Cryptocurrencies legislations have always been in an evolving stage in the United States (‘US’). The US has been supportive of cryptocurrencies and decentralised ledger technology (‘DLT’) based enterprises. Earlier, New York issued BitLicenses to help support early stage cryptocurrencies businesses. Taking the facilitation on cryptocurrencies forward, the Office of Comptroller of the Currency (‘OCC’) issued a letter on July 22, 2020 (‘letter’) clarifying national banks’ and federal savings associations’ authority to provide cryptocurrency custody services for customers.
The letter described the market capitalisation of cryptocurrencies and the increased used of DLT and blockchain technology in the US markets. In the US, bitcoins and other cryptocurrencies are heavily regulated. Bitcoin has been recently approved for a futures fund by the US Securities and Exchange Commission (‘SEC’). Moreover, many centralised cryptocurrency exchanges, which trade cryptocurrency into fiat money, have obtained state banking licenses as trusts to operate in the US. Hence, there is a clear demand of cryptocurrencies in the US, whether it be for investment purposes or individual trading purposes. However, cryptocurrencies work on a mechanism of cryptographic codes and keys. These cryptographic keys are which are associated with cryptocurrencies grants access to the holder to sell or transfer cryptocurrencies. If the key is lost, the holder shall lose the value of the cryptocurrency. Hence, there is a growing demand for safe places such as banks to hold cryptographic keys on behalf of the customer and to provide safe custodial services. Existing options are not as safe as regulated banks. Moreover, with banks offering custodial services for cryptocurrencies, investment advisors may be able to manage various cryptocurrency portfolios. Custodial services for cryptocurrencies would differ when compared with traditional custodial services in the following manner:
Digitally held: Cryptocurrencies are normally held in wallets which function on the blockchain or DLT based networks which also store the cryptographic keys. Hence, there is no ‘physical’ allocation of cryptocurrencies to a customer. Hence, banks providing custody services, would be holding the cryptographic keys which gives access to the holder of such keys to transfer or sell the cryptocurrencies. These keys, are held in either a) cold wallets; or b) hot wallets. Cold wallets are more private mechanism as the cryptographic keys are stored in them physically, such as paper or hardware wallets which can be stored physically. Cold wallets are completely offline and thus safer. Hot wallets are online based wallets where cryptographic keys are stored digitally, hence making them more susceptible to hacking.
According to the OCC, by providing custodial services for cryptocurrencies, banks may be able to play the intermediary function which they have performed for time immemorial. This also give leverage to federal authorities in the US to consider financial risk management when it comes to cryptocurrencies. The fact is that when national banks offer custodial services, cryptocurrencies may also come under the purview of banking laws in the US. Hence, making them susceptible to regulation by public authorities such as the SEC, and other financial authorities. The letter did not provide for any opinion whether cryptocurrencies may be exchanged for the purpose of 12 U.S.C. 24(Seventh), which provide corporate powers of association and to carry out the business of banking such as bills of exchanged, deposits, loaning money etc. Hence, the OCC has not provided any opinion for banking functions such as loans based on personal security to be exchanged through cryptocurrencies. Hence, the OCC did not opine on the regulation of loans by taking custody of cryptocurrencies by banks. However, in the US, cryptocurrencies have been awarded the status of investment contracts by the SEC. Hence, in time, cryptocurrencies may also be regulated and facilitated by national banks for loan facilities under the term- investment securities as provided by 12 U.S.C. 24(Seventh).
The US has indeed been frontrunning the cryptocurrency market regulations. The custodial services as provided by banks will provide for more business opportunities for portfolio managers and institutional investors. Where other countries have been considering introduction of Central Bank Digital Currency (‘CBDC’), or have been issuing new licensing mechanisms, India has yet not decided its stance on cryptocurrencies. Most, developed nations and even third world countries (Cambodia) have recognised cryptocurrencies in one form or another. India is susceptible to fall behind in the highly competitive market. Where in the US there is a market capitalisation of USD 170 billion on bitcoins with almost 40 million Americans owning cryptocurrencies, India has about 5 million customer for cryptocurrencies. However, at this stage it is difficult to state how many of such users actually trade or invest in cryptocurrencies provided the uncertainty in regulation. It is high time India recognises the decentralising structure of financial instruments.
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