On March 3, Virginia passed a new bill (HB 263) permitting banks in the Commonwealth to provide its customers with crypto custody services “so long as the bank has adequate protocols in place to effectively manage risks and comply with applicable laws.” Prior to offering custody services, a bank will need to carefully examine the risks involved in offering the service, which include meeting the following three requirements referenced in the bill:
Implementing effective risk management systems and controls to measure, monitor, and control relevant risks associated with custody of digital assets;
Implementing insurance coverage for such services; and
Maintaining a service provider oversight program to address risks to service provider relationships.
The bill explains that Virginia banks may offer this service either in a fiduciary or non-fiduciary capacity.
Acting in a fiduciary capacity, the bank will require customers to transfer their virtual currencies to the control of the bank by creating new private keys to be held by the bank and the bank will have authority to manage virtual currency assets as it would any other type of asset held in such capacity
As a nonfiduciary, the bank will act as a bailee, taking possession of the customer’s asset for safekeeping while legal title remains with the customer, meaning that the customer retains direct control over the keys associated with their virtual currency.
Virginia Governor, Glenn Youngkin, is expected to sign the bill into law in the coming weeks.
Putting it Into Practice: At the federal level, the OCC has already instituted measures allowing nationally-chartered banks to offer crypto custody services. In spite of the OCC rules, most banks have not carried out crypto custody services, in part, because without federal legislation, most banks are unwilling to take risks in the highly-regulated banking sector where even though they be in compliance with OCC rules, they may be in violation of other federal laws. While taking this wait-and-see approach, banks may not have to look any further than the recent executive order from the Biden administration outlining its cryptocurrency policy that may lay the foundation for future banking policy impacting crypto (we discussed the executive order in a recent Consumer Finance and FinTech blog post here).