Fed, FDIC, And OCC Lay Down Rules For Crypto Custody Of Banks

• The Fed, FDIC, and OCC recently issued a joint letter pertaining to the crypto custody of banks.
• The collective statement provides a framework for safekeeping these assets.
• The agencies reminded that banks are liable for the actions of their sub-custodians.

The US Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) recently released a joint statement for banking organizations that are planning or are already providing Bitcoin (BTC) and cryptocurrency custody services.

According to the federal agencies, crypto custodians may offer other custody services while safekeeping crypto assets. The guidance clarifies the “safekeeping” aspect of crypto custody, which it defined as “the service of holding an asset on a customer’s behalf.”

No “New Supervisory Expectations” for Crypto Custody Services

The parties emphasized that they are not creating “new supervisory expectations.” Instead, they are establishing a robust framework for banks to follow when safekeeping crypto assets under existing laws, regulations, and risk-management best practices.

ADVERTISEMENTThe document titled “Crypto-Asset Safekeeping by Banking Organizations” laid down several factors that custodians must consider in relation to safeguarding crypto assets. These include properly securing cryptographic keys, enforcing a high-level cybersecurity infrastructure, ensuring legal compliance, and establishing reliable auditing mechanisms.

The Fed, FDIC, and OCC also highlighted that banks are still liable “for the activities performed by the sub-custodians.” This is in reference to financial institutions tapping third-party custody providers to safeguard their crypto assets. These include the likes of BlackRock, which is employing Coinbase and later Anchorage for its Bitcoin treasury reserves, and BNY Mellon, which is now serving as Ripple’s US dollar reserve custodian for its Ripple USD (RLUSD) stablecoin.

A Follow-Up to FDIC’s Notice

The agencies’ issuance is a follow-up to the FDIC’s notice in March of this year. The federal insurer rescinded FIL-16-2022 while providing new guidance for institutions covered in its mandate, particularly those seeking or engaging in crypto-related activities.

ADVERTISEMENTThe rescinding Financial Institution Letter stated that FDIC-supervised institutions may engage in permissible activities related to crypto-assets and other digital assets. However, they must understand the associated risks in dealing with such. These include operational and cybersecurity risks, as well as market and liquidity risks.

Moreover, the conduct of their services related to these products must be consistent with applicable laws and regulations. Hence, these should align with consumer protection requirements and anti-money laundering rules.

FDIC ordered the affected parties to engage with their supervisory team for guidance as well as for security and compliance purposes.

Final Thoughts

Overall, the joint statement of the Fed, OCC, and FDIC recognizes the growing acceptance of crypto assets in traditional finance. On the other hand, it also reminds banks and financial institutions to exercise due prudence in navigating the complex requirements involved in dealing with these assets.

These rules are necessary to ensure a balanced approach in crypto custody that enables continuous exploration and adoption of innovations without compromising security and investor trust.

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