In January 2021, the Office of the Comptroller of the Currency (OCC), via Interpretive Letter 1174, authorized national banks and federal savings associations to use new technologies, including independent node verification networks (INVNs)1 and related stablecoins,2 to perform bank-permissible functions, such as payment activities and to validate, store, and record payments transactions by serving as a node on an INVN. The Interpretive Letter is an extension of the OCC’s July 2020 decision, which allowed all nationally chartered banks in the U.S. to provide custody services for cryptocurrencies. In addition, the Interpretive Letter demonstrates the OCC’s support and recognition of the advancement of new technologies to facilitate payments.
The Interpretive Letter analyzes why the above falls within the established framework of permissible banking activities. The OCC reasoned that the above represents a system akin to those of other electronically stored value systems (ESVs) and that the “creation, sale, and redemption of [ESVs] 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 traveler’s checks.” The OCC further indicated that stablecoins can serve as electronic representations of those US dollars, similar to how value is stored on an ESV card. As such, banks may use new technologies that afford them a new means of carrying out permissible banking functions, such as providing payments services and facilitating payments.
The OCC continues to caution that digital currency payment activities also raise heightened compliance risks related to anti-money laundering (AML) and counterterrorism financing, because “cryptocurrencies may be used by bad actors for the purposes of avoiding the financial system or engaging in other illicit activities.” Finally, the OCC advises that banks should consult with OCC supervisors, as appropriate, prior to engaging in these payment activities.
The OCC’s letter is limited in scope to the use of stablecoins and is consistent with how the OCC has treated new payment technologies over the past decade (e.g., real-time payments).
Risks present in a stablecoin/INVN environment are likely no different than other payment rails involved in payments and correspondent banking. Further, digital currency generally is high risk in a loosely regulated environment. Arguably, INVNs and stablecoins will help mitigate AML risk and reduce fraud through the use of decentralized payment ledger technologies.
If a financial institution is looking to implement stablecoin and INVN technologies, they should review payment transparency rules that have presented a challenge for entities working within the cryptocurrency supply chain. Financial institutions should conduct a gap analysis to ensure compliance with FATF 16, Travel Rule, and ISO 20022 requirements (in addition to a thorough risk assessment to ensure the ability to conduct effective OFAC screening and AML transaction monitoring). Ultimately, institutions that develop this technology in compliance with these standards and regulations will likely be best positioned in establishing sustainable and scalable payment models for electronic data interchange.
The OCC’s position is consistent with that established by the New York Department of Financial Services (DFS). The DFS, through its BitLicense regulatory framework, includes registrants to obtain DFS approval for listing stablecoins. The list of regulatory considerations can be found here.
1INVNs consist of a shared electronic database where copies of the same information are stored on multiple computers.
2Stablecoins are a type of digital currency that is designed to have a stable value as compared with other types of digital currency. (Some stablecoins are backed by a fiat currency, such as the US dollar). According to Finextra, there are currently over 200 stablecoins (fiat-backed and other combinations) trading.