The OCC Response
The response of the OCC is as follows.
“We conclude a national bank may provide … cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency. This letter also reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”
This response indicates a number of things, one of which is a fundamental understanding of how cryptocurrencies are held. This is not insignificant, as regulatory bodies are notorious for lagging behind on the understanding of cutting edge technology. The letter demonstrates that the OCC has at least a rudimentary understanding of what is required to custodian cryptographic assets. Furthermore, it indicates a broader level of acceptance in the American banking system in general. The OCC is willing to accept that American banks will custodian cryptographic assets for their clients, as long as they are following existing laws. All in all, this is a huge step towards mass adoption, as now banks are free to expose the customers to cryptocurrencies through the trusted relationship that already exists.
Mass Adoption on its Way
Since this announcement was made public on July 26th, bitcoin has risen 15% and broken the 10k level once again. This is simply just the price of bitcoin, and is only one factor to be considered when evaluating levels of adoption. The more interesting aspect of the OCC’s letter is to consider how this decision will propagate into the future. Entire generations of individuals who have been with their financial institutions for decades will gradually be introduced to the concept of cryptocurrency. Not through YouTube, Twitter, or ransomware attacks, but through established and trusted institutions.
Much attention has been given to cryptocurrencies in the recent months due to economic fluctuations on a global scale. There is real debate taking place as to whether or not cryptocurrencies are safe or removed from the events that take place on the regular stock market. This conversation was had on blogs, podcasts, and in niche forums. Now this conversation will be had in offices amongst financial advisors and people of all ages. One of the biggest barriers to the adoption of cryptocurrency is education. American banks will begin to seek software that simplifies the custodianship of digital assets. Platforms with integrated learning material will be given preference over software that simply does the job.
Perhaps one of the more unknown aspects of this ruling is how the banks will manage cryptocurrency deposits. Traditionally, banks operate on the basis of fractional reserves. This means that they only need to hold a fraction of the deposits in the vault, and are free to lend the rest to other clients. This is much more difficult to achieve with cryptocurrencies, as most cryptocurrencies fluctuate in value on a daily basis. If a client is seeking a loan, and decides to take the loan in bitcoin, then the loan will likely need to be paid back in bitcoin. However, if the client has traded their bitcoin for another asset, and the price of bitcoin rises, this could put the client in a very precarious position. Very quickly, the client could find themself in a situation where an amount of bitcoin is owed, that they are simply unable to pay.
There is a finite amount of most cryptocurrencies, and so fractional reserves are inherently more complex. If American banks do decide to loan bitcoin out to clients, then we could see a situation where there are more bitcoin held in banks, than there are bitcoin in existence. A subsequent run on the bank would surely cause the banks to be unable to make good on the withdrawal. In theory, this would cause a significant increase in demand for bitcoin, and we would see a subsequent rise in prices.
America Sets the Precedent
America is often the first to trudge bravely into new technology. Although, a firm argument can be made that cryptocurrencies and blockchain is not that new anymore. Many believe that this opinion is too late, while others are happy it is here nonetheless. Now that America has taken this step into the acceptance of digital assets, it will prompt other countries to follow suit. Other countries may see America’s acceptance of cryptocurrencies as a competitive geopolitical advantage. If this is the case, then we can be sure to see similar regulations be instantiated in other countries in the near future.
The Best Way to Hold Cryptocurrency is Still By Yourself
Even though American banks may now hold cryptocurrency, the safest, and best way to hold cryptocurrency is by yourself. Nothing beats a cold storage hardware wallet. In the event that the bank would need to freeze your assets, or the government needs to seize your funds, they can. These American banks are going to start to look a lot like cryptocurrency exchanges, acting as general custodians for cryptocurrencies. Therefore, it is still imperative that you take precaution when selecting who you store your cryptocurrencies with. The same basic checks should be done to ensure that your cryptocurrencies are in good hands. Regardless, people of all ages are about to get exposed to the world of cryptocurrency for the first time. Who is ready for mass adoption?