Thursday, September 24, 2020
On 21 September, the Workplace of the Comptroller of the Foreign money (OCC) issued Interpretive Letter Quantity 11721 (Letter) confirming that nationwide banks and federal financial savings associations (collectively, nationwide banks) can maintain sure varieties of deposits that function reserves of sure varieties of stablecoins. The Letter follows solely two months after the OCC’s choice that nationwide banks may present custodial companies of cryptocurrencies broadly.
In response to the Letter, a nationwide bank may maintain deposits of fiat forex that function reserves of a stablecoin offered:
the reserves are to be redeemed on a 1:1 foundation;
the reserves are denominated in a single fiat forex;
the nationwide bank “verifies at least daily that reserve account balances are always equal to or greater than the number of the issuer’s outstanding stablecoins;” and
the issuer of the stablecoin has the stablecoin reserve held in a hosted digital wall
Accordingly, the Letter does not apply to stablecoins backed by a number of fiat currencies, different cryptocurrencies, commodities, different belongings, or a mix thereof, nor to stablecoins whose value floats inside a variety through energetic or passive (through algorithm) administration. Moreover, the Letter does not deal with a nationwide bank’s “authority to support stablecoin transactions involving un-hosted wallets.”
In the event that they select to train this authority, the Letter reminds nationwide banks that their obligations below the Bank Secrecy Act (BSA), akin to due diligence, buyer identification (together with useful possession), and monitoring for suspicious actions, amongst others, would apply to eligible stablecoin issuers. For steering, the Letter refers banks to OCC Bulletin 2016-102, noting that holding deposits for stablecoin issuers “is analogous… [to] prepaid cards distributed and sold by third-party program managers….”
The Letter additionally advises nationwide banks to implement an applicable danger administration framework. Particularly, nationwide banks ought to concentrate on the applicability of pass-through deposit insurance coverage (reserve accounts could be structured as deposits of the issuer of the holder) and corresponding disclosures; the flexibility to confirm that reserves are of enough value; liquidity danger; and clear task of duties and rights per a written contract (together with audit authority as exists “in the analogous context of prepaid cards distributed and sold by third-party program managers,” redemption rights, and the scope of bank’s companies).
Whereas a constructive step ahead, the Letter’s restricted scope is notable. First, though the overwhelming majority of the stablecoin market (per market capitalization) could be lined, a number of outstanding stablecoins are excluded by advantage of being cryptocurrency- or commodity-backed cash. Second, stablecoins backed by a basket of currencies, as Libra was initially designed to be, should not lined. In response to the OCC, “the current stablecoin activities discussed in this letter would not contribute to the global and systemic risks noted by the Financial Stability Board in its recent consultation.” The implication is that different classes of stablecoins would possibly pose such a danger. Third, the OCC is limiting companies to entities regulated by the Monetary Crimes Enforcement Community (FinCEN). Per FinCEN’s May 2019 Guidance3, hosted wallets are topic to the BSA whereas non-hosted wallets should not.
The OCC continues to press ahead with favorable, albeit cautious, steering for the cryptocurrency ecosystem. We’ll proceed to observe and advise as new developments come up.