The office of the US Treasury in charge of currency policy has revealed plans to grant special-purpose bank charters to companies working in the fintech space.
The proposal, revelealed on Friday but hinted at as recently as October, is currently open to comment by the public. If approved, the new breed of chartered institutions would deepen a global trend that has leaned toward modernizing existing definitions of what constitutes a bank.
The impact on the digital currency and blockchain space would be far more meaningful, observers say. Should it be approved, the move could "help drive greater mainstream adoption of cryptocurrency", by giving approved exchange services a greater degree of credibility, according to lawyer Carol Van Cleef, newly hired by Baker Hostetler.
But Van Cleef went further, telling CoinDesk that not only could nationally granted bank charters give crypto-exchanges more credibility, but it would simplify the current US system requiring state-by-state money transmitter licenses.
Van Cleef said:
"It will provide a solution to 50 state money transmitter licensing and it may create different impressions in the mind of potential cryptocurrency users if they’re dealing with a bank instead of a cryptocurrency exchange."
According to Van Cleef, startup banks (which she has previously helped obtain traditional charters) are required to keep $2m cash on hand, but the actual cost of becoming a bank runs as high as $40m.
Van Cleef also attended the Georgetown University Law Center event at which Comptroller of the Currency Thomas J Curry related multiple reasons why the fintech charters could be helpful.
But the top benefit was "public interest," he said.
"It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters," Curry added at the time.
Without the FDIC
Notably, the new FinTech charter push is being undertaken without the involvement of the Federal Deposit Insurance Corporation. The OCC has "taken the position that they don’t need new legislation to create a special purpose program for fintech," according to Van Cleef.
Companies that seek the charter would be evaluated regarding their likelihood of success, their risk management strategy, the effectiveness of their consumer protection and the strength of their capital and liquidity.
Jesse Powell, founder and CEO of cryptocurrency exchange Kraken, says that bitcoin exchanges have been "captured" by the existing "ancient laws", and noted that he welcomes the proposal.
"Having a rational, federal license to run specific, limited banking functions would be a godsend to the fintech industry, which has to date been severely hobbled by the high costs and lack of options around licensing," Powell told CoinDesk.
Non-profit advocacy group Coin Center emphasized that, while the federal charter would "open up" the possibly of preempting state-by-state licensing laws, it would not completely eliminate the local option.
In a recent blog post, CoinCenter director of research Peter Van Valkenburgh wrote:
"A federal charter would be a very sensible option for companies in the digital currency space who, because of the nature and of the Internet and digital currency networks, operate globally from day one."
Times are changing
The plans, unveiled last week by the OCC, are aligned with similar efforts currently underway in Switzerland to create a "crypto-bank" for digital currency companies.
In March, the OCC published a white paper laying the groundwork for "responsible innovation" within the banking sector.
During a public comment period, several blockchain industry leaders (including Coinbase, Circle and Ripple) have published notes in support of a measure to modernize the regulatory body's requirements, making it easier for tech companies to serve their customers while still ensuring the protection of investors and consumers
Then, last month Switzerland’s own Financial Market Supervisory Authority published its plans to create an innovation-friendly environment in which newly conceived “crypto-banks” could thrive while still protecting interested parties.
The paper describing the fintech charter is currently available on the OCC’s site and a period of public comments will end on 15th January 2017.
While Van Cleef is excited about the potential impact the charter could have on cryptocurrency exchanges and similar kinds of services, she warns the compliance requirements would likely exceed anything the industry has experienced thus far.
Van Cleef concluded:
"The standards that they’re going to have to meet to get a bank charter are much higher than what they’re being expected to do today."
Piggy bank image via Shutterstock