Major U.S. banks might be willing to support cryptocurrency services – with just a bit of additional guidance from the Office of the Comptroller of the Currency (OCC), their federal regulator.
Multiple national banks responded to the OCC’s June “Advance Notice of Proposed Rulemaking” (ANPR), which asked the general public to weigh in before Aug. 3. on how cryptocurrencies and other fintech tools might be used in the financial sector. Notably, several banks, including U.S. Bank and PNC, indicated they might be interested in actually providing crypto custody and other services to customers.
The responses by just under a dozen banks, among a total of 89 submissions from think tanks, policy advocates, crypto startups and other entities, represent one of the strongest signs yet that traditional financial institutions view the still-nascent crypto space as a legitimate asset class.
The responses contrast sharply with an open letter sent to Acting Comptroller of the Currency Brian Brooks. The letter, which opposed a narrow payments charter for fintech companies, was signed by many of the same respondents and sent to the OCC on July 29.
Fresh guidance from the OCC may help provide the necessary legal comfort for banks to provide crypto-native analogs to traditional bank services, wrote Juan Saurez, Coinbase’s vice president and general counsel for enterprise.
“Although these services, such as borrowing, lending and remittances, are permissible activities for national banks, there remains some uncertainty as to whether the provision of these services using cryptocurrencies is authorized,” he said.
Peter Najarian, chief revenue officer at BitGo, told CoinDesk the ANPR’s very existence is exciting, as it’s “a frankly inevitable step in the maturing of this ecosystem.”
Dominic Venturo, chief digital officer at U.S. Bank National Association, perhaps went the furthest in his response, writing that the OCC and other banking regulators should issue guidance around the cryptocurrency market as well as the “expectations for services conducted on distributed ledger technology.”
A lack of clear regulations might result in both banks and customers being unwilling to invest or use cryptocurrencies and similar digital assets, he wrote, with customers potentially being interested in investing in crypto, funding traditional financial products, using cryptos as payments, tokenizing physical assets.
“U.S. Bank does not have a position on the role that cryptocurrency should undertake in the financial services sector, but merely seeks additional regulatory clarity to service the cryptocurrency market as it is currently structured or may be structured in the future,” he wrote.
The OCC should work with the other federal regulators to clarify how cryptocurrencies and digital assets are treated, Venturo wrote.
Specifically, he suggested the OCC differentiate between utility tokens, stablecoins and exchange tokens; clarify the requirements for providing custody services; cross-border restrictions; and “the extent consensus rules must be a part of a transaction.”
PNC Bank’s head of technology and innovation, Steven Van Wyk, commented that the OCC should “continue to reinforce that national banks should take a risk-based approach” in reviewing new products, but should not have risk elimination as the ultimate goal.
“All banking activities (including deposit-taking and lending) involve risk, and the implementation of new technologies … necessarily will involve some degree of risk,” Van Wyk wrote. “A supervision framework that is focused only on preventing risk will, almost by necessity, prevent responsible innovation and the implementation of new technologies by national banks.”
Financial institutions – and OCC rulemaking – should have some focus on consumer protections, several of the responses indicated.
Banks might even need to be encouraged to use “privacy-enhancing cryptocurrency technologies,” wrote Peter Van Valkenburgh, Coin Center’s director of research.
He said banks are obligated to both protect their customers’ privacy as well as surveil and report activities that may break the law. In his view, they can do this effectively with privacy coins and other tools.
Banks can conduct know-your-customer checks and otherwise identify their users to comply with relevant laws before providing privacy services by using mixers or other tools to facilitate crypto transactions.
“They should perform heightened due diligence on any payments their customers initiate or receive if either the amounts involved are substantial or a suspicious pattern of behavior has emerged with respect to several smaller transactions,” Van Valkenburgh wrote.
Tina Woo, senior managing counsel for regulatory affairs at Mastercard, also suggested consumer protection rules by the OCC would be helpful, addressing both security and privacy concerns.
The OCC should develop criteria for which “types of cryptocurrencies in which banks may transact,” she wrote, which address “core network principles” including protecting consumers and preventing money laundering or terrorist financing.
“We believe cryptocurrencies and blockchain technology hold the potential to enhance operational resiliency, improve auditability, and enable new functionalities,” she wrote.
‘Based on confidence’
Not all submissions were positive: some expressed concern about relaxing regulations.
Cornell Law School Professor Dan Awrey, Wharton Financial Institutions Center Senior Fellow James McAndrews and Columbia Law School Academic Fellow and Lecturer Lev Menand wrote the OCC’s ANPR has two major flaws: “an excessive focus” on finding ways to relax existing rules and “its narrow focus” in updating the regulatory framework for national banks and savings associations.
“Money and payment systems are based on confidence,” the three wrote. “In the case of the national banking system, this confidence stems from highly sophisticated regulatory frameworks that govern national banks. These regulatory frameworks include federal deposit insurance, access to central bank liquidity support and a special resolution regime.”
In other words, individuals trust banks because of a strict regulatory regime that lets them deposit their funds secure in the knowledge their money is safeguarded.
The second flaw relates to the existing legal structure surrounding banks and savings associations, they wrote.
The ANPR notes that many new financial technologies exist because newly created institutions and platforms try to perform banking functions but aren’t regulated like traditional banks.
The OCC should consider whether it makes more sense to strengthen regulations around non-bank financial institutions, which the letter refers to as “shadow payment systems.”
New financial technology firms that sprung up in recent years, including stablecoin issuers and companies like PayPal, operate in a murky regulatory environment that requires far fewer protections than banks face.
To resolve these concerns, the three said Congress could pass new laws requiring these startups hold insured deposits and deposits at commercial banks. Stablecoin issuers could be required to maintain either the sum total of U.S. dollars or the U.S. dollar equivalent of issued tokens at a bank.
“The OCC should recommend that Congress enact new legislation to address the shortcomings in our existing regulatory framework. Such legislation can be quite simple,” they wrote.
Third party help
Banks don’t necessarily have to provide crypto services directly. BitGo, which has offered custody services for over a year, believes that banks should be able to tap sub-custodians to provide these services, Najarian said.
This would relieve banks of the technological and resource burden that would come of having to directly build out their own services.
Miller Whitehouse-Levine at the Blockchain Association told CoinDesk he agreed. The industry organization recommended letting third parties provide certain services for banks in its own response, he said.
“The OCC permits banks to engage third parties to conduct what they consider to be critical bank activities,” he told CoinDesk.
Visa Vice President for Global Regulatory Affairs Ky Tran-Trong wrote that the payment rail wants to be an intermediary for cryptocurrencies and its 61 million merchants.
“Our objective is to enable digital currency users to spend from their digital currency balance using a Visa debit or prepaid credential anywhere Visa is accepted,” Tran-Trong said in the letter.
R3, another third-party service provider, touted its integrations with SWIFT, Nasdaq and Deutsche Börse Group, noting these partnerships have allowed participants in financial transactions to monitor these transactions more efficiently than traditional tools provided for.
In particular Nasdaq has launched a platform tapping R3 to help manage issuance and other services, wrote Isabelle Corbett, R3’s global head of government relations.
Kristin Boggiano, founder of the Digital Asset Regulatory and Legal Alliance and co-founder of trading platform CrossTower, told CoinDesk the OCC is in its initial stage of rulemaking, meaning this is the best time for the industry to express its concerns and make suggestions to the agency.
“Once the broad policy has been etched, market participants and regulators will move to proposed rulemaking,” she said through a spokesperson. “At that stage, the ability to engage in dialogue about policy and the broad framework becomes more difficult. Thus, this is a critical time for market participants and regulators to jointly develop a framework in which all stakeholders are comfortable.”
A wide range of industry participants appear to agree: Novi (the rebranded Facebook subsidiary Calibra), ConsenSys, Celo, Axos Bank, the American Bankers Association, Figure Technologies, Chamber of Digital Commerce, Silvergate Bank, Ripple Labs and other respondents all supported the idea that banks and savings institutions can safely handle crypto-related services with the right amount of regulation.
The Blockchain Association’s Kristin Smith told CoinDesk it is important, as a first step, for any entity that has a stake in the crypto industry to ensure it weighs in with the OCC..
Visa’s Tran-Trong summed up his hope for the OCC’s ultimate rulemaking process by calling for new regulation that still allows for innovation:
“We recognize that enterprise adoption of blockchain technology can improve several core functions in financial services by providing tamper evident and tamper resistant digital ledgers. However, absent further innovations, inherent challenges with respect to improving scalability, security and device usage, can limit consumer adoption and fail to meet regulatory standards,” he wrote.