The landscape of finance is rapidly evolving, with the introduction of digital currencies presenting both opportunities and challenges. Recently, the major U.S. banking regulators—the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC)—have released pivotal guidelines that illuminate the frameworks banks should adopt when managing cryptocurrency assets.
This new guidance does not create additional regulations but rather emphasizes the importance of applying current risk management practices and compliance protocols for banks engaging with digital assets on behalf of their clients.
Framework for Crypto Asset Custody
The guidance specifically targets banking institutions that are either offering or contemplating the provision of custodial services for cryptocurrencies, as highlighted in insights shared by journalist Eleanor Terret.
Under this guidance, “safekeeping” refers to the responsibility of banks to securely hold a client’s assets, while also allowing for the possibility of additional custody services tailored towards cryptocurrencies.
The regulators address the inherent complexities of the digital asset ecosystem, reaffirming the necessity to comply with established laws that govern both fiduciary and non-fiduciary relationships.
Financial institutions that undertake these responsibilities are mandated to adhere to relevant legal frameworks, including stipulations in Title 12 of the Code of Federal Regulations (CFR), ensuring that cryptocurrencies are managed with the same diligence as traditional financial assets.
Notably, Timur Suleimenov, the head of the National Bank of Kazakhstan, remarked on the alluring potential for profit in cryptocurrencies, while simultaneously warning about the significant risks stemming from their volatility. Hence, regulators stress the importance of conducting comprehensive risk evaluations before entering the digital asset custodian space.
Additionally, competent staff trained in the nuances of cryptocurrency safekeeping are essential. Institutions must develop robust contingency plans to address potential obstacles that may arise as they venture into providing these services.
Essential Audit and Compliance Measures
Legal and compliance dimensions are critical in the operation of crypto-asset custodial services. Banks must navigate existing regulations, including the Bank Secrecy Act (BSA), anti-money laundering (AML) mandates, and directives from the Office of Foreign Assets Control (OFAC).
The guidance also underscores the significance of well-defined customer agreements that clarify the obligations of both banks and their clients. These contracts should explicitly address various facets of digital asset custody, such as governance, custodial methods, and the engagement of any sub-custodians.
As banks explore the integration of crypto-asset custodial services into their offerings, it is paramount to evaluate the implications and potential risks associated with third-party sub-custodians. Rigorous due diligence is critical when selecting these partners, as banks bear full responsibility for the actions of any third-party custodians they employ.
To facilitate effective oversight, banks are recommended to establish thorough audit procedures that evaluate their crypto-asset safekeeping practices. These audits should encompass a wide range of factors, including cryptographic key management, asset transfer protocols, and the general efficacy of the bank’s internal controls.
Image derived from DALL-E, with additional data sourced from TradingView.com.
