OCC regulator implements groundbreaking clues for banks’ cryptocurrencies and the future of payments

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

Since then, the OCC has provided interpretive letters and guidelines that make it clear that banks can preserve cryptocurrencies and stable currencies, as well as stablecoin activities. The OCC has also drafted a charter for special target payments for FinTech companies. In December, OCC chief economist Charles Calomiris published an article entitled ‘Chartering the FinTech Future’, in which Calomiris outlined the benefits of the OCC offering banking charters to stable money providers.

Today’s interpretive letter

Today, the OCC published Interpretive 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 stable coins (using cryptocurrencies to limit price volatility) to facilitate payment transactions for customers.

In this way, a bank can issue stable coins, exchange stablecoins for fiat currency, as well as validate, store and record payment transactions by serving as a node in a blockchain (INVN).

Rationale

Today’s OCC news is innovative and exciting. Not because it is a major pivot of how banks have traditionally functioned, but because the OCC is doing a remarkable job of keeping pace with the changing technology and landscape. Many criticize the US for stifling innovation and not allowing businesses to develop with innovative technologies that will improve our financial system. Well, the OCC does exactly the opposite. Brooks keeps moving carefully but quickly.

As noted in today’s letter of interpretation from today’s OCC, “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 bank-authorized activities, 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 stable currency transactions. ‘

Banks have always been a place where customers could store valuable items for safekeeping, and over time have become a critical part of our financial and payment infrastructure. The history of the US banking system (from the adoption of the National Bank Act in 1863, the Federal Reserve Act in 1913 and the establishment of the FDIC in the Banking Act of 1933) tells a story of regulation that adapts to economic realities and changing technologies .

Stephen Palley, a partner at Washington DC law firm Anderson Kill, showed the analogy of the demand for Internet banking, explaining ‘early Internet banking has been approved by the OCC and is currently ubiquitous, despite early concerns about safety or practical use. of such technology for secure banking. The OCC continues to show interest in and desire to engage in new financial technologies that consumers need. ”

Seen against this historical background, the OCC’s latest letter fits squarely within the framework of a conservative prudential regulator that creates road rules for new and powerful technology and adapts to changing times and needs of the customer.

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 operates relatively smoothly, traditional payment rails are still slow, expensive, and subject to bank hours and holidays.

The OCC’s leadership opens up the possibility that banks will use INVNs and stable coins to transfer funds between financial institutions more quickly and without the government mediator.

Kristin Smith, executive director of the Blockchain Association, remarked to me: ‘The interpretive letter from OCC shows that there are people in government who truly understand that cryptocurrency networks are the foundation of a next-generation payment system. Stablecoins, like USDC, can drive faster 24-hour real-time payments in a way that the current US payment infrastructure cannot handle. ”

Nic Carter, a partner at Castle Island Ventures, added that this would allow banks to ‘take advantage of the ongoing functions of public blocks.’

Banks that use INVNs and stable currencies can also significantly increase the efficiency of cross-border transactions, but this requires banks in the US and abroad to implement a lot of technology.

Carter warns: ‘I do not see stable coins immediately replacing traditional financial tracks, but it is an important first step in normalizing the notion of public blocs as an alternative settlement infrastructure that banks can use freely.’

The future of finance looks bright.