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OCC and SEC Wade into Stablecoin Regulation 

by Kevin Tran, Marc Adesso

Published: October, 2020

Submission: October, 2020

 



The Office of the Comptroller of the Currency (“OCC”) issued an interpretive letter (the “Stablecoin Letter”) confirming that national banks and federal savings associations are permitted to take and hold fiat currency deposits that serve as reserves for fiat-currency backed stablecoins associated with hosted digital wallets (the “OCC Stablecoin Letter”). The Securities and Exchange Commission (“SEC”) Strategic Hub for Innovation and Financial Technology (“FinHub”) simultaneously published a statement on the OCC’s Stablecoin Letter reminding the public that whether a particular digital asset, such as a stablecoin, is a security under federal security laws is a facts and circumstances determination, such that the SEC encourages market participants contact FinHub before finalizing any structuring, marketing or operation of a digital asset structure such as stablecoins.


A stablecoin is a type of cryptocurrency that is intended to offer price stability by pegging the value of the stablecoin to a financial asset denominated in a fiat currency (including the U.S. dollar). Given the volatility in value of popular cryptocurrencies such as bitcoin, stablecoins have garnered increasing popularity because they offer the instant processing and security of payments using cryptocurrencies with the volatility-free nature of fiat currencies.


Summary


The Stablecoin Letter reflects a continuation of OCC actions to provide guidance on how banking regulations apply to certain fintech activities, particularly those core activities traditionally conducted by banks such as deposit-taking and custody services. In July 2020, the OCC issued an interpretive letter (the “Custody Letter”) that concluded national banks may provide cryptocurrency custody services on behalf of customers and reaffirmed the OCC’s position that national banks may provide permissible banking services to any lawful business, including cryptocurrency businesses, so long as the national bank appropriately manages the risks and comply with applicable law.


The Stablecoin Letter acknowledges that stablecoin issuers have sought out banks to store the cash reserves backing their stablecoins in deposit accounts. Since national banks are authorized to receive deposits[1]and the OCC Custody letter reaffirmed that national banks are permitted to provide permissible banking activities to cryptocurrency businesses, the OCC concluded through the Stablecoin Letter that national banks are authorized to receive deposits from stablecoin issuers, including deposits used as reserves for a stablecoin associated with hosted wallets, and provide services incidental to receiving deposits from stablecoin issuers.


Notwithstanding the OCC’s affirmation that national banks may provide a broad scope of banking services to cryptocurrency businesses, the OCC did issue a reminder that banks remained beholden to applicable laws and regulations. Specifically, banks providing custody and deposit services to cryptocurrency businesses need (i) to ensure compliance with customer due diligence requirements under the Bank Secrecy Act and customer identification requirements under section 326 of the USA Patriot Act, (ii) to identify and verify the beneficial owners of legal entity customers opening accounts, (iii) to develop and implement sound risk management policies specific to working with cryptocurrency businesses, and (iv) to be aware of laws and regulations governing deposit insurance and how such insurance may cover assets in the reserve account . In addition, the OCC permits banks to enter into contractual agreements with stablecoin issuers governing the terms and conditions of the services that the bank provides to the issuer, including agreements to restrictions placed on assets held in the reserve account.


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