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

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

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Since that time, the OCC has provided interpretive letters and guidelines clarifying that banks can hold cryptocurrency and stablecoins as well as engage in stablecoin activities. The OCC has also prepared a Special Purpose Payments Charter for FinTech companies. In December, the OCC’s chief economist Charles Calomiris published a paper entitled “ Chartering the FinTech Future, ” in which Calomiris outlined the benefits of the OCC providing bank charters to stablecoin providers.

Today’s explanatory letter

Today, the OCC published interpretive letter 1174, explaining that banks can use new technologies, including independent node authentication networks (INVNs) and stablecoins, 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.

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

Background

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

As the OCC’s current interpretive letter notes, “Over time, the financial intermediation activities of banks have evolved and adapted in response to changing economic conditions and customer needs. Banks have applied new technologies to conduct banking-permitted activities, including payment activities. . The evolving financial needs of the economy are well illustrated by the increasing market demand for faster and more efficient payments through the use of decentralized technologies, such as INVNs, that validate and record financial transactions, including stablecoin transactions. ”

Banks have always been a place for customers to 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 (from 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 regulatory adaptation to economic realities and changing technology.

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Stephen Palley, a partner at the Anderson Kill law firm in Washington DC, drew the analogy with the demand for online banking, explaining, “Early internet banking received OCC approval and is now ubiquitous, despite early concerns about the safety or usability of. such technology for secure banking services. The OCC continues to show an interest in and desire to connect with new financial technology that consumers demand. “

Against this historical backdrop, the latest letter from the OCC fits right in the context of a conservative prudential regulator who rules for new and powerful technology and adapts to changing times and customer needs.

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What it really means

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

While the United States financial system is running relatively smoothly, traditional payment rails are still slow, expensive, and subject to banking hours and holidays.

The OCC’s guidelines open up the possibilities that banks will use INVNs and stablecoins to transfer money between financial institutions more quickly and without the intervention of a government broker.

Kristin Smith, Executive Director of the Blockchain Association commented, “The OCC’s interpretive letter shows that there are those in the government who truly understand that cryptocurrency networks are the foundation of a next-generation payment system. Stablecoins, such as USDC, can enable faster, 24-hour real-time payments in a way that the existing US payment infrastructure cannot handle. ”

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Nic Carter, partner of Castle Island Ventures added, this allows banks to “take advantage of the always-on features of public blockchains.”

Banks adopting the use of INVNs and stablecoins can also greatly increase the efficiency of cross-border transactions, but this requires banks in the US and beyond to implement a lot of technology.

Carter cautioned, “I don’t see stablecoins replacing traditional financial rails any time soon, but this is a critical first step in normalizing the idea of ​​public blockchains as an alternative settlement infrastructure that banks can freely use.”

The future of finance looks bright.