OCC Regulator Implements Groundbreaking Cryptocurrency Guidelines for Banks and the Future of Payments

When Brian Brooks assumed the role of Acting Comptroller of the Currency for the Office of the Comptroller of the Currency (“OCC”) in May 2020, many in the industry knew that part of Brooks’ focus would be on fintech technology and blockchain technology.

Since then, the OCC has provided interpretation letters and advice clarifying that banks can hold cryptocurrencies and stablecoins, as well as engage in stablecoin business. The OCC has also created a special purpose payments charter for FinTech companies. In December, OCC Chief Economist Charles Calomiris published an article titled “Chartering the FinTech Future,” in which Calomiris outlined the benefits of OCC providing bank charters to stablecoin providers.

Today’s Interpretation Letter

Today, the OCC issued Interpretive Letter 1174, which explains that banks can use new technologies, including Independent Node Verification Networks (INVNs) and stable coins, to perform functions authorized by banks. , such as payment activities. In other words, a bank can use stablecoins (cryptocurrencies designed to minimize price volatility) to facilitate customer payment transactions.

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

Reasoning

Today’s OCC news is innovative and exciting. Not because it is a major fulcrum to the traditional way banks operate, but because the OCC does a remarkable job of keeping up with the changing technology and landscape. 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 does the exact opposite. Brooks continues to advance cautiously but quickly.

As OCC’s interpretive letter notes today, “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 conduct activities authorized by banks, including payment activities. . . The changing financial needs of the economy are well illustrated by the growing demand in the market for faster and more efficient payments through the use of decentralized technologies, such as INVNs, which validate and record financial transactions, including including stable transactions.

Banks have always been a place where customers could store their valuables for safekeeping and over time they have become a vital part of our financial and payments infrastructure. The history of the American banking system (since the passage 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 a story of regulation adapting to realities economic and technological developments.

Stephen Palley, a partner at Anderson Kill law firm in Washington DC, drew the analogy with the demand for internet banking, explaining that “the first internet banking was approved by the OCC and is now ubiquitous, despite early concerns about safety or practicality. of such technology for secure banking services. The BCC continues to demonstrate its interest and desire to engage in the new financial technologies that consumers demand.

In this historical context, the latest letter from the OCC fits perfectly into the framework of a conservative prudential regulator creating rules of conduct for a new and powerful technology and adapting to changing times and to the needs of clients.

What it really means

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

While the financial system in the United States operates relatively well, traditional payment rails are still slow, expensive, and subject to bank hours and public holidays.

The OCC guidelines open the possibility for banks to use INVNs and stablecoins to transfer funds between financial institutions faster and without the need for a government intermediary.

Kristin Smith, Executive Director of the Blockchain Association, remarked to me: “The OCC Interpretive Letter shows that some in government actually understand that cryptocurrency networks are the basis of a new payment system. generation. Stablecoins, like USDC, can make 24-hour real-time payments faster in a way that the existing U.S. payment infrastructure cannot handle. ”

Nic Carter, Castle Island Ventures partner, added that this will allow banks “to take advantage of the permanent functionality of public blockchains.”

Banks adopting the use of INVNs and stablecoins could also dramatically increase the efficiency of cross-border transactions, but it 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 rails, but it’s a vital first step in standardizing the notion of public blockchains as an alternative settlement infrastructure that banks can freely adopt.

The future of finance looks bright.