In current months, the federal Workplace of the Comptroller of the Forex (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,” mentioned Performing Comptroller of the Forex Rodney E. Hood earlier this 12 months.
On March 7, the OCC started formalizing its shift away from its Biden-era strategy to regulating banks’ crypto-asset actions with the issuance of Interpretive Letter 1183. By way of this interpretive letter, the OCC rescinded its supervisory non-objection course of for banks looking for to have interaction in crypto-asset actions, thereby eradicating vital crimson tape round banks’ talents to take action. This interpretive letter additionally reaffirmed the OCC’s prior steering allowing banks to have interaction in a spread of crypto-asset actions.
The OCC adopted up on this motion in Might 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—equivalent to fintech corporations—can play in these actions. The interpretive letter was typically supportive of third events’ involvement in them.
Key Takeaways:
- The OCC will not require banks to bear a supervisory non-objection course of (see definition under) earlier than providing services referring to crypto property to their clients. Banks regulated by the OCC can now supply crypto-asset services while not having to first reveal that they’ve sufficient compliance processes in place.
- Eradicating this course of considerably lowers the obstacles to crypto-asset banking actions turning into extra widespread. Supervisory expectations nonetheless apply, although. The OCC will doubtless 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 referring to stablecoins, together with performing as nodes for distributed ledgers in reference to verifying clients’ funds and facilitating cost transactions on a distributed ledger.
- Concerning crypto-asset custody companies a minimum of, 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 excited by providing crypto-asset services to clients ought to evaluate the OCC’s present steering to establish compliance obligations and expectations. Anticipate the OCC’s steering to evolve as crypto-asset actions mature and achieve wider adoption within the banking business.
- As a result of crypto-asset actions are nonetheless novel within the banking business, banks might profit from taking a proactive strategy to figuring out acceptable controls and processes for managing dangers related to crypto-asset services.
What the Latest Interpretive Letters Do
The OCC’s current interpretive letters sign a shift away from the extra cautious and restrictive strategy taken by the company below the Biden administration and the OCC’s confidence in banks’ talents to handle dangers related to crypto-asset actions. They reaffirm that banks are permitted to have interaction in sure crypto-asset actions and expressly allow third-party service operators to supply crypto-asset custody companies (to be “sub-custodians”). In addition they give banks a inexperienced gentle 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 skill to have interaction 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 current 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 clients 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 have interaction in sure payment-related actions involving stablecoins, together with performing as nodes for an impartial node verification community (i.e., a distributed ledger) in reference to verifying clients’ funds and facilitating cost transactions on a distributed ledger.
In its current 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 properly.
What Was the OCC’s Supervisory Non-Objection Course of?
Below the now-rescinded Interpretive Letter 1179, banks looking for to have interaction in crypto-asset actions have been required to inform their OCC supervisory workplace and acquire a written non-objection earlier than continuing.
Non-objection letters can be issued provided that the financial institution might reveal, to the supervisory workplace’s satisfaction, that it had sufficient 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, equivalent 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’ talents to have interaction in crypto-asset actions. Nevertheless, its elimination doesn’t absolve banks of their duty to successfully handle the dangers related to these actions.
Crypto-Asset Threat Administration Going Ahead
Transferring ahead, these actions shall be reviewed by the OCC as a part of its common supervisory course of. Meaning banks partaking in crypto-asset actions should nonetheless be certain that such actions are carried out in a protected, sound, and honest method and in compliance with relevant regulation. If a third-party service supplier—equivalent to a fintech firm—shall be concerned in them, banks shall be anticipated to implement acceptable third-party threat administration practices as properly.
By eliminating the supervisory non-objection barrier, the OCC has positioned better duty on banks to implement the suitable complete threat administration frameworks. They might discover it simpler to combine crypto-related services into their choices consequently.
Nonetheless, the OCC will doubtless count on 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 major areas of concern, notably if reserve balances don’t align with excellent stablecoins. Accordingly, if they’re holding stablecoin reserves, banks ought to keep 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 obtainable reserves.
- Stablecoin Funds Actions – The OCC expects banks to handle the anti-money laundering, cybersecurity, fraud, and client safety dangers related to payments-related crypto-asset actions by creating adequate technological experience to handle the complexity of blockchain transactions safely and in compliance with relevant legal guidelines, notably given the possibly pseudo-anonymous nature of such transactions.
Banks partaking in crypto-asset actions ought to align with these expectations. Nevertheless, crypto-asset actions stay comparatively novel compared to conventional banking actions, and the compliance questions they elevate 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 latest regulatory developments by taking a proactive strategy to managing these dangers, equivalent to by creating strong governance frameworks to stop regulatory gaps and interesting with regulators and business to tell supervisory expectations.