Daily Vecsignal - Minnesota Enacts Crypto Custody Law for Banks, Bans ATMs

 Minnesota Enacts Crypto Custody Law for Banks, Bans ATMs

May 19, 2026 | VECS News

Minnesota Governor Tim Walz has signed legislation authorizing state-chartered banks and credit unions to offer regulated cryptocurrency custody services starting August 1, 2026 . House File 3709, now Chapter 93 of Minnesota's 2026 Session Laws, establishes the first unified legislative framework for digital asset safekeeping in the Midwestern United States, positioning Minnesota alongside pioneering states like Wyoming, Virginia, and New York . The law is structured as a voluntary pathway, not a mandate, allowing financial institutions to evolve alongside customer demand for trusted crypto storage solutions .

The law imposes strict operational requirements designed to protect customer assets and maintain institutional stability. Banks and credit unions must submit a comprehensive 60-day advance written notice to the Minnesota Commissioner of Commerce detailing their internal risk management, cybersecurity, and operational continuity frameworks before launching any crypto custody service . Crucially, the legislation mandates complete legal and operational segregation of customer digital asset holdings from the financial institution's own assets, meaning customer crypto cannot be treated as bank property or used for trading, lending, or proprietary investment . Institutions may work with third-party subcustodians but retain full regulatory responsibility for safeguarding client assets .

Simultaneously, Walz signed a separate bipartisan bill (SF 3868) imposing a statewide ban on all cryptocurrency kiosks and ATMs effective August 1, 2026 . This dual approach creates what analysts call a "regulatory sandwich" that closes unregulated high-risk on-ramps while opening regulated custody corridors . Representative Erin Koegel, author of the House version of the ban, stated that crypto kiosks had become a "tool for scammers to target some of our most vulnerable neighbors, especially seniors living on fixed incomes" . The Minnesota Department of Commerce reported average losses of $6,700 per reported scam involving crypto ATMs, with only 48% of victims recovering funds and an average recovery of just 16% .

For crypto investment instruments, this law represents a significant maturation of the digital asset custody landscape. Prior to this legislation, many Minnesota residents holding crypto relied on unregulated exchanges, offshore platforms, or out-of-state custodians, exposing them to risks of fraud, hacking, or total loss from misplaced private keys . State Representative Steve Elkins, one of the bill's authors, noted that he personally knows individuals who "have essentially lost their cryptocurrency accounts because they misplaced their account ID or password," arguing that such losses would not occur if a regulated bank or credit union acted as custodian for their account information . The St. Cloud Financial Credit Union reported that approximately 20% of its 28,000 members already hold cryptocurrency but lacked trusted local custody options, and the institution has already launched its CU Digital Asset Vault™ with over $1 million in Bitcoin under custody .

Expert responses to Minnesota's approach have been cautiously optimistic, with attention focused on implementation details and competitive dynamics. The Minnesota Credit Union Network stated that the law creates a "clear regulatory framework for Minnesota credit unions to provide crypto custody services within regulated environments focused on safety, soundness, cybersecurity, compliance, and member protection," adding that it represents "an important step toward giving consumers safer, more trusted options within the regulated financial system while helping credit unions remain relevant in a rapidly changing financial landscape" . However, some analysts note that the custody-only limitation—explicitly excluding trading, lending, or yield generation—may limit the revenue potential for participating institutions, potentially slowing adoption . Switzerland's FINMA, which published its own comprehensive guidance on crypto custody in January 2026, emphasizes that even with proper custody arrangements, crypto-based assets "are not considered safe investments" and remain "highly speculative and subject to significant volatility," a warning that applies equally to Minnesota's framework .

The national competitive landscape is shifting beneath Minnesota's new law. National crypto firms like Kraken's parent company Payward are moving to secure OCC trust company charters for fiduciary custody authority, creating direct competitive pressure on state-based banks . With 240 commercial insured banks holding approximately $128 billion in assets and 82 credit unions across Minnesota, the potential scope of this regulatory shift is substantial . AInvest analysts identify three key metrics to watch following the August 1 effective date: institutional application volume, the efficiency of the 60-day notice review process, and potential legal challenges from ATM operators that could partially restore the banned kiosk channel . For crypto investors, the message is clear: regulated custody is expanding into traditional banking infrastructure, potentially reducing counterparty risk and increasing institutional participation, but the speed and scale of adoption will determine whether Minnesota's experiment becomes a national model or a cautionary tale of regulatory friction.