Q&A w/ Texas Department of Banking

The Network Firm was able to engage with the Texas Department of Banking and ask the following questions and receive the following answers regarding HB 1666.

Please see TNF's overview of the bill here: Texas PoR Bill - HB1666 Fast FAQs


Questions & Answers

Q: Does the Department anticipate issuing an interpretation or supervisory memo?

A: To date, the Department of Banking ("DoB") has sent out a brief notice with general requirements and pertinent dates. The DoB may or may not issue further memos in the future, depending on findings from the DoBs examinations of relevant parties. The DoB does not plan on rulemaking and plans to err of the side of guidance.

Q: What should Digital Asset Service Providers (“DASP”) expect to provide within its “plan” as mentioned within Section 160.004 section (c) of HB1666?

A: The plan should include a comprehensive walkthrough of how the company plans to comply with the requirements outlined within the HB1666. The plan should be understandable by DASP users, regulators, and those who are not experts in digital assets. Topics that should be covered include: how funds are held in custody, how account balances are managed and updated, how balances are made available to the auditor, the like (as mentioned within HB1666). The plan will be submitted within 90 days of the DASP’s fiscal year, along the other requirements outlined within 160.004 section (d).

Q: What must be done on a quarterly basis?

A: A full accounting must be made available to customers as outlined within the requirements of 160.004 section (c1). The DASP will not have to submit any other documents on a quarterly basis unless otherwise requested or part of an examination by the DoB. The quarterly cadence should be in line with the DASP’s fiscal calendar.

Q: Will the requirements outlined within HB1666 be subject to examination as part of the DoB’s standard examination process?

A: Yes.

Q: How many entities with this law effect?

A: 70+ entities today, with the expectation that the number of entities grows about 10% per year.

Q: What attestation standards will suffice?

A: Currently, there are no specific attestation standards related to Proof of Reserve-like engagements. However, the AICPA does have various standards that can be applied to Proof of Reserve like engagements, such as AT-C 205 Examinations, and AT-C 215 Agreed Upon Procedures. Up to this point, most, if not all CPA-assisted Proof of Reserve like have used the AT-C 215 standards due to it’s flexibility and limited assurance/risk for the auditor in a new type of engagement.


Open Questions

The Texas Department of Banking was unable to provide clear answers on the following questions. However, TNF notes and responses to the DoB are available for your consideration.

Q: What will be considered a sufficient method to allow “each digital asset customer to view at least a quarterly accounting” of outstanding liabilities and digital assets held in custody as noted within 60.004 section (c1)?

TNF Notes:

Notes from draft contributors of the bill mentioned that simply “displaying” a user account balance within their log in portal would not fulfill the spirit of the bill.

The intention described would be that the DASP provide a “self attested PoR” on a quarterly basis and a “auditor-assisted PoR” on an annual basis.

  • Liabilities: This would include publishing the full liability set with obfuscated user details either via full balance download or via a quarriable Merkle Tree as customary in the industry.

  • Asset: regarding assets, the level of detail to publish may warrant further consideration. It is possible to publish addresses or screenshots of balances, but this erodes privacy of the DASP. Therefore, additional thought and consideration regarding the level of disclosure may be warranted on this subject.

Q: What will be considered a sufficient method to allow an auditor “to review a pseudonymized version of this information at any time”?

TNF Response to DoB:

In practice, this is feasible. However, it is the timing of always being available that is a challenge. Perhaps, the spirit of the bill is to enable the auditor to go back into any historical point and inspect the balances vs. always having every balance readily available for viewing at all points in time.

Q: Often times, DASPs have a large number of supported assets, with a number of them contributing to less than 1% or even .1% of assets under custody. Does the DoB plan to implement a “materiality” threshold that would essentially descope small asset amounts?

TNF Response to DoB:

Often times, the technical challenge of verifying ownership of hundreds of assets may be costly for now much additional assurances.

The DoB may consider achieving a certain level of covered (95%+ or a number up to the DoB) that achieves the spirit of the bill, but does not make the requirements overly burdensome to businesses in Texas.

Q: Once a DASP trips the $10M or 500 Customer threshold, will they always be required to adhere to the requirements set forth within HB1666? Is it possible for a DASP to “fall back under” the predefined thresholds, and no longer have to comply?

TNF Response to DoB:

In practice, this would require that a DASP monitor the USD-equivalent balance of it’s digital assets under custody.

In an industry whereby assets fluctuate up to 50% in a given day, it is possible that a DASP may have $10M in AUC (“Assets Under Custody”) one day, and $5M under the next.

It may be helpful to understand what compliance requirements are relevant in these scenarios.

Perhaps a “measurement date” at the beginning of the fiscal year would require the DASP to comply for the next calendar year until remeasurement of AUC.


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