OCC Gives U.S. Banks All-Clear to Use Blockchain and Crypto

Posted on Jan 13, 2021 | BLOG

OCC Gives U.S. Banks All-Clear to Use Blockchain and Crypto

Table of Contents

Introduction

The Office of the Comptroller of the Currency (OCC), the United States federal banking regulator  has delivered its latest regulatory shot in the arm for the cryptocurrency industry. 

The OCC, under leadership of Acting Comptroller Brian Brooks, the former Coinbase legal head and crypto advocate who is expected to soon step down or be replaced by the new Biden administration, caused waves in 2020 when it clarified that U.S. banks were indeed allowed to offer custodial crypto services to their clients. This has since resulted in a growing influx of financial institutions into the crypto space seeking to diversify their portfolios as the greenback continues to trend down. 

The U.S. Dollar has declined significantly in the face of the 2020 trifecta of the Covid-19 pandemic, spiraling political turmoil and massive stimulus injections to keep the economy afloat. 

Mr. Brooks this week gave banks the greenlight to utilize distributed ledger technologies (DLT) like blockchain, and products born of it, such as stablecoins. The development resulted from Brian Brooks’ pledge to reform the USA’s innovation-stifling digital asset regulations when he assumed office in May 2020.

What is the Office of the Comptroller (OCC)?

The OCC is a branch of the United States Treasury,  tasked with overseeing financial institutions operating in the country. Periodically, the regulator releases interpretive letters guiding US banks on how to interact with the FinTech industry.

What Is the OCC January 2021 ruling on crypto and stablecoins?

The OCC’s most recent letter, dated January 4, 2021, allows banks to access and be active on blockchain platforms. Additionally, it gives financial institutions the freedom to conduct customer transactions using stablecoins.

What are independent node verification networks?

In addition, the US regulator confirms that banks can now run nodes on a blockchain. In other words, financial institutions can join a decentralized platform and participate in transaction validation. OCC calls them independent node verification networks (INVNs).

INVNs use decentralized technology to validate and record financial transactions, including stablecoin transmittals. Brooks further noted that INVNs enable faster and efficient payments through decentralized protocols. 

How The Latest OCC Crypto Ruling Impacts U.S. Banks

Notably, the letter’s content applies to major financial entities such as national banks.

This is huge news, especially when viewed against last year’s regressive and poorly received Stable Act proposal by U.S. congress members that aimed to throttle the adoption of stable assets, which they felt could undermine the U.S. Dollar’s dominance. 

The OCC has done a phenomenal job of keeping hopes alive for U.S. digital asset users in a country whose financial regulators have been notoriously anti-crypto.

The January 4 letter (Interpretive Letter #1174) observed financial institutions in the US have “adapted” to the ever-changing FinTech ecosystem. To elaborate, they have reevaluated their operating models to encompass current “economic conditions and customer need

But, with such high praises from a top-ranking regulator, what does this letter actually mean for banks?

What the OCC letter means for U.S. financial institutions

Banks can provide digital currency custody services

From the letter, it’s clear that the OCC sees cryptocurrency custody as a natural evolution of financial institutions’ history of safely keeping physical and digital items. Therefore, cryptocurrencies such as Bitcoin, Ethereum and Bitcoin Cash are no different, and the OCC feels that banks are well-positioned for this iteration.

Financial institutions can hold more than just crypto

The federal banking regulator notes that conventional banks can provide escrow services for virtual currencies’ private keys. Why? “Because a key escrow service is a functional equivalent to physical safekeeping.”

Banks need to acquire cold wallets to ensure safekeeping of assets

Unlike hot wallets, cold wallets, also known as hardware wallets, are more secure since they are offline. As such, traditional financial institutions wishing to provide cryptocurrency custody services need to acquire cold wallets since crypto custody differs “from other custody activities” that don’t require as many layers of security. While cold wallets like Ledger have had their share of data security and phishing issues in 2020, hardware wallets are still considered the safest storage option by a long way and increasingly demanded by regulators and investors alike. 

It’s time for banks to move with the times

The need to evolve is perhaps the most pertinent message in the OCC letter. Financial regulators always tread a fine line between creating regulations that deter illicit behavior but doesn’t stifle innovation. The lack of regulatory clarity surrounding cryptocurrencies has been a major drawback that has all but stopped traditional financial institutions from taking up the crypto baton and running with it. This has allowed other nations such as Singapore, Hong Kong and certain European jurisdictions to create the playbook for effective crypto regulation, which in turn lured many innovative blockchain startups to leave the U.S. in favor of these greener pastures. 

The OCC aims to correct the U.S. ship and kickstart digital asset innovation in the U.S. banking sector. Banks have to abandon their rigidity and evolve with the technology if they want to stay relevant. Part of the evolution involves being at the top of technological advancements at a time when financial markets are being digitized.

Banks are mandated to provide safekeeping

The OCC notes that it is the mandate of banks to secure assets, whether in “virtual vaults” or deposit boxes. Brooks added that custody services are the minimum services banks can provide. Therefore, they need to assure Americans that their virtual assets are safe.

Notably, the letter opens the door for more crypto-centric services, such as an interaction with the decentralized finance (DeFi) ecosystem to offer lending and staking services.

How the OCC ruling benefits the crypto ecosystem

The OCC interpretive letter comes months after another note, “Interpretive Letter #1170,” which was issued in July 2020. The letter provided clarification that banks can provide “cryptocurrency custody services for customers.” This in turn offers key advantages to the entire cryptocurrency space.

Here’s how: 

  • It beats a path to crypto approvals by regulators – Financial watchdogs in the US have a history of taking too long to provide clear guidelines on crypto-related issues. Fortunately, the letter from the OCC offers a clear direction for their regulatory duties.
    The letter paints a picture of a regulator who has already come to terms with the idea that Bitcoin and other cryptos are here to stay. As such, legacy financial firms need to adapt, and regulators need to provide the way forward.
  • It gives traditional investors the confidence to jump into crypto – From the onset, allowing banks to provide crypto custody services gives investors, both retail and institutional, the greenlight to include cryptocurrencies in their portfolios.
  • Firms providing digital currency safekeeping services can acquire a bank status – Previously, companies providing crypto custody services evaded crossing the regulatory line by acting as trust companies. Fortunately, with the clarifications, they can access dollar-designated payment systems by operating as banks.
  • Companies dealing with cryptocurrencies can tap into US banks for banking services – US banks have been skeptical about serving crypto-focused businesses due to the associated CFT and AML risks. But that ends with the OCC’s ruling. Now, crypto service companies can boldly turn to conventional banks for services.

Conclusion

It’s clear that the OCC’s new regulation allows banks already dealing in custody services to include or shift from safety deposit boxes to cold wallets for crypto custody. However, conventional financial firms aren’t the only beneficiaries.

OCC’s Interpretive Letter #1170 carries a plethora of good news for the cryptocurrency industry. For instance, it can attract new crypto investors, allowing crypto firms and high-net-worth individuals (HNWIs) to be served by banks. 

Furthermore, crypto custody firms can emerge from the shadows to become legal banks. As Kraken’s successful acquisition of a Wyoming banking license (thus becoming the first crypto exchange to become a U.S. bank) has proven in 2020, the crypto custodial industry is still in its infancy and most legitimate crypto money service businesses are looking to align with, rather than shy away from, traditional finance standards in order to avoid regulatory scrutiny and attract institutional investment. 

The OCC’s latest issuance sets this in motion to play out in 2021 and beyond, and should go a long way to help the U.S. blockchain space reduce the lead that other countries, especially in Asia, hold over it. 

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