On June 10, 2021, the Texas Department of Banking (TDB) issued Industry Notice 2021-03, affirming TDB's position that, under Texas Finance Code § 32.001, Texas state-chartered banks may provide customers with virtual currency custody services, provided the bank has in place "adequate" protocols to effectively manage the risks and comply with applicable law.

The notice specifies TDB's position that a Texas state-charted bank may take customer virtual currency deposits and create new private keys that are held by the bank on behalf of the customer. As with fiat custody services, the notice states that each bank will need to determine which storage option best fits the circumstances.

The notice states that TDB has previously determined that custody services may be provided by a Texas state-chartered bank in either a fiduciary 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 asset remains with the customer.

The extent of the bank’s duties regarding 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 amendment and/or compliance with 7 Texas Administrative Code § 3.23 prior to doing so. In its fiduciary capacity, the bank has the authority to manage virtual currency assets as it would any other type of asset held in such capacity.

TDB notes that 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. These necessary controls consist of:

The notice advises that, if a bank chooses to establish a relationship with a service provider with expertise in handling virtual currency, it is incumbent on the bank to maintain a strong service provider oversight program that addresses risk in the service provider relationship from the first steps of due diligence through a potential termination of the service provider relationship.

The notice also defines "virtual currency" as an electronic representation of value intended to be used as a medium of exchange, unit of account, or store of value.

Nebraska state bank charters. On May 25, 2021, Nebraska Governor Pete Ricketts signed into law Legislative Bill 649, the Nebraska Financial Innovation Act, which establishes digital asset depository institutions as a new kind of state financial institution and establishes Nebraska as the second state, after Wyoming, to allow digital asset banks to receive state bank charters.

For further information on virtual currency and cryptocurrency, see the Practical Law Cryptocurrency and Virtual Currency Regulatory Tracker.

For more on digital assets and other blockchain-related matters, see Practical Law's Blockchain Toolkit.