Tech Barrier Would Slow Down The Approach Of Banks To Crypto-Deposit Services

Safety and security are the foundations for making things work. If you do not get that right, the entire system could crash.

Banks may have been provided with the green light to provide their customers with cryptocurrency custody services following a letter issued by the Currency Management Office (USA) last month, but this does not mean these organisations can hurry to provide the services soon.

"It’s going to be a hurdle for many banks — the technology integration of the traditional manner of managing money with this new manner of doing digital custody," said Scott Carlson, head of digital asset security at Kudelski Security. 

The letter from the OCC states that banks are permitted to provide cryptocurrency custody services as well as keep unique cryptographic "keys" linked with cryptocurrency on behalf of clients.

Banks will continue to address the needs of their customers to protect their most precious assets which today include cryptocurrency for tens of millions of Americans

Yet financial institutions that are involved in offering the service will first need to make important choices on their commitment to the technologies associated with crypto-custody, noting that banks will follow three paths.

Two, they should outsource it completely. Three, they can have a lot in best-of-breed bits and connect them to the stuff they currently do, they already have a know-how-your-customer program, they already have an accounting system, they can put in parts from various suppliers. Or three, they can build it themselves. Some very difficult decisions will be made for some places because many banks are traditionally used to hosting their own all.

As other banking environments, institutions would also have to quantify risk.

Bank technologists may see a new crypto-custody path as an opportunity to learn innovation, but it would be up to the risk department of the bank to decide whether or not their engineering departments have the resources, expertise and technical capabilities to take on the initiative.

Acquisitions or joint partnerships may be another tactic for banks who want to leverage businesses with the technological resources already available. 

The calculated measures involved with measuring the costs and returns of being a crypto-custodian coupled with the pandemic mean it could take time before banks deploy such services.

With US banks amid COVID in 2020, it's not a fast process

Overall, the letter from the OCC will help banks feel more relaxed with the thought of delivering the service, even though that means they 're going to take their time in the process.

The letter from the OCC is an "exciting development for the digital asset space," and one that could lead to a trickle-down impact. Large banks would be the first to provide crypto-custody services, and smaller banks, he said, could follow.

This is exciting news for an asset class that has historically lost clarification about institutional custodial facilities in the federal regulatory system.

There aren't many well-known, proven brands working in this sector right now, and that's because of what many have viewed as the regulatory risk and their tolerance for that challenge.

This opens the door to a broader asset class market, from the viewpoint of digital assets. People have been tiptoeing around this topic to date, and I think what we can see here is the momentum is growing up.