While many in the Cryptoverse celebrate a decision by the US Office of the Comptroller of the Currency to allow all federally chartered banks in the US to provide cryptoasset custody services to their customers, it also brings an “existential” risk to Bitcoin (BTC).
The OCC published a letter stating that all national and state banks and federal savings associations can hold their clients’ digital assets. It also acknowledged BTC as “the first widely-adopted cryptocurrency.”
“The OCC concludes that providing cryptocurrency custody services, including holding unique cryptographic keys associated with cryptocurrency, is a modern form of traditional bank activities related to custody services,” their press release said. “Crypto custody services may extend beyond passively holding “keys”.”
Acting Comptroller Brian Brooks, who joined OCC this year after leaving his position of an executive at major crypto exchange Coinbase, said:
“This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”
The letter recognized the need for banks to leverage new technologies, particularly given the increasing digitization of the financial markets. Furthermore, national banks providing cryptocurrency custody might signal recognition of cryptos by these financial authorities, which could be reassuring to people who place their trust in traditional institutions. After all, the letter described fiat as an instrument that doesn’t “have intrinsic value but that individuals and institutions are willing to use for purposes of purchase and investment because they are issued by a government.”
“This clarification from the OCC may open the doors for larger financial institutions to be more comfortable providing traditional bank accounts to cryptocurrency companies, as well as actually provide custodial services for customers’ private keys,” Hailey Lennon, a legal counselor to crypto and fintech companies, wrote, adding that the OCC acknowledged the difference between custodial services for fiat money versus cryptocurrency.
Su Zhu, CEO of Singapore-based investment management firm Three Arrows Capital, called this news “insanely bullish.”
Also, firms like BlockFi, Coinbase may now want to become banks to be able to receive banking deposits directly without needing intermediaries
— Su Zhu (@zhusu) July 23, 2020
“BOOM! Today’s ruling is a huge step forward,” wrote Ripple CEO Brad Garlinghouse. “The future has never been fiat versus crypto – these can and should coexist in harmony!”
4/ But more importantly, this letter lays the groundwork for the further integration of cryptocurrencies into the existing financial system. It sends a clear message to banks that crypto should be embraced, not shunned.
— Blockchain Association (@BlockchainAssn) July 22, 2020
Per Coin Center‘s Peter Van Valkenburgh, not every person can hold “their entire life-savings directly in a wallet they personally control. “Accepting that centralized entities for cryptocurrency safekeeping and storage are unavoidable and essential, then it is excellent news that, thanks to the OCC’s new policies, there will be even more competition for providing those services,” possibly leading to more traditional institutional investors to deal in crypto.
A national charter, argued Coin Center, can improve consumer protection and bolster financial inclusion, among other benefits.
Meanwhile, Jameson Lopp, Chief Technology Officer at crypto security specialist Casa, said: “I can see the headlines from the near future…BANK OF AMERICA HACKED, LOSES 20000 BITCOIN,” with people commenting that the banks are untrustworthy, they’re not knowledgeable about crypto, and “not your keys, not your bitcoin.”
The dark side
As reported in May, popular crypto researcher Hasu warned that the growing custodial banking layer creates a systemic and existential risk for Bitcoin.
In a future where hundreds of millions of people use BTC, most of them through the custodial banking layer, the banks would be using the base chain as an interbank settlement network, while users would trade in Bitcoin IOUs that represent Bitcoin deposits, Hasu said back then. The system would be kept in check if users could switch at any point to a competitor, including the system’s trustless layers. But, if they are locked in, which depends on the exit cost from the system, then the power is in the hands of the banks and governments.
Moreover, according to the researcher, “there exists a feedback loop that makes custodial layers more attractive the larger they become, driving further users to them.” Eventually, noncustodial users could “find themselves facing the option to use custodial options or stop using Bitcoin altogether.”
After the OCC announced their decision, some other members of the cryptoverse have also voiced their concerns.
Just what I’ve always wanted, to pay a US bank to hold my bitcoin for me. Makes perfect sense doesn’t it. Exactly what satoshi had in mind I’m sure
— Mike (@MikeTerril) July 23, 2020
@Xentagz Different actors will need different key management solutions. Self-custody is great for individuals but n… https://t.co/EyS5A014JD
In either case, Ian Lee, Managing Director of IDEO Colab Ventures, argued that it might take two years for a bank “to get something in market.”
“If they’ve already been working on it, some will be able to get into market in 12 months, but that’s if they REALLY have their ducks in a row. It’ll take 3-4 months to get through risk and regulatory reviews alone after the solution is built,” he said, adding that “banks won’t touch anything other than “safe” large cap cryptos like Bitcoin & Ethereum, or things like Libra or USDC.”
c/ Acquisitions of top companies in the crypto infrastructure space by financial institutions like @Citi @jpmorgan,… https://t.co/6DhGYQyzWT
Learn more: Why Banks Hold the Key to Wider BTC Adoption and Hyperbitcoinization