The U.S. Office of the Comptroller of the Currency (OCC) published a letter on January 4, 2021 (January 2021 Letter) clarifying the authority of national banks and thrift institutions (collectively, Banks) to participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank-permissible functions. The January 2021 Letter follows a September 21, 2020 letter from the OCC (see our post here) which concludes that Banks may hold “reserves” on behalf of customers who issue certain stablecoins. The OCC is a bureau within the U.S. Department of the Treasury (of which the IRS and FinCEN are also a part) that serves to charter, regulate, and supervise all U.S. national banks, thrift institutions and the federally licensed branches and agencies of foreign banks in the U.S. In the U.S., the term “national banks” refers to private banks chartered and supervised by the OCC—rather than government-owned banks. Thrift institutions, also known as federal savings associations, are financial institutions governed by a modestly different regulatory regime.
The January 2021 Letter concludes that Banks may validate, store, and record payments transactions by serving as a node on an INVN, and Banks may use INVNs and related stablecoins to carry out other permissible payment activities. The January 2021 Letter bases this conclusion on the premise that INVNs and stablecoins simply represent new technological means of carrying out permissible activities.
The OCC highlights that Banks, as financial intermediaries, are in the business of electronic payments message transmission, electronic payments processing, and payments settlement. Further, Banks have broad discretion to pursue these activities “by any mechanism or device” including through an electronic means. Indeed, the OCC has historically permitted Banks to adopt new technologies such as electronic funds transfer systems, real-time settlement systems, and stored value systems. The January 2021 Letter also notes that courts have similarly recognized that Banks may utilize new technologies for payments.
- INVNs are Permissible Payments Systems: the OCC explains that all payment activities involve the transmission of instructions to transfer value from one account on a ledger to another account on the same or a different ledger (i.e., accounts at the same bank or accounts at different banks, respectively). The January 2021 Letter continues that, while INVN use a shared network to validate transfers rather than utilizing a centralized entity, INVNs serve the same basic function as existing systems: transmitting payment instructions and validating payments. Since Banks may adopt new technologies to pursue these activities, Banks may serve as a node on an INVN to facilitate payment transactions.
- Stablecoins are a Permissible Means for Payments: the January 2021 Letter cites statutory authority for Banks to offer electronically stored value (ESV). When this statute was codified, the OCC wrote in a May 17, 2002 letter that, the “creation, sale, and redemption of [ESV] in exchange for dollars is part of the business of banking because it is the electronic equivalent of issuing circulating notes or other paper-based payment devices like travelers checks.” Thus, the January 2021 Letter continues, stablecoins can serve as electronic representations of U.S. dollars that are bought, sold, converted into dollars and vice versa. While the means of storage may be different from other types of ESVs, the underlying activity is still permissible.
The January 2021 Letter is not an assessment of appropriateness for all INVNs and stablecoins. The January 2021 Letter mentions, but does not discuss in more detail, that stablecoins may be backed by assets other than U.S. dollars. Also, the OCC emphasized that Banks must evaluate any participation in or usage of INVNs and stablecoins. A series of benefits and risks are discussed in the January 2021 Letter. For example, INVNs may be more resilient to tampering and inaccurate information than other payment networks due to their decentralized nature and consensus mechanisms. Further, stablecoins are a means to transfer fiat currency via a system involving INVNs. The January 2021 Letter also noted the existence of operational risks, such as fraud, AML and liquidity issues, involved with stablecoins. Banks must acquire the requisite technological expertise before implementing any new system.