Cryptocurrency and Banking: A New Era of Regulatory Clarity

A Brief History of Regulatory Ambiguity

In 2020, the Office of the Comptroller of the Currency (OCC) published Interpretive Letter 1170 (IL 1170), which opened the door for national banks to provide cryptocurrency-related services. This letter was a groundbreaking step toward modernizing the financial services system by allowing banks to offer cryptocurrency custody services and facilitate related transactions. However, despite its potential, IL 1170 was never fully realized under the Biden administration. While the letter was never officially retracted, regulators essentially ignored its existence, leaving banks in a state of confusion and uncertainty. For nearly five years, banks and firms seeking to engage in cryptocurrency activities were left without clear guidance, with regulators dismissively telling them that IL 1170 was "not enough."

Clarity Finally Arrives with IL 1183

Fast forward to March 7, 2025, when the OCC published Interpretive Letter 1183 (IL 1183), providing the clarity the banking industry had long been waiting for. This new letter confirmed that national banks can indeed provide cryptocurrency-related services, as long as they do so in a "safe and sound" manner. IL 1183 effectively validated the principles outlined in IL 1170, ensuring that banks can now move forward with confidence. For banks and firms like LevelField Financial, which is seeking to acquire a bank to serve cryptocurrency-focused customers, this clarity is a cornerstone for building a viable business model.

The Road to Regulatory Approval

Before engaging in any new activity, banks must prove to their regulators that the activity is permissible. For years, banks and firms attempting to enter the cryptocurrency space relied on IL 1170 as a reference point, only to be told by regulators that it was insufficient. This selective acknowledgment of official guidance created a confusing landscape where banks could not rely on published rules, even if they had never been withdrawn. IL 1183 puts an end to this ambiguity, providing a clear roadmap for banks to follow.

Banks Can Now Provide Cryptocurrency Trading Services

IL 1170, published in 2020, went beyond simply allowing banks to provide traditional custody services. It explicitly stated that banks could facilitate cryptocurrency and fiat currency exchanges, transaction settlements, trade executions, and other related services. The OCC emphasized that banks must apply the same rigorous risk management standards to cryptocurrency activities as they do to traditional assets. This makes sense, given that banks have decades of experience managing complex financial assets and are highly regulated to ensure stability. By bringing cryptocurrency under the banking system’s umbrella, the OCC aims to bring trust and scale to a rapidly growing market valued at nearly $3 trillion.

Challenges and Opportunities Ahead

While IL 1183 is a significant step forward, challenges remain. For instance, banks are still prohibited from owning cryptocurrency for their own accounts, as stated in a 2023 joint statement by the OCC, FDIC, and Federal Reserve. This restriction limits banks’ ability to fully participate in the cryptocurrency asset class and manage risks effectively. Additionally, the volatility of cryptocurrency, such as Bitcoin’s frequent 20% price swings, may make some banks hesitant to expose their customers to such risks. Nevertheless, the potential rewards are substantial. For banks, this represents a massive revenue opportunity through transaction fees, custody charges, and tapping into a demographic—millennials and Gen Z—that is deeply engaged with cryptocurrency. For customers, it offers the convenience and security of dealing with a trusted, FDIC-insured institution instead of unregulated or offshore entities.

A Watershed Moment for Cryptocurrency Adoption

The affirmation of IL 1170 through IL 1183, combined with the U.S. strategic Bitcoin reserve announcement, signals America’s commitment to leading the cryptocurrency asset class. While some hail this development as a "watershed" moment for institutional adoption, caution is warranted. Banks will need time to develop robust controls and adapt their century-old safeguards to the unique challenges of cryptocurrency. The OCC’s hands-off approach leaves the execution of these services to bank executives rather than regulators, which could lead to varying levels of success across the industry.

Ultimately, IL 1183 represents more than just a regulatory update—it marks the mainstreaming of a once-fringe idea. By allowing banks to merge cryptocurrency’s speed with their own stability, the OCC has handed legacy financial institutions a tool to redefine their relevance in the digital age. If banks can successfully navigate this new landscape, they may bridge the gap between Main Street and the blockchain, reshaping how we bank, invest, and trust in a digital world.