OCC Confirms Authority of National Banks to Use Independent Node Verification Networks and Stablecoins for Payment Activities

The Office of the Comptroller of the Currency (OCC) on January 4, 2021, issued an interpretive letter (Letter) confirming the authority of federally chartered banks and savings associations (together, banks) to participate in Independent Node Verification Networks (INVNs), such as blockchains, and to use stablecoins for payment activities.¹ According to the Letter, national banks are permitted to engage in payment-related activities as activities within the business of banking. The OCC is taking the position that the use of INVNs and stablecoins merely represent new technological means of carrying out these permissible activities.

The Letter is the latest in a series of actions taken by the OCC and other federal regulators to offer regulatory clarity on the use of cryptocurrency and other emerging technologies by banks and other financial institutions. In July of 2020, the OCC confirmed the authority of national banks to offer custody services for cryptocurrencies.² In September, the OCC and SEC issued corresponding statements discussing the authority of national banks to hold stablecoin reserves as a service to bank customers.³

Background

INVNs, such as the Bitcoin and Ethereum blockchains (among others), are shared electronic databases where information is recorded and stored across multiple computers, known as “nodes.” In these systems, information cannot be added to the blockchain unless a consensus is reached by the various nodes that information is valid, and tampering with the blockchain on one computer will not affect it on other computers.

A stablecoin is a type of cryptocurrency that is backed by another asset, such as a fiat currency or a commodity, in order to maintain a stable value. Although stablecoins may be backed by different assets, the Letter focuses its analysis on stablecoins that are backed by U.S. dollars.

The Letter

In the Letter, the OCC confirms that national banks may use INVN and stablecoin technology to facilitate payment activities. The Letter highlights several possible roles a bank may play in these types of transactions. A bank may support the INVN by serving as a node and validating transactions, it may facilitate the conversion from U.S. dollars to stablecoin or vice versa, or it may issue stablecoins.

According to the Letter, traditional payment activities involve transmitting payment instructions to transfer specified sums of currency between accounts and the use of a trusted, centralized entity to validate those transfers. Serving as a node within an INVN serves a similar purpose. Instead of relying on a centralized entity, nodes on the INVN are able to transmit payment instructions and validate payments by utilizing the shared network. The Letter also confirms the authority of banks to use stablecoins to facilitate customer transactions on an INVN. This authority necessarily includes the power to issue stablecoins and to convert dollars to stablecoins and vice versa. The OCC states that, in this context, the stablecoin acts as a mechanism of payment similar to a debit card or check.

Benefits and Risks

The OCC argues that participating in INVNs and using stablecoins to facilitate payments may provide a faster, cheaper, and more efficient method for bank customers to transfer funds. The Letter also notes that, because INVNs do not rely on a central entity to verify payments, the networks may be more resilient because they can continue to operate even if a number of nodes fail. Additionally, an INVN may be more trusted because of their consensus mechanisms that require multiple nodes to validate the underlying transaction. Because stablecoins, which may be backed by fiat currency, can be transferred using an INVN, stablecoins provide a method for fiat currency to take advantage of the speed and efficiency of INVN transfers.

The use of INVNs and stablecoins is not without risk, however. First, the OCC notes that any new banking activity must be conducted in a safe and sound manner. These activities involve operational, liquidity, and compliance risks. For example, banks should be aware of liquidity risks involved when holding assets linked to a rapidly evolving industry. The Letter emphasizes anti-money laundering compliance as an area of concern. Because cryptocurrencies, including stablecoins, can be used by bad actors to avoid the traditional financial system and engage in illegal activities, banks should ensure that their AML policies and procedures have been adapted and expanded to address the distinct risks presented by these activities. The Letter states that banks should consult with OCC supervisors prior to engaging in these payment activities.

Conclusion

The Letter is the latest in a series of regulatory developments demonstrating the OCC’s continued acceptance of cryptocurrency and blockchain technology. Banks and financial institutions interested in engaging in the activities contemplated by the Letter should consider all applicable laws and regulations applicable to them, including other interpretive guidance issued by the OCC and other federal regulators

Footnotes

1) OCC Interpretive Letter No. 1174, OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities

2) See Dechert OnPoint, OCC Allows National Banks to Custody Cryptocurrency

3) See Dechert OnPoint, OCC and SEC Staff Issue Statements on Stablecoin Reserves