Minnesota enacts law authorizing banks and credit unions to offer ‘virtual-currency custody services’ | Orrick, Herrington & Sutcliffe LLP

On May 14, the Minnesota governor signed HF 3709 into law, authorizing state-chartered banking institutions and credit unions to provide virtual-currency custody services. The law defines “virtual-currency custody services” as “safekeeping, controlling, or managing virtual currency, or the cryptographic private keys used to access virtual currency, on behalf of another person.” Under the new law, banking institutions and credit unions may offer these services in a “nonfiduciary capacity,” subject to applicable state and federal law, and must conduct the activity in a safe and sound manner while maintaining written policies and procedures governing risk management, internal controls, cybersecurity, business continuity, and compliance.

The law requires institutions to provide written notice describing the nature of the services and the institution’s risk management framework to the commissioner at least 60 days before commencing virtual-currency custody services. Further, institutions must ensure that customer virtual currency and associated control mechanisms are legally and operationally segregated from the institution’s own assets and are not treated as the institution’s property. The law permits institutions to engage qualified third-party service providers or subcustodians to facilitate custody services, provided the institution retains oversight responsibility and ensures compliance with the law enacted by HF 3709. Under the law, the commissioner retains authority to limit or condition virtual-currency custody services if the activity is conducted in an unsafe or unsound manner, and such services remain subject to examination as part of the regular supervisory process. The law takes effect August 1.