OCC Green-Lights Crypto Activities for Banks

In caller months, the national Office of the Comptroller of the Currency (OCC) has signaled a much permissible regulatory stance towards nationalist banks and national savings associations (collectively, banks) engaging successful crypto-asset activities. “I volition proceed to enactment diligently to guarantee regulations are effectual and not excessive, portion maintaining a beardown national banking system,” said Acting Comptroller of the Currency Rodney E. Hood earlier this year.

On March 7, the OCC began formalizing its displacement distant from its Biden-era attack to regulating banks’ crypto-asset activities with the issuance of Interpretive Letter 1183. Through this interpretive letter, the OCC rescinded its supervisory non-objection process for banks seeking to prosecute successful crypto-asset activities, thereby removing important reddish portion astir banks’ abilities to bash so. This interpretive missive besides reaffirmed the OCC’s anterior guidance permitting banks to prosecute successful a scope of crypto-asset activities.

The OCC followed up connected this enactment successful May with Interpretive Letter 1184. In it, the OCC further confirmed that banks whitethorn prosecute successful definite crypto-asset activities and addressed the roles third-party work providers—such arsenic fintech companies—can play successful those activities. The interpretive missive was mostly supportive of 3rd parties’ engagement successful them.

Key Takeaways:

• The OCC volition nary longer necessitate banks to acquisition a supervisory non-objection process (see explanation below) earlier offering products and services relating to crypto assets to their customers. Banks regulated by the OCC tin present connection crypto-asset products and services without needing to archetypal show that they person capable compliance processes successful place.
• Removing this process importantly lowers the barriers to crypto-asset banking activities becoming much widespread. Supervisory expectations inactive apply, though. The OCC volition apt inactive usage supervisory exams to cheque whether banks person implemented beardown controls to negociate the risks associated with crypto-asset activities.
• The OCC besides re-confirmed that banks tin supply crypto-asset custody services, clasp funds arsenic reserves of stablecoins, and supply definite payments services relating to stablecoins, including acting arsenic nodes for distributed ledgers successful transportation with verifying customers’ payments and facilitating outgo transactions connected a distributed ledger.
• Regarding crypto-asset custody services astatine least, the OCC has confirmed that banks whitethorn usage third-party sub-custodians to supply custody services, taxable to due third-party hazard absorption practices.
• Banks funny successful offering crypto-asset products and services to customers should reappraisal the OCC’s existing guidance to place compliance obligations and expectations. Expect the OCC’s guidance to germinate arsenic crypto-asset activities mature and summation wider adoption successful the banking industry.
• Because crypto-asset activities are inactive caller successful the banking industry, banks whitethorn payment from taking a proactive attack to identifying due controls and processes for managing risks associated with crypto-asset products and services.

What the Recent Interpretive Letters Do

The OCC’s caller interpretive letters awesome a displacement distant from the much cautious and restrictive attack taken by the bureau nether the Biden medication and the OCC’s assurance successful banks’ abilities to negociate risks associated with crypto-asset activities. They reaffirm that banks are permitted to prosecute successful definite crypto-asset activities and expressly licence third-party work operators to supply crypto-asset custody services (to beryllium “sub-custodians”). They besides springiness banks a greenish airy to research crypto-asset opportunities arsenic specified opportunities whitethorn originate by eliminating the supervisory non-objection process archetypal adopted successful 2021.

Previously, a bank’s quality to prosecute successful crypto-asset activities was constrained by a supervisory non-objection process adopted successful 2021 that required banks to get the OCC’s tacit support earlier engaging successful specified activities. The OCC’s caller interpretive letters eliminated this supervisory non-objection process.

What Crypto-Asset Activities Are Permitted?

• Interpretive Letter 1170 – Permits banks to supply crypto-asset custody services to customers successful some fiduciary and non-fiduciary capacities arsenic portion of their accepted safekeeping and custody activities.
• Interpretive Letter 1172 – Allows banks to person and clasp deposits from stablecoin issuers, including reserves for stablecoins associated with hosted wallets.
• Interpretive Letter 1174 – Authorizes banks to prosecute successful definite payment-related activities involving stablecoins, including acting arsenic nodes for an autarkic node verification web (i.e., a distributed ledger) successful transportation with verifying customers’ payments and facilitating outgo transactions connected a distributed ledger.

In its caller interpretive letters, the OCC reaffirmed that these crypto-asset activities are inactive permissible banking activities. The OCC besides expressly confirmed that banks whitethorn usage third-party, which indicates that the OCC mightiness besides beryllium supportive of third-party work providers participating successful banks’ different crypto-asset activities arsenic well.

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

Under the now-rescinded Interpretive Letter 1179, banks seeking to prosecute successful crypto-asset activities were required to notify their OCC supervisory bureau and get a written non-objection earlier proceeding.

Non-objection letters would beryllium issued lone if the slope could demonstrate, to the supervisory office’s satisfaction, that it had capable hazard absorption processes successful spot to identify, measure, monitor, and power imaginable risks associated with its planned crypto-asset activities.

Additionally, banks had to amusement a wide knowing of the laws applicable to its planned crypto-asset activities, specified arsenic national securities laws, anti-money laundering laws, and user extortion laws.

Eliminating this supervisory non-objection process removes a important regulatory obstruction to banks’ abilities to prosecute successful crypto-asset activities. However, its removal does not absolve banks of their work to efficaciously negociate the risks associated with these activities.

Crypto-Asset Risk Management Going Forward

Moving forward, these activities volition beryllium reviewed by the OCC arsenic portion of its regular supervisory process. That means banks engaging successful crypto-asset activities indispensable inactive guarantee that specified activities are carried retired successful a safe, sound, and just mode and successful compliance with applicable law. If a third-party work provider—such arsenic a fintech company—will beryllium progressive successful them, banks volition beryllium expected to instrumentality due third-party hazard absorption practices arsenic well.

By eliminating the supervisory non-objection barrier, the OCC has placed greater work connected banks to instrumentality the due broad hazard absorption frameworks. They whitethorn find it easier to integrate crypto-related products and services into their offerings arsenic a result.

Still, the OCC volition apt expect banks to instrumentality beardown controls to negociate the risks associated with these activities accordant with those outlined successful the OCC’s erstwhile interpretive letters and guidance. For example:

• Crypto-Asset Custody Services – The OCC has stated that beardown information controls are needed to debar mismanagement of cryptographic keys, which tin pb to irretrievable losses. The OCC recommends dual controls, segregation of duties, and unafraid retention solutions (e.g., acold wallets) to forestall unauthorized access, on with robust audit procedures for effectual cryptographic cardinal management.
• Holding Stablecoin Reserves – The OCC has highlighted liquidity risks and compliance with applicable superior and liquidity regulations arsenic superior areas of concern, peculiarly if reserve balances bash not align with outstanding stablecoins. Accordingly, if they are holding stablecoin reserves, banks should support regular reserve verification requirements that guarantee a 1:1 backing of the stablecoin by fiat, and they should besides found contractual restrictions with stablecoin issuers to guarantee redemption obligations bash not transcend disposable reserves. 
• Stablecoin Payments Activities – The OCC expects banks to code the anti-money laundering, cybersecurity, fraud, and user extortion risks associated with payments-related crypto-asset activities by processing capable technological expertise to negociate the complexity of blockchain transactions safely and successful compliance with applicable laws, peculiarly fixed the perchance pseudo-anonymous quality of specified transactions.

Banks engaging successful crypto-asset activities should align with these expectations. However, crypto-asset activities stay comparatively caller successful examination to accepted banking activities, and the compliance questions they rise whitethorn not yet beryllium afloat understood. The OCC’s information and soundness expectations whitethorn germinate and caller authorities whitethorn change applicable laws. Staying up to day connected the regulatory scenery surrounding crypto-asset activities is apt cardinal for banks’ engaged successful them.

Banks engaged successful crypto-asset activities whitethorn beryllium capable to enactment up of caller regulatory developments by taking a proactive attack to managing these risks, specified arsenic by processing robust governance frameworks to forestall regulatory gaps and engaging with regulators and manufacture to pass supervisory expectations.