The Texas Department of Banking has published a new stating that state-licensed banks can offer bitcoin custody solutions to customers, provided the bank has specific protocols in place to manage risk and comply with the law. The authority to provide these services already existed under the Texas Finance Code.
The notice states that banks can choose the specific custody and storage solutions they want to offer their clients based on what best suits the bank’s experience, risk appetite, and business model. When it comes to escrow solutions, the advisory mentions two example scenarios.
“For example, the bank may choose to allow the customer to retain direct control over its own virtual currency and simply store copies of the customer’s private keys associated with that virtual currency,” the notice states. “Alternatively, the bank can have the customer transfer their virtual currency directly to the bank’s control, creating new private keys that are then held by the bank on behalf of the customer.”
In both scenarios, however, the client would not be in control of their funds. In the first example, while the client would know what private keys As they spend their funds, the bank would have a copy of their keys – theoretically they could spend the funds without the consent of the customer. And in the second case, the customer would not even know which private keys control their funds.
Additionally, the notice mentions that a state-authorized bank seeking to provide these bitcoin custody services may do so in fiduciary or non-fiduciary capacity. In the first capacity, the bank would have the authority to manage the client’s bitcoin like any other asset that has that power. And in a non-fiduciary capacity, the bank would act as a custodian and take possession of the client’s bitcoin, who would then receive legal title to those funds.
While it may seem natural for clients to lose sovereignty over their funds by choosing to delegate some of their bitcoin custody responsibilities to third parties, such as state-licensed banks, this need not be the case. With multi-signature In custody, for example, banks could retain the configuration’s minority of private keys for backup purposes only or to increase security, preventing you from wasting customer funds. In this case, the bank would be providing valuable customer service, while the latter would still be fully sovereign over their bitcoin.