I. Introduction and Summary Conclusion
This letter responds to your request regarding the authority of a national bank to provide cryptocurrency custody services for customers. For the reasons discussed below, we conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.1 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.2
Cryptocurrencies—also known as "digital currencies" or "virtual currencies"—are designed to work as a medium of exchange and are created and stored electronically.3
Depending on the type of cryptocurrency, it may have characteristics of either fiat money or money backed by some underlying asset(s) or claim(s). Fiat money refers to instruments that do not 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. Government-issued currencies, including the U.S. dollar following abandonment of the gold standard, are traditional fiat money. Some types of cryptocurrencies may have similar characteristics as fiat money because they are not backed by any other assets. Other types of money may be backed by assets (such as a commodity). The U.S. dollar was a type of asset-backed money prior to abandonment of the gold standard. Some types of cryptocurrencies may have similar characteristics to this type of money. For example, stablecoin is a type of cryptocurrency that is backed by an asset, such as a fiat currency or a commodity.
While cryptocurrency shares certain characteristics of these traditional types of money, the exchange mechanism is novel. The exchange mechanism for most cryptocurrencies is based on two separate underlying technologies. The first is advanced cryptography, which is used to protect information related to the cryptocurrency. Cryptography allows the creation of digital code that generally cannot be altered without the permission of the creator.
The second type of technology underlying cryptocurrencies' exchange mechanism is known as "distributed ledger technology," and consists of a shared electronic database where copies of the same information are stored on multiple computers. This shared database functions as both a mechanism to prevent tampering and as a way to add new information to the database. Information will not be added to the distributed ledger until consensus is reached that the information is valid. Furthermore, attempts to change the information on one computer will not impact the information on the other computers. Some distributed ledgers are known as "blockchains" because the transactions stored on the ledger are sequentially grouped together in blocks, thus creating a chronological record of all transactions to that point.3
Cryptocurrencies do not exist in any physical form. They exist only on the distributed ledger on which they are recorded. A particular unit of cryptocurrency is assigned to a party through the use of a set of unique cryptographic keys. Those keys allow that party to transfer the cryptocurrency to another party.4 If those keys are lost, a party will generally be unable to access its cryptocurrency. Furthermore, if a third party gains access to those keys, that third party can use the keys to transfer the cryptocurrency to themselves.
The first widely-adopted cryptocurrency, Bitcoin, was introduced in 2008.5 Since the creation of Bitcoin, hundreds of additional virtual currencies have been created, all of which have different characteristics and potential uses. Some cryptocurrencies may have characteristics of currency or cash, including as a medium of exchange, but with a new exchange mechanism (i.e., electronic transfer without an intermediary). This letter expresses no opinion on whether cryptocurrencies may be exchange for purposes of 12 U.S.C. 24(Seventh).
1 As discussed further below, this conclusion also applies to Federal savings associations (FSAs).
2 Banks determine the levels and types of risks that they will assume. Banks that operate in compliance with applicable law, properly manage customer relationships and effectively mitigate risks by implementing controls commensurate with those risks are neither prohibited nor discouraged from providing banking services. As the federal banking agencies have previously stated, banks are encouraged to manage customer relationships and mitigate risks based on customer relationships rather than declining to provide banking services to entire categories of customers. See Joint Statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering Supervision, at 2 (July 22, 2019), available at https://www.occ.gov/news-issuances/news-releases/2019/nr-ia-2019-81a.pdf . 3 The term "cryptocurrency" as used in this letter also encompasses digital assets that are not broadly used as currencies.
3 See, e.g., How does Bitcoin work?, bitcoin.org (last visited July 20, 2020), https://bitcoin.org/en/how-it-works (describing Bitcoin's shared public ledger as a blockchain).
4 See, e.g., FAQs, How does Bitcoin work?, bitcoin.org (last visited July 20, 2020), https://bitcoin.org/en/faq#howdoes-bitcoin-work (from a user perspective, Bitcoin is nothing more than an application that provides a digital wallet); How does Bitcoin work?, bitcoin.org (last visited July 20, 2020), https://bitcoin.org/en/how-it-works (describing use of keys to sign transactions); How do Bitcoin Transactions Work?, Coindesk.com (last visited July 20, 2020), https://www.coindesk.com/information/how-do-bitcoin-transactions-work/ .
5 See Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, available at https://bitcoin.org/bitcoin.pdf (Bitcoin Whitepaper).
Originally published 24 July, 2020
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