US Banks Get Crypto Custody Nod, but Instant Demand Surge Is Unlikely
The Office of the Comptroller of the Currency, a division of the United States Treasury that supervises banking in the country, on July 22, issued an interpretive letter clarifying that nationally chartered banks are allowed to provide cryptocurrency custody services to their customers extended to storing cryptographic keys associated with the currencies.
In its letter, the OCC recognizes the current need for banks and other financial service providers to leverage blockchain technology and provide related services to their customers. In addition to national banks, this permission extends to state banks and to loans/savings associations, also known as “thrifts.”
Most notably, this move, combined with the news of an expected $2-trillion Fed stimulus, has pushed Bitcoin’s (BTC) price over the $11,000 mark. However, the outcome may not be just short term. Highlighting the significance of this move, Hong Fang, the CEO of OKCoin — a global cryptocurrency exchange — told Cointelegraph:
“The OCC has made an important milestone by allowing traditional banks to provide custodial services that will apply to crypto, thereby strengthening the overall financial system and broadening financial inclusion. While the public letter didn’t introduce new regulations, it added much-needed clarification in regard to national banks providing cryptocurrency custody services.”
According to Fang, the latest decision is heavily influenced by the acting comptroller of the currency, Brian Brooks — the former chief legal officer of the U.S.-based cryptocurrency exchange Coinbase. His experience in legal, compliance and government-related functions has equipped him to further the understanding of custodial aspects of cryptocurrency in the U.S. financial system: “The safety-focused remarks by Acting Comptroller Brian Brooks will help enable the U.S. to remain a leader in the global financial landscape.”
A development like this is highly impactful on institutional investors who are often skeptical of new industries like crypto. It’s a step toward crypto assets being considered a legitimate asset class by the big banks, payment companies and clearing agencies. Sam Wyner, a co-lead of cryptoasset services at KPMG, discussed the impact of this announcement on institutional investors with Cointelegraph, alluding to the nature of custodians:
“Custody is a fees-based business and regulatory support behind a new fees-based business makes it that much more desirable. The institutional crypto markets continue to grow in size, maturity and sophistication, driving the need for custody services. Uncertainty in the market further increases the appeal of a net-new fees-based product offering.”
Leading global banks in the U.S. already have a robust underlying infrastructure and systems in place for a traditional custodian business, and crypto can share that base according to Wyner, who further added: “Building out the infrastructure for crypto now will enable banks to support tokenized assets in the future.”
Considering the custody fee opportunities that this move brings, institutional players are bound to be the biggest benefactors. The trickle-down impact of this increase in interest is inevitably going to affect retail investors, enabling them to increase the proportion of crypto assets in their individual portfolios. Here, Fang stated further: “I look forward to seeing more banks becoming more open to crypto, with potentially better banking channels, more public awareness, as well as more regulatory clarity. A better user experience ultimately wins.”
The largest institutional crypto exchange, Bakkt, has smashed its daily BTC Futures volumes records twice in the past 2 days and BTC options volume hitting an all-time high on Deribit could also be telling signs of this interest picking up. However, a clear trend still needs to be established before any judgement is made.
Earlier this year, 40 German banks reached out to regulators, expressing interest in custody licenses for crypto assets, and Germany’s Federal Financial Supervisory Authority, or BaFin, also released guidance in March that says that firms may only be called custodians if they have access to customers’ private keys, which could eliminate providers that see encrypted keys. Despite this interest, the CEO of Crypto Storage AG said that the company found it extremely hard to even open a bank account in the country due to the banks not understanding the nature of the crypto industry.
Similarly in the U.S., it is highly possible that banks might not immediately lunge at the opportunity since, technically, banks were never prohibited to custody crypto assets, and there was never any transparency on the risks that might entail. From this perspective, such a development can be considered as only a clarification from the OCC. Alex Batlin, the founder and CEO and founder of Trustology — a custodial wallet provider — told Cointelegraph that he expects some latency, adding: “For anyone active in this space, it’s just an affirmation of what’s there. For those not active in the past, it could prompt some movement, but it may take some time for the consciousness to evolve.”
Adding to the lack of clarity on behalf of the Treasury Department, there have been barriers in the past that have added enormous costs for organizations. For example, Fidelity did offer custodial services for crypto assets, but there was always an issue around mixing normal business activities with crypto due to the lack of clarity if the same organization was allowed to do both.
“Now that the greenlight is official, in principle, one of the things it should do is reduce the cost of entering this line of business, it’s easier to do so because there are less hurdles,” according to Batlin. Referring to the risk-averse nature of the banks and large scale institutional investment vehicles, he further stated:
“Banks are very risk-conscious. So, when you have them looking at a proposal, and there is lack of regulation, why would you risk your license for something that will yield pretty low returns in the next couple of years? I think there will be demand whether it’s on the lower end or whether it’s sufficient for the likes of BNY and others.”
Cryptocurrency exchanges could use this change to have collaborative relationships with banks in order to enable better future prospects for the industry, fuel liquidity and improve the user experience. Wyner elaborated that crypto firms may start taking advantage of banking products to fast track growth, further adding: “This will likely impact exchanges’ roadmaps on how they build products and integrate non-custodial services that better enable market liquidity and access to staking and governance service offerings.” Batlin believes exchanges could start leveraging banks in this scenario to serve their customers:
“Exchanges will now be able to leverage banks as custodians and streamline on-ramp and off-ramp payments where banks were once reticent participants. In short, opportunity for them to drive a better user experience and open up crypto to be a mainstream payment mechanism.”
Investors in the U.S. would be able to realize enhanced experiences while engaging with crypto assets when their existing banks enable them to track and interact with these assets on their established platforms for e-banking and digital commerce. Looking beyond similar short term and long term lucrative outcomes of this move, Wyner stated:
“The increased competition for custody services in the long term may drive new innovation and lower prices. In the short term, however, there is the potential for increased fee structures, limitations on the types of supported crypto assets and decreased ability to access best price execution across liquidity pools.”
This move might not be good news for all in the business. Established crypto custody firms like Coinbase, Blockchain.com and Trustology may be highly skeptical due to the economies of scale already achieved by the banks in the traditional custody business. These custody firms would have two options in either competing and/or integrating with these banks by using external wallets and ordering routing systems to maintain strong liquidity. Wyner believes that “there is new competition and they will need to consider differentiating themselves in capabilities and fees against new market entrants,” adding: “At the same time, mature crypto custodians with proven capabilities continue to be desirable to the market.”
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Jack Dorsey-backed CoinList Launches Pro Exchange
The CoinList Pro exchange aims to offer a seamless experience to investors and traders for token purchase and sale while overcoming previous hassles.
On Thursday, July 30, the Jack Dorsey-backed token sale platform CoinList announced the launch of its professional platform CoinList Pro. The professional exchange is majorly aimed for token investing and trading facilities institutional clients.
CoinList is popular worldwide for some of its successful cryptocurrency sales to accredited investors and other non-U.S. clients. Some of the very popular cryptocurrency sales hosted by CoinList include Solana, Celo, Dfinity, Blockstack and Filecoin. Since its inception in 2017, CoinList hosts several Thunder users on its platform. Besides, it has also facilitated over $1 billion worth of transactions to date.
Last year in 2019, CoinList received a good amount of investment from Twitter CEO Jack Dorsey. CoinList president Andy Bromberg said that the new Pro Exchange will add features like “a live order book and multiple order types”. This will be in line with CoinList’s token sale offering with secondary trading. Thus, unlike earlier, investors and traders won’t face friction for token distribution after a sale.
“Previously, the token sale would happen and then we would give users instructions to generate a wallet, then they would wait for an exchange to support the token on the trading side and then they would have to send the tokens from their wallet to the exchange,” Bromberg explained.
Bromberg aims to change this with CoinList Pro. He added: “Our dream sequence is users buying from a token sale and eventually selling that asset on CoinList Pro for a seamless flow”.
On the other hand, CoinList aims to be an exchange popular for the trading of new and less popular tokens. Although it lists cryptocurrencies like Bitcoin and Ethereum, it’s not a go-to platform for trading these high-value digital currencies. Rather it’s more popular for early-stage cryptocurrencies. Admitting it, Bromberg said:
“The exchange space is hard. But our biggest advantage is: anyone who participated in a token sale on our platform is a CoinList user and they are going to be the most passionate community members. And we instantly will have those community members as exchange clients.”
With its new service, CoinList plans to partner startups like Bison Trails, Anchorage, and BitGo. CoinList looks to partner for staking and custody options for a dozen cryptocurrencies by 2021. Currently, CoinList Pro lists cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Orchid (OXT), Celo (CELO), and Algorand (ALGO). Bromberg said that it will be the first exchange to support Filecoin trading after the token launch in September.
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Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.