State-chartered banks in Texas can provide virtual currency custody services if they have the proper safeguards in place, the Texas Department of Banking (TBD) said. Participating banks must have strong risk management protocols while also complying with applicable law
An important aspect of the guidance, and one which a growing number of stakeholders in both the DeFi and traditional finance communities often cite, is that existing laws and frameworks already provide adequate protections for this new investment sector. In Texas’ case, regulators cited Texas Finance Code § 32.001.
“What virtual currency custody services a bank chooses to offer will depend on the bank’s expertise, risk appetite, and business model,” the TBD said in its guidance letter. “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 virtual 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 accessibility. The bank will have to determine which storage option best fits the circumstances.”
The TBD previously said custody services may be provided by a state-chartered bank in either a fiduciary or non-fiduciary capacity. In the latter, the bank takes possession of the asset while legal title remains with the customer.
Should a bank wish to offer fiduciary custody services they may need a charter amendment and first ensure they are compliant with 7 Texas Administrative Code § 3.23.
Banks must establish effective risk management systems and controls to measure, monitor, and control relevant risks, the TBD said. Those include policies and procedures, access controls and authentication and protection of hardware and data specific to the virtual currency held. Proper insurance must also be in place.
