On January 4, 2021, the U.S. Office of the Comptroller of the Currency (OCC) issued an interpretative letter (Letter) confirming the authority of national banks and federal savings associations (collectively referred to as “banks”), in connection with their provision of payment services, to (i) validate, store, and record payment transactions by serving as a node on an Independent Node Verification Network (INVN), for example, a blockchain node,1 (ii) provide stablecoin exchange services, and (iii) issue stablecoins to carry out permissible payment activities.2 This confirmation of authority comes with a price, however — the OCC’s adoption of the statement by the President’s Working Group on Financial Markets (PWG) that stablecoin arrangements “should have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.”3
The principal thrust of the Letter is a further endorsement by the OCC to the role of banks in the cryptocurrency space. Last year, the OCC addressed the permissibility of banks holding reserves for certain stablecoins backed by fiat currency4 and the ability of banks to custody digital assets.5 In this case, the OCC moves a significant step forward by confirming the authority of banks to connect to blockchains as validator nodes, exchange fiat currency for stablecoin, and vice versa and issue stablecoins as payment mechanism. Importantly, unlike the position adopted by the OCC in its previous opinions, the Letter does not limit the banks’ payment activities to stablecoins supported by fiat currency (or to stablecoins backed by U.S. dollars) or to customers for whom the bank is performing custody functions.6
As support for this authority, the OCC relies on the extensive body of precedent authorizing banks to use electronic means to perform permissible banking and payments-related activities, arguing that INVN nodes and stablecoins represent new technological means of carrying out historic bank-authorized activities as financial intermediaries. For example, the OCC explains that stablecoins function as a mechanism of payment in much the same way as debit cards, checks, and electronically stored value (ESV) systems permitted under 12 C.F.R. 7.5002(a)(3) and that the risks associated with buying, selling, and issuing stablecoins are similar to those that banks assume in other permissible payment activities, including in the provision of ESV systems. Similarly, the OCC cites related precedents allowing banks to engage in activities related to electronic funds transfer systems, real-time settlement systems, and stored value systems.
Furthermore, as policy support for its position, the OCC mentions the ability to increase the efficiency, effectiveness, and stability of payment activities from participation in INVNs and stablecoins systems, including in the ability to support real-time cross-border transfers. The Letter emphasizes the resiliency and enhanced security offered by the INVN due to its decentralized nature, by which the risks of tampering or alteration of the information related to payment transactions are significantly reduced.
On the other hand, the Letter also highlights that stablecoin operations may entail operational, fraud, and liquidity risks and require technological expertise and a proper legal analysis. Banks seeking to take advantage of this authority must, therefore, implement appropriate risk management practices and comply with the applicable laws, including but not limited to consumer protection laws and regulations. In particular, the OCC cautions that banks should guard against potential money-laundering activities and terrorist financing by adapting and expanding their current compliance programs to ensure compliance with the reporting and recordkeeping requirements of the Bank Secrecy Act and to address the specific risks presented by cryptocurrency transactions.
It is on this final point that the Letter veers in a troubling direction for bank involvement in stablecoin projects. Specifically, the Letter affirmatively adopts the PWG’s recent statement regarding the controls and risk management practices that should be involved in stablecoin transactions. In particular, the Letter cites with approval the PWG’s assertion that stablecoin arrangements must provide for verification of the identity of “all transacting parties, including for those using unhosted wallets.”7 That statement, which complements the controversial recent notice of proposed rulemaking by the Financial Crimes Enforcement Network regarding transactions involving virtual currencies with unhosted wallets,8 would constitute a sea change in anti-money-laundering compliance obligations. Unfortunately, beyond citing the PWG statement with approval, the Letter provides no guidance as to how the OCC would expect such a broad mandate to be implemented by banks participating in a stablecoin system. Indeed, even at the most basic level, the statement simply indicates that an identity verification capability should exist within the system, without any indication of which entities would bear the burden of implementation of such a capability. Similarly, the Letter gives no indication that the OCC has considered the myriad issues associated with the type of identity verification apparently contemplated by the PWG.
In closing, the Letter advises banks intending to engage in the stablecoin activities authorized by the Letter to consult with the OCC supervisors before commencing such activities.
1 As the Letter explains, an INVN consists of a shared electronic database where copies of the same information are stored on multiple computers (such as distributed ledgers, like blockchain, where cryptocurrency transactions are recorded). INVN’s participants are known as “nodes,” and they validate transactions, store transactions information, and transfer data to other nodes.
2 OCC Interpretative Letter No. 1174 (available at https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2a.pdf).
3 Id. at 4.
4 OCC Interpretative Letter No. 1172 (available at https://www2.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1172.pdf). See our summary at https://www.sidley.com/en/insights/newsupdates/2020/09/occ-establishes-standards-for-national-banks.
5 OCC Interpretative Letter No. 1170 (available at https://www2.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf). See our summary at https://www.sidley.com/en/insights/newsupdates/2020/07/occ-confirms-the-authority-of-national-banks-to-provide-cryptocurrency-custody-services.
6 The OCC cautions that certain stablecoins may be securities, and, consequently, banks must comply with all applicable securities laws and regulations for any stablecoin that constitutes a security.
7 Letter, at 4.
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