When Brian Brooks took 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 some of Brooks’ focus would be on fintech and blockchain technology.
Since that time, the OCC has provided interpretive letters and guidance clarifying that banks can custody cryptocurrency and stablecoins, as well as engage in stablecoin activity. The OCC also created a Special Purpose Payments Charter for FinTech companies. In December the Chief Economist of the OCC, Charles Calomiris, published a paper titled “Chartering the FinTech Future,” in which Calomiris set out the benefits of the OCC providing bank charters to stablecoin providers.
Today the OCC published Interpretive Letter 1174, which explains banks may use new technologies, including independent node verification networks (INVNs) and stablecoins, to perform bank-permissible functions, such as payment activities. Said simply, a bank may use stablecoins (cryptocurrencies designed to minimize the price volatility) to facilitate payment transactions for customers.
In doing so, a bank may issue stablecoins, exchange stablecoins for fiat currency, as well as validate, store, and record payments transactions by serving as a node on a blockchain (INVN).
Today’s OCC news is innovative and exciting. Not because it is a huge pivot from how banks have traditionally functioned but because the OCC is doing a notable job keeping up with the changing technology and 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 is doing just the opposite. Brooks continues to move carefully but quickly.
As today’s OCC interpretive 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 bank-permissible activities, including payment activities. . .The changing financial needs of the economy are well-illustrated by the increasing 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 stablecoin transactions.”
Banks have always been a place where customers could store valuables for safe-keeping and, over time, became a critical part of our financial and payments infrastructure. The history of the American banking system (from the passage of the National Bank Act in 1863, Federal Reserve Act in 1913 and the creation of the FDIC in the Banking Act of 1933) tells a story of regulation adapting to economic realities and changing technology.
Stephen Palley, a partner in the Washington D.C. law firm of Anderson Kill drew the analogy to demand for internet banking, explaining “early internet banking was met with approval by the OCC and is now ubiquitous, in spite of early concerns about the safety or practicality of such technology for secure banking services. The OCC continues to show an interest in and desire to engage with new financial technology that consumers demand.”
Seen against this historical backdrop, the OCC’s latest letter fits squarely into the framework of a conservative prudential regulator creating rules of the road for new and powerful technology and adapting to changing times and customer needs.
What It Really Means
So what does this really mean for the payment systems as we know it today?
While the United State’s financial system functions relatively smoothly, traditional payment rails are still slow, expensive and subject to banking hours and holidays.
The OCC’s guidance opens the possibilities that banks will use INVNs and stablecoins to transfer funds between financial institutions faster and without the need of a government intermediary.
Kristin Smith, Executive Director of the Blockchain Association noted to 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 payments system. Stablecoins, like USDC, can power faster, 24-hour real time payments in a way that existing US payments infrastructure can’t handle.”
Nic Carter, Partner of Castle Island Ventures added, this will allow banks “to take advantage of the always-on features of public blockchains.”
Banks adopting the use of INVNs and stablecoins could also vastly increase the efficiency of cross-border transactions, but that will require banks in the US and abroad to implement a lot of technology.
Carter cautioned, “I don't see stablecoins 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 can freely adopt.”
The future of finance looks bright.