OCC Green-Lights Crypto Activities for Banks

In current months, the federal Office of the Comptroller of the Currency (OCC) has signaled a extra permissible regulatory stance in the direction of nationwide banks and federal financial savings associations (collectively, banks) partaking in crypto-asset actions. “I will continue to work diligently to ensure regulations are effective and not excessive, while maintaining a strong federal banking system,” mentioned Acting Comptroller of the Currency Rodney E. Hood earlier this 12 months.

On March 7, the OCC started formalizing its shift away from its Biden-era strategy to regulating banks’ crypto-asset actions with the issuance of Interpretive Letter 1183. Through this interpretive letter, the OCC rescinded its supervisory non-objection course of for banks searching for to have interaction in crypto-asset actions, thereby eradicating important pink tape round banks’ skills to take action. This interpretive letter additionally reaffirmed the OCC’s prior steerage allowing banks to have interaction in a variety of crypto-asset actions.

The OCC adopted up on this motion in May with Interpretive Letter 1184. In it, the OCC additional confirmed that banks could interact in sure crypto-asset actions and addressed the roles third-party service suppliers—similar to fintech firms—can play in these actions. The interpretive letter was usually supportive of third events’ involvement in them.

Key Takeaways:

• The OCC will now not require banks to endure a supervisory non-objection course of (see definition under) earlier than providing services regarding crypto belongings to their clients. Banks regulated by the OCC can now supply crypto-asset services while not having to first display that they’ve satisfactory compliance processes in place.
• Removing this course of considerably lowers the obstacles to crypto-asset banking actions turning into extra widespread. Supervisory expectations nonetheless apply, although. The OCC will doubtless nonetheless use supervisory exams to test whether or not banks have applied sturdy controls to handle the dangers related to crypto-asset actions.
• The OCC additionally re-confirmed that banks can present crypto-asset custody providers, maintain funds as reserves of stablecoins, and supply sure funds providers regarding stablecoins, together with appearing as nodes for distributed ledgers in reference to verifying clients’ funds and facilitating cost transactions on a distributed ledger.
• Regarding crypto-asset custody providers at the least, the OCC has confirmed that banks could use third-party sub-custodians to offer custody providers, topic to acceptable third-party danger administration practices.
• Banks considering providing crypto-asset services to clients ought to evaluation the OCC’s present steerage to establish compliance obligations and expectations. Expect the OCC’s steerage to evolve as crypto-asset actions mature and acquire wider adoption within the banking trade.
• Because crypto-asset actions are nonetheless novel within the banking trade, banks could profit from taking a proactive strategy to figuring out acceptable controls and processes for managing dangers related to crypto-asset services.

What the Recent Interpretive Letters Do

The OCC’s current interpretive letters sign a shift away from the extra cautious and restrictive strategy taken by the company underneath the Biden administration and the OCC’s confidence in banks’ skills to handle dangers related to crypto-asset actions. They reaffirm that banks are permitted to have interaction in sure crypto-asset actions and expressly allow third-party service operators to offer crypto-asset custody providers (to be “sub-custodians”). They additionally give banks a inexperienced gentle to discover crypto-asset alternatives as such alternatives could come up by eliminating the supervisory non-objection course of first adopted in 2021.

Previously, a financial institution’s skill to have interaction in crypto-asset actions was constrained by a supervisory non-objection course of adopted in 2021 that required banks to acquire the OCC’s tacit approval earlier than partaking in such actions. The OCC’s current interpretive letters eradicated this supervisory non-objection course of.

What Crypto-Asset Activities Are Permitted?

• Interpretive Letter 1170 – Permits banks to offer crypto-asset custody providers to clients in each fiduciary and non-fiduciary capacities as a part of their conventional safekeeping and custody actions.
• Interpretive Letter 1172 – Allows banks to obtain and maintain deposits from stablecoin issuers, together with reserves for stablecoins related to hosted wallets.
• Interpretive Letter 1174 – Authorizes banks to have interaction in sure payment-related actions involving stablecoins, together with appearing as nodes for an unbiased node verification community (i.e., a distributed ledger) in reference to verifying clients’ funds and facilitating cost transactions on a distributed ledger.

In its current interpretive letters, the OCC reaffirmed that these crypto-asset actions are nonetheless permissible banking actions. The OCC additionally expressly confirmed that banks could use third-party, which signifies that the OCC may additionally be supportive of third-party service suppliers taking part in banks’ different crypto-asset actions as nicely.

What Was the OCC’s Supervisory Non-Objection Process?

Under the now-rescinded Interpretive Letter 1179, banks searching for to have interaction in crypto-asset actions have been required to inform their OCC supervisory workplace and procure a written non-objection earlier than continuing.

Non-objection letters can be issued provided that the financial institution may display, to the supervisory workplace’s satisfaction, that it had satisfactory danger administration processes in place to establish, measure, monitor, and management potential dangers related to its deliberate crypto-asset actions.

Additionally, banks needed to present a transparent understanding of the legal guidelines relevant to its deliberate crypto-asset actions, similar to federal securities legal guidelines, anti-money laundering legal guidelines, and shopper safety legal guidelines.

Eliminating this supervisory non-objection course of removes a big regulatory barrier to banks’ skills to have interaction in crypto-asset actions. However, its elimination doesn’t absolve banks of their accountability to successfully handle the dangers related to these actions.

Crypto-Asset Risk Management Going Forward

Moving ahead, these actions might be reviewed by the OCC as a part of its common supervisory course of. That means banks partaking in crypto-asset actions should nonetheless be sure that such actions are carried out in a protected, sound, and truthful method and in compliance with relevant regulation. If a third-party service supplier—similar to a fintech firm—might be concerned in them, banks might be anticipated to implement acceptable third-party danger administration practices as nicely.

By eliminating the supervisory non-objection barrier, the OCC has positioned higher accountability on banks to implement the suitable complete danger administration frameworks. They could discover it simpler to combine crypto-related services into their choices in consequence.

Still, the OCC will doubtless anticipate banks to implement sturdy controls to handle the dangers related to these actions in step with these outlined within the OCC’s earlier interpretive letters and steerage. For instance:

• Crypto-Asset Custody Services – The OCC has acknowledged that sturdy safety controls are wanted to keep away from mismanagement of cryptographic keys, which may result in irretrievable losses. The OCC recommends twin controls, segregation of duties, and safe storage options (e.g., chilly wallets) to stop unauthorized entry, together with sturdy audit procedures for efficient cryptographic key administration.
• Holding Stablecoin Reserves – The OCC has highlighted liquidity dangers and compliance with relevant capital and liquidity rules as major areas of concern, notably if reserve balances don’t align with excellent stablecoins. Accordingly, if they’re holding stablecoin reserves, banks ought to preserve day by day reserve verification necessities that guarantee a 1:1 backing of the stablecoin by fiat, and they need to additionally set up contractual restrictions with stablecoin issuers to make sure redemption obligations don’t exceed obtainable reserves. 
• Stablecoin Payments Activities – The OCC expects banks to deal with the anti-money laundering, cybersecurity, fraud, and shopper safety dangers related to payments-related crypto-asset actions by creating enough technological experience to handle the complexity of blockchain transactions safely and in compliance with relevant legal guidelines, notably given the possibly pseudo-anonymous nature of such transactions.

Banks partaking in crypto-asset actions ought to align with these expectations. However, crypto-asset actions stay comparatively novel compared to conventional banking actions, and the compliance questions they increase could not but be absolutely understood. The OCC’s security and soundness expectations could evolve and new laws could alter relevant legal guidelines. Staying updated on the regulatory panorama surrounding crypto-asset actions is probably going key for banks’ engaged in them.

Banks engaged in crypto-asset actions could possibly keep forward of recent regulatory developments by taking a proactive strategy to managing these dangers, similar to by creating sturdy governance frameworks to stop regulatory gaps and interesting with regulators and trade to tell supervisory expectations.