The Office of the Comptroller of Currency (OCC) an independent bureau within the US Department of Treasury, has been actively releasing guidelines on handling Crypto based assets over the past 6 months. In a sign of confidence in the technology of blockchain and cryptocurrencies as an intermediary source of payments or alternative asset, the OCC has allowed federally chartered banks to engage in crypto related activities.
In July of 2020, the OCC made a press release allowing national and state banks to serve as custodians for crypto related assets. The guidance in the press release allowed chartered banks to not only serve as key holders, but also to engage in payment, lending and deposit services for cryptos. This was the first major recognition that provided a legal basis for banks to provide crypto based services as an alternative asset.
Stablecoins are derivative cryptos that are typically pegged to a common currency, like USD. The two most notable stable coins are USDC, issued by US most prolific exchange – Coinbase, and USDT, backed by Bitfinex through Hong Kong-based Tether Limited which is a fully owned subsidiary of Tether Holdings Limited. Stablecoins are often a derivative of the Ethereum blockchain platform. The guidance provided by OCC Chief Counsel affirmed that chartered banks are allowed to partake in the process of deposit holdings in addition to providing other suitable banking related services required to conduct transactions. The letter also recognizes that these derivatives are treated as currencies and are subjected to typical risk management, compliance requirements (KYC/AML), and disclosures regarding deposit insurance coverage.
We do not recognize the current version of USDT or Tether as a suitable holding for stablecoin due to the unverifiable holdings of USD by Tether Limited. However many international exchanges do use Tether or USDT as a stablecoin on its platform.
Federally Chartered Banks and Thrifts May Participate in Independent Node Verification Networks and Use Stablecoins for Payment Activities
On January 4th, the OCC released another guidance, this time allowing federal chartered banks to not only provide custodian and alternative asset based services but legitimizing the industry as a whole. This is the biggest win yet for the crypto market as it allows Federally Chartered banks to partake in node verification (mining, POS, etc..) and also serve in payment related activities. This allows federally chartered banks to now participate in real-time payment technologies using USD in both local and international settlements. The opinion piece provides guidance to the banks as follows:
Banks must also be aware of potential risks when conducting INVN-related activities, including operational risks, compliance risk, and fraud. New technologies require enough technological expertise to ensure banks can manage these risks in a safe and sound manner. Banks have experience with managing such risks, which are similar to those of other electronic activities expressly permitted for banks, including providing electronic custody services, acting as a digital certification authority, and providing data processing services. Among the compliance risks, banks should guard against potential money laundering activities and terrorist financing by adapting and expanding their compliance programs to ensure compliance with the reporting and recordkeeping requirements of the Bank Secrecy Act and to address the particular risks of cryptocurrency transactions.
The OCC’s latest interpretation provides Fintech firms and Chartered Banks with a framework on reporting. A recent tweet by Jack Dorsey, CEO of major Fintech firm – Square, however questions the need for two different reporting standards.
Our comments on FinCen’s rule proposal on #bitcoin and “cryptocurrency.”
We believe this rule will do the opposite of what it intends, will leave people out of participating fully in the economy, and that it being rushed prevents better solutions.https://t.co/VRXYpLg8Mw
— jack (@jack) January 4, 2021
Overall the guidance provided by the OCC is a big win for crypto advocates and fund managers seeking to find yields in alternative assets. It is believed that more positive regulations related to the crypto space are coming.
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