In recent months, the Currency (OCC) Federal Office has signed a more allowable bearing of regulation to national banks and federal savings associations (together, banks) engaged in crypto asset activities. “I will continue to work diligently to ensure that the regulations are effective and not excessive, while maintaining a powerful federal banking system,” said money comptroller Rodney E. Hood earlier this year.
On March 7, OCC initiated its formalization as it moved away from the Biden-era strategy in regulating banks asset activities with the release of Letter of Interpretive 1183. Through this letter of interpretation, the OCC saves the administration of the non-objection process for banks seeking to engage in crypto asset activities, and thus eliminate significant red tape around banks’ capabilities to do so. This letter re -confirmed the previous OCC guide allowing banks to engage in a range of crypto asset activities.
Occ followed this action in May with Letter of Interpretive 1184. In it, the OCC has confirmed that banks can engage in several crypto asset activities and face the duties of third-party-party service providers-such as fintech companies-can play with those activities. The interpretive letter usually supports the involvement of third parties with them.
Key Takeaways:
- The OCC will no longer require banks to undergo a management process that does not deduct (see definition below) before offering products and services related to crypto assets to their customers. OCC-controlled banks can now offer crypto-asset products and services without having to show that they have enough processes of compliance with the area.
- Removal of this process significantly lowers barriers to crypto-asset banking activities that become wider. Administration expectations still apply. OCC is likely to still use administration tests to check if banks have implemented strong controls to manage the risks associated with crypto asset activities.
- The OCC also confirmed that banks can provide asset precautionary services, hold funds as a reserves of stablecoins, and provide some payment services related to stablecoins, including acting as nodes for shared ledgers related to validating customers’ payments and facilitating transactions on a paying ledger.
- Regarding the crypto-asset service services at least, the OCC confirmed that banks could use third-party sub-custodians to provide precautionary services, subject to appropriate third-party risk management skills.
- Banks interested in offering crypto asset products and services to customers should check the existing OCC guide to identify obligations and expectations of compliance. Expect the OCC guide to change as crypto asset activities grow old and get a broader adoption to the banking industry.
- Because crypto-asset activities are still a novel in the banking industry, banks can benefit from getting an active approach to identify the appropriate controls and processes for managing the risks associated with crypto-asset and service products.
What do recent interpretive letters do
The recent OCC letters suggest a transition from the more careful and restrictive approach that the agency has taken under the Biden Administration and the OCC’s confidence in the capabilities of banks to manage the risks associated with crypto asset activities. They have proven that banks are allowed to engage in certain crypto asset activities and clearly allow third-party service operators to provide asset precautionary services (to become “sub-custodians”). They also provide banks with a green light to explore the opportunity of crypto assets as opportunities may arise by removing the non -deduction process that is first adopted in 2021.
Previously, a bank’s ability to engage in crypto asset activities was forced by a non-objection process adopted in 2021 that needed banks to obtain OCC tacit approval before engaging in such activities. The recent OCC interpretive letters have removed this non -objection process.
What crypto-asset activities are allowed?
- Interpretive 1170-Provides Banks to provide Crypto assets Services with both fiduciary and non-fiduciary capacities as part of their traditional precaution and precautionary activity.
- Interpreting Letter 1172 -Allows banks to receive and hold deposits from Stablecoin Issuers, including reserves for stablecoins associated with in -law purse.
- Letter of Interpretive 1174-Provides banks engage in certain payment-related activities involving stablecoins, including acting as nodes for an independent node verification network (ie, a shared ledger) related to verifying customers’ payments and facilitating payment transactions with a shared ledger.
In its recent interpretive letters, the OCC has reaffirmed that these crypto asset activities still allow banking activities. The OCC also clearly confirms that banks can use third-party, indicating that the OCC can also support third-party service providers participating in other banks’ asset activities.
What is the process of administering Occ non -objection?
Under the now rescinded letter of Interpretive 1179, banks seeking to engage in crypto asset activities are required to inform their OCC Supervisory Office and get a written non-reduction before proceeding.
Non-deduction letters will only be released if the bank shows, at the satisfaction of the office office, that it has sufficient risk management processes to identify, measure, monitor, and control the potential risks associated with planned asset-asset activities.
In addition, banks need to present a clear understanding of laws applicable to planned crypto-asset activities, such as lawral securities laws, anti-perad laws, and consumer protection laws.
Removal of this non-objection process eliminates a significant regulation of banks’ capabilities to engage in asset-asset activities. However, its removal does not forgive the banks of their responsibility to effectively manage the risks associated with these activities.
Managing the risk of crypto-asset risk is forward
Moving forward, these activities will be evaluated by the OCC as part of the regular administration process. This means that banks engaged in crypto asset activities should still ensure that such activities are carried out in a safe, sound, and fair manner and adherence to applicable law. If a third-party service provider-like a FinTech company-is involved with them, banks are expected to implement the appropriate third-party risk management skills.
By removing the non-objection barrier, the OCC has put a greater responsibility on the banks to implement appropriate comprehensive frameworks at risk management. They can be easier to incorporate crypto -related products and services into their offerings as a result.
However, the OCC is likely to expect banks to implement strong controls to manage the risks associated with these activities corresponding to those structured in previous OCC guides and guides. Example:
- Crypto-asset-asset custody services say strong security controls are required to avoid mismanagement of cryptographic keys, which can lead to losses that are irresistible. The OCC recommends dual controls, separation of duties, and safe storage solutions (for example, cold wallets) to avoid unauthorized access, along with stable audit procedures for effective key cryptographic key management.
- Handling stablecoin reserves -OCC has highlights the risk of liquidity and compliance with appropriate capital and liquidity regulations as the main areas of remembering, especially if the reserve balances are not aligned with the remaining stablecoins. Accordingly, if they hold stablecoin reserves, banks must maintain sun -day -to -day reserve requirements to ensure a 1: 1 supporting stablecoin of FIAT, and they should also establish contractual restrictions with stablecoin providers to ensure that the redemption obligations will not exceed reserves.
- Stablecoin payment activities-OCC’s expectation that banks meet anti-money laundering, cybersecurity, fraud, and consumer protection risks associated with the complexity of blockchain-related transactions that are safe and in compliance with the appropriate laws, specifically given the potential pseudo-annon-nature of such transactions.
Banks engaged in crypto asset activities should be aligned with these expectations. However, crypto asset activities remain relatively novel compared to traditional banking activities, and compliance with compliance questions may not be fully understood. OCC safety and sound expectations may change and new law may change applicable laws. Keeping up to date with regulation surrounding crypto asset activities is likely to be key for banks engaged with them.
Banks engaged in crypto asset activities can remain in advance of new regulatory development by obtaining an active approach to managing these risks, such as developing stable management frameworks to prevent regulations that gaps and engage in regulators and industries to inform administration expectations.
