State Regulator Affirms That Texas Banks Can Offer Virtual Currency Services

As a reflection of the state’s support for emerging technology initiatives, the Texas Department of Banking issued an industry notice affirming that state-chartered banks are permitted to offer virtual currency custody services, provided the bank has adequate protocols to manage related risks and comply with applicable law. The announcement was notable because it underscores the Department’s position noting that new regulations may not be required to address virtual currency activities of Texas state-chartered banks.

Proceed, With Caution

While the announcement indicates banks may not be subject to additional regulations, it clarifies the need to have the right expertise and controls in place before offering virtual currency services. The notice states, in part:

• “Prior to a bank entering a new line of business, such as offering virtual 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.”

In essence, there should be a robust administrative system in place, including policies and procedures; technical controls (system access controls and authentication); and physical controls, including protection of hardware and data specific to the virtual currency held. One key point that is often overlooked is to ensure the bank assesses whether there is adequate insurance coverage.

As with offering any new product or service, the notice cautions that management conduct due diligence and conduct a risk assessment using a sound methodology in order to identify the bank’s exposure.  

What Is Virtual Currency?

An electronic representation of value, virtual currency is intended to be used as a medium of exchange, unit of account or store of value, but does not exist in a physical form. Virtual currencies are intangible and exist only on the blockchain or distributed ledgers specific to the virtual currency. In this manner, the owner of the virtual currency holds cryptographic keys associated with the specific unit of virtual currency in a digital wallet. The keys enable the rightful owner of the virtual currency to access and use it further.

For information about controls, including IT assessments, or other processes related to virtual currency, contact us. Weaver’s Banking Team has the risk and IT advisory resources to help you navigate this new service opportunity.

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