OCC regulator implements innovative cryptocurrency guidelines for banks and the future of payments

When Brian Brooks took over as the currency controller for the Currency Controller’s Office (“OCC”) in May 2020, many in the industry knew that some of Brooks’ focus would be on fintech and blockchain technology.

Since then, the OCC has provided letters of interpretation and guidance clarifying that banks can keep cryptocurrency and stablecoins, as well as engage in stablecoin activity. OCC has also created a special purpose payment card for FinTech companies. In December, OCC chief economist Charles Calomiris published a paper entitled “Chartering the FinTech Future,” in which Calomiris presented the benefits of OCC’s provision of bank charters to stablecoin providers.

Today’s interpretive letter

Today, the OCC issued Interpretative Letter 1174, which explains that banks can use new technologies, including independent node verification networks (INVNs) and stable currencies, to perform bank-permitted functions, such as payment activities. Simply put, a bank can use stablecoins (cryptocurrencies designed to minimize price volatility) to facilitate payment transactions for customers.

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

Justification

Today’s OCC news is innovative and interesting. Not because it’s a huge pivot of how banks have traditionally worked, but because OCC does a remarkable job keeping up with changing technology and landscape. Many criticize the US for stifling innovation and for not allowing companies to evolve with innovative technologies that would improve our financial system. Well, OCC does the exact opposite. Brooks kept moving carefully, but quickly.

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

Banks have always been a place where customers could store valuables for safekeeping and over time have become a critical part of our financial and payment infrastructure. The history of the American banking system (since the enactment of the National Banking 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 that adapts to economic realities and changing technology.

Stephen Palley, a partner at Washington DC law firm Anderson Kill, drew the analogy with the demand for internet banking, explaining that “early internet banking was approved by the OCC and is now ubiquitous, despite early security concerns or practically such a technology for secure banking services. OCC continues to show interest and a desire to engage with the new financial technologies that consumers are demanding. “

Seen in this historical context, OCC’s latest letter falls directly within a conservative prudential regulator that creates roadmaps for new and powerful technologies and adapts to changing times and customer needs.

What it really means

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

While the US financial system works relatively smoothly, traditional payment lines are still slow, expensive and subject to banking hours and holidays.

OCC guidelines open up the possibility for banks to use stable NFIs and currencies to transfer funds between financial institutions faster and without the need for a government intermediary.

Kristin Smith, executive director of the Blockchain Association, told me: “The OCC’s interpretive letter shows that there are those in government who actually understand that cryptocurrency networks are the foundation of a next-generation payment system. Stablecoins, like the USDC, can fuel faster, 24-hour real-time payments in a way that the US payment infrastructure can’t handle. ”

Nic Carter, a partner at Castle Island Ventures, added that this would allow banks to “take advantage of the ever-active features of public blockchains.”

Banks that adopt the use of GNI and stable currencies could also greatly increase the efficiency of cross-border transactions, but this will require US and foreign banks to implement a lot of technology.

Carter warned: “I don’t see stable currencies imminently replacing traditional financial rails, but this is a vital first step in normalizing the notion of public blockchains as an alternative settlement infrastructure that banks are free to adopt.”

The future of finance looks bright.