The Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1174 on January 4, 2021, granting permission to national banks and federal savings associations to (i) participate in the independent node verification networks (INVN) as “nodes” and (ii) use stablecoins to facilitate payment activities and other bank-permissible functions, consistent with applicable law and safe and sound banking practice.
In the Letter, OCC explained that an INVN “consists of a shared electronic database where copies of the same information are stored on multiple computers,” and “the common form of an INVN is a distributed ledger.” Any computer or other device that connects to an INVN would be the INVN node. One of the potential benefits the OCC noted about INVNs is their decentralized nature, which may “enhance the efficiency, effectiveness, and stability of the provision of payments.” There are a comparatively large number of nodes connected to INVNS and each will verify payments independently. Payment information will not be added to the INVNs until consensus is reached among the nodes that the information is valid. INVNs may be more resilient than other payment networks because there is no single point of failure as in many centralized networks – even if a number of nodes cease to function, the other nodes can continue to operate. Further, each node may contain a full copy of the network’s entire history, which helps to prevent tampering in that it would require massive amounts of computing power to alter the records all at once.
The Letter states that “serving as nodes on INVNs is a new means of transmitting payment instructions and validating payments.” When banks act as “nodes” on an INVN, they become participants of such networks, and can validate transactions, store transaction history, and record payments transactions.
As to stablecoins, the Letter states that stablecoins can “provide a means of transmitting value denominated in an existing currency using INVN technology,” “should have the capability to obtain and verify the identity of all transacting parties,” and “should have appropriate systems, controls, and practices in place to manage these risks, including to safeguard reserve assets.” OCC emphasized that “strong reserve management practices include ensuring a 1:1 reserve ratio and adequate financial resources to absorb losses and meet liquidity needs.” OCC focused on the industry observation that using stablecoins to facilitate payments may combine the efficiency and speed of digital currencies with the stability of existing currencies. Thus, stablecoins operate the same as other payment mechanisms, such as debit cards and electronically stored value (ESV) systems.
On the other hand, the Letter outlined potential operational risks and fraud risks associated with the payment activities involving cryptocurrencies, as well as the heightened compliance risks, including the risks under anti-money laundering (AML) and Bank Secrecy Act (BSA) statutes. The OCC expected that banks engaged in providing cryptocurrency services to customers to adapt and expand their BSA/AML compliance programs to address the particular risks of cryptocurrency transactions.
This is the third letter issued by the OCC addressing cryptocurrency-related services. The first interpretive letter (Interpretive Letter #1170) clarified the legal basis for banks to provide cryptocurrency custody services for customers. The second interpretive letter (Interpretive Letter #1172) addressed banks’ authority to hold stablecoin reserves. For more information on the OCC’s perspective on decentralized finance and stablecoins, click here.