XRP News Today: US Agencies Outline Risks for Banks Offering Crypto Custody Services

Three federal agencies of the United States government have outlined the risks that banks must consider if they decide to offer crypto custody services to their clients. The document, titled “Crypto-Asset Safekeeping by Banking Organizations,” was published jointly by the agencies and emphasizes the complexities and potential liabilities associated with this new venture.

The document does not create new supervisory expectations but provides a framework for banks considering entry into the crypto space. It highlights several key risks, including the need for banks to understand a complex and evolving asset class, the potential liability if crypto assets are lost, and the legal and compliance responsibilities associated with regulations such as the Bank Secrecy Act and Anti-Money Laundering laws.

According to the document, providing crypto-asset safekeeping services may require significant resources and attention. The three federal agencies responsible for the document are the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Board of Governors of the Federal Reserve System. These agencies stress that banks must be prepared to handle the nuances of crypto assets, including key generation, controls related to the transfer and settlement of assets, and staff expertise.

Banks often use third parties to custody their crypto assets, as seen with asset manager BlackRock using Coinbase and later Anchorage for the custody of its Bitcoin (BTC). The document notes that banks are responsible for the activities performed by the sub-custodian, which could be significant if a bank’s custodian is hacked and the crypto is lost. The agencies advise that audit programs are essential and should address the specific challenges of crypto assets. If these programs do not exist within the bank, management should engage external resources to assess crypto-asset safekeeping operations.

There have been indications that some banks are considering entering the crypto space. In May, a group of big banks was in early talks to issue a joint crypto stablecoin. The current regulatory environment may be seen as more favorable, especially as governing bodies have made it easier for banks to enter the crypto market. For instance, the Federal Reserve has eliminated the “reputational risk” criteria from its oversight of banks, which critics say was used to unfairly target crypto businesses. Additionally, Acting Comptroller Rodney Hood wrote a letter to banks and federal savings associations saying they could buy and sell cryptocurrency that they are custodying at the direction of their clients.

Some native crypto companies are looking to become banks themselves. Ripple, the creator of XRP (XRP), applied for a banking license with the OCC. Circle, the creator of stablecoin USD Coin (USDC), has done the same. This trend highlights the growing interest in the crypto space and the potential for traditional financial institutions to adapt to this new landscape.

The agencies' guidance underscores the importance of a proactive approach to risk management in the crypto custody space. Banks must be prepared to invest in the necessary resources and expertise to effectively manage these risks, while also remaining agile and responsive to changes in the market and regulatory environment. By doing so, banks can position themselves to capitalize on the opportunities presented by the growing demand for crypto custody services, while also protecting their own interests and those of their clients.