Cry Foul Over Debanking — Could Real Issue Lie in Risk?
Crypto Custody Versus Self-Custody Explained
Cryptocurrency custody refers to how digital assets are stored and managed. There are two primary forms: custodial (third-party custody), such as across exchanges and other institutional custodians, and self-custody, such as with hardware and software wallets. Understanding the difference is crucial for managing crypto securely, as well as comprehending the relationship between financial institutions and digital asset custodial services.
Banking and custodial solutions have long been the preferred model within the traditional financial landscape and in crypto, custodians serve a similar role. Crypto exchanges like Coinbase and Gemini provide custody services alongside trading platforms, offering secure storage, insurance and compliance frameworks for institutional and retail investors, while specialized firms such as BitGo and Anchorage cater to institutional players with advanced security features.
Several major financial institutions, including BNY Mellon, Fidelity and State Street, have also entered the crypto custody space.
Still, custodial solutions can come with risks, including hacks or company failures such as the FTX collapse.
On the other end of the spectrum, self-custody aligns with the foundational ethos of cryptocurrency: decentralization and financial sovereignty. By holding their own private keys, users retain complete control over their assets, eliminating counterparty risks associated with custodians and centralized exchanges.
However, self-custody comes with its own risks. Losing access to a private key can mean irreversible loss of funds.
Read also: 5 Blockchain Projects the World’s Biggest Banks Are Behind
The Regulatory and Security Considerations for Banks
The OCC’s interpretative letters have established that banks can offer custody solutions, engage in stablecoin-related activities, and participate in distributed ledger networks.
Given the OCC’s green light, banks can issue and manage stablecoins pegged to fiat currencies, provided they meet regulatory expectations. This development presents an opportunity for banks to position themselves as trusted stablecoin custodians, reinforcing the stability of digital assets and enhancing cross-border payments and remittances.
While the decentralized ethos of cryptocurrency often positions banks as adversaries to the movement, the reality is more nuanced. Institutional investors, pension funds and high-net-worth individuals require compliant and secure custody solutions that align with existing financial regulations.
“The largest financial institutions are eager to explore tokenized assets,” but they require regulatory certainty to do so at scale, Nikola Plecas, head of commercialization at Visa Crypto, told PYMNTS in October.
Unlike FinTech startups and crypto-native firms, banks possess a long-standing reputation for safeguarding assets, making them well-positioned to attract institutional clients seeking both regulatory compliance and robust security. By leveraging existing infrastructure and expertise, banks can bridge the gap between traditional finance and the digital asset space.
The PYMNTS Intelligence report “Blockchain’s Benefits for Regulated Industries” found that blockchain technology has numerous potential benefits to serve the unique needs of regulated industries, including finance.
“As more banks integrate blockchain capabilities, customers will have greater choice in transferring value,” FV Bank CEO Miles Paschini told PYMNTS this month. “We’re blazing the trail for a future where blockchain is just another payment rail.”
