By Sean Needham and Zachary Durant

In September of 2020, the Office of the Comptroller of the Currency (“OCC”) issued initial guidance on national banks’ ability to hold deposits that serve as reserves for certain “stablecoins,” a type of cryptocurrency commonly backed by fiat currency like the U.S. Dollar.[1]

Last month, in recognition of how cryptocurrencies have exploded across financial markets, the OCC expanded the role of financial institutions by approving their participation in independent node verification networks (“INVNs”) as well as the use of stablecoins to perform bank-permissible functions, such as payment activities. Said another way, banks can now participate in blockchains and use cryptocurrencies to facilitate the flow of money and credit to different parts of the economy. 

In Interpretive Letter 1174 (the “Letter”), the OCC reaffirmed banks traditional role as financial intermediaries and recognized that emerging technologies have always been used to help carry out that essential function.[2] In this context, blockchain technology and stablecoins are just another tool to be used in fulfilling bank-permissible functions consistent with the law, and safe and sound banking practices.

One such bank-permissible function is the execution of payment services.[3] These payment services involve banks transmitting instructions to transfer a specified sum from one account to another, whether it be at the same bank or a different bank. As part of this process, banks need to verify that the money being paid is coming from, and going to, legitimate accounts.

To facilitate this verification process, the OCC has made clear that banks may validate, store, and record payment transactions by utilizing INVNs. As explained in the Letter, “[a]n INVN consists of a shared electronic database where copies of the same information are stored on multiple computers,” and “[o]ne common form of an INVN is a distributed ledger.”[4] Additionally, “[a]n INVN’s participants, known as nodes, typically validate transactions, store transaction history, and broadcast data to other nodes.”[5] In order to utilize INVNs, banks may now serve as a node on an INVN, which may be beneficial seeing as INVNs are typically decentralized and may be more resilient than other payment networks, which, in turn, may enhance the efficiency, effectiveness, and stability of the payment services overall. It may also assist in facilitating cross-border payment transactions which are traditionally cumbersome and therefore expensive. The INVN’s decentralized nature increases reliability as a comparatively large number of nodes verify the transactions rather than relying on one single entity to verify payments.

In addition, the OCC will now permit banks to use stablecoins to facilitate payment transactions for customers on an INVN. In this regard, the Letter describes stablecoins as “a type of cryptocurrency that is designed to have a stable value as compared with other types of cryptocurrency,” which is due, in part, to the fact that “[s]ome stablecoins are backed by a fiat currency, such as the U.S. dollar.”[6] In order to utilize stablecoins to facilitate payment transaction for customers, banks can now issue stablecoins and exchange stablecoins for fiat currency. Thus, it is completely conceivable, if not likely, that we will see Bank of America, Citi, or JP Morgan Chase backed stablecoins in the near future which will be used as a mechanism for payments just like debit cards, checks and electronically stored value (ESV) systems are used today. The enhanced efficiency, effectiveness, and stability of a decentralized network will simply be too attractive to ignore.  

However, this new frontier is not without risk. According to the OCC, banks that seek to utilize INVNs and stablecoins should conduct their own due diligence in order to understand the risks associated with INVNs and stablecoins, and understand the legality of their anticipated activities under applicable regulatory framework as well as laws such as the Bank Secrecy Act and other anti-money laundering statutes. Moreover, payment activities involving cryptocurrencies may pose unforeseen operational risks, including fraudulent transfers and liquidity risks.

Clearly, the landscape is developing rapidly. And, while regulators are looking to provide banks with new avenues to facilitate capital and credit throughout the marketplace, they remain vigilant in reminding banks of their ongoing obligations to adhere to safe and sound banking practices. Either way, the Letter is a significant step toward the traditional banking industry embracing the world of cryptocurrency and we will be monitoring the developments going forward.

If you have questions on OCC Interpretive Letter 1174, or other regulatory issues surrounding the emergence of cryptocurrencies in the financial markets, please contact a member of Reminger’s Financial Services Liability Practice Group.

This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.

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[1] While “stablecoins” may be more complex and include cryptocurrencies backed by commodities, cryptocurrencies, and other assets, the OCC considers “stablecoins” to be a unit of cryptocurrency associated with hosted wallets backed by fiat currency and redeemable by the holder on a 1:1 basis for the underlying fiat currency upon submission of a redemption request. See, OCC Interpretive Letter No. 1172 (Sept. 21, 2020) (IL 1172).

[2] OCC Interpretive Letter No. 11022 (Nov. 2008); see NationsBank of North Carolina N.A. v. Variable Life Annuity Co. 513 US 251, 252 (1995).

[3] See, e.g., IL 890; IL 854; IL 1157; IL 1140; OCC Conditional Approval Letter 220; OCC Conditional Approval Letter 568; IL 737.

[4] IL 1174, p. 1.

[5] Id.

[6] Id. at p. 2.

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