Office of the Comptroller of the Currency (OCC)
The purpose of this blog post is to give an overview of the Office of the Comptroller of the Currency (OCC) and examine the regulatory guidance pertaining to cryptocurrencies.
NOTE: Regulatory guidance in this area is rapidly evolving. As such, this blog post may not be entirely up to date. Please DYOR.
INTRODUCTION
The OCC is an independent bureau within the U.S. Treasury and charters, regulates, and supervises all national banks, federal savings associations and all federal branches/agencies of foreign banks.
Thus far, the OCC has issued interpretive letters pertaining to cryptocurrencies, which lack the force of law. Such letters are useful however to glean insight into the action the OCC may take in the future in this regard.
INTERPRETIVE LETTERS
The OCC has issued four interpretive letters:
OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves, September 21, 2020.
This letter is primarily concerned with a situation involving the issuer of a stablecoin that wishes to place a large amount of cash reserves on deposit with a bank in order to “provide assurance that the issuer has sufficient assets backing the stablecoin in situations where there is a hosted wallet.”
The OCC stated that banks may take on these deposits if certain conditions are met, such as the stablecoins being backed 1:1 by a single fiat currency and may be redeemed “on demand” for the underlying fiat currency and that the bank verifies daily that the reserve account balances are equal to or greater than the amount of the issuer’s stablecoins. Please refer to the letter on pages 2-3 for the full list.
The OCC also states that before the bank takes on a stablecoin issuer as a customer, it must obtain a “no-action” letter from the issuer in advance and must demonstrate that the bank has a mitigation of risk plan in place.
In this vein, BNY Mellon announced in March 2022 that it would take on the reserve deposits for Circle’s USDC stablecoin.
Authority of a National Bank to Provide Cryptocurrency Custody Services for Customers, July 22, 2020.
The letter outlines that banks are permitted to engage in custody services pertaining to cryptocurrencies in the following ways: (1) taking direct control of cryptocurrencies while providing indirect access to customers; (2) securely storing private keys for “hot” or “cold” wallets; and (3) serving in a fiduciary capacity.
The letter notes that these services may also include “services such as facilitating the customer’s cryptocurrency and fiat currency exchange transactions, transaction settlement, trade execution, recording keeping, valuation, tax services, reporting, or other appropriate services.”
The letter clarifies that banks and savings associations may use stablecoins for payments and participate in independent node verification networks (INVNs) (an INVN is a shared electronic database, such as a distributed ledger, wherein copies of the same information are stored on multiple computers and an INVN’s participants are known as “nodes,” which validate transactions, store transaction history, and broadcast data to other nodes).
Essentially, the OCC has allowed banks to serve as nodes on an INVN and to use INVNs and related stablecoins to conduct permissible banking activities, such as authorized payment activities.
Interestingly, the letter also allows banks to issue their own stablecoins to facilitate payments on an INVN and may exchange stablecoins for fiat currency (and vice versa).
Chief Counsel’s Interpretation Clarifying: (1) Authority of a Bank to Engage in Certain Cryptocurrency Activities; and (2) Authority of the OCC to Charter a National Trust Bank, November 18, 2021.
In relevant part, this letter provides clarification to the OCC’s earlier letters discussed above.
Specifically, the letter outlines that before engaging in cryptocurrency activities, banks must “demonstrate, to the satisfaction of its supervisory office, that it has controls in place to conduct the activity in a safe and sound manner” and must receive the supervisory office’s non-objection letter.
To obtain the non-objection letter, a bank must demonstrate “that it has established an appropriate risk management and measurement process for the proposed activities” and specifically risks related to operations, liquidity, strategy and compliance.
STABLECOIN REPORT
In late 2021, the OCC worked with the President’s Working Group and the FDIC to issue a report on stablecoins. See Report on Stablecoins.
This report is discussed in greater detail in an earlier blog post.
STATEMENTS
In late 2021, the OCC issued a joint statement with the FDIC and the Fed that it plans to provide greater clarity regarding whether activities related to cryptocurrencies conducted by banking organizations are legally permissible and the expectations for “safety and soundness, consumer protection, and compliance with existing laws and regulations.” Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps.
In 2022, OCC head Michael Hsu made public remarks about stablecoins and that firms issuing stablecoins were not currently subject to regulatory oversight, which could lead to a “sudden loss of trust” in a given stablecoin (i.e, the equivalent of a bank run). Remarks before the BritishAmerican Business Transatlantic Finance Forum Executive Roundtable: “The Future of Crypto-Assets and Regulation.”
In this vein, Hsu later made public remarks following the collapse of algorithmic stablecoin TerraUSD (UST). Specifically, Hsu stated his belief that cross-chain bridges are “highly prone to being hacked” and outlined the risk of market contagion in a panic (like what happened with UST). Hsu also reiterated that banks should focus on “safety and soundness” with respect to cryptocurrency. Remarks at the DC Blockchain Summit 2022: "Crypto: A Call to Reset and Recalibrate."
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