Jan 6, 2021
Stablecoin: U.S. Banks Allowed to Use Stablecoins
Stablecoin and the OCC: A First Interpretive Letter in September 2020
Stablecoin: To facilitate customer payment transactions
Stablecoin and OCC: blockchain can reduce transaction costs
Stablecoin: SEC Supports OCC Interpretation
Stablecoins and U.S. Banks: Prices of Cryptocurrency are rising
The Office of the Comptroller of the Currency (OCC) said in a second interpretive letter on Monday that U.S. national banks and federal savings associations can participate in Independent Node Verification Networks (INVNs) and use the stablecoins to perform payment activities and other bank-authorized functions.
Stablecoin and the OCC: A First Interpretive Letter in September 2020
The OCC or Office of the Comptroller of the Currency is an independent office within the U.S. Department of the Treasury that was created by the National Currency Act of 1863 and charters, regulates and supervises all domestic banks and federal savings associations and the federal branches and agencies of foreign banks.
On September 21, 2020, in a letter entitled ‘Interpretation of the OCC’s Chief Counsel on the National Bank and Federal Savings Association/Authorization to Hold Stablecoin Reserves’, the OCC clarified guidance for national banks and federal savings associations on their authority to hold stablecoin reserves.
In its first letter, the OCC stated that U.S. banks can legally hold the foreign exchange reserves of companies that issue stable coins, provided that these companies comply with federal banking laws.
However, the OCC qualified its support for Stablecoin by stating that it applied only to companies that comply with regulations such as ‘know-your-customer’ laws that allow regular audits of their reserves.
Stablecoin: To facilitate customer payment transactions
According to the OCC’s letter, U.S. financial institutions are allowed to hold deposits as reserves for stablecoins that represent a fiduciary currency such as the U.S. dollar.
Banks and savings associations can therefore manage encryption nodes and use the associated stable coins for ‘authorized payment activities’. This means that banks can use public blockchain to validate, store, record and settle payment transactions, as long as they comply with applicable laws.
The regulator noted:
‘Similarly, a bank may use stable wedges to facilitate customers’ payment transactions over an independent verification network, including by issuing a stable coin and exchanging that stable coin for currency’.
For example, one entity (the payer) may wish to deliver a payment in U.S. dollars to a second entity (the payee). Rather than using a centralized payment system, the payer converts the U.S. dollars into stable coins and transfers them to the payee through the INVN.
The payee then reconverts the stable wedges back to U.S. dollars. In a current version of this de facto model, the payment is a cross-border transfer’.
The use of INVN within the federal banking system can improve the effectiveness, efficiency and stability of payment activities and allow for the benefits of real-time payments already enjoyed by other countries.
An INVN is a shared electronic database where copies of the same information are stored on multiple computers.
For example, these activities may be more resilient than other payment networks due to the decentralized nature of INVN, which allows a relatively large number of nodes to reliably verify transactions.
An INVN also limits the falsification or addition of inaccurate information to the database, as information is only added to the network after consensus has been reached among the nodes validating the information.
Stablecoin and OCC: blockchain can reduce transaction costs
The OCC press release explained that: ‘Stablecoins refer to cryptography secured by an asset such as a fiduciary currency, including the U.S. dollar or other foreign currency’.
The letter also stated that blockchain networks can reduce the costs of cross-border transactions as a ‘cheaper, faster and more efficient’ means of payment. However, banks need to be aware of potential risks, including fraud, and that they need to guard against money laundering and terrorist financing by extending their compliance practices to address the specific risks of encrypted transactions.
In other words, banks need to be aware of potential risks when carrying out activities related to INVN, including operational risks, compliance risk and fraud. According to the OCC, new technologies require sufficient technological expertise for banks to manage these risks in a secure and robust manner.
Acting Comptroller of the Currency and former head of the coin database, Brian Brooks, said in a statement:
‘National banks and federal savings associations are currently engaged in stable coin-related activities involving billions of dollars every day’. He added:
‘Our letter removes any legal uncertainty regarding the authority of banks to connect to blockchains as validation nodes and thus make payments with stablecoins on behalf of customers who increasingly demand the speed, efficiency, interoperability and low cost associated with these products.
Stablecoin: SEC Supports OCC Interpretation
Following the OCC’s letter, the SEC (Security and Exchange Commission) in turn issued a statement.
The SEC is the U.S. federal agency that regulates and supervises financial markets. It is a kind of American ‘stock exchange policeman’, with functions generally similar to those of the Financial Market Authority (AMF) found in other states.
As mentioned, the SEC has issued a statement in support of the OCC’s interpretation. The statement, which comes from SEC FinHub staff, states:
‘We believe that market participants may structure and sell a digital asset in such a way that it does not constitute a security and involves registration, reporting, and other requirements under federal securities laws.
The SEC also wishes to make it clear that simply calling a cryptocurrency ‘stablecoin’ does not exempt it from being reported as a security.
Stablecoins and U.S. Banks: Prices of Cryptocurrency are rising
While the letter specifically mentioned ‘stablecoins’; cryptocurrency prices jumped Monday night after the OCC statement.
Bitcoin BTCUSD, +2.31%, had initially gained more than 5%, but had finally risen only 1%, while ether (ETH, +1.35%) had jumped nearly 12% upon publication of the letter.
Ripple XRPUSD, +2.28%, Bitcoin Cash BCHUSD, +3.02% and Litecoin LTCUSD, +1.56% had also fallen back after brief peaks.
The OCC letter concludes that a national bank or a federal savings association can use the stablecoins to perform payment activities and other functions authorized by the banks. This allows them to validate, store and record payment transactions using blockchain technology. Does this mean that the banks are adhering to cryptocurrency, hence decentralization?
Written by Laetitia Harson, Project Manager
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