The Office of the Comptroller of the Currency (OCC) published a letter, nearly 2 months ago, clarifying the authority of national banks and federal savings associations to provide cryptocurrency custody services for its customers.
Acting Comptroller of the Currency Brian P. Brooks said “From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today. This statement cleared uncertainties from banks of whether it could provide custody services for its clients.
The OCC also recognizes with the rapid technological development and transformation of people’s daily lives, the need to keep up with new innovations becomes greater. By keeping up, banks can continue to serve the financial intermediation function, as it has been doing since the inception of banking.
The next question is, with the green light of the OCC, how are banks going to provide this service?
According to a report by the UK’s Financial Conduct Authority, nearly 50% of the banks do not upgrade old IT systems as soon as they should. A different report shows that 43% of US banks still use COBOL, a programming language dating back to 1959. COBOL has been criticised throughout its life for its verbosity, design process, and poor support for structured programming. These weaknesses result in not easily comprehensible and verbose programs making them difficult to upgrade.
With such a big number of banks running legacy systems, the possibility of banks accepting cryptocurrencies as a payment method seems far fetched. However, custody services might be an interesting proposition for banks even if they have an outdated banking system.
Before banks can launch a virtual vault, several steps have to be taken. They must develop a full understanding of cryptocurrencies, the risks, possible exploits (pitfalls), blockchain as a technology, and digital asset, and learn how to provide a scalable custody service. Besides the core technology and regulatory requirements, banks need to gain expert level knowledge on related technologies, regulatory hurdles, and security on safeguarding crypto assets for both institutional and retail customers.
Another thing that might need to be addressed is the insurance of such digital assets. Depending on the bank, it might be eligible for Federal Deposit Insurance Corporation deposit insurance, with a standard deposit insurance coverage limit of $250,000 per depositor. However, if it is not, what should be the protocol?
It is estimated that in 2018 over $1.74 billion damages occurred, in 2019 it surged to $4.52. CipherTracer reported that in the first 5 months of 2020, already $1.36 billion was stolen. As the adoption of cryptocurrencies develops the losses will rise with it. Further proving that secure custody services are more important than ever.
There are many more custody services over the world, however, these are the ones that are well known.
For this piece we’ve contacted our partner Amdax, and asked them about how they view the custody environment. Amdax Bio: AMDAX is dedicated to helping people invest in Bitcoin and digital assets. They provide private clients services, access to market intelligence, and investment opportunities across a range of digital assets.
What is your opinion on the current state of custodial services for crypto currencies?
Custodial services are getting better and better. The tech is getting better, we deploy multi party computation (MPC) which basically eliminates the private seed phrase / private key problem, which so many have/had to battle with. It also gives the added flexibility for clients who want to cosign transactions. The useability and front ends are much user friendlier. Functionality is better, speed and interoperability between other financial institutions has greatly increased. Furthermore, we also have an unprecedented insurance policy within our industry. We can insure assets on cyber breach, extortion, loss of data assets, technical errors, etc.
What is in your opinion the most important aspect for custodians?
Safety first and foremost, followed by interoperability and then speed. You want to have an extremely secure venue. But what good is a secure venue in a digital age, if it’s not connected to the right counterparties in the right ecosystem. Furthermore, what good is having a secure and connected vault if it isn’t able to send and process transactions in a speedy manner. Especially when you are servicing financial institutions which need processing speed.
Should traditional banks dip their toes in crypto currency custody services?
We are seeing some interest from banks that want to try and dabble in the custodian business for digital assets. This seems to be a logical step down the line as banks are already custodians of cash. They do, however, lack behind in knowledge. This puts them at a disadvantage. Currently, there isn’t that much demand from retail within banks, thus the urge to innovate is not as strong yet. Players like paypal have signalled they will be building wallet integrations into their service. In the USA for example, all banks can become a digital asset custodian. Banks like Avanti in the USA are leading the race.