Texas allows state-chartered banks to hold crypto on behalf of clients
- Banks must implement efficient, effective risk management protocols before proceeding.
- Reportedly, banks can offer custody services at fiduciary on non-fiduciary capacities.
- Per the Texas Department of Banking, banks should return client funds unharmed upon request.
State-chartered banks in Texas can now hold cryptocurrencies on behalf of their clients. The Texas Department of Banking issued a notice on June 10, saying that the banks must have efficient protocols in place for the effective management of associated risks. Apart from this, they must remain compliant.
According to the notice, state-chartered banks in Texas have provided their clients with safe custody for a plethora of assets. To this end, the Texas Department of Banking concluded that the authority to provide crypto custody services already exists under Texas Finance Code § 32.001. While the department acknowledges that crypto custody and safekeeping will vary from that of traditional assets, it does not believe it will be an issue, provided the aforementioned protocols are implemented.
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With this in mind, the department said banks would have to choose which crypto custody services they offer based on their expertise. Giving banks crypto custody options they can employ, the department said interested financial institutions could let users retain full control of their crypto holdings and only take a copy of their wallet’s private keys. Alternatively, banks can have their clients transfer crypto holdings to its wallet and create new private keys for safe custody.
Prioritizing the safety of customer funds
Per the Texas Department of Banking, state-chartered banks can offer crypto custody services at fiduciary or non-fiduciary capacities. By taking a non-fiduciary approach, banks will hold their customers’ crypto while letting the clients keep a legal title to their holdings. In this case, banks’ scope of obligations will depend on their agreement with their clients. However, they must ensure the safety of funds under their care and return them to customers unharmed upon request.
To use a fiduciary crypto custody approach, banks must have trust powers. Reportedly, this might require the banks to amend their charters and/or comply with 7 Texas Administrative Code § 3.23. By offering custody services in a fiduciary capacity, banks will have the power to manage cryptocurrencies the same way they do other assets.
Apart from looking out for customers, the notice cautioned that banks must conduct due diligence to understand the risks involved in offering crypto custody. For banks that decide to push forward with offering this service, the notice suggested the implementation of effective risk management systems. With such systems, banks will be in a position to measure, monitor, and control a variety of risks associated with crypto custody.