The Office of the Comptroller of the Currency (OCC) issued Interpretive Letter 1174 on January 4, 2021, clarifying the authority of national banks and federal savings associations to buy, sell, and issue stablecoins and participate in independent node verification networks (INVNs) in order to conduct payment activities and other bank-permissible functions.
The OCC has taken a systematic approach to its digital asset and cryptocurrency guidance. This is the third letter issued by the OCC that focuses on banks’ authority to offer innovative cryptocurrency-related services.
The first interpretive letter (Interpretive Letter 1170) clarified the legal basis for banks to provide cryptocurrency custody services for customers, specifically for custody of cryptographic keys associated with cryptocurrency. Cryptographic keys are a fundamental component of the technology underlying INVNs and stablecoins.
The second interpretive letter (Interpretive Letter 1172) focuses on the authority of banks to hold stablecoin reserves. Now the OCC has gone one step further in allowing banks to directly provide payment and related services using stablecoins or INVNs. All three interpretive letters emphasize that these new cryptocurrency-related services are merely extensions, and new methods of delivery, of traditional banking activities, including custody, safekeeping, and fiduciary services, accepting deposits, facilitating payments, and other financial intermediation services. Banks have historically adopted new technologies to carry out bank-permissible activities, such as those adopted in the development of electronic funds transfer, real-time settlement, and stored value systems—the OCC views digital asset and cryptocurrency activities as a similar type of development.
A stablecoin is a specific type of cryptocurrency that is designed to maintain a stable value by tying the value to another asset, most commonly a fiat currency like the U.S. dollar. INVNs consist of shared electronic databases that store copies of the same information on multiple computers—distributed ledgers, such as blockchains, are common forms of INVNs. INVNs are the ledgers underlying stablecoins where transactions are recorded. Because INVNs and stablecoins are inextricably linked, the OCC clarified the authority of banks to leverage both technologies in the new Interpretive Letter.
The OCC focuses on the fact that stablecoins backed by fiat currencies provide the ability to store, transfer, transmit, and exchange the underlying fiat currency. In this sense, stablecoins operate the same as other payment mechanisms, such as debit cards and electronically stored value (ESV) systems. National banks are authorized by statute to offer ESV systems.
While the Interpretive Letter focuses on the general legal permissibility of payment activities involving the use of INVNs and stablecoins, in the accompanying OCC News Release, Comptroller Brooks specifically mentioned the recent statement by the President’s Working Group on Financial Markets that outlines seven broad principles that have to be carefully considered in any stablecoin system. Among the primary considerations, banks will have to establish robust consumer protection practices and procedures if the payment system is to be utilized directly by consumers.
Consumer protection laws and regulations, such as Regulation E, will extend to stablecoin payment arrangements offered by banks. Banks will need to consider how to develop robust dispute resolution processes as well as clear communications regarding the rights of stablecoin holders. The Consumer Financial Protection Bureau (CFPB) has a lot of work to do as the primary federal regulator responsible for supervising compliance with consumer financial laws in order to ensure its rules and guidance extend to innovative payment systems.
The Interpretive Letter emphasizes that banks have significant experience with establishing and maintaining programs to comply with Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements. The OCC expects banks to leverage such BSA/AML experience when offering new payment systems to properly address the unique risks related to cryptocurrency transactions. As always, the level of risk management should be commensurate with the complexity of the products and services offered. Additionally, any new activities must align with the respective bank’s overall strategic plan.
For the time being, it is clear that national banks wishing to engage in cryptocurrency activities may do so, whether it involves safeguarding cryptographic keys for digital assets or offering innovative stablecoin payment systems, provided the banks can engage in such activities in a safe and sound manner. State banks whose regulators are hesitant to issue explicit guidance authorizing banks to engage in cryptocurrency activities can likely rely on parity statutes that create a level playing field between national and state banks. Alternatively, or in addition, state banks can make the same argument that the OCC continues to make: that using stablecoins, INVNs, digital assets, cryptocurrencies, and other blockchain technologies is merely a new means of performing existing bank-permissible functions.