Should your bank provide cryptocurrency services?

More and more banking customers are looking for secure ways to facilitate cryptocurrency activities, which poses a question for banks: Should you incorporate cryptocurrency services into your offerings for customers? 

The decision depends on several factors, including federal and state law, the specific type of cryptocurrency, security risks and heightened regulatory scrutiny. State laws vary regarding regulating cryptocurrency services, and federal regulators are expected to issue more guidance in the coming months. 

Before your bank offers cryptocurrency products or services, there are seven critical steps to keep in mind:

  • Review current state and federal regulatory guidance that may be applicable to the activity being considered.
  • Establish a system to monitor developing regulatory guidance.
  • Only accept cryptocurrencies for which the SEC has issued no-action letters stating  they are not securities, and ones that can be used as payment without first needing to convert to another kind of cryptocurrency or fiat currency.
  • Evaluate methods for the bank to securely hold the cryptocurrency.
  • Consider the risk — cryptocurrency is not federally insured.
  • Think through the details. How will the bank demonstrate that it can conduct the activity in a safe and sound manner? How will the bank effectively monitor and control risk, and address issues that may arise such as hacking, fraud, theft, liquidity risk, strategic risk and compliance risk?
  • Have discussions with your bank regulators about the proposed activity; the bank must provide written notice and wait for approval before proceeding.

Because cryptocurrency is a target for hacking and piracy, your bank should consider the risk associated with offering those services and take steps to proactively secure and protect the digital assets of your customers. Cryptocurrency is not federally insured, thus any theft or loss will not be backed by the federal government and accordingly a robust plan for protecting your customer’s cryptocurrency is essential to offering cryptocurrency services. 

Cryptocurrency is a new and developing area, requiring diligent consideration and ongoing monitoring of all the legal and regulatory factors. It is important to balance offering flexibility to customers while at the same time ensuring that the bank is protected from undue liability, security concerns or regulatory issues. Should you wish to discuss or review offering cryptocurrency services at your organization, Winthrop & Weinstine regularly works with its clients on such issues.

This Winthrop & Weinstine commentary is provided by Anton Moch, shareholder, Amber Kraemer, managing associate, and Jack Koepke, associate. Reach them at [email protected], [email protected] and [email protected], respectively.