The opening statement of the News Release by the OCC states –
“The Office of the Comptroller of the Currency (OCC) today published a letter clarifying national banks’ and federal savings associations’ authority to participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank-permissible functions.”
Brian Brooks, the acting Comptroller of the Currency at OCC, acknowledges that the US has often relied on the innovative technology sector for designing real-time payments system. He further states, while some of these payment systems are built by bank consortia, a few of them are based on “independent node verification networks such as Blockchains.”
What does the OCC letter means to Blockchain? What is the impact on stablecoins and the broader crypto space?
What does the letter say?
The letter imparts clarity on the authority the banks have to transact stablecoin payments on behalf of the customers by acting as validator nodes on the Blockchain network. The letter further adds that a financial institution can validate, store, and record payment transactions in its capacity as a validator node. They, however, have to comply with the applicable law and adopt fair banking principles.
Banks’ changing role
The OCC emphasizes on the bank’s role as an efficient financial intermediary. It interprets how its role has evolved and adapted in response to changing economic conditions and customer needs. The letter expounds on how the era of new technologies in the financial sector has necessitated banks to adopt INVNs to carry out their traditional functions. OCC agrees that the banks have evolved with the technology and now use electronic means to facilitate several services. Accordingly, they can serve as a node on an INVN and use stablecoins to conduct permissible banking activities. It treats serving as nodes on INVNs as a new channel for the banks to execute their core tasks – transmitting payment instructions and validating payments.
Likewise, OCC regards stablecoins that have the backing on an underlying fiat currency as a mechanism for storing, transferring, transmitting, and exchanging the underlying fiat currency value. Hence it considers them to have a more stable value than cryptocurrencies. It sees stablecoins as having the efficiency and speed of digital currencies, supplemented with the stability. As a result, the OCC contemplates that the stablecoins as apt for digital payments such as cross-border trade settlements. It also views stablecoins as a channel for the payment system participants to avail the potential benefits of the INVNs. As per the letter, a bank can issue stablecoins to its customers and exchange them for fiat. Here, stablecoins will function as a payment option similar to cards, checks, and other instruments facilitating cashless payments.
According to OCC, stablecoins are an electronic representation of the US Dollar. Instead of a dollar value stored in any form of electronic payment methods, the value is represented on the stablecoin. Likewise, stablecoins can be bought, sold, and issued by the banks to facilitate customer payments. OCC asserts that stablecoins are potentially cheaper, efficient, and faster payment options for cross-border remittances.
Adherence to Law
The OCC, however, also states maintaining strict compliance with the AML laws is essential while handling stablecoin transactions. It means the stablecoin arrangements should have provisions to collect and verify the identity of the involved parties. Unhosted wallets are also included. OCC also highlights the practices that need to be in place to manage the risks and to safeguard the reserve assets. It adds that strong reserve management – having adequate financial reserve to cover the losses and meet liquidity needs – is vital.
As per the OCC, engaging in INVN allows the federal banks to improve the efficiency, speed, and stability of the payment system. It considers the decentralized nature of the network makes the system more trustworthy, resilient, and tamper-resistant. As per OCC, since the information is added to the network after reaching a consensus among the nodes, the data is likely to be accurate.
The OCC also warns of the potential risks while participating in INVN activities. It states operational, compliance, and fraud-related risks as the challenges. Banks would have to gain the necessary technical expertise to manage the operational risks. Moreover, they have to administer the essential compliance safeguards against money laundering and terrorist financing activities. These compliance measures must also address the risks unique to the cryptocurrency transactions. Hence, it is prudent for the banks to conduct a legal analysis to ensure compliance with the AML and consumer protection regulations.
What is the market reaction?
Several crypto market experts consider the OCC letter as favorable to the crypto and Blockchain community. This move is seen by many as the US’s progress in joining other nations who have wholeheartedly embraced digital money. Immediately following the announcement, Ether, the native currency of Etherum, one of the popular platforms for stablecoins, jumped nearly 12 percent. Bitcoin sprung 5 percent. Several other stablecoin networks followed suit.
In conclusion, cryptocurrencies have for long been considered as antiestablishment. Adding financial institutions such as banks as Blockchain nodes sounds antithetical to the very reason behind the dawn of the decentralized network that underpins crypto. This move by OCC is an attempt to give the mainstream role to what has been perceived by many as a formidable alternative. How this new synergy will transpire is worth watching.