Joseph (Jay) E. Spruill III

Joseph (Jay) E. Spruill III
Of Counsel

As consumer demand for bitcoin rises, a small but growing number of community banks are working with their vendors to allow customers to buy, hold, and sell bitcoin and other digital assets. These efforts involve a bank’s core vendor collaborating with a bitcoin technology company to facilitate the offering of bitcoin services, including digital wallets, through the bank’s online and mobile banking apps.

A Growing Market

Press reports indicate that 46 million Americans own bitcoin. This number is certain to grow despite the price volatility involved with such digital assets. Bankers are realizing that allowing customers to keep and see their deposits and digital assets in one place is an attractive option for consumers, and thus a way for banks to get new customers.

In addition, offering such services is a way to keep existing customers from moving their deposits out of the bank to a company like Coinbase if they want to buy and hold bitcoin and other cryptocurrencies. Importantly, banks can grow their fee income by imposing custodianship and related fees in connection with digital asset services.

Favorable Regulations

The question naturally arises as to whether cryptocurrency activities are permitted for banks under the law. The Office of the Comptroller of the Currency (OCC) recently issued favorable rulings confirming the authority of national banks to provide cryptocurrency custody services (Interpretive Letter # 1170 [pdf]) and to use cryptocurrencies to carry out bank-permissible functions such as payment activities (Interpretive Letter #1174 [pdf]).

On May 17, 2021, the Federal Deposit Insurance Corporation (FDIC) signaled its interest in custodianship of digital assets by banks by issuing a request for information and comment. This request may reflect that the FDIC looks favorably on bank involvement in these activities and that it seeks to bring regulatory certainty to this area. The comment deadline on the FDIC’s request for information and comment is July 16, 2021.

Risks and Rewards

Community banks should study the new technology needed to both protect and serve customers using cryptocurrencies. As with any financial transaction that involves FinTech, there are risks and rewards combined with the ongoing need for compliance. Community banks should look to serve customers and ensure processes and procedures that protect everyone’s security.

Conclusion

As bitcoin and other cryptocurrencies grow more popular and accepted in the marketplace, community banks may be well-suited to serve their customers in this area, and, in doing so, their bottom line.