- >Banks Get Greenlight to Use Stablecoins, Blockchain for Payment Processing
Banks Get Greenlight to Use Stablecoins, Blockchain for Payment Processing
Banks can use stablecoins to conduct payment activities, according to an interpretative letter published by the US Office of the Comptroller of the Currency on January 4. The OCC writes that blockchains “and related stablecoins represent new technological means of carrying out bank-permissible payment activities.”
Simon Chandler | Jan 8, 2021
Figures within the cryptocurrency industry have taken this letter as a seal of approval for stablecoins like Tether and USDC, one that provides reassurance at a time when other official pronouncements indicate that such stablecoins may end up being classed as securities. However, the letter represents not only an encouraging step forward for stablecoins, but also for cryptocurrencies in general, given the OCC’s acknowledgement of “independent node validator networks” (INVNs, aka blockchains).
In other words, the letter will help pave the way for a future scenario where banks themselves handle bitcoin and other cryptos. However, with their regulatory status remaining decidedly uncertain, it may still be a while before even stablecoins are processed by mainstream banks.
OCC Approves Banks Conducting Payments Using Stablecoins… And Bitcoin
There are several key statements included in the OCC’s letter, which is signed by Jonathan V. Gould, the Senior Deputy Comptroller and Chief Counsel at the Office. Taken together, they state that banks can fully integrate themselves in INVNs, processing transactions involving stablecoins and also serving as a node on stablecoin blockchains.
“Banks may serve as a node on an INVN and use INVNs and related stablecoins to conduct permissible banking activities, including authorized payment activities,” it reads in the Discussion section.
It’s clear that the focus of the letter is on stablecoins and on banks using stablecoins as “a mechanism for storing, transferring, transmitting, and exchanging the underlying fiat currency value, all of which are key to facilitate payment activities.”
However, it also leaves the door wide open for banks to later use bitcoin and other cryptocurrencies, given its general approval of banks using blockchains in general, which must presumably encompass the blockchains for bitcoin, ethereum, and others.
“We therefore conclude that a bank may validate, store, and record payments transactions by serving as a node on an INVN,” Gould writes.
And just to be clear, the OCC does indeed take “INVN” to mean cryptocurrencies in general, and not just stablecoins.
“An INVN consists of a shared electronic database where copies of the same information are stored on multiple computers. One common form of an INVN is a distributed ledger. Cryptocurrency transactions are recorded on these ledgers,” the letter says.
At no point does the letter exclude non-stablecoin cryptocurrencies from the future purview of banks, or explicitly warn against banks carrying out payments using bitcoin or other cryptos. Instead, it notes that the evolution of money and technology is likely to require banks to keep up with the times, and to offer services demanded by customers.
Gould says, “While the OCC neither encourages nor discourages banks from participating in and supporting INVNs and stablecoins, the recent adoption of INVNs and stablecoins by a major payment system operator [PayPal], coupled with the rapid market adoption of INVNs and stablecoins, indicates that banks should evaluate the appropriateness of INVNs and stablecoin participation in order to ensure banks’ continuing ability to provide payment services to their customers in a manner that reflects changing demand.”
This is the OCC facing up to reality. The more institutions and corporations buy bitcoin/crypto during the current bull market, the more banks will lose out by not offering services for these institutions, including the ability to store crypto and transact in it.
Reassurance for Stablecoins?
The OCC’s letter comes at a delicate time for stablecoins. Just before Christmas, the President’s Working Group on Financial Markets — which consists of officials from the US Treasury, SEC, CFTC, and Federal Reserve — issued a statement on regulatory matters regarding “certain stablecoins.”
The key detail in this statement was the Working Group’s insistence that stablecoins could potentially be classified as securities, making them subject to securities law:
“Depending on its design and other factors, a stablecoin may constitute a security, commodity, or derivative subject to the U.S. federal securities, commodity, and/or derivatives laws. If so, the federal securities laws, and/or the Commodity Exchange Act (“CEA”), would govern the stablecoin itself, transactions in, and/or participants involved in the stablecoin arrangement.”
However, with the OCC now advising banks that they can carry out payments using stablecoins, it seems hard to believe that Tether will be classed as a security and that the SEC will come down on it. Otherwise, the OCC has issued bad advice, given that banks would be potentially violating securities laws by transacting with what may be unregistered securities.
That said, some experts seem to think that the OCC may have jumped the gun in delivering its interpretative letter.
“While the OCC’s recent announcement is a win for the digital asset space in general, we must proceed with caution. The regulatory status of ‘stablecoins’ has not yet been resolved and there are a number of stablecoins operating with various levels of state government oversight, inviting questions around counterparty risk,” Arca Labs president Jerald David told me.
Put simply, despite the OCC’s letter, the status of stablecoins still remains uncertain.
Bitcoin Bank Adoption
As for bitcoin and crypto more generally, it may also be some time before mainstream banks actually deal with them as they do with normal fiat currencies. Yes, the OCC seems to have taken one step further down the road of bank adoption, but it’s likely that most major banks will be shy for as long as bitcoin remains volatile and wider regulations remain unclear.
Still, it’s almost certainly only a matter of time before banks make the plunge, if only because crypto will soon become too lucrative to miss out on. In this respect, it’s encouraging to note that various banks have already begun dealing with bitcoin or crypto in some way or another, with Gazprombank offering trading services in Switzerland and DBS Bank in Singapore offering its own exchange.
And with the OCC’s letter removing a potential obstacle in the US, we may soon see American banks increasingly doing the same.