Insight into the OCC's perspective on stablecoins and decentralized finance
The Office of the Comptroller of the Currency (OCC), a part of the US Treasury Department and a key banking regulator for federally chartered banks, has recently been taking a favorable position regarding the permitted uses by banks of blockchain technologies, digital assets, and stablecoins. Over the past six months, the OCC has published three interpretive letters on the subject, and the outgoing head of the OCC also published an op-ed on the future of “self-driving banks,” each discussed further below. Taken together, these three letters and op-ed present a favorable view towards the financial innovation occurring in the blockchain space and enable nationally chartered banks to maintain blockchain nodes and offer stablecoin-related services.
Stablecoins are digital assets that are designed to be pegged to the value of another asset, often the US dollar. Popular stablecoins include Tether, USDC, DAI, True USD, and Paxos Standard, with an aggregate market capitalization of over $29 billion as of January 12, 2020.
Certain stablecoins, such as DAI, are part of a new breed of financial services being created on blockchain networks that are collectively referred to as Decentralized Finance (DeFi). DeFi protocols enable blockchain users to conduct financial transactions without relying on a trusted counter-party, and often without knowing the identity of the other participants in the transaction. Examples of DeFi protocols include MakerDAO, a digital asset-collateralized loan system with $3.73 billion of assets locked in smart contracts as of January 12, 2021; Uniswap, a digital asset exchange with $2.9 billion of assets locked in smart contracts as of January 12, 2021; and Aave, a money market protocol with $1.89 billion of assets as of January 12, 2021.
The rapid rise of DeFi protocols has piqued the interest of banking and financial regulators and has them rushing to design and implement clear guidance that protects users but also allows for the US to continue to be a leader in banking innovation. The recent OCC guidance is a step in that direction. Interpretive Letter #1170, published on July 22, 2020, enabled national banks to custody cryptoassets. Interpretive Letter #1172, published on September 21, 2020, enabled national banks to hold stablecoin reserves for customers. Interpretive Letter #1174, published on January 4, 2021, enabled national banks to run blockchain nodes (referred to as “independent node verification networks” by the OCC) and use stablecoins for payments. Taken together, these letters allow federally chartered banks to treat blockchains the same as other financial networks, such as Fedwire, ACH, or SWIFT and to participate in such networks.
In case there was any doubt of the favorable view the OCC has taken on stablecoins and DeFi, Brian Brooks, the outgoing acting comptroller of the OCC and a former chief legal officer of Coinbase (crypto brokerage), authored an opinion piece in the Financial Times on January 12, 2021 titled “Get ready for self-driving banks.” In it, Mr. Brooks makes a case for federal regulators to take the lead in designing regulatory schemes for self-driving banks and updating the rules governing the issuance of banking charters. He even postulates that the OCC could one day “grant a national bank charter to open-source software that manages deposit-taking, lending, or payments, if it doesn’t have officers or directors,” and that the efficiency of such banks could “free significant amounts of capital that is lost to operating costs today or slowed by decisions dependent on human grey matter.”
Looking forward, these letters give the green light for federally chartered banks to explore blockchain infrastructure projects, such as mining on proof-of-work networks (such as Bitcoin and the current version of Ethereum) and staking on proof-of-stake networks (such as Tezos and the current version of the plan for the Ethereum 2.0 network). It is easy to imagine such banks offering staking as a service for clients, in exchange for a percentage of the staking rewards. Banks may also look to develop and implement their own proprietary blockchain solutions, or continue to develop existing solutions like JP Morgan’s JPM Coin.
It is important to note that the majority of banks are in fact state chartered, not federally charted, with federally chartered banks making up only about 20 percent to 30 percent of all banks from 1992 through 2018 according to George Mason University’s Mercatus Center. Wyoming has recently been a popular state charter for banks focused on digital assets, as the state introduced the Special Purpose Depository Institution, (SPDI) a new banking charter in 2019. The cryptocurrency exchange Kraken was granted such a license, through a subsidiary, in September 2020, allowing it to accept wire transfers, custody digital assets, and offer demand/deposit accounts (DDAs). Kraken also announced the SPDI charter will allow it to pursue additional features in the future, including digital asset staking, trust account administration, and bank comfort letters.
However, these letters have a greater level of influence than what such percentages would indicate, as the total assets under management (AUM) at federally chartered banks tend to be much larger than the AUM at state chartered banks. Moreover, it is likely that fintech startups will pursue federal charters, as their business models are often based around intra-state banking.
It is also worth noting that Brian Brooks is stepping down from his role as acting comptroller of the OCC. Similar to the lack of clarity on how cryptocurrency will be viewed by the incoming Biden administration, it is unclear at this time who will lead the OCC next, or what their attitude towards digital assets will be.
For more information on the OCC’s most recent Interpretive Letter #1174 on bank’s use of stablecoins, click here.
