OCC Regulator implements innovative guidance on cryptocurrency for banks and the future of payments

When Brian Brooks took over as acting Currency Controller for the Currency Controller Office (“OCC”) in May 2020, many in the industry knew that part of Brooks’s focus would be on fintech and blockchain technology.

Since then, the OCC has provided interpretative letters and guidance clarifying that banks can custody cryptocurrencies and stablecoins, as well as engage in stablecoin activity. The OCC has also created a Special Purpose Payments Letter for FinTech companies. In December, OCC Chief Economist Charles Calomiris published an article entitled “Chartering the Future of FinTech”, in which Calomiris outlined the benefits of OCC in providing bank licenses to stable currency providers.

Today’s Interpretive Letter

Today, the OCC has published Interpretative Letter 1174, which explains that banks can use new technologies, including independent node verification networks (INVNs) and stablecoins, to perform functions permitted by the bank, such as payment activities. Simply put, a bank can use stablecoins (cryptocurrencies designed to minimize price volatility) to facilitate payment transactions for customers.

In doing so, a bank can issue stablecoins, exchange stablecoins for fiat currency, as well as validate, store and record payment transactions serving as a node on a blockchain (INVN).

Justification

Today’s OCC news is innovative and exciting. Not because it is a major pivot of the traditional functioning of banks, but because the OCC is doing a remarkable job in keeping with technological and landscape changes. Many criticize the United States for stifling innovation and not allowing companies to evolve with innovative technologies that would improve our financial system. Well, the OCC is doing the exact opposite. Brooks continues to move carefully, but quickly.

As today’s OCC interpretative letter notes, “over time, banks’ financial intermediation activities have evolved and adapted in response to changing economic conditions and customer needs. Banks have adopted new technologies to carry out activities permitted by banks, including payment activities. . Changes in the financial needs of the economy are well illustrated by the growing market demand for faster and more efficient payments through the use of decentralized technologies, such as INVNs, which validate and record financial transactions, including stable currency transactions. “

Banks have always been a place where customers could store valuables for safekeeping and, over time, have become a critical part of our financial and payment infrastructure. The history of the American banking system (since the approval of the National Bank Act in 1863, the Federal Reserve Act in 1913 and the creation of the FDIC in the Banking Act of 1933) tells the story of adapting regulation to changing economic realities and technology.

Stephen Palley, a partner at the law firm Anderson Kill in Washington DC, made an analogy with the demand for Internet banking services, explaining that “the first Internet banking services had OCC approval and are now ubiquitous, despite early concerns. about the security or practicality of such technology for secure banking services. The OCC continues to show interest and desire to be involved with the new financial technology that consumers demand ”.

Viewed against this historical background, the latest letter from the OCC fits perfectly into the framework of a conservative prudential regulator, creating rules for new and powerful technology and adapting to changing times and customer needs.

What it really means

So, what does this really mean for payment systems as we know them today?

Although the financial system in the United States works relatively well, traditional payment trails are still slow, expensive and subject to bank hours and holidays.

The OCC’s guidance opens the possibility for banks to use INVNs and stablecoins to transfer funds between financial institutions more quickly and without the need for a government intermediary.

Kristin Smith, Executive Director of the Blockchain Association noted to me: “The OCC interpretive letter shows that there are people in the government who really understand that cryptocurrency networks are the foundation of a next generation payment system. Stablecoins, like the USDC, can accelerate payments in real time 24 hours a day in a way that the existing payment infrastructure in the U.S. cannot handle. ”

Castle Island Ventures partner Nic Carter added that this will allow banks to “take advantage of the always-active resources of public blockchains.”

Banks that adopt the use of INVNs and stablecoins can also greatly increase the efficiency of international transactions, but this will require banks in the United States and abroad to implement a lot of technology.

Carter warned: “I don’t see stablecoins imminently replacing traditional financial trails, but this is a vital first step towards normalizing the notion of public blockchains as an alternative settlement infrastructure that banks can freely adopt.”

The future of finance looks bright.