Bank Custody, Trust Banks, and Cryptocurrency
December 10, 2021
Bank Custody, Trust Banks, and Cryptocurrency
Congress, the White House, and several financial regulators
Trust Banks
have demonstrated a recent interest in the intersection of
A trust bank is effectively a bank chartered with the
banking regulation and cryptocurrency. This interest is
authority to do a limited set of business operations.
underpinned by the trend of cryptocurrency firms seeking
Typically, trust bank activities focus on holding funds
various forms of bank charters. This In Focus explains the
placed in trusts and executing contracts on behalf of the
way that banks—in particular trust banks, which have been
beneficiaries of trust accounts. While trust banks can accept
the subject of recent cryptocurrency policy discussions—
some deposits and make some credit available, they are
interact with cryptocurrency.
often restricted from making certain business lines a main
source of their operating income. For this reason, trust
Fiduciary and Custody Services
banks are subject to different regulatory standards than
Many banks offer fiduciary and custody services, such as
commercial banks are; for example, they are generally not
managing trust agreements and safekeeping assets. Full-
required to have deposit insurance from the Federal Deposit
service commercial banks provide fiduciary services and
Insurance Corporation (FDIC), and a parent company that
custody services in addition to their core banking activities
owns one may be exempt from the legal definition of bank
of deposit taking and lending. In addition, there are a
holding company under the Bank Holding Company Act
number of limited-purpose banks, including trust banks,
(P.L. 84-511).
which focus exclusively on a narrow set of fiduciary and
custody activities. Together, these institutions hold a
Trust banks are chartered at the state level by state banking
significant value of assets for their customers. For example,
agencies pursuant to state law or at the federal level by the
according to data collected by bank regulators, 387 deposit-
OCC. State chartering statutes determine the authorities
taking banking institutions held $259 trillion worth of assets
granted to state trust banks. The OCC charters national trust
in fiduciary and custody accounts as of September 2021.
banks as national banks authorized to provide various
fiduciary services under Title 12, Section 27a, of the U.S.
Fiduciary services include operating a trust. A trust is a
Code. (Title 12, Section 92a, gives the OCC the authority to
contract that gives an institution authority to hold assets or
grant fiduciary powers to national banks.) In addition to
the titles to assets and manage them on behalf of
providing custody of fiduciary assets as noted above, trust
beneficiaries. These contracts can be structured as either
banks (and all national banks) may offer non-fiduciary
revocable or irrevocable, meaning their terms either can be
custodial services (general safekeeping) for assets. Title 12,
amended or are permanent, respectively. Often they are
Section 24, serves as the basis for national banks to offer
used for estate planning purposes, but as discussed below,
non-fiduciary custody services.
they are increasingly used to manage cryptocurrency assets.
Using their fiduciary and custody authorities, some trust
Non-fiduciary custody services provided by banks typically
banks hold cryptocurrency and digital assets in custody and
include the settlement, safekeeping, and reporting of
often back those holdings with dollar reserves. Depending
customers’ assets, such as marketable securities and cash.
on the business model, trust banks can exchange them for
In addition, some banks can allow a customer to make
other assets if the customer wishes. Since U.S. bank
additional income on custody assets by loaning these assets
customers cannot deposit cryptocurrency into normal bank
to approved borrowers on a short-term basis. In 2020, the
accounts, trust banks are serving two main functions for
Office of the Comptroller of the Currency (OCC) issued
cryptocurrency assets: (1) acting as a de facto bank account
guidance clarifying that nationally chartered banking
where assets are held in safekeeping and backed by dollar
institutions (including trusts) could offer custody services
reserves (in lieu of FDIC insurance); or (2) acting as a
for cryptographic keys associated with cryptocurrency.
broker, where the institution facilitates transactions on the
Further, in 2021, the OCC issued guidance that national
consumer’s behalf.
banks (including trusts) could issue stablecoins, a type of
cryptocurrency with a value pegged to fiat currency, for
Recent Charters for Crypto Firms
payment activities.
There are currently three cryptocurrency firms that have
applied for and received conditional approval from the
While some national banks have issued their own
OCC for a national trust charter: Anchorage Digital Bank,
stablecoins (for instance, JPMorgan Chase and Wells Fargo
Protego Trust Bank, and Paxos National Trust. In addition,
issued stablecoins for use among institutional clients), much
there are some notable state-chartered limited purpose
of the recent banking activity with cryptocurrency has
banks that are operating in cryptocurrency markets,
centered around the chartering of trust or custody banks.
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,
https://crsreports.congress.gov
link to page 2 Bank Custody, Trust Banks, and Cryptocurrency
and Paxos holds a state charter from New York’s Division
regulatory arbitrage, blending commerce with banking, and
of Financial Services. Recently, New York conditionally
the potential for systemic risk.
approved a partnership between PayPal, a money
transmitter, and Paxos to engage in cryptocurrency
Deposit Insurance. Deposit insurance is a government
business. Each of these institutions has a different business
safety net designed to prevent “runs” at banks and protect
model; Table 1 depicts some of the cryptocurrency
ordinary citizens seeking to keep their money safe from
activities the banks are undertaking.
losses. The recent findings in the November 2021
President’s Working Group on Financial Markets report
Table 1. Select Bank Cryptocurrency Activities
(issued along with the federal banking regulators) on
Examples of recent banking activities in cryptocurrency
stablecoins suggest that the Administration may favor
regulating issuers of such digital assets as insured
Type of Banking
depository institutions. To do so, the OCC may need to
Institution
Cryptocurrency Activities
either require deposit insurance for certain trust banks that
issue stablecoins, charter all issuers as full-service national
Ful -service national
Issue stablecoins for payment
banks (which are required to have deposit insurance), or
banks (i.e.,
purposes; participate in blockchain
create a separate regime for chartering these issuers. Many
commercial banks)
networks; hold cryptocurrency and
trust institutions are limited in their deposit-taking capacity,
cryptographic keys in custody.
and so the effectiveness of deposit insurance on stemming
Limited-purpose
All of the above, plus offering trading
the likelihood of runs is up for debate. Extending deposit
national banks (i.e.,
and lending platforms (or facilitating
insurance to stablecoin issuers extends the federal safety net
trust banks)
such activities through partnerships);
and inherent moral hazard issues to a product that does not
custody and management of stablecoin
have many of the features that have justified federal
reserves; payment, exchange, and
insurance for traditional deposits. Further, reserve
other agent services for digital assets.
requirements could offset the risk of consumer losses
without the need for a government safety net. Another issue
Limited-purpose
Issue stablecoins and tokenized dol ars;
is the authority of the federal government to compel deposit
state banks (e.g.,
offer deposit accounts 100% backed by
insurance for all issuers without new legislation,
Wyoming Special
dol ar reserves (in lieu of deposit
particularly among state-chartered issuers. While most
Depository
insurance); offer wire transfer and
states require full-service banks to have FDIC insurance,
Institution, New
funding services; potentially act as
states do not necessarily require it for limited-purpose
York BitLicense)
Federal Reserve clearing bank (upon
banks. For example, Wyoming does not require FDIC
receiving FDIC insurance); partner
insurance for special purpose depository institutions
with businesses to facilitate
(SPDIs); rather, it requires 100% reserves against the value
cryptocurrency transactions.
of cryptocurrency held in SPDIs.
Source: OCC Conditional Charter approvals for Anchorage,
Protego, and Paxos; Wyoming Division of Banking, New York
Reserves and Disclosures. Another potential area of
Division of Financial Services; Kraken and Avanti websites.
regulatory concern is the disclosure of reserves that back
stablecoin issuers. This was highlighted by the October
Debate over Regulating Crypto as Banks
2021 charges taken by the Commodity Futures Trading
Charters. Since 2016, the OCC has shown an interest in
Commission against Tether, a stablecoin issuer that
chartering various financial technology (fintech) companies
misrepresented the reserves it held against its token. In
as banks, initially by piloting a special purpose national
October 2020, the OCC issued interpretive guidance
bank (SPNB) charter for fintech firms. This charter met
clarifying that national banks were allowed to receive USD
significant legal challenges from the states and has resulted
deposits, which may serve as reserves for stablecoins
in no SPNB charters to date. The crux of the issue centered
issuers. At the state level, Wyoming requires custody banks
on the authority of the OCC to charter fintech institutions
that issue stablecoins to hold at all times “unencumbered
that did not take deposits as banks. The OCC’s authority to
level 1 high-quality liquid assets valued at 100% or more of
issue these charters remains in question.
their depository liabilities.” These reserves could be
vulnerable to runs if the stablecoin holders seek to redeem
While the OCC’s authority to issue trust charters is clearly
their holdings for cash simultaneously. However, unlike
laid out in statute, there is still the question of whether the
securities regulation, which requires a disclosure of reserves
OCC should be issuing trust charters to cryptocurrency
to investors, no such disclosure to the public is required
firms. On the one hand, these institutions can provide
from banking regulators for trust banks that issue
fiduciary and non-fiduciary custody services for
stablecoins or for national banks that hold stablecoin
cryptocurrency products much the same way they do for
reserves. Thus, it is unclear whether stablecoin market
dollar-denominated accounts. Further, without an FDIC
participants can appropriately discern whether they are
insurance requirement, trust banks can back holdings with
holding assets backed by the claimed reserves. Legislation
reserves, offering some deposit protection to customers
could seek to require reserve disclosures for stablecoins,
without jeopardizing the government backstop of deposit
either through anti-money-laundering reporting
insurance. On the other hand, there are persistent concerns
requirements for issuers that hold reserves in U.S. banks or
about the entry of fintechs into the banking system, and the
through banking laws for trusts and insured depository
use of trust charters for these firms may draw concern over
institutions that issue stablecoins or hold their reserves.
https://crsreports.congress.gov
Bank Custody, Trust Banks, and Cryptocurrency
IF11997
Andrew P. Scott, Analyst in Financial Economics
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