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1 1 (December 10, 2021)

handle is hein.crs/goveeyx0001 and id is 1 raw text is: C o g e s o a R e s a r c S e r v k 0 December 10, 2021 Bank Custody, Trust Banks, and Cryptocurrency Congress, the White House, and several financial regulators have demonstrated a recent interest in the intersection of banking regulation and cryptocurrency. This interest is underpinned by the trend of cryptocurrency firms seeking various forms of bank charters. This In Focus explains the way that banks-in particular trust banks, which have been the subject of recent cryptocurrency policy discussions- interact with cryptocurrency. Fiduciary and Custody Services Many banks offer fiduciary and custody services, such as managing trust agreements and safekeeping assets. Full- service commercial banks provide fiduciary services and custody services in addition to their core banking activities of deposit taking and lending. In addition, there are a number of limited-purpose banks, including trust banks, which focus exclusively on a narrow set of fiduciary and custody activities. Together, these institutions hold a significant value of assets for their customers. For example, according to data collected by bank regulators, 387 deposit- taking banking institutions held $259 trillion worth of assets in fiduciary and custody accounts as of September 2021. Fiduciary services include operating a trust. A trust is a contract that gives an institution authority to hold assets or the titles to assets and manage them on behalf of beneficiaries. These contracts can be structured as either revocable or irrevocable, meaning their terms either can be amended or are permanent, respectively. Often they are used for estate planning purposes, but as discussed below, they are increasingly used to manage cryptocurrency assets. Non-fiduciary custody services provided by banks typically include the settlement, safekeeping, and reporting of customers' assets, such as marketable securities and cash. In addition, some banks can allow a customer to make additional income on custody assets by loaning these assets to approved borrowers on a short-term basis. In 2020, the Office of the Comptroller of the Currency (OCC) issued guidance clarifying that nationally chartered banking institutions (including trusts) could offer custody services for cryptographic keys associated with cryptocurrency. Further, in 2021, the OCC issued guidance that national banks (including trusts) could issue stablecoins, a type of cryptocurrency with a value pegged to fiat currency, for payment activities. While some national banks have issued their own stablecoins (for instance, JPMorgan Chase and Wells Fargo issued stablecoins for use among institutional clients), much of the recent banking activity with cryptocurrency has centered around the chartering of trust or custody banks. Trust Banks A trust bank is effectively a bank chartered with the authority to do a limited set of business operations. Typically, trust bank activities focus on holding funds placed in trusts and executing contracts on behalf of the beneficiaries of trust accounts. While trust banks can accept some deposits and make some credit available, they are often restricted from making certain business lines a main source of their operating income. For this reason, trust banks are subject to different regulatory standards than commercial banks are; for example, they are generally not required to have deposit insurance from the Federal Deposit Insurance Corporation (FDIC), and a parent company that owns one may be exempt from the legal definition of bank holding company under the Bank Holding Company Act (P.L. 84-511). Trust banks are chartered at the state level by state banking agencies pursuant to state law or at the federal level by the OCC. State chartering statutes determine the authorities granted to state trust banks. The OCC charters national trust banks as national banks authorized to provide various fiduciary services under Title 12, Section 27a, of the U.S. Code. (Title 12, Section 92a, gives the OCC the authority to grant fiduciary powers to national banks.) In addition to providing custody of fiduciary assets as noted above, trust banks (and all national banks) may offer non-fiduciary custodial services (general safekeeping) for assets. Title 12, Section 24, serves as the basis for national banks to offer non-fiduciary custody services. Using their fiduciary and custody authorities, some trust banks hold cryptocurrency and digital assets in custody and often back those holdings with dollar reserves. Depending on the business model, trust banks can exchange them for other assets if the customer wishes. Since U.S. bank customers cannot deposit cryptocurrency into normal bank accounts, trust banks are serving two main functions for cryptocurrency assets: (1) acting as a de facto bank account where assets are held in safekeeping and backed by dollar reserves (in lieu of FDIC insurance); or (2) acting as a broker, where the institution facilitates transactions on the consumer's behalf. Recent Charters for Crypto Firms There are currently three cryptocurrency firms that have applied for and received conditional approval from the OCC for a national trust charter: Anchorage Digital Bank, Protego Trust Bank, and Paxos National Trust. In addition, there are some notable state-chartered limited purpose banks that are operating in cryptocurrency markets, primarily in Wyoming and New York. Kraken Bank and Avanti Bank received custody charters (similar to a trust charter) from the Wyoming Division of Banking in 2020, ittps://Crsreports.congress.g(

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