In latest months, the federal Workplace of the Comptroller of the Foreign money (OCC) has signaled a extra permissible regulatory stance in the direction of nationwide banks and federal financial savings associations (collectively, banks) partaking in crypto-asset actions. “I’ll proceed to work diligently to make sure laws are efficient and never extreme, whereas sustaining a powerful federal banking system,” stated Performing Comptroller of the Foreign money Rodney E. Hood earlier this yr.
On March 7, the OCC started formalizing its shift away from its Biden-era method to regulating banks’ crypto-asset actions with the issuance of Interpretive Letter 1183. Via this interpretive letter, the OCC rescinded its supervisory non-objection course of for banks in search of to interact in crypto-asset actions, thereby eradicating vital pink tape round banks’ skills to take action. This interpretive letter additionally reaffirmed the OCC’s prior steering allowing banks to interact in a variety of crypto-asset actions.
The OCC adopted up on this motion in Could with Interpretive Letter 1184. In it, the OCC additional confirmed that banks might interact in sure crypto-asset actions and addressed the roles third-party service suppliers—comparable to fintech firms—can play in these actions. The interpretive letter was usually supportive of third events’ involvement in them.
Key Takeaways:
- The OCC will not require banks to endure a supervisory non-objection course of (see definition under) earlier than providing services and products regarding crypto property to their prospects. Banks regulated by the OCC can now provide crypto-asset services and products with no need to first reveal that they’ve satisfactory compliance processes in place.
- Eradicating this course of considerably lowers the limitations to crypto-asset banking actions turning into extra widespread. Supervisory expectations nonetheless apply, although. The OCC will seemingly nonetheless use supervisory exams to verify whether or not banks have applied robust controls to handle the dangers related to crypto-asset actions.
- The OCC additionally re-confirmed that banks can present crypto-asset custody companies, maintain funds as reserves of stablecoins, and supply sure funds companies regarding stablecoins, together with appearing as nodes for distributed ledgers in reference to verifying prospects’ funds and facilitating fee transactions on a distributed ledger.
- Relating to crypto-asset custody companies at the least, the OCC has confirmed that banks might use third-party sub-custodians to supply custody companies, topic to acceptable third-party threat administration practices.
- Banks focused on providing crypto-asset services and products to prospects ought to assessment the OCC’s current steering to establish compliance obligations and expectations. Count on the OCC’s steering to evolve as crypto-asset actions mature and achieve wider adoption within the banking trade.
- As a result of crypto-asset actions are nonetheless novel within the banking trade, banks might profit from taking a proactive method to figuring out acceptable controls and processes for managing dangers related to crypto-asset services and products.
What the Latest Interpretive Letters Do
The OCC’s latest interpretive letters sign a shift away from the extra cautious and restrictive method taken by the company below the Biden administration and the OCC’s confidence in banks’ skills to handle dangers related to crypto-asset actions. They reaffirm that banks are permitted to interact in sure crypto-asset actions and expressly allow third-party service operators to supply crypto-asset custody companies (to be “sub-custodians”). Additionally they give banks a inexperienced mild to discover crypto-asset alternatives as such alternatives might come up by eliminating the supervisory non-objection course of first adopted in 2021.
Beforehand, a financial institution’s capability to interact in crypto-asset actions was constrained by a supervisory non-objection course of adopted in 2021 that required banks to acquire the OCC’s tacit approval earlier than partaking in such actions. The OCC’s latest interpretive letters eradicated this supervisory non-objection course of.
What Crypto-Asset Actions Are Permitted?
- Interpretive Letter 1170 – Permits banks to supply crypto-asset custody companies to prospects in each fiduciary and non-fiduciary capacities as a part of their conventional safekeeping and custody actions.
- Interpretive Letter 1172 – Permits banks to obtain and maintain deposits from stablecoin issuers, together with reserves for stablecoins related to hosted wallets.
- Interpretive Letter 1174 – Authorizes banks to interact in sure payment-related actions involving stablecoins, together with appearing as nodes for an impartial node verification community (i.e., a distributed ledger) in reference to verifying prospects’ funds and facilitating fee transactions on a distributed ledger.
In its latest interpretive letters, the OCC reaffirmed that these crypto-asset actions are nonetheless permissible banking actions. The OCC additionally expressly confirmed that banks might use third-party, which signifies that the OCC may additionally be supportive of third-party service suppliers taking part in banks’ different crypto-asset actions as effectively.
What Was the OCC’s Supervisory Non-Objection Course of?
Beneath the now-rescinded Interpretive Letter 1179, banks in search of to interact in crypto-asset actions had been required to inform their OCC supervisory workplace and procure a written non-objection earlier than continuing.
Non-objection letters could be issued provided that the financial institution might reveal, to the supervisory workplace’s satisfaction, that it had satisfactory threat administration processes in place to establish, measure, monitor, and management potential dangers related to its deliberate crypto-asset actions.
Moreover, banks needed to present a transparent understanding of the legal guidelines relevant to its deliberate crypto-asset actions, comparable to federal securities legal guidelines, anti-money laundering legal guidelines, and client safety legal guidelines.
Eliminating this supervisory non-objection course of removes a major regulatory barrier to banks’ skills to interact in crypto-asset actions. Nonetheless, its removing doesn’t absolve banks of their accountability to successfully handle the dangers related to these actions.
Crypto-Asset Threat Administration Going Ahead
Shifting ahead, these actions might be reviewed by the OCC as a part of its common supervisory course of. Which means banks partaking in crypto-asset actions should nonetheless be sure that such actions are carried out in a secure, sound, and truthful method and in compliance with relevant legislation. If a third-party service supplier—comparable to a fintech firm—might be concerned in them, banks might be anticipated to implement acceptable third-party threat administration practices as effectively.
By eliminating the supervisory non-objection barrier, the OCC has positioned better accountability on banks to implement the suitable complete threat administration frameworks. They might discover it simpler to combine crypto-related services and products into their choices consequently.
Nonetheless, the OCC will seemingly anticipate banks to implement robust controls to handle the dangers related to these actions in step with these outlined within the OCC’s earlier interpretive letters and steering. For instance:
- Crypto-Asset Custody Providers – The OCC has said that robust safety controls are wanted to keep away from mismanagement of cryptographic keys, which may result in irretrievable losses. The OCC recommends twin controls, segregation of duties, and safe storage options (e.g., chilly wallets) to stop unauthorized entry, together with strong audit procedures for efficient cryptographic key administration.
- Holding Stablecoin Reserves – The OCC has highlighted liquidity dangers and compliance with relevant capital and liquidity laws as main areas of concern, notably if reserve balances don’t align with excellent stablecoins. Accordingly, if they’re holding stablecoin reserves, banks ought to preserve every day reserve verification necessities that guarantee a 1:1 backing of the stablecoin by fiat, and they need to additionally set up contractual restrictions with stablecoin issuers to make sure redemption obligations don’t exceed out there reserves.
- Stablecoin Funds Actions – The OCC expects banks to deal with the anti-money laundering, cybersecurity, fraud, and client safety dangers related to payments-related crypto-asset actions by creating ample technological experience to handle the complexity of blockchain transactions safely and in compliance with relevant legal guidelines, notably given the doubtless pseudo-anonymous nature of such transactions.
Banks partaking in crypto-asset actions ought to align with these expectations. Nonetheless, crypto-asset actions stay comparatively novel compared to conventional banking actions, and the compliance questions they increase might not but be totally understood. The OCC’s security and soundness expectations might evolve and new laws might alter relevant legal guidelines. Staying updated on the regulatory panorama surrounding crypto-asset actions is probably going key for banks’ engaged in them.
Banks engaged in crypto-asset actions might be able to keep forward of recent regulatory developments by taking a proactive method to managing these dangers, comparable to by creating strong governance frameworks to stop regulatory gaps and fascinating with regulators and trade to tell supervisory expectations.
