OCC and SEC Staff Issue Statements on Stablecoin Reserves

The Office of the Comptroller of the Currency published an interpretive letter on September 21, 2020 (Letter), confirming that national banks and federal savings associations (together, banks) may hold “stablecoin” reserves as a service to bank customers.¹ This guidance follows an earlier interpretive letter published by the OCC in July confirming the authority of banks to provide cryptocurrency custody services.² A stablecoin is a particular type of cryptocurrency that is backed by another asset (e.g., a fiat currency or a commodity) in order to reduce volatility in the price of the stablecoin.

In a corresponding statement on September 21, the staff of the Securities and Exchange Commission’s Strategic Hub for Innovation and Financial Technology (FinHub Staff) issued a reminder (FinHub Staff Statement)³ that whether a digital asset is a security, including a stablecoin, is a facts-and-circumstances analysis that requires application of the test from SEC v W.J. Howey Co. and its progeny, as well as consideration of applicable SEC guidance, (e.g., the Framework for “Investment Contract” Analysis of Digital Assets). The Letter and the FinHub Staff Statement further confirm the willingness of the OCC and the SEC, respectively, to engage with the cryptocurrency industry to provide regulatory clarity. 

Background

Cryptocurrencies are digital assets designed to act as a medium of exchange. As with other types of cryptocurrencies, stablecoins rely on cryptography and distributed ledger technology to function.⁴ Cryptocurrencies are created and stored electronically and are accessed with a unique cryptographic “key.” The owner of cryptocurrency can store their keys in a computer program known as a “wallet.” A “hosted wallet” is held by an identifiable third-party, while an “un-hosted wallet” is held by the individual who owns the cryptocurrency.

The cryptocurrency industry, including the use of stablecoins, is rapidly evolving. According to the Letter, stablecoin issuers often wish to hold their fiat currency reserves in U.S. banks, and, further, wish to promote the fact that their reserves are held in banks to establish that their stablecoin is trustworthy. In a statement released alongside the Letter, Acting Comptroller of the Currency Brian Brooks indicated that federally chartered banks “currently engage in stablecoin related activities involving billions of dollars each day. … [The Letter] provides greater regulatory certainty for banks within the federal banking system to provide those client services in a safe and sound manner.”

Stablecoin Reserves

In the Letter, the OCC confirmed that the authority to receive deposits (including with respect to stablecoin reserves) is a core function of a bank, and banks may provide banking services to any lawful business they choose. However, the Letter extends this interpretation only to stablecoins: (i) whose keys are stored on a hosted wallet; (ii) are backed by a single fiat currency; and (iii) are redeemable on a 1:1 basis for the underlying fiat currency. In order to ensure compliance with the 1:1 redemption requirement, a bank holding the stablecoin reserves must verify at least daily that the reserve account balance is equal to or greater than the number of outstanding stablecoins issued.

The Letter reiterates that a bank holding stablecoin reserves must comply with all applicable laws and regulations. The Letter further identifies several areas of concern, including compliance with: federal deposit insurance coverage and related limits (including whether the stablecoin reserves will be considered deposits of the stablecoin issuer or if they will pass through to the ultimate holder of the stablecoin); the customer due diligence requirements of the Bank Secrecy Act; the customer identification requirements under the USA PATRIOT Act; and any applicable federal securities laws. The Letter notes that, as with any new activity, a bank accepting deposits intended to act as reserves for a stablecoin should engage in such activities with risk management in mind. In particular, the Letter notes that banks should consider liquidity risks inherent in holding reserves for a rapidly evolving industry. The Letter recommends that banks have appropriate contractual agreements with stablecoin issuers to ensure, for example, that the issuer’s reserve account has reserves that are greater than or equal to the number of the issuer’s outstanding stablecoins.

FinHub Staff Statement

This statement encourages market participants seeking to structure and sell digital assets (such as stablecoins) to contact the FinHub Staff with questions regarding whether their activities may implicate the federal securities laws. The FinHub Staff notes that the sale of digital assets could be structured in a way that does not constitute a “security” or implicate the registration and reporting requirements of the various securities laws. However, the FinHub Staff Statement indicates that the determination of whether a particular asset is a security is dependent on the applicable facts and circumstances in connection with the marketing and sale of that asset. The FinHub Staff indicated its willingness to provide no-action relief when appropriate for sales of digital assets it does not consider to be securities.

Conclusion 

The Letter further confirms the willingness of the OCC and the SEC to engage with the cryptocurrency industry to provide regulatory clarity. As the cryptocurrency industry gains further market, legal and regulatory acceptance, banks and other regulated entities may wish to begin or increase their involvement with the industry. Banks contemplating holding stablecoin reserves should consider the regulatory issues discussed above as well as other relevant state and federal law.

Footnotes

1) OCC Interpretive Letter No. 1172, OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves, (Sept. 21, 2020).

2) OCC Interpretive Letter No. 1170, Authority of a National Bank to Provide Cryptocurrency Custody Services for Customers (July 22, 2020). For further information, please refer to Dechert OnPoint, OCC Allows National Banks to Custody Cryptocurrency.

3) SEC FinHub Staff Statement on OCC Interpretation (Sept. 21, 2020).

4) For further information regarding the technologies underlying cryptocurrencies, please refer to Dechert OnPoint, supra note 2.