The Texas Department of Banking has authorized state-chartered banks to offer customers custody services for virtual currencies.
The announcement specified that banks could do this as long as they had adequate protocols in place. It added that these protocols should effectively manage the risks and comply with the applicable laws. The banking authority also pointed out that an existing finance code technically already enabled such services.
The banking authority defined virtual currencies as “an electronic representation of value intended to be used as a medium of exchange, a unit of account, or store of value.” It also noted that they do not exist physically, but only on a blockchain or distributed ledger associated with them.
It defined the owner of the virtual currency as the person holding the cryptographic keys for the digital wallet storing the virtual currency. This definition is important regarding the type of services banks can render to these owners. For instance, banks can allow customers to keep directly controlling their virtual currency, or merely store copies of the customer’s private keys. On the other hand, banks may require customers to transfer their virtual currency directly to the control of the bank. This would involve creating new private keys that are then held by the bank on behalf of their customer.
In regard to these custodial services, the banking authority determined that state-chartered banks can offer them in either a fiduciary or non-fiduciary capacity. For instance, in the non-fiduciary case, the bank would act as a bailee. This means that while it would possess the customer’s asset for safekeeping, legal title to that asset would remain with the customer.
If a bank offers custody services in a fiduciary capacity, it must receive trust powers. The banking authority admits that this may require a charter amendment. Similar to other assets, banks with fiduciary authority can manage its customers’ virtual currency assets.
Finally, the banking authority takes note of the technical nature distinctive of virtual currencies versus other assets. Banks may therefore choose to supplement their custodial services with the help of service providers experienced in handling virtual currency. These banks would naturally have to provide an oversight program in relation to these external custodial service providers. This could benefit several such incumbent service providers, bolstering the local cryptocurrency industry as a whole.