Comptroller of the Currency Backpedals on Rulings Allowing Banks to Handle Crypto

Crypto Regulations

On the surface, it sounds good. Acting Comptroller of the Currency Michael Hsu confirmed that banks can hold cryptocurrencies for customers, can hold dollar reserves for stablecoin issuers and can use stablecoins to make payments.

In reality, the Nov. 23 interpretive letter was a stark warning for national banks and federal savings associations to tread very cautiously, ordering them to be certain they have adequate controls in place — and to get permission (technically “non-objection”) from the Office of the Comptroller of the Currency (OCC) before engaging with cryptocurrencies.

“Today’s letter reaffirms the primacy of safety and soundness,” Hsu said in a release. “Because many of these technologies and products present novel risks, banks must be able to demonstrate that they have appropriate risk management systems and controls in place to conduct them safely. This will provide assurance that crypto-asset activities taking place inside of the federal regulatory perimeter are being conducted responsibly.”

In describing its Nov. 23 letter, the OCC also reiterated that its authority to issue bank charters “did not expand on or change a bank’s existing obligations under the OCC’s fiduciary activities regulations. The OCC retains discretion in determining whether an activity is conducted in a fiduciary capacity for purposes of federal law.”

While Hsu’s action was far better than the outright reversal of the OCC’s previous guidance that some feared, it was also a big step backwards for the crypto industry.

Based on interpretive letters issued by Hsu’s predecessor at the OCC, former Coinbase cryptocurrency exchange general counsel Brian Brooks, the rulings referred to were considered major wins in the crypto community.

Letter 1170, issued in July 2020, authorized national banks and federal savings associations (FSAs) to provide “cryptocurrency custody services on behalf of customers.”

Letter 1172, issued that September, said that national banks and FSAs could hold stablecoin reserves — the basket of fiat currency like dollars that generally back stablecoins one-to-one, enabling them to retain their value.

Letter 1174, issued on Jan. 4, allowed national banks and FSAs to host blockchain nodes and to use stablecoins to make payments and settle transactions for customers.

When the stablecoin payments letter was published on Jan. 4, Jeremy Allaire, CEO of USDC stablecoin issuer Circle, called it “a huge win for crypto and stablecoins,” adding that it “paves the way for the use of leading dollar digital currencies such as USDC as a mainstream payment medium for all forms of payments and settlement, and helps put the U.S. in a leadership position in embracing the power of public blockchains.”

The ‘First FinTech Comptroller’

Brooks also made waves when his OCC — a regulatory agency within the U.S. Treasury Department — proposed a rule that banned banks from “refusing to provide services, capital and credit” to “whole categories or classes of customers.” Notably cryptocurrency firms, although that was unspoken.

Another notable first under Brooks’ watch was the Jan. 13 issuance of a national trust charter to crypto custodian Anchorage. That made South Dakota-chartered Anchorage Trust Company into  Anchorage Digital Bank National Association, “the first federally chartered digital asset bank in history,” CEO Nathan McCauley and President Diogo Mónica said in a statement at the time. “This is a major milestone, not only for us as an organization, but also for the crypto industry and the wider financial world. Crypto deserves a bank, and we are immensely proud of being approved as the one to set the standard.”

When Brooks stepped down on Jan. 14 — just one day after granting Anchorage its banking charter — industry publication American Banker described him as “one of the most active and controversial interim regulatory chiefs in recent memory.”

The article said his “fierce advocacy for letting FinTech firms access the banking system, drew criticism from the financial services industry,” adding that his critics in the financial industry “described him as the nation’s ‘first FinTech comptroller’ for his push to give non-banks federal chartering options.”