Key Takeaways

The Texas Department of Banking has allowed state-chartered banks to provide custody services for crypto investors.
The regulator clarified that custody services would only be allowed for banks that establish adequate protocols.
The notice follows the state’s approval of a bill recognizing commercial investments in cryptocurrency.

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The Texas Department of Banking has confirmed that state-licensed banks can offer cryptocurrency custody services to clients.

Texas Issues Notice on Crypto Custody 

The Texas Department of Banking has allowed state charted banks to store crypto assets on behalf of clients.

In a Thursday notice, the banking regulator announced that state-chartered in Texas are now permitted to provide custody services on cryptocurrency investments under the Texas Finance Code § 32.001.

The notice added that to have custody over client’s funds, interested banks could store a copy of the private keys of their clients’ assets or have clients transfer funds into wallets controlled only by the banks.

While giving banks the control of private keys to banks is at odds with the ethos underpinning the cryptocurrency movement, it is a much-needed step for institutional adoption. As per U.S. legal requirements, institutional investors must have their assets, including cryptocurrencies, stored securely with a qualified third-party custodian such as a bank.

At the same time, safely storing cryptocurrency is a serious matter and requires a level of understanding that banking institutions may not always have.

Policies around the security of funds are a critical requirement for crypto custody. Security options include cold storage and multi-signature wallets, as well as insurance coverage.

The notice recognized that banks may not possess the ability to securely safeguard cryptocurrencies, an asset class that is prone to frequent hacks and thefts. In the notice, Texas Department of Banking pointed out that the custody of crypto assets differs from traditional assets like certificates of stock and bonds.

The bank regulator added that that the provision of custody services on cryptocurrency would only be allowed if banks have “adequate protocols in place to effectively manage the risks and comply with applicable law.”

The notice added that effective risk management systems and controls must be implemented to measure, monitor, and control relevant risks associated with the custody of digital assets.

Texas’ attitude towards cryptocurrency has shifted in the last month. In May, the state passed the House Bill 4474 that amended Texas Uniform Commercial Code to add “virtual currency.” The law established a legal framework for cryptocurrency investments.

Texas is not the only state to allow banks to launch crypto custody services. In Wyoming, another crypto-friendly U.S. state, the state’s Division of Banking has issued a new kind of banking charter known as a “special-purpose depository institution.” That charter, granted to Kraken and Avanti, allows institutions to offer both custody and trading services for clients. In addition to Wyoming and Texas, as of last year, the Office of the Comptroller of the Currency also allows U.S. national banks and cooperative banks to offer custody services for cryptocurrency investments.

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