Texas Department of Banking allows state banks to provide virtual currency custody services

The Texas Department of Banking announced on June 10, 2021 that Texas-chartered banks may provide virtual currency custody services. The Department's notice provides clarity to the Texas Finance Code, which the Department believes already gave authority to banks to provide virtual currency custody services.

The types of virtual currency custody services a Texas-chartered bank may provide will depend on the bank's expertise, risk appetite and business strategy, the notice stated. According to the notice, a Texas-chartered bank may provide custody services in either a non-fiduciary or fiduciary capacity. In providing services in a non-fiduciary capacity, the bank would act as a bailee, taking possession of the virtual currency for safekeeping while the customer retained legal title to the asset. For example, the bank may choose to only store copies of customer private keys and allow the customer to retain direct control. Alternatively, a bank may cause the customer to transfer their virtual currency directly to the control of the bank, creating new private keys that are then held by the bank on behalf of the customer. Services provided in such a fiduciary capacity would allow the bank to manage the virtual currency in the same way it would with any other asset held in a similar capacity. A bank must have trust powers under Texas law to provide fiduciary services.

Texas' decision to provide state-chartered banks with greater regulatory certainty in offering virtual currency custody services follows a series of similar moves at the federal level by the Office of the Comptroller of the Currency ("OCC")—the federal regulator of nationally-chartered banks and savings associations. Late last year, the OCC issued several interpretive letters affirming the ability of national banks to provide digital asset custody services and to hold stablecoin reserves. Since then, they have conditionally approved several crypto-focused, state-chartered trust companies to convert into federally-chartered banks.

According to the OCC, these banks will provide a wide range of services associated with digital assets that are permissible for a national bank. These include, among other things: custody services for digital assets; payment and exchange services; trading services; and "know your customer" services, which includes customer identification, sanctions screening, enhanced due diligence, customer risk rating and more.

These developments likely present a range of opportunities to Texas banks. The notice may be staging a pathway, like the OCC's recent activity, for Texas-chartered banks interested in providing crypto-related services. This newly recognized ability of Texas-chartered banks to provide digital asset custody services will allow them to better compete at the forefront of the quickly growing crypto-banking industry.

For more information or questions about providing virtual currency custody services, please contact the authors.