Podcast Listener
ComplianceNovember 13, 2020

Episode 13: OCC Clears The Way: Banks Allowed to Hold Cryptocurrencies

Banking Compliance Insights is a podcast series created to deliver insights on compliance trends and provide strategies for navigating today’s regulatory and risk environments.


What do we need to know about the regulatory requirements for the Office of the Comptroller of the Currency's (OCC) letter?
 
The OCC was not exhaustive in its Interpretive Letter about regulating this new trend. Our Wolters Kluwer experts use this episode, "OCC Clears The Way: Banks Allowed to Hold Cryptocurrencies" to break it down.
 
Our new podcast episode focuses on the OCC's recent move to permit OCC-regulated banks to provide custody services for virtual assets, including cryptocurrencies. Our host, Wolters Kluwer Vice President of Banking Compliance Solutions, Samir Agarwal, sits down with Mark White, Senior Securities Compliance Analyst with Wolters Kluwer's Compliance Center of Excellence, to tell us what it means for banks. 
 
Topics discussed in this episode:
 
Digital assets: What risks are the regulators most concerned about?
 
What are banks’ reservations with this new technology?  Are they receptive?
Should Chief Compliance Officers at small-to-mid-sized banks think about entering the cryptocurrency market?  What should they consider before they leap?
How can banks attract prospects with cryptocurrency? How do banks introduce the cryptocurrency market and digital assets to existing customers?
 

Wolters Kluwer maintains a world-class regulatory Advisory Services team that…has the best AML and KYC experts to lift the veil on some of the uncertainties in this area and help banks work with the OCC requirements to determine their best course of action.
Mark White, Senior Securities Compliance Analyst with Wolters Kluwer's Compliance Center of Excellence

Transcript:

Greg Corombos, News Director at Radio America  00:06
Hi, I’m Greg Corombos. Welcome to Banking Compliance Insights, a podcast series from Wolters Kluwer. This series was created to deliver insights on compliance trends and strategies for navigating today’s regulatory and risk environments. Today’s episode, “OCC Clears the Way: Banks Allowed to Hold Cryptocurrencies,” will focus on a recent OCC move to permit OCC-regulated banks to provide custody services for virtual assets. Here to lead our discussion on this subject is Wolters Kluwer Vice President of Banking Compliance Solutions, Samir Agarwal. He is joined by Mark White, a Senior Securities Compliance Analyst with Wolters Kluwer’s Compliance Center of Excellence. Samir, let me pass the conversation over to you.

Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  00:56
Thanks, Greg. While investors and practitioners are grappling with how virtual or cryptocurrencies play a role in our financial ecosystem, we’re seeing little or no guidance from the Federal Reserve or other regulatory bodies regarding cryptocurrencies. However, on July 22, 2020, the Office of the Comptroller of the Currency (OCC) sent Interpretive Letter #1170. It permits OCC-regulated banks to provide custody services for virtual assets provided that other conditions specified in the letter were met. I’ve invited Mark White, a Senior Securities Compliance Analyst with Wolters Kluwer, to break down the letter and tell us what it means for banks. Welcome, Mark. Please tell us a little bit about your role at Wolters Kluwer and how you entered into the cryptocurrency space.
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  01:45
I would be happy to Samir. Thanks for having me on today. I’m an attorney by trade and a Senior Securities and Senior Banking Compliance Advisor. I got into the crypto space by being fortunate enough to work in a division that emphasizes emerging trends, which is really fascinating to me. I also work alongside our consulting group, which is on the front lines every day, dealing with these types of issues. It’s a great marriage between practical and theoretical compliance where we take it upon ourselves to develop expertise in these new areas and get to delve into the underlying regulatory compliance requirements and the associated risks.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  02:24
When the OCC came out with support for this type of asset, and the letter is quite interpretive. How are you interpreting it? What does it really mean? What do banks really need to be aware of?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  02:36
It’s just a small piece, Samir, of what’s really happening today in the cryptocurrency world in the universe of cryptocurrencies and electronic currencies. Digital assets, in general, we don’t really know what’s going to be happening in the long run with these things. But with this letter that came out in July, we know that the regulators are going to really start to open these markets up, even though they aren’t giving us specific guidance yet. We do see with letters like this that there’s no stopping it. But these things are going to start rolling out, and banks are either going to get on board with these things, or they’re not.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  03:14
Let’s draw a parallel to make sure everybody’s grounded on what we’re talking about and how we’re talking about it. I know in a conversation we’ve had in the past, we talked about a relationship to securities and digital keys that are used in security. Let’s start there to take baby steps into what cryptocurrency means for institutions. How does this relate to products that are already being used by banks or other financial institutions?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  03:39
As we all know, one of a bank’s primary functions is to be the custodian of different assets in different asset classes. We know this to be true. Banks have already worked with some digital assets for the last 15 to 20 years, with different encryption keys and things of that nature. This is really an extension of what banks are already doing. But there’s a fear that surrounds cryptocurrencies, specifically that banks are having a hard time understanding what a blockchain is, what cryptocurrencies are, how the regulators are viewing these asset classes, and how they’re going to regulate them.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  04:21
Let’s say we’re talking about being in a movie, like a James Bond movie, right? The villain wants money, and you’ve got a USB key or some sort of code that needs to get put out there. It’s always amazing to me that the money transfers immediately. You’re saying banks have been doing that type of work for over 15 years, and really this is just another way of doing the same thing?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  04:42
In a sense, yes. Banks have been on the front lines dealing with different types of currencies that require only a digital key to access that asset. They understand the fundamentals of what it’s going to take to allow this to happen. But what we’re getting into now is a difference between a traditional digital asset and the new cryptocurrencies that are based on this new software platform, which is the blockchain.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  05:09
What are the scary points of the blockchain technology that we need to be aware of?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  05:15
That’s a good question, and even the regulators, I don’t think, really understand that. This letter isn’t anything more than some suggestions from the OCC, and none of the other regulators have come out in support of this letter. And they haven’t explained what their roles are going to be and how they’re going to tackle these issues at this point. But what the OCC wants banks to do is simply get in touch with the OCC and work with them to figure this thing out. They see the writing on the wall. Crypto assets and digital assets are here to stay. The marketplace for these things is huge, and they’re not going anywhere. The OCC is just the first one to take the gloves off and say let’s deal with these things. We don’t know exactly how we’re going to deal with them. We know you have to be in compliance with certain rules and regulations. But let’s work through this together. So, get a hold of us, and let’s see if we can work this thing out. The fear comes from the fact that they don’t think that they can trace back through this blockchain to see who’s doing these trades, and trace forward to see who’s the recipient of these trades. But I don’t think that is necessarily true. Banks are going to be able to capture the blockchain and see what’s happening above it and below it, in a sense, and give them clarity into what’s happening even more so than what they’re dealing with now with current digital assets.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  06:45
Let’s rewind just a little bit and talk about what it means for the bank. A federally chartered bank - what does it really mean for how they need to adhere to any regulation? And what things do they need to be concerned with? Is the OCC going to play an active role once they reach out to them?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  07:02
It’s hard to say at this point, but I believe they will. Yes, and I think we’re going to have to because of the letter’s obscurity. It didn’t go into detail as to what banks are going to have to do. They (OCC) talked about necessitating things like having dual controls. They’re going to have to have accounting controls. There’s going to have to be a segregation of duties, settlement practices, physical access to controls, but they talk at a high level. Samir, they’re not giving us details on how this has to be implemented. We know that they’re going to have to abide by all the traditional rules and regulations. But we just don’t know yet how that’s going to look.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  07:43
Lately, what I’ve been hearing is the state of Wyoming has been very accommodating for anyone who wants to become a custodian of cryptocurrencies. Two banks, in particular, that we’ve been following have stated a pretty grand plan of how they want to get involved with their currencies and virtual assets. I’m curious what makes Wyoming so unique or so special?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  08:07
Wyoming is a unique state in a lot of ways. Legally, it was the first state to allow LLCs. And it’s just an area where the law allows some creativity. That’s why we get these little hotbeds of these startup opportunities that come along in Wyoming. And it’s not surprising that that’s where these things start. It’s just a place where legally it’s accommodating to these types of vouchers.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  08:34
It’s kind of a trial and error world that’s being allowed. But do you believe that the regulation is going to be crafted around what we find from that trial and error from a few banks in that state?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  08:45
I don’t know. It’s hard to say. I think it’s going to be a good test site that’s going to give us some insight into how this is going to unfold across the rest of the nation, certainly. But as far as the smaller banks that are there, they’re going to be undertaking this opportunity. I don’t know if it’s even the national banks that are going to be looking at these opportunities. Smaller banks, I don’t know if they have the bandwidth to bring in-house all of the resources that they’re going to need to start these lines of business. They may have to adapt and partner with existing companies that currently do all of the stuff that the OCC is now saying that the banks can do. It’ll be interesting to see how those banks in Wyoming start these lines of businesses because we just don’t know how that’s going to reflect on the national banks that want to get into this area as well.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  09:40
How does the OCC advise a bank on how to adhere to AML or KYC rules in regard to crypto?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  09:49
Those details, again, haven’t been ironed out. And we’ve only got one regulator at this point that wants to dip their toe in the water in regard to the cryptocurrencies in the digital assets. It’s going to be interesting to see how they diverge from traditional AML and KYC requirements. I don’t know that they even will at the end of the day. I think it’s going to be undertaken the same way that they’re undertaking the current asset classes in regard to digital currencies. I don’t know how we’re going to distinguish themselves from what’s currently happening; that’s going to be one of the conundrums.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  10:30
When you look at this market in its entirety, what’s the size of it? And what’s the growth potential?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  10:37
While the growth potential is enormous, it’s pretty much limitless as these currencies and digital assets grow. It’s been estimated that over 50 million people in America currently hold some kind of a digital assets in their portfolio. And that’s as many people, and this is kind of a strange figure, but as many people have cryptocurrencies as use Uber on a daily basis. It’s everywhere. The younger generations are flocking to this new type of investment. It’s here to stay. There’s no getting around it. It’s an enormous asset class that’s just going to keep growing, and there’s no avoiding it. The banks are going to get involved someday.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  11:24
Mark, that’s a pretty large group of people. That means there’s the potential for these virtual assets to have large impact. As far as that goes, I want to understand a little bit more about what regulators are most concerned with? And as we talk about regulation, how do we maintain law enforcement?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  11:43
That’s the million-dollar question, Samir. It’s like with traditional banking, we have concerns about human trafficking, money laundering, and things of that nature. And with digital currencies, that doesn’t change. But we just don’t know how we’re going to find out how to track all of this stuff.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  12:02
It’s like saying that now there’s something more that we have to track. It’s not like one or the other, but something is completely changing. We’ve got a new technology that comes in here. I’ve got to monitor the traditional method, and now I’ve got to monitor the new method. But they’re disconnected, right? To get a full picture on what’s happening, let’s say from a KYC and AML perspective, I’ve got to link that together. Is that right?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  12:25
It is.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  12:26
Relate that to banks and their reservations of the new technology. Are they receptive to trying this? Are they not? What is the way that banks are receiving this?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  12:36
Right now, I think banks are just kind of laying back and watching these things develop. They’re probably hoping that somebody jumps into the fray before they have to, so they can have a map to follow and to see how this thing is going to play out. But there’s not this big explosion of banks wanting to run down the street and wave their arms and say, “Come to us, come to us.” As far as cryptocurrencies are concerned, that’s not the way these banks work. Traditionally, banks are slow to move and even slower to bring on new lines of assets and things of that nature. And they’re just more risk-adverse. We saw that in the early 2000s with the internet. We didn’t know how that was going to impact banks. A lot of banks thought that traditional banking was doomed. They didn’t know how they were going to accommodate this new technology. But that seems to have worked out OK for everybody.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  13:33
There are some lessons learned from that event?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  13:35
It certainly is.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  13:37
And what should somebody think about now? What are the compliance issues that the Chief Compliance Officer would have to think about or at least start thinking about when it comes to crypto?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  13:47
We’re going to have to think about this new technology from top to bottom. We’re going to have to think about whether we have the staffing to accommodate this. We’re going to take a look at our current compliance system. Do we have the expertise here? Does that exist on our team? And if not, they’re going to have to find the right people. What does that look like? They can either hire people. They can bring people on board that have this experience, or they can partner with other companies as third parties. It’s going to be different from bank to bank. We’re going to have to take a look at their systems, and look at their software to determine if this can be expanded on. Does it currently have the potential to bring on this new asset class? That’s going to have to be thought through and then everything from top to bottom, and marketing. If they want to talk about marketing, how do we bring this up to our current clients? Do we want to market this to our current clients and bring them on, as well as new potential clients. How do we do that? Are there any marketing restrictions that come into play when we get into the space and try to capture some of this market space? It’s going to have to be determined from the outset whether these banks will do this or not, and whether they want to do this in-house with their own systems and their own manpower, or do they want to outsource some of this stuff? There are a lot of decisions to be made.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  15:10
How do you think the industry is going to receive this? Is it something that most folks are going to be embracing, or do you think that the ones that are more risk-takers are going to really dabble and try becoming the custodians?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  15:22
I think that eventually all banks are going to have to embrace this one way or the other. They’re going to have to either get on board with this, or they’re just going to have to say we don’t want to do it. And I think that would be a mistake for banks to take that position. As we get further and further down the road with these things, more and more people are buying them as investments, and eventually for use for transactions and even point of sale someday. But it’s not moving quickly at this point. That could be due to a number of reasons. This is new. There’s a lot of ambiguity surrounding this thing. Not all of the regulators have come out with proper guidance. Some of them haven’t said anything at all, which is a little unusual. Typically, when a regulator comes out and takes a stand of this magnitude, it could be disruptive, in a sense. It could change things for a lot of people. And when the other regulators don’t come out in support of one another, it raises a few eyebrows. We wonder, what are they thinking? How are they going to handle this? In the past, a lot of regulators have simply signed on to what the other regulators have come out with when one of the regulators is a first. When they come to bat first, other regulators typically follow suit. But we haven’t seen that. Part of the reason could be because of our political climate. As we know, things are not normal by any stretch of the imagination. Once those issues get resolved politically, we might see some of these issues kind of smooth out. I don’t see banks clamoring again for this opportunity. But I think we will in the future.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  17:06
It’s pretty important when we talk about the political climate. What changed for the OCC? What was the major thing, in your opinion, that kind of said, “Hey, they’re going to support this other type of asset?”
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  17:17
President Trump installed a new director at the OCC, and this individual has a background in coin desks, and in the actual operations of cryptocurrencies. His background in that was brought over to the OCC, and he quickly made digital currencies his number one priority. That’s when we saw the letter come out in July, and that’s where we are today. It’s an interesting dynamic as we move through the selection process. We’ll see how long he’s with the OCC. If there is a changing of the guard, if there is somebody new to be installed at the OCC, it’ll be interesting to see if there is any kind of pullback on what was put out already. That would be quite a reversal.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  18:05
Let’s elaborate on that. It’s actually a very interesting thing. You mentioned something that I want to talk about - coin desks. Is it fair for me to assume that the coin desk is like a central banking agency?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  18:18
Yes and no.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  18:21
Because what I want to help people understand and what we were talking about before was, “Hey, is this different from another virtual asset that banks already use?” Right? There’s digital keys already out there. This is just a different type of asset. Along with this type of asset is a new concept of clearing, which is through these coin desks. It’s almost like it’s a brand new infrastructure for the money machines of how real currency or assets are being transferred. Usually, you’re not transferring them like this. The other virtual assets are not going through their own specific central exchange, whereas this one is. Makes sense? I think it becomes less scary, at least the way you have described it to me, where, it’s like other virtual assets. That’s a plus. I’m familiar with that because it’s been around for 15 years. They both use digital keys. There’s a difference from the virtual asset, as in there’s a central monetary exchange or asset exchange, and that operates virtually similar to a central bank. That doesn’t seem outrageous or doesn’t even seem that complicated. And the blockchain technology is probably one of the higher levels of security for it. Is that right?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  19:32
It is, but since it’s new, there’s a fear that surrounds it. I guess we’ll find out with time, but there will probably be some mishaps along the way. I think banks will get this figured out. I really do. What they’re going to have to be concerned about is simply compliance. They’re going to have to get it right the first time. I don’t think there’s any way around the fact that they’re going to need help with that. I know that the OCC is saying that they’re going to help with it, but they’re going to need some third party help with their compliance, as well.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  20:01
What are some of the benefits of using blockchain, in general? How does it relate to what we’re talking about here?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  20:09
The blockchain, as you know, is simply the ledger that keeps track of all of the transactions in perpetuity. Once one of the blocks gets put in place, it doesn’t go anywhere. It can be corroborated from anywhere and by anyone. That’s the beauty of the blockchain. It’s a really unique technology. It’s pretty fascinating. When the banks finally get a good grip on this thing, and they start to understand it, and the compliance issues start to be put in the rearview mirror, I think that they’re going to find that blockchain, coupled with these digital assets, is maybe even more secure than a lot of those traditional asset classes that they currently have.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  20:53
Set ledger is permanent, right? This isn’t like my driving record, where the points disappear later on, correct?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  21:01
No, these things are embedded in such a way that you’ll be able to trace these things back 1,000 years from now.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  21:08
That becomes very powerful for an end-to-end view and traceability. I think that a lot of our concern has been around not being able to trace. There may be some solutions that are external to the transaction for KYC and AML, or even just in the entire BSA program, that are required. But ultimately, this actually helps us become more transparent.
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  21:31
It does. You’re absolutely right.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  21:34
For AML and KYC, I know that the concern is going to be around anonymity. But technically, is that really a concern? What should we know about that?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  21:44
AML and KYC issues typically revolve around anonymity. And that’s what banks really are concerned with. How do we find out who’s doing what, when, how, where, and why? All of their compliance issues center around those questions when it comes to AML and KYC. The fear with blockchain and digital currencies, like cryptos, is that banks don’t understand yet how they can get around this anonymity issue. Right now, nobody knows this. It seems to be an insurmountable issue. But is it really? I don’t know. My gut is telling me it’s not because many experts have agreed that the blockchain can actually break down some of this anonymity and give banks and the federal government opportunities to hone in on these transactions, which might lead to decreased instances of fraud and misuse.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  22:49
This is all really interesting and new. It seems like there is potential for many new things to happen for banks, the industry, and regulators. It’s something that we need to keep a pulse on what’s happening and when it’s happening. From your perspective, how does Wolters Kluwer and the role that you’re in now begin to assist banks with understanding and remaining vigilant around becoming a custodian of digital assets?
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  23:19
Wolters Kluwer can help in a number of ways. We’ve got an Advisory Services team that I work with that’s out there on the front lines. They work with these types of novel issues on a daily basis. They’re really adept at what they do. They stay abreast of all these emerging technologies. They can help institutions of any size navigate these waters. We also have some of the best AML and KYC experts in the industry. These individuals can certainly help lift the veil on some of these uncertainties, help the banks work alongside the OCC to break through, and really work through some of these compliance barriers that they’re facing. Even beyond this, we’ve got certain capabilities with software, where we can assist banks with their software development and formulation. We can also help customize internal controls from beginning to end. We can help banks of any size formulate these solutions.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  24:23
That’s comforting to know that folks out there are becoming experts at virtual assets in crypto and also being able to help guide others along the way. Mark, it’s been a pleasure to speak with you today. Thank you for stepping us through some of the initial developments as banks are jumping into this space. It is good to hear that Wolters Kluwer is actively involved in helping customers navigate this space, or even potential customers, and just understanding what’s happening. Thank you for joining us today, and thank you for the information. I’m sure our listeners are going to truly enjoy the conversation and the insights that you’ve provided today. It really was a pleasure to have you aboard.
 
Mark White, Senior Securities Compliance Analyst, Wolters Kluwer  25:04
Thank you, Samir. It was a pleasure to be on today.
 
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer  25:08
Absolutely. Greg, I’m going to turn things right back over to you.
 
Greg Corombos, News Director at Radio America  25:10
That’s Wolters Kluwer Vice President of Banking Compliance Solutions, Samir Agarwal, joined on this episode by Mark White, a Senior Securities Compliance Analyst with Wolters Kluwer’s Compliance Center of Excellence. Wolters Kluwer hosts this podcast and is a market-leading provider of advisory services and technology solutions for optimizing compliance and risk management programs. For more information and additional guidance, please visit WoltersKluwer.com or call 1-800-397-2341. Please join us for future podcasts focused on navigating emerging trends in regulatory compliance.

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