Blockchain Legal Resource

On Monday, September 21, 2020, the Office of the Comptroller of the Currency (“OCC”) issued an interpretive letter on the authority of national banks and federal savings associations to hold stablecoin reserves (the “OCC Interpretive Letter”). That same day, the Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology (“FinHub”) issued a statement on the OCC’s interpretive letter. While not an official joint statement, the federal agencies were clearly aligned as FinHub’s statement on the OCC Interpretive Letter was posted on its website before the OCC published its letter.

In the OCC Interpretive Letter, the OCC’s Chief Counsel clarifies that national banks and federal savings associations may hold stablecoin “reserves” as a service to bank customers. Stablecoins are a specific type of cryptocurrency that are designed to have a stable value and can be backed by a variety of assets, such as gold or as fiat currency. The OCC Interpretive Letter has a relatively narrow effect as it only applies to stablecoins that are “backed on a 1:1 basis by a single fiat currency where the bank verifies at least daily that reserve account balances are always equal to or greater than the number of the issuer’s outstanding stablecoins.”  The OCC Interpretive Letter also does not speak to the authority of a national bank or federal savings association to issue the stablecoin itself—rather, the letter presumes the stablecoin is issued by a third party.

The OCC explains that issuers of stablecoins often desire to place the funds backing the stablecoin—the reserve funds—with a U.S. bank. Issuers tend to promote stablecoins where the reserves are held by banks as being more trustworthy. The Interpretive Letter is specifically issued to address the legal authority of national banks to hold stablecoin reserves on behalf of customers in light of the public interest in such reserve accounts.

In addition to limiting the applicability of the Interpretive Letter to stablecoins that are backed on a one-to-one basis, the OCC also cautions that the guidance is limited to hosted wallets and does not apply to unhosted wallets. On a high level, a hosted wallet means that the cryptographic keys associated with the stablecoin are stored online by a trusted third party, such as Coinbase or Kraken.

In accordance with the OCC’s general guidance on new or expanded bank products and services, the OCC emphasizes that new bank activities should be developed in accordance with sound risk management principles and that the extent of due diligence should be commensurate with the risks posed by the proposed activities. The OCC specifically highlights liquidity and compliance risk as two primary risk categories that should be carefully assessed by a bank prior to commencing any new activities related to stablecoins. To effectively mitigate compliance risk, a bank will need to develop customized agreements designed to ensure, among other things, that an issuer can verify and confirm that any deposits held by the bank for the issuer are always equal to or greater than the number of stablecoins (both issued and outstanding).

The OCC cited its recent interpretive letter authorizing national banks to offer cryptocurrency services more generally in explaining that national banks may provide any permissible banking services to any lawful business they choose so long as they effectively manage risks and comply with applicable law, including those relating to the Bank Secrecy Act (“BSA”) and anti-money laundering. In addition to BSA and other customer identification requirements under the PATRIOT Act, banks will also need to ensure that they comply with FDIC requirements by making appropriate and accurate disclosures regarding deposit insurance coverage. Finally, prior to engaging in any cryptocurrency activities or offering services to customers engaged in cryptocurrency activities, the bank should ensure that it has the requisite expertise necessary to effectively monitor the risk related to such activities.

Significantly, the OCC once again reaffirmed the federal banking agencies’ position that “banks are encouraged to manage customer relationships and mitigate risks based on customer relationships rather than declining to provide banking services to entire categories of customers.”

The FinHub statement addresses one of the caveats in the OCC Interpretive Letter where the OCC states that the agency expresses no conclusion on the applicability of other laws to the stablecoin activities addressed in the letter. In line with the SEC’s approach to cryptocurrencies generally, the statement emphasizes that “whether a particular digital asset, including one labeled a stablecoin, is a security under the federal securities laws is inherently a facts and circumstances determination.” The FinHub statement noted, however, that “market participants may structure and sell a digital asset in such a way that it does not constitute a security and implicate the registration, reporting, and other requirements of the federal securities laws.” Underscoring the coordination between the OCC and the SEC in releasing the respective guidance, the OCC Interpretive Letter includes a footnote citing to the FinHub statement that encourages issuers of stablecoins to contact the SEC staff with questions on how to structure, market, and operate stablecoins in compliance with federal securities laws.

The OCC Interpretive Letter is the second such letter to specifically authorize national banks to engage in broader cryptocurrency activities. Acting Comptroller Brooks remains intent to provide banks with welcomed clarity on how to effectively offer cryptocurrency services while the other federal banking regulators drag their feet on offering any concrete guidance.

We expect to see more crypto-related interpretive letters from the OCC that continue to expand and clarify how the banks it supervises can offer broader cryptocurrency products and services. Hopefully other federal and state banking regulators will soon follow the lead of the OCC and SEC.