US Banking Regulator Issues Interpretation Letter on Banks Using Blockchain Networks and Stablecoins to Facilitate Payment Activities

On January 4, 2021, the U.S. federal prudential banking regulator, the Office of the Comptroller of the Currency (“OCC”) published a letter providing its interpretation on the authority of national banks and federal savings associations to use independent node verification networks (“INVNs”) and stablecoins for payment activities (the “Interpretation Letter”).

In noting that banks are the intermediaries between non-bank participants in the financial markets and that they possess necessary expertise, while recognizing that banks have adopted new technologies to carry-out bank-permissible activities to meet changing economic needs, the OCC concluded that banks may use:

  • INVNs to validate, store and record payments transactions, and
  • INVNs and stablecoins to carry out other permissible payment activities, in a manner consistent with applicable laws and safe and sound banking practices.

The OCC’s Interpretation Letter followed a recent statement made by the President’s Working Group on Financial Markets on regulatory and supervisory considerations for stablecoin arrangements (the “Statement”), and echoes some of the principles and requirements outlined in the Statement, particularly as they pertain to identification and verification of transacting parties and risk management requirements.

The Interpretation Letter also comes only a few months after the OCC released guidance in September 2020 on banks holding stablecoin reserves, and goes one step further in allowing banks to use stablecoins and INVNs to facilitate payment and related services. Further details and key points of the OCC’s Interpretation Letter are detailed below.

Permissible Payments Activities

In coming to the conclusion that banks may use INVNs and stablecoins for permissible payment activities, the OCC notes in the Interpretation Letter that both the OCC and courts have repeatedly recognized that banks may conduct and engage in permissible payments activities with new and evolving payments technologies. The OCC further notes that these precedents are consistent with the fundamental principle that national bank powers must be construed in a manner that permits new ways of banking.

The Interpretation Letter draws comparisons between INVNs and existing forms of payment services, noting that the main functions are the same, and that the only main difference is the use of network nodes rather than a centralized entity to validate transfers in order to conclude that banks may serve as a node on an INVN to facilitate payment transactions.

Furthermore, the Interpretation Letter notes that, in the issuance and exchange of stablecoins for fiat currency, stablecoins function in the same way as debit cards, checks and electronically stored value (“ESV”) systems in conveying payment instructions and that banks have long used various instruments as a means of facilitating cashless payments. In drawing a comparison between stablecoins and ESVs, the OCC observes that Title 12 of the United States’ Code of Federal Regulations expressly allows national banks to offer ESV systems. The Interpretation Letter further goes on to characterize the distinction between value stored on an ESV card and value represented on a stablecoin as merely technological in nature in order to determine that the use of INVNs and stablecoins are merely new means of carrying out permissible banking functions. The Interpretation Letter concludes that banks are thus allowed to buy, sell and issue stablecoins to facilitate payment, just as they are allowed to buy and sell ESV as a means of converting the ESV into dollars to complete customer payment transactions.

Benefits and Risks

The Interpretation Letter indicates that the OCC presently neither encourages, nor discourages the use of INVNs, but notes that banks should evaluate their appropriateness in order to ensure the bank’s continued ability to provide payment services to customers.

The OCC notes that INVNs and stablecoins pose several potential benefits including the enhancement of (i) efficiency, (ii) effectiveness and (iii) stability of the provision of payments, including retention of the stability of the fiat currency.

The OCC also observes that the use of INVNs may pose new risks for banks, and emphasizes the importance of banks seeking to use INVNs (i) understanding the risks associated with the underlying activity, (ii) conducting said activities in a safe and sound manner and (iii) conducting legal analysis to ensure compliance with all applicable laws (including anti-money laundering and consumer protection laws and regulations).

Additionally, the Interpretation Letter notes that the use of cryptocurrencies could increase operational risks, including fraud, compliance and stability risks, while describing a need for banks to align new activities with sound risk management practices and the adaption and expansion of Bank Security Act (“BSA”)/ anti-money laundering (“AML”) compliance programs.

The Interpretation Letter concludes that a bank should consult with OCC supervisors, as appropriate, prior to engaging in the payment activities described above and that the OCC will review these activities as part of its ordinary supervisory processes.

Canadian Implications

In Canada, the Office of the Superintendent of Financial Institutions (“OSFI”), issued a consultation paper on technology and related risks (the “OSFI Consultation Paper”) in 2020. While OSFI describes three priority risk areas in the OSFI Consultation Paper: (i) cybersecurity – focusing on confidentiality, integrity and availability of information, (ii) advanced analytics and (iii) third-party eco-systems, it also identifies blockchain as a topic for future Technology Risk Bulletins, suggesting that more regulatory guidance from OSFI in the future on blockchain-related issues may follow.

For more information about our firm’s Fintech expertise, please contact the authors and see our Fintech group page.

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