Texas Bank Report, February 2022 Page: 3
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Authority of Texas State-Chartered Banks to Provide
Virtual Currency Custody Services to Customers
Industry Notice 2021-03 (republished)
Issued June 10, 2021This notice affirms that Texas state-chartered banks may
provide customers with virtual currency custody services,
so long as the bank has adequate protocols in place to effectively
manage the risks and comply with applicable law.
Texas state-chartered banks have long provided their custom-
ers with safekeeping and custody services for a variety of assets.
These services play a crucial role in the business of banking as
customers look to banks to offer secure and dependable storage.
While custody and safekeeping of virtual currencies will neces-
sarily differ from that associated with more traditional assets, the
Texas Department of Banking believes that the authority to pro-
vide these services with respect to virtual currencies already exists
pursuant to Texas Finance Code g 32.001.
Virtual currency is an electronic representation of value intended
to be used as a medium of exchange, unit of account, or store of
value. Virtual currencies do not exist in a physical form. Instead,
they are intangible and exist only on the blockchain or distributed
ledger associated with that virtual currency. The owner of the vir-
tual currency holds cryptographic keys associated with the spe-
cific unit of virtual currency in a digital wallet. The keys enable
the rightful owner of the virtual currency to access and utilize it
further.
What virtual currency custody services a bank chooses to offer
will depend on the bank's expertise, risk appetite, and business
model. For instance, the bank may choose to allow the customer
to retain direct control over their own virtual currency and merely
store copies of the customer's private keys associated with that vir-
tual currency. Alternatively, the bank may cause the customer to
transfer their virtual currency directly to the control of the bank,
creating new private keys that are then held by the bank on behalf
of the customer. As with the method of custody services, several
secure storage options are available to the bank, each of which has
distinctive characteristics pertaining to level of security and acces-
sibility. The bank will have to determine which storage option best
fits the circumstances.
The Department has previously determined that custody services
may be provided by a Texas state-chartered bank in either a fidu-
ciary or non-fiduciary capacity. In providing such services in a
non-fiduciary capacity, the bank acts as a bailee, taking possession
of the customer's asset for safekeeping while legal title to that assetremains with the customer. The extent of the bank's duties regard-
ing the asset depends on the custodial agreement between bank
and customer but generally, the bank owes its customer the duty to
use proper care to keep the asset safely and to return it unharmed
upon request.
A bank proposing to offer custody services in a fiduciary capacity
must possess trust powers, which may require a charter amend-
ment and/or compliance with 7 Texas Administrative Code 3.23
prior to doing so. In its fiduciary capacity, the bank has the author-
ity to manage virtual currency assets as it would any other type of
asset held in such capacity.
Prior to a bank entering a new line of business, such as offering vir-
tual currency services, it is incumbent on management to conduct
due diligence and carefully examine the risks involved in offering
a new product or service through a methodical risk assessment
process. Should management and the board of directors decide
to move forward, effective risk management systems and controls
must be implemented to measure, monitor, and control relevant
risks associated with custody of digital assets.
Necessary controls consist of administrative controls, such as pol-
icies and procedures; technical controls, such as access controls
and authentication; and physical controls, such as protection of
hardware and data specific to the virtual currency held. The bank
should also confirm the existence of adequate coverage with its
insurance carrier.
Due to the technical nature of holding virtual currency, the bank
may choose to establish a relationship with a service provider with
expertise in handling virtual currency. Therefore, it is incumbent
on the bank to maintain a strong service provider oversight pro-
gram that addresses risk in the service provider relationship from
the first steps of due diligence through a potential termination of
the service provider relationship. More information on outsourc-
ing technology services can be found in the Federal Financial
Institutions Examination Council's IT Examination Handbook for
Outsourcing Technology Services.
If you have any questions regarding the provision of virtual cur-
rency custody services, please contact Marcus Adams, Assistant
General Counsel, via email at marcus.adams@dob.texas.gov or by
phone at (512) 475-1236.February 2022 www.dob.texas.gov * 3
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Texas. Department of Banking. Texas Bank Report, February 2022, periodical, February 2022; Austin, Texas. (https://texashistory.unt.edu/ark:/67531/metapth1454274/m1/3/: accessed May 30, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu; crediting UNT Libraries Government Documents Department.