US Banking Regulator Greenlights Crypto Custody At Federally Chartered Banks (#GotBitcoin?)
The office of the U.S. Treasury that handles banks has issued a determination on the long-debated subject of custodying crypto assets. US Banking Regulator Greenlights Crypto Custody At Federally Chartered Banks (#GotBitcoin?)
Per a July 22 announcement shared with Cointelegraph, the Office of the Comptroller of the Currency (OCC) is granting permission to federally chartered banks to custody cryptocurrency.
This issue has seen much skepticism, given that crypto wallets do not resemble the custody requirements of other sorts of assets. Nonetheless, in its interpretive letter on the subject, the OCC wrote:
“The OCC recognizes that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers.”
In the words of the announcement, the new opinion “applies to national banks and federal savings associations of all sizes.”
Acting Comptroller of the Currency Brian Brooks similarly saw the development as part of modernizing banking in the U.S., saying “From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today,”
The OCC’s letter further specifies that bank “custody” of crypto assets is dependent on their access to the keys to the crypto wallets rather than any sort of physical requirement — a confirmation of Andreas Antonopoulos’ famous line of “not your keys, not your coins.” the OCC specifies:
“That national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”
OCC’s Heightened Crypto Engagement Under Brooks
Coming from Coinbase’s legal team, Brian Brook’s tenure as Acting Comptroller has seen accelerated onboarding of crypto capabilities in the U.S. financial system.
Speaking with Cointelegraph in early June, Brooks hinted at his interest in expanding the right to custody crypto.
This follows an international trend of banks looking to incorporate the crypto asset class.
Don’t Expect Banks To Jump On The OCC Crypto Custody News
Banks can now offer cryptocurrency and digital asset custody to their clients, but what does this really mean?
As you may know, the Office of the Comptroller of the Currency (OCC) announced Wednesday that nationally chartered banks in the U.S. can now jump into the crypto custody arena. There are plenty of opinions about what impact this will have on the industry, and many of them are at odds.
Some feel this is the beginning of a new era for the industry where banks will be able to offer complimentary digital asset services attractive to sophisticated investors; or, even more optimistically, that a Bitcoin ETF is more likely to be approved. Others have lamented that banks will audit and tax every penny, or, even worse, that they will readily agree to help the federal government seize coins in the future.
Here’s the thing. Traditional financial institutions, banks included, move slowly. Most make turtles look like they’re in a hurry. So, don’t expect any to announce their brand new custody platform immediately, if at all.
According to a recent Fidelity survey, only about a third of all these firms even own crypto.
Think about that for a second.
Many investors in this space are here because they are weary of being exposed to the systemic risk that having digital assets custodied in a traditional financial institution could create. They are hedging against the very network that’s trying to encroach on Bitcoin.
“The bulk of banks and other sophisticated players in the old school markets don’t know much about our industry.”
Given this unusual (and vocal) segment of our industry, banks may not have quite the opportunity they think they do, and a significant share of crypto asset traders and investors may avoid them altogether and stick with crypto native firms that are somewhat insulated from the potential problems of a Northern Trust or a State Street, both of which are large traditional custodians that took TARP bailout funds during the Great Recession.
The bulk of banks and other sophisticated players in the old school markets don’t know much about our industry. Most of them don’t appear to have even done anything as basic as buying a fractional Bitcoin on Robinhood.
Some firms have even publicly frowned upon bitcoin. For example, just this past May, Goldman Sachs said in a widely publicized research note that “cryptocurrencies including bitcoin are not an asset class.”
Comments like those don’t appear to be aging well, and are important because they show the fundamental lack of experience and understanding of digital asset markets that at least some of these firms have. Sure, their reach and distribution is huge, but what does that matter if they don’t have the knowledge or relationships to build such an offering?
It isn’t all negative, though. There are positives that can be taken away from this announcement.
When former Coinbase Chief Legal Officer Brian Brooks became the acting head of the OCC, his office announced that he wanted banks to submit input on crypto rule policies, this was a major change from the previous head.
Additionally, now that nationally chartered banks can officially do business as a crypto custodian, this will legitimize digital assets to more people, both on the retail consumer side and institutionally. And, I wouldn’t be surprised if we saw a jump in values for many of the more well-known crypto assets over the coming days and weeks.
Paul Tudor Jones, one of the most successful and well known hedge fund managers in the world, recently made news by making public his intention to include bitcoin futures in response to an “unprecedented expansion of every form of money unlike anything the developed world has ever seen,” and what he sees as “the upcoming digitization of money everywhere, accelerated by Covid-19.”
He can’t be the only member of the old guard starting to see the value and practicality of Bitcoin and other crypto assets.
More than likely, this will be a catalyst of sorts for an acceleration of clarity from Washington regarding a more solid regulatory framework for our industry (also good). All too often, the clarity of what we can or can’t do seems to shift with the winds. Hopefully, this is the beginning of a trickle-down effect. Maybe this announcement is our stabilizer, maybe Brian Brooks is the even-keeled captain that we need to move forward.
Once all the headlines surrounding this announcement fade away, what will we be left with? Probably not many new custodial entrants from this regulatory approval in the short term, but the bright hope that the onlookers will see the acknowledgement from our government that crypto is real, at least real enough for the house that Morgan built to be allowed to do business with it.
Mainstream Institutions No Longer Have Regulatory Reasons To Fear Crypto
Institutions on the fence about crypto involvement may no longer fear legal uncertainty, given recent crypto custody regulatory clarity.
Recent regulatory transparency provided by U.S. banking regulator, the Office of the Comptroller of the Currency, or OCC, may give interested institutions the confidence to enter the crypto industry.
“For those of us who have been building up this ecosystem for years, it’s hugely validating of those efforts,” Diogo Monica, president of crypto custody service Anchorage, told Cointelegraph on July 23, referring to the OCC’s actions.
“But the real significance here is for the kinds of institutional players who may have been sitting on the sidelines in the absence of clear regulatory guidance. The OCC coming out and saying that more traditional financial institutions can custody crypto effectively erases that concern.”
The OCC’s Move Is A Victory For The Crypto Industry
On July 22, the OCC proclaimed digital asset custody by federally chartered U.S. banks as permissible activity.
The move provided transparency without changing any current guidelines, Morgan Creek Digital co-founder Anthony Pompliano said in a recent YouTube video.
“Yesterday’s OCC letter is a huge win for crypto,” Monica said. “Not only does it bring much needed regulatory clarity to the digital asset space in the United States, it also signals to skeptics and the wider market that this asset class is here to stay.”
More Banks May Enter The Industry
Will all banks offer crypto custody in the future? “It’s not so much a question of if they will as how they will,” said Monica. Holding digital assets for customers currently requires specific technical tools and prowess — something banks may not house at present, he explained. Blockchain activity and interaction, such as staking, also brings further complications and requirements.
“Particularly when those actions are yield-generating, it will be imperative for fiduciary banks to support them through partnerships or sub-custodian relationships with a financial services platform like Anchorage,” he added.
An up and coming crypto custody outfit, Anchorage garnered $40 million from a number of companies, including Visa, announced in mid-2019. The startup has since posted a number of new developments.
Wall Street Journal: Banks May Provide Safekeeping of Cryptocurrency, OCC Says
Services may include holding unique cryptographic keys associated with cryptocurrency.
National banks and federal savings associations in the U.S. can provide cryptocurrency custody services for customers, a federal banking regulator said in a guidance letter intended to clarify the role of traditional financial institutions in the virtual-assets market.
The Office of the Comptroller of the Currency said in an interpretive letter this week that national banks and federal savings associations are authorized to provide the services, including holding unique encoded keys associated with digital currencies, for clients.
The letter, made public Wednesday, came in response to a request from an unidentified party that asked the Treasury Department unit that supervises and regulates banks and savings associations to address the authority of a national bank to provide cryptocurrency custody services. Banks wanting to provide such services faced ambiguity around compliance in this area of cryptocurrency, experts said.
The OCC also restated its position that banks may provide permitted banking services to cryptocurrency businesses as long as the banks effectively manage risks and comply with regulations such as anti-money-laundering requirements.
Banks and savings associations have long provided safekeeping and custody services for physical and digital assets. Providing cryptocurrency custody services is a “modern form of traditional bank activities related to custody services,” the OCC said in its letter.
“From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today,” Brian Brooks, acting Comptroller of the Currency, said in a statement. “This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”
The OCC said in its letter that it also recognized there will be a growing need for banks and other providers of financial services to use new technology to meet customer needs as financial markets become increasingly digitized.
While the guidance didn’t represent a major policy shift, it provided added recognition of cryptocurrency from a federal banking regulator, said Ross Delston, a Washington, D.C., lawyer who advises clients on anti-money-laundering issues.
Some cryptocurrency exchanges already provide custody services for digital assets, but banks may be able to offer more security for storing cryptocurrency with so-called cold wallets, in which cryptographic keys for a particular unit of digital currency are kept on devices that are completely offline and can be stored in physical vaults, the OCC said in its letter.
The additional sense of security that banks can provide can be an important incentive for customers such as investment advisers connected with hedge funds or private-equity funds to potentially pay more to use custody services instead of similar services offered by crypto-exchanges, Mr. Delston said.
The OCC also clarified in its letter that investment advisers can manage cryptocurrencies on behalf of clients and may use national banks as custodians for the managed assets.
Open The Floodgates: US Customers To See More Crypto Accessibility
Digital payment platforms add more cryptocurrency features for U.S. customers, but will big banks take the lead?
The cryptocurrency market has come a long way in a seemingly short amount of time. Digital payment platforms have particularly taken note of the crypto market’s impressive growth, which is evident, as many have adopted new features and support for more cryptocurrencies.
United States-based customers in particular seem to be reaping the benefits of recent implementations being made by digital payment providers. It’s especially notable that these new features are coming at a time when the Office of the Comptroller of the Currency has granted permission for federally chartered banks to custody cryptocurrency.
Mati Greenspan, a crypto market analyst and the founder of Quantum Economics, told Cointelegraph that the advantages of cryptocurrencies and other digital assets are now quickly becoming apparent to all:
“It did take a while, but governments and large corporations are finally realizing the power of programmable money and the necessity for digital scarcity. The internet of value is now under construction and they don’t want to be left behind.”
A Race To Drive Adoption
Just as the U.S. government has started taking note of cryptocurrency’s intrinsic value, digital payments platforms seem to be adding support for more cryptocurrencies for their American customers. For example, Uphold just added support for Cardano (ADA), Zilliqa (ZIL), LINK, Cosmos (ATOM) and EOS.
JP Thieriot, the CEO of Uphold, told Cointelegraph that these five cryptocurrencies fall into Uphold’s “Tier 4” category, which includes up-and-coming digital assets that are quickly gaining adoption.
“Although these were all launched on Uphold last year, they have been unavailable in the U.S. until today,” he said. Interestingly enough, Uphold announced support for the five new cryptocurrencies shortly after the company’s competitor, Revolut, expanded its cryptocurrency trading services to 49 states in the United States.
While the neobank’s service has been available to its European clients for many years now, as the company first added support for Bitcoin (BTC), Ether (ETH), Litecoin (LTC) and XRP in 2017, Revolut finally launched in the U.S. this March.
Initially, Revolut went live without crypto support, but the platform now allows U.S. users to buy, sell and trade Bitcoin and Ether within its app through its partnership with Paxos. Edward Cooper, the head of crypto at Revolut, told Cointelegraph that the company also plans to extend support for additional cryptocurrencies to its U.S. customers:
“Our job will be to support the tokens we support in Europe including Litecoin and Bitcoin Cash. Stellar Lumens has also been a popular request from our users. So, we’re looking into that. There are about 14 other tokens that have passed our internal due diligence tests that we’re currently looking into adding as well.”
More Than Just Speculation For Retail Investors
Cooper further noted that Revolut has about 60,000 U.S.-based customers and that the company is aware of additional features being requested from these individuals. For instance, the ability to offload crypto from the platform has been a feature that Revolut users have been anxiously awaiting.
While Cooper previously told Cointelegraph that limiting users to trade only within Revolut is a unique advantage over incumbents like Coinbase, he noted that the company has been working with partners and regulators on ways to enhance the product to meet certain requests.
Unlike Revolut and the popular stock and trading platform Robinhood, Uphold claims to be the only digital money platform that allows for the easy withdrawal of cryptocurrencies. According to Michelle O’Connor, the vice president of marketing at Uphold, the platform has implemented full connectivity to support onboarding and offboarding across seven blockchain networks.
Thieriot believes that Uphold offers more crypto-friendly features to its U.S. customers compared to other digital payment platforms, saying that users “aren’t buying the crypto but rather buying participation in a unit of account for that crypto. This means users can’t deposit, withdraw or move the crypto anywhere. Rather, they can just speculate in it.”
Yet as the cryptocurrency market continues to mature, Thieriot pointed out that full-integration platforms that allow users to deposit, withdraw, send and ultimately do more with their crypto will become more important than ever before.
Greenspan stated that the U.S. customers have been mainly buying cryptocurrencies for speculative purposes. However, he pointed out that as with most markets, capital allocation is important. “Money flows tend to determine the future of innovation and vise versa, and it’s quite clear at this point which direction the world is headed,” he remarked.
Digital Payment Platforms Act More Like Banks
It’s also interesting that digital payment platforms continue to adopt features similar to traditional banks, both for U.S. and global customers. For example, cryptocurrency investment app Abra just announced the launch of a savings account, providing its global users with the opportunity to earn up to 9% interest per annum of digital assets and USD-backed stablecoins. Abra CEO Bill Barhydt told Cointelegraph that this has been one of the most requested features from users:
“Many investors use Abra for trading, but there are users outside of the U.S. that use the app for dollar deposits. Abra has now become a bank account. Earning interest not only protects users dealing with local currencies in markets where currencies are being devalued but now these individuals can earn interest at rates much higher than any bank can offer.”
Moreover, Barhydt emphasized that users will be able to earn 9% interest on USD-backed stablecoins, noting that the market currently seems to be supporting that rate. “It starts to set the stage for cryptocurrencies to look more like bank account replacements, as opposed to crypto just for the sake of crypto,” he said.
Will Traditional Banks Eventually Replace Digital Payment Platforms?
Although a number of new features are being implemented by digital payment platforms to make crypto more accessible to users — particularly those based in the U.S. — some may wonder if traditional banks will eventually replace these platforms. Especially now that the OCC is exhibiting interest in cryptocurrencies, digital payment platforms may be racing to ensure that big banks don’t take the lead.
Fortunately, at least for now, this doesn’t seem to be the case. In fact, this may open doors for digital payment platforms to collaborate with major banks in the future, according to Thieriot, who added that it is great for adoption: “I’m not too worried about being out-innovated by the banks. Probably creates space for greater collaboration between companies like Uphold and the more forward-thinking banks we work with.”
Barhydt further explained in an Abra blog post that the implications of the OCC’s actions are far-reaching, writing: “Abra could in theory become a nationally chartered bank in the US. It also means that existing national banks could eventually compete with Abra. Welcome to the party banks!”
OKCoin Says Institutional Investors Benefit Most From OCC Crypto Clarity
OKCoin says recent U.S. regulatory clarity on digital asset custody is significant for big money players.
Recent digital asset custody clarity from the U.S. Office of the Comptroller of the Currency, or OCC, will likely affect institutional investors more, according to OKCoin CEO Hong Fang.
“The biggest impact will potentially be on institutional investors,” Fang told Cointelegraph.
“Retail investors have a much wider range of existing choices (and preferences). I look forward to seeing more banks becoming more open to crypto, with potentially better banking channels, more public awareness, as well as more regulatory clarity. A better user experience ultimately wins.”
The OCC Brings Clarity
On July 22, the OCC clarified a former regulatory grey area of sorts around cryptocurrency custody. As a result, federally chartered banks now know they can custody cryptocurrencies.
“The OCC ruling is definitely positive news for the nascent crypto industry, as crypto assets are now considered a legitimate asset class for banks,” Fang said. “The OCC has made an important milestone by allowing traditional banks to provide custodial services that will apply to crypto, thereby strengthening the overall financial system and broadening financial inclusion.”
Fang added that the clarification allows for further crypto industry expansion.
Will All Banks Offer Crypto Custody In The Future?
Given the OCC’s clarity, matched with the crypto and blockchain industry’s growth over the years, logic might see banks becoming increasingly involved. “Banks will continue to provide products and services that their customers demand,” Fang said on the matter. “Therefore, offering crypto custody depends on each bank’s target market as well as the mainstream adoption of cryptocurrencies,” she added.
The crypto space also already houses several entities pointed toward digital asset solutions, including various U.S. institutions separate from the banking sector, Fang said, adding her interest in viewing how everything plays together around the industry in the coming days.
Industry Calls On Us Regulator To Open Floodgates On Banks’ Crypto Capabilities
A number of crypto businesses and non-profits have written to the main banking regulator in the U.S. asking for banks to have more authorization to deal with crypto.
In response to a request for comment on potential rules from the Office of the Comptroller of the Currency (OCC), many major players in crypto have written in, asking the regulator to expand the authorizations it gives banks to handle cryptocurrencies and use blockchain technology.
Blockchain-Backed Transfers And New Stablecoins As Dollar Competitors
One of the leaders in blockchain-backed financial services, Silvergate Bank wrote to the OCC to promote blockchain as a more efficient way for banks to send money to each other and between client accounts. Silvergate pointed to USD-backed stablecoins like USDC or USDT as examples of how much quicker this system could be:
“Blockchain technology delivers a recognized use case as a transfer of value network, and while many continue to explore how to expand upon that use case, as demonstrated by various USD backed stablecoin projects, they are doing so within existing regulatory frameworks that do not provide adequate guidance for regulated entities, like financial institutions.”
Crypto lobbying group the Blockchain Association similarly applauded the example of stablecoin projects, making a central part of its commentary that the OCC “Allow banks to settle payments and accept deposits in dollar stablecoins that meet criteria defined by the OCC.”
Coin Center, a think tank and lobbying group promoting decentralized network, went a step further in its response to the OCC, advocating for banks to support controversial privacy technologies like:
“(1) trustless transaction mixing technologies like CoinJoin for Bitcoin transactions, and (2) privacy enhanced cryptocurrency networks like Zcash and Monero.”
The OCC And New Vision For Banks
As the Blockchain Association pointed out, even well-intentioned and compliant crypto companies operating in the U.S. have been unfairly locked out of basic financial services. That ends up hurting users: “The lack of access of cryptocurrency business to safe and sound financial services ultimately creates unnecessary risks for U.S. consumers.”
In the OCC’s request, the office emphasized the flexibility of banking, saying “the Federal banking system is well acquainted with and well positioned for change, which has been a hallmark of this system since its inception.”
The OCC is the office of the U.S. Treasury responsible for regulating the country’s federally chartered banks. Since Brian Brooks took over as acting head of the office, it has seen radically accelerated crypto interest. Two weeks ago, the OCC finally authorized banks to custody crypto assets. Since then, Brooks has continued to express interest in blockchain as a way of modernizing payments in the U.S.
Following OCC Letter, Some US Banks Appear Open To Providing Crypto Services
Major U.S. banks might be willing to support cryptocurrency services – with just a bit of additional guidance from the Office of the Comptroller of the Currency (OCC), their federal regulator.
Multiple national banks responded to the OCC’s June “Advance Notice of Proposed Rulemaking” (ANPR), which asked the general public to weigh in before Aug. 3. on how cryptocurrencies and other fintech tools might be used in the financial sector. Notably, several banks, including U.S. Bank and PNC, indicated they might be interested in actually providing crypto custody and other services to customers.
The responses by just under a dozen banks, among a total of 89 submissions from think tanks, policy advocates, crypto startups and other entities, represent one of the strongest signs yet that traditional financial institutions view the still-nascent crypto space as a legitimate asset class.
The responses contrast sharply with an open letter sent to Acting Comptroller of the Currency Brian Brooks. The letter, which opposed a narrow payments charter for fintech companies, was signed by many of the same respondents and sent to the OCC on July 29.
Fresh guidance from the OCC may help provide the necessary legal comfort for banks to provide crypto-native analogs to traditional bank services, wrote Juan Saurez, Coinbase’s vice president and general counsel for enterprise.
“Although these services, such as borrowing, lending and remittances, are permissible activities for national banks, there remains some uncertainty as to whether the provision of these services using cryptocurrencies is authorized,” he said.
Peter Najarian, chief revenue officer at BitGo, told CoinDesk the ANPR’s very existence is exciting, as it’s “a frankly inevitable step in the maturing of this ecosystem.”
Dominic Venturo, chief digital officer at U.S. Bank National Association, perhaps went the furthest in his response, writing that the OCC and other banking regulators should issue guidance around the cryptocurrency market as well as the “expectations for services conducted on distributed ledger technology.”
A lack of clear regulations might result in both banks and customers being unwilling to invest or use cryptocurrencies and similar digital assets, he wrote, with customers potentially being interested in investing in crypto, funding traditional financial products, using cryptos as payments, tokenizing physical assets.
“U.S. Bank does not have a position on the role that cryptocurrency should undertake in the financial services sector, but merely seeks additional regulatory clarity to service the cryptocurrency market as it is currently structured or may be structured in the future,” he wrote.
The OCC should work with the other federal regulators to clarify how cryptocurrencies and digital assets are treated, Venturo wrote.
Specifically, he suggested the OCC differentiate between utility tokens, stablecoins and exchange tokens; clarify the requirements for providing custody services; cross-border restrictions; and “the extent consensus rules must be a part of a transaction.”
PNC Bank’s head of technology and innovation, Steven Van Wyk, commented that the OCC should “continue to reinforce that national banks should take a risk-based approach” in reviewing new products, but should not have risk elimination as the ultimate goal.
“All banking activities (including deposit-taking and lending) involve risk, and the implementation of new technologies … necessarily will involve some degree of risk,” Van Wyk wrote. “A supervision framework that is focused only on preventing risk will, almost by necessity, prevent responsible innovation and the implementation of new technologies by national banks.”
Financial institutions – and OCC rulemaking – should have some focus on consumer protections, several of the responses indicated.
Banks might even need to be encouraged to use “privacy-enhancing cryptocurrency technologies,” wrote Peter Van Valkenburgh, Coin Center’s director of research.
He said banks are obligated to both protect their customers’ privacy as well as surveil and report activities that may break the law. In his view, they can do this effectively with privacy coins and other tools.
Banks can conduct know-your-customer checks and otherwise identify their users to comply with relevant laws before providing privacy services by using mixers or other tools to facilitate crypto transactions.
“They should perform heightened due diligence on any payments their customers initiate or receive if either the amounts involved are substantial or a suspicious pattern of behavior has emerged with respect to several smaller transactions,” Van Valkenburgh wrote.
Tina Woo, senior managing counsel for regulatory affairs at Mastercard, also suggested consumer protection rules by the OCC would be helpful, addressing both security and privacy concerns.
The OCC should develop criteria for which “types of cryptocurrencies in which banks may transact,” she wrote, which address “core network principles” including protecting consumers and preventing money laundering or terrorist financing.
“We believe cryptocurrencies and blockchain technology hold the potential to enhance operational resiliency, improve auditability, and enable new functionalities,” she wrote.
‘Based On Confidence’
Not all submissions were positive: some expressed concern about relaxing regulations.
Cornell Law School Professor Dan Awrey, Wharton Financial Institutions Center Senior Fellow James McAndrews and Columbia Law School Academic Fellow and Lecturer Lev Menand wrote the OCC’s ANPR has two major flaws: “an excessive focus” on finding ways to relax existing rules and “its narrow focus” in updating the regulatory framework for national banks and savings associations.
Menand is an advocate for a digital dollar structure, and supported efforts to introduce a digital dollar in multiple congressional bills earlier this year.
“Money and payment systems are based on confidence,” the three wrote. “In the case of the national banking system, this confidence stems from highly sophisticated regulatory frameworks that govern national banks. These regulatory frameworks include federal deposit insurance, access to central bank liquidity support and a special resolution regime.”
In other words, individuals trust banks because of a strict regulatory regime that lets them deposit their funds secure in the knowledge their money is safeguarded.
The second flaw relates to the existing legal structure surrounding banks and savings associations, they wrote.
The ANPR notes that many new financial technologies exist because newly created institutions and platforms try to perform banking functions but aren’t regulated like traditional banks.
The OCC should consider whether it makes more sense to strengthen regulations around non-bank financial institutions, which the letter refers to as “shadow payment systems.”
New financial technology firms that sprung up in recent years, including stablecoin issuers and companies like PayPal, operate in a murky regulatory environment that requires far fewer protections than banks face.
To resolve these concerns, the three said Congress could pass new laws requiring these startups hold insured deposits and deposits at commercial banks. Stablecoin issuers could be required to maintain either the sum total of U.S. dollars or the U.S. dollar equivalent of issued tokens at a bank.
“The OCC should recommend that Congress enact new legislation to address the shortcomings in our existing regulatory framework. Such legislation can be quite simple,” they wrote.
Third Party Help
Banks don’t necessarily have to provide crypto services directly. BitGo, which has offered custody services for over a year, believes that banks should be able to tap sub-custodians to provide these services, Najarian said.
This would relieve banks of the technological and resource burden that would come of having to directly build out their own services.
Miller Whitehouse-Levine at the Blockchain Association told CoinDesk he agreed. The industry organization recommended letting third parties provide certain services for banks in its own response, he said.
“The OCC permits banks to engage third parties to conduct what they consider to be critical bank activities,” he told CoinDesk.
Visa Vice President for Global Regulatory Affairs Ky Tran-Trong wrote that the payment rail wants to be an intermediary for cryptocurrencies and its 61 million merchants.
“Our objective is to enable digital currency users to spend from their digital currency balance using a Visa debit or prepaid credential anywhere Visa is accepted,” Tran-Trong said in the letter.
R3, another third-party service provider, touted its integrations with SWIFT, Nasdaq and Deutsche Börse Group, noting these partnerships have allowed participants in financial transactions to monitor these transactions more efficiently than traditional tools provided for.
In particular Nasdaq has launched a platform tapping R3 to help manage issuance and other services, wrote Isabelle Corbett, R3’s global head of government relations.
Kristin Boggiano, founder of the Digital Asset Regulatory and Legal Alliance and co-founder of trading platform CrossTower, told CoinDesk the OCC is in its initial stage of rulemaking, meaning this is the best time for the industry to express its concerns and make suggestions to the agency.
“Once the broad policy has been etched, market participants and regulators will move to proposed rulemaking,” she said through a spokesperson. “At that stage, the ability to engage in dialogue about policy and the broad framework becomes more difficult. Thus, this is a critical time for market participants and regulators to jointly develop a framework in which all stakeholders are comfortable.”
A wide range of industry participants appear to agree: Novi (the rebranded Facebook subsidiary Calibra), ConsenSys, Celo, Axos Bank, the American Bankers Association, Figure Technologies, Chamber of Digital Commerce, Silvergate Bank, Ripple Labs and other respondents all supported the idea that banks and savings institutions can safely handle crypto-related services with the right amount of regulation.
The Blockchain Association’s Kristin Smith told CoinDesk it is important, as a first step, for any entity that has a stake in the crypto industry to ensure it weighs in with the OCC..
Visa’s Tran-Trong summed up his hope for the OCC’s ultimate rulemaking process by calling for new regulation that still allows for innovation:
“We recognize that enterprise adoption of blockchain technology can improve several core functions in financial services by providing tamper evident and tamper resistant digital ledgers. However, absent further innovations, inherent challenges with respect to improving scalability, security and device usage, can limit consumer adoption and fail to meet regulatory standards,” he wrote.
The OCC’s Crypto Custody Letter Was Years In The Making
A federal banking regulator’s decision to let banks provide crypto custody services may have seemed out of the blue, but the agency has been looking at cryptocurrencies for years.
The Office of the Comptroller of the Currency (OCC) announced last month that federally regulated banks could provide services to crypto startups in addition to custody. It turns out the OCC was already leaning toward the move before Acting Comptroller Brian Brooks took the top job at the agency.
Indeed, the OCC has been examining the cryptocurrency space since at least 2018 and likely longer, said Jonathan Gould, senior deputy comptroller and chief counsel. He told CoinDesk that the very act of writing an interpretive letter typically takes months.
“Before we actually put pen to paper that process can sometimes take a while,” he said.
The OCC’s interpretative letter last month opened the door for banks to provide services to crypto companies in addition to custody services for cryptocurrencies directly, but it’s unlikely that banks will immediately start providing either service.
Rather, these letters are supposed to help banks that are also interested in crypto determine whether it makes sense for them to begin getting involved in the space, Gould said.
Banks still need to ensure they have proper risk management practices and otherwise ensure they are prepared legally to offer these services before they can actually do so.
The process of creating an interpretive letter typically begins when a bank makes a request, or the OCC sees a number of similar requests from different institutions.
The actual act of drafting interpretive letters can take weeks or months, Gould said.
“A lot of times we just provide informal advice, meaning advice about what we think is okay, and when we do [we do] so without putting anything in writing,” he said. “But sometimes we put things into these interpretive letter forms so again it’s a function of kind of the nature of the issue.”
The OCC looks at how many banks are asking about a specific issue or whether the regulatory agency itself thinks there might be a commonly held question, with these factors determining whether there will be an informal response or a formal letter.
“The kind of process to actually write an interpretive letter like this one, that doesn’t necessarily take a huge amount of time,” he said. “But kind of thinking through the legal and other issues associated with an issue that can take a lot longer depending upon the complexity of the issue.”
The letter is just the beginning of a longer process. The OCC will interact with banks on their next steps if they do decide to pursue crypto services.
“There are a whole host of legal, regulatory and supervisory expectations that we have,” he said. “Especially with new activities that involve kind of iterative and interactive dialogue with the OCC supervisors, about how XYZ activity can be done in a safe and sound fashion, whatever risks are associated when activity can be appropriately kind of managed and so forth.”
The OCC has published more than 1,100 letters it believes are precedential or otherwise of interest to the general public.
Gould did not say how long the OCC had been looking at last month’s interpretive letter on crypto services specifically, but reiterated that it could take the agency weeks or months to draft a 10-page letter.
The OCC has been considering the legal and supervisory questions around crypto for years, he said, prior to Brooks joining the agency from his previous role at Coinbase. But Brooks has been able to bring specific knowledge about the crypto space to the agency.
“It is certainly the case, however, that because we have an Acting Comptroller who is exceptionally knowledgeable about these areas that has been hugely beneficial in terms of the agency’s thinking and understanding,” Gould said.
Banks that are now interested in branching out into crypto should reach out to their local OCC supervisors if they have additional questions, and Gould said he hopes institutions that are looking at crypto reach out sooner than later.
“This is and will continue to be a learning process for us from a supervisory perspective and so we really need that engagement and welcome it on our end,” Gould said.
Federal Payments Licensing Push Could Boost Crypto Adoption
The Office of the Comptroller’s move to license payments firms at the federal level is receiving push-back from state regulators.
Brian Brooks, Coinbase’s former chief legal officer and the current U.S. Comptroller of the Currency, is pushing to consolidate licensing regulations for payment companies at the federal level in the United States.
Federal licensing for payments firms that do not accept deposits could open the door to further mainstream adoption of virtual currencies by allowing crypto payments firms to obtain approval to operate across multiple states. The U.S.’s patchwork of federal and state regulations has deterred many virtual currency firms from setting up shop in the United States.
However, analysts predict that many states will push back against federal licensing, citing an ongoing dispute over the OCC’s fintech charter with the New York Department of Financial Services.
In An Interview With Law360, Crowell & Moring Partner Michelle Gitlitz Said:
“It would surprise me if the same thing didn’t happen again. I don’t see why a regulatory institution like the New York Department of Financial Services would take a different position with respect to a payment charter than they did with the fintech charter.”
At the end of August, John Ryan, president of the Conference of State Bank Supervisors (CSBS), published a statement expressing the association’s opposition to federal payment licensing and accusing the OCC of “disregard[ing] the statutory limits of its authority.”
“The OCC’s proposed payments charter is no different than the fintech charter already rejected in federal court and subject to a nationwide order preventing the OCC from accepting applications from a company that does not take deposits,” the letter said.
“State regulators are opposed to this unconstitutional expansion of power.”
Despite this, the Office of the Comptroller of the Currency announced it was prepared to accept applications from payment firms for a federal banking charter last week.
Brian Brooks’ appointment to head the OCC has been welcomed by the crypto sector, with Celsius founder and CEO Alex Masinsky tweeting:
I think most of #Cryptoland does not understand how big this is for everyone in our community. I hope Brian can get the lawmakers and regulators change their ways and open the doors for Crypto to scale. https://t.co/yZauzPXVBs
— Alex Mashinsky ©️ (@Mashinsky) September 11, 2020
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