US Banks Get Crypto Custody Nod, but Instant Demand Surge Is Unlikely

CoinTelegraph

The Office of the Comptroller of the Currency, a division of the United States Treasury that supervises banking in the country, on July 22, issued an interpretive letter clarifying that nationally chartered banks are allowed to provide cryptocurrency custody services to their customers extended to storing cryptographic keys associated with the currencies. 

In its letter, the OCC recognizes the current need for banks and other financial service providers to leverage blockchain technology and provide related services to their customers. In addition to national banks, this permission extends to state banks and to loans/savings associations, also known as “thrifts.”

How To Get Free Crypto  

What will change?

Most notably, this move, combined with the news of an expected $2-trillion Fed stimulus, has pushed Bitcoin’s (BTC) price over the $11,000 mark. However, the outcome may not be just short term. Highlighting the significance of this move, Hong Fang, the CEO of OKCoin — a global cryptocurrency exchange — told Cointelegraph:

“The OCC has made an important milestone by allowing traditional banks to provide custodial services that will apply to crypto, thereby strengthening the overall financial system and broadening financial inclusion. While the public letter didn’t introduce new regulations, it added much-needed clarification in regard to national banks providing cryptocurrency custody services.”

According to Fang, the latest decision is heavily influenced by the acting comptroller of the currency, Brian Brooks — the former chief legal officer of the U.S.-based cryptocurrency exchange Coinbase. His experience in legal, compliance and government-related functions has equipped him to further the understanding of custodial aspects of cryptocurrency in the U.S. financial system: “The safety-focused remarks by Acting Comptroller Brian Brooks will help enable the U.S. to remain a leader in the global financial landscape.”

Impact on institutional investors

A development like this is highly impactful on institutional investors who are often skeptical of new industries like crypto. It’s a step toward crypto assets being considered a legitimate asset class by the big banks, payment companies and clearing agencies. Sam Wyner, a co-lead of cryptoasset services at KPMG, discussed the impact of this announcement on institutional investors with Cointelegraph, alluding to the nature of custodians:

“Custody is a fees-based business and regulatory support behind a new fees-based business makes it that much more desirable. The institutional crypto markets continue to grow in size, maturity and sophistication, driving the need for custody services. Uncertainty in the market further increases the appeal of a net-new fees-based product offering.”

Leading global banks in the U.S. already have a robust underlying infrastructure and systems in place for a traditional custodian business, and crypto can share that base according to Wyner, who further added: “Building out the infrastructure for crypto now will enable banks to support tokenized assets in the future.”

Coinbase Banner  

Considering the custody fee opportunities that this move brings, institutional players are bound to be the biggest benefactors. The trickle-down impact of this increase in interest is inevitably going to affect retail investors, enabling them to increase the proportion of crypto assets in their individual portfolios. Here, Fang stated further: “I look forward to seeing more banks becoming more open to crypto, with potentially better banking channels, more public awareness, as well as more regulatory clarity. A better user experience ultimately wins.”

The largest institutional crypto exchange, Bakkt, has smashed its daily BTC Futures volumes records twice in the past 2 days and BTC options volume hitting an all-time high on Deribit could also be telling signs of this interest picking up. However, a clear trend still needs to be established before any judgement is made.

An opportunity for banks?

Earlier this year, 40 German banks reached out to regulators, expressing interest in custody licenses for crypto assets, and Germany’s Federal Financial Supervisory Authority, or BaFin, also released guidance in March that says that firms may only be called custodians if they have access to customers’ private keys, which could eliminate providers that see encrypted keys. Despite this interest, the CEO of Crypto Storage AG said that the company found it extremely hard to even open a bank account in the country due to the banks not understanding the nature of the crypto industry.

Similarly in the U.S., it is highly possible that banks might not immediately lunge at the opportunity since, technically, banks were never prohibited to custody crypto assets, and there was never any transparency on the risks that might entail. From this perspective, such a development can be considered as only a clarification from the OCC. Alex Batlin, the founder and CEO and founder of Trustology — a custodial wallet provider — told Cointelegraph that he expects some latency, adding: “For anyone active in this space, it’s just an affirmation of what’s there. For those not active in the past, it could prompt some movement, but it may take some time for the consciousness to evolve.”

FreeBitcoin Banner  

Adding to the lack of clarity on behalf of the Treasury Department, there have been barriers in the past that have added enormous costs for organizations. For example, Fidelity did offer custodial services for crypto assets, but there was always an issue around mixing normal business activities with crypto due to the lack of clarity if the same organization was allowed to do both. 

“Now that the greenlight is official, in principle, one of the things it should do is reduce the cost of entering this line of business, it’s easier to do so because there are less hurdles,” according to Batlin. Referring to the risk-averse nature of the banks and large scale institutional investment vehicles, he further stated:

“Banks are very risk-conscious. So, when you have them looking at a proposal, and there is lack of regulation, why would you risk your license for something that will yield pretty low returns in the next couple of years? I think there will be demand whether it’s on the lower end or whether it’s sufficient for the likes of BNY and others.”

Crypto exchanges and users stand to gain

Cryptocurrency exchanges could use this change to have collaborative relationships with banks in order to enable better future prospects for the industry, fuel liquidity and improve the user experience. Wyner elaborated that crypto firms may start taking advantage of banking products to fast track growth, further adding: “This will likely impact exchanges’ roadmaps on how they build products and integrate non-custodial services that better enable market liquidity and access to staking and governance service offerings.” Batlin believes exchanges could start leveraging banks in this scenario to serve their customers:

“Exchanges will now be able to leverage banks as custodians and streamline on-ramp and off-ramp payments where banks were once reticent participants. In short, opportunity for them to drive a better user experience and open up crypto to be a mainstream payment mechanism.”

Investors in the U.S. would be able to realize enhanced experiences while engaging with crypto assets when their existing banks enable them to track and interact with these assets on their established platforms for e-banking and digital commerce. Looking beyond similar short term and long term lucrative outcomes of this move, Wyner stated:

“The increased competition for custody services in the long term may drive new innovation and lower prices. In the short term, however, there is the potential for increased fee structures, limitations on the types of supported crypto assets and decreased ability to access best price execution across liquidity pools.”

This move might not be good news for all in the business. Established crypto custody firms like Coinbase, Blockchain.com and Trustology may be highly skeptical due to the economies of scale already achieved by the banks in the traditional custody business. These custody firms would have two options in either competing and/or integrating with these banks by using external wallets and ordering routing systems to maintain strong liquidity. Wyner believes that “there is new competition and they will need to consider differentiating themselves in capabilities and fees against new market entrants,” adding: “At the same time, mature crypto custodians with proven capabilities continue to be desirable to the market.”

Go to Source
Author: Anirudh Tiwari


Recommended Crypto Services, Products and Strategies:

The first thing any crypto investor needs is is a reliable and secure Crypto Wallet.  Whether you’re looking for an online wallet, hardware wallet, desktop or mobile wallet, Crypto Renegade provides you with all the Best Crypto Wallets in each category.

Best Crypto Wallets Banner

When you’re ready to buy more crypto, or exchange your coins for others, Crypto Renegade’s list of the Best Crypto Exchanges has you covered.  The Crypto Exchanges recommended here offer everything from simplicity and convenience to advanced trading platforms and profit sharing. 

Best Crypto Exchanges Banner

If you want to learn more about the methods and tools that can be used to find Great Crypto Projects, then be sure to check out Crypto Renegade’s strategy for How To Find The Best Cryptocurrency.

Crypto Strategy Banner

For those people that don’t have any money to invest right now, or just want to understand the technology a bit more, you’ll definitely want to check out Crypto Renegade’s Free Crypto Strategy and start collecting Free Coins today!

Free Crypto Banner

What do you think about cryptocurrency? Do you have any questions about it? Be sure to leave a comment below.

This site uses Akismet to reduce spam. Learn how your comment data is processed.