Crypto integration among banks: Does the OCC’s recent letter open the door?
In an interpretive letter published on January 4th, the Office of the Comptroller of the Currency (OCC), an independent Treasury agency responsible for regulating US national banks, outlined how banks and savings associations could interact with stablecoins and blockchain networks. Among other points, the letter, whose language leaves open narrower and broader readings, states that national banks and associations can:
- Issue stablecoins for the purpose of offering payments.
- Trade (buy and sell) stablecoins with fiat currency for the purpose of offering payments.
- Operate blockchain nodes for the purpose of validating, storing, and recording payment transactions.
- Operate blockchain nodes and use stablecoins for financial activities beyond payments.
Unsurprisingly, the above letter was received warmly by many in the blockchain industry, especially those directly involved with USD-pegged stablecoin projects. Jeremy Allaire, CEO of Circle, a firm which, along with Coinbase, operates the Centre consortium responsible for the USD Coin (USDC) stablecoin, claimed that the guidance effectively establishes a level-playing field between blockchain networks and legacy payments infrastructure such as SWIFT, ACH, and FedWire, at least in terms of how banks can use blockchain networks for facilitating payments while also, supposedly, establishing stablecoins as “electronic stored value.”
Explaining the rationale for its new guidelines, the agency states that stablecoins have the ability to offer faster, cheaper, more efficient, and interoperable payments. Beyond this, the letter argues that the decentralized nature of some blockchain networks makes them more resilient than legacy infrastructure, insofar as neither banks nor consumers would be reliant on a small group of operators to process their payments. Among the threats that banks and associations should be aware of, the agency cites the potential operational, compliance, liquidity, and fraud risks that blockchain networks may pose and advises financial organizations to ensure that they have the technical ability to verify the identity of all entities involved in stablecoin payment transactions. While the authorization to run blockchain nodes may seem separate from the authorization to use stablecoins, the letter makes it clear that the OCC views the former as a prerequisite for using stablecoins in a secure manner, insofar as it allows banks to verify transactions independently.
Although the letter seemingly represents a large step towards including blockchains and stablecoins in the US financial infrastructure, the letter’s more permissive stance is in keeping with the agency’s other recent statements concerning cryptonetworks. Since May of last year, when Brian Brooks, who was formerly the Chief Legal Officer of Coinbase, assumed his role as Acting Comptroller of the Currency, the OCC has issued guidance allowing banks to provide cryptoasset custody for their customers and penned a working paper discussing the implications of chartering stablecoin providers.
A striking theme throughout the January 4th letter is its open-ended language that, on some readings, would appear to justify other interactions with cryptonetworks, such as mining and non-USD stablecoins. Aside from introducing some new terminology, such as “independent node verification networks (INVNs)” under which the OCC includes blockchain networks, language used in the agency’s guidance introduces several unanswered questions.
For one, it is not clear whether the guidance extends to all types of blockchain networks, whether they be private, permissioned, public, or otherwise: a distinction that is highly relevant to the existing stablecoin market, which almost wholly consists of assets operating on public, permissionless networks, most commonly Ethereum. Secondly, the agency’s use of the term ‘node,’ which only differentiates between ‘light nodes’ and ‘full nodes,’ arguably opens the door to banks and savings associations experimenting with mining operations, since a miner can and often does function as a full node. Finally and perhaps most importantly, the letter’s wording does not confine the new provisions solely to the use of stablecoins pegged to and collateralized by the US dollar. For instance, in saying that “some stablecoins are backed by a fiat currency, such as the U.S. dollar” and only otherwise referring to ‘stablecoins,’ the letter seemingly authorizes the use of stablecoins pegged to other fiat currencies or those that achieve some level of price stability compared to other cryptoassets by some other non-fiat peg. Additionally, the letter acknowledges that commodity-backed tokens, such as those backed by gold, are sometimes also described as stablecoins, further broadening its guidance’s potential ramifications.
While we are certainly not suggesting that the above interpretations are definitive, it will be interesting to see whether the letter’s broad scope and open-ended wording will encourage US banks to begin considering or experimenting with mining operations and non-USD stablecoins. Regardless, the relative clarity from the OCC that banks can permissibly use USD stablecoins is in itself significant, to say the least, and seemingly represents a major validation of the use of cryptonetworks for stablecoins beyond existing crypto-native use cases.