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Federal Banking Agencies Issue Joint Statement on Crypto-Asset Policy and OCC Issues Interpretive Letter on Bank Cryptocurrency Activities
Practical Law Legal Update w-033-5616 (Approx. 6 pages)
Federal Banking Agencies Issue Joint Statement on Crypto-Asset Policy and OCC Issues Interpretive Letter on Bank Cryptocurrency Activities
by Practical Law Finance
| Published on 30 Nov 2021 • USA (National/Federal) |
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) issued a joint statement on the development of policy initiatives related to crypto-asset activities in the US federal banking system. The OCC also issued Interpretive Letter #1179, clarifying that national banks and federal savings associations must demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger, and stablecoin activities.
On November 23, 2021:
- The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, prudential bank regulators) issued a joint statement on the development of policy initiatives related to crypto-asset activities in the US federal banking system and (see Joint statement on crypto-asset policy).
- The OCC issued Interpretive Letter #1179, confirming that national banks and federal savings associations must demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger, and stablecoin activities (see OCC Interpretive Letter #1179: Approval of Bank Crypto Activities).
Both items are part of interagency efforts to address crypto-assets activity in the federal banking system.
Joint Statement on Crypto-Asset Policy
In the joint statement, the prudential bank regulators note that as:
- The supervised institutions seek to engage in crypto-asset-related activities.
- The prudential regulators will seek to provide coordinated and timely clarity where appropriate to promote:
- safety and soundness;
- consumer protection; and
- compliance with applicable laws and regulations, including anti-money laundering (AML) and illicit-finance statutes and rules.
The prudential regulators report in the joint statement that they recently conducted a series of interagency "policy sprints" focused on crypto-assets, using a methodology similar to the "tech sprint" model where agency staff with various backgrounds and relevant subject matter expertise conducted preliminary analysis on various issues regarding crypto-assets. The joint statement summarizes the work undertaken during these policy sprints and provides a roadmap to future planned banking agency work in this area, which will include:
- Developing a commonly understood vocabulary using consistent terms regarding the use of crypto-assets by banking organizations.
- Identifying and assessing key risks, including those related to safety and soundness, consumer protection, and compliance, and considering legal permissibility related to potential crypto-asset activities conducted by banking organizations.
- Analyzing the applicability of existing regulations and guidance and identifying areas that may benefit from additional clarification.
According to the joint statement, the emerging crypto-asset sector presents both potential opportunities and risks to banking organizations, their customers, and the overall financial system. The joint statement also provides a review and analysis of a number of crypto-asset activities in which banking organizations may be interested in engaging including:
- Crypto-asset custody.
- Facilitation of customer purchases and sales of crypto-assets.
- Loans collateralized by crypto-assets.
- Activities involving payments, including stablecoins.
- Activities that may result in the holding of crypto-assets on a banking organization’s balance sheet.
The interagency policy sprints sought to quickly advance and build on the combined knowledge of the prudential regulators to identify and assess key issues related to potential crypto-asset activities conducted by banking organizations, including a review of comment letters submitted in response to the FDIC’s May 17, 2021 request for information (RFI) on digital assets that sought information and comment regarding current and potential future digital asset activities of banks (see Legal Update, FDIC Issues RFI, Federal Regulators Signal Focus on Digital Assets).
Based on this work, the banking agencies have identified a number of areas they plan to focus on throughout 2022 as a crypto-asset roadmap for future work designed to provide greater clarity on whether certain crypto-asset activities by banking organizations are legally permissible under existing laws and regulations related to:
- Crypto-asset safekeeping and traditional custody services.
- Ancillary custody services.
- Facilitation of customer purchases and sales of crypto-assets.
- Loans collateralized by crypto-assets.
- Issuance and distribution of stablecoins.
- Activities involving the holding of crypto-assets on balance sheet
OCC Interpretive Letter #1179: Approval of Bank Cryptocurrency Activities
On November 23, 2021, the Chief Counsel of the Office of the OCC issued Interpretive Letter #1179, dated November 18, 2021 (OCC Interpretive Letter #1179), which clarifies that national banks and federal savings associations must demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger, and stablecoin activities, as specified in certain prior OCC interpretive letters on the cryptocurrency activities of banks.
OCC Interpretive letter #1179 clarifies that the cryptocurrency activities discussed in certain prior OCC interpretive letters are legally permissible for national banks and federal savings associations (collectively, banks), provided the bank can demonstrate, to the satisfaction of its OCC supervisory office, that it has controls in place to conduct the activity in a safe and sound manner. The prior interpretive letters specifically addressed in OCC Interpretive Letter #1179 (prior OCC interpretive letters) are:
- OCC interpretive letter #1170 (July 22, 2020), addressing whether banks may provide cryptocurrency custody services (see Legal Update, OCC Clarifies Authority of Banks to Provide Cryptocurrency Custody Services).
- OCC interpretive letter #1172 (Sept. 21, 2020), addressing whether banks may hold dollar deposits serving as reserves backing stablecoin in certain circumstances (see Legal Update, OCC Issues Interpretive Letter Clarifying Authority of Banks to Hold Reserves Backing Stablecoins).
- OCC interpretive letter #1174 (Jan. 4, 2021), addressing whether:
- banks may act as nodes on an independent node verification network (i.e., distributed ledger) to verify customer payments; and
- banks may engage in certain stablecoin activities to facilitate payment transactions on a distributed ledger (see Legal Update, OCC Clarifies Authority of Banks to Use Stablecoins to Conduct Payment Activities and Other Banking Functions).
Under OCC Interpretive Letter #1179:
- A bank should notify its relevant OCC supervisory office (12 CFR § 4.5 - Other OCC supervisory offices), in writing, of
- its intention to engage in any of the cryptocurrency activities addressed in the prior OCC interpretative letters; and
- should not engage in the activity until it receives written non-objection from the relevant OCC supervisory office.
- The supervisory office will then evaluate the adequacy of the notifying bank's risk-measurement systems and risk-management systems and controls to enable the bank to engage in the proposed activities:
- in a safe and sound manner; and
- in compliance with all applicable law.
OCC Interpretive Letter #1179 also:
- Reiterates that OCC Interpretive Letter #1176 (Jan. 11, 2021) which addressed the OCC’s chartering authority did not expand or otherwise change the existing obligations of banks under the OCC’s fiduciary activities regulation (12 CFR 9).
- Clarifies that the OCC retains discretion to determine, for purposes of federal law, whether an activity is a trust activity and whether an activity is conducted in a fiduciary capacity.
OCC Interpretive Letter #1179 also explains:
- That a bank may demonstrate that it will engage in the activities described in interpretive letters #1170, #1172, and #1174 (OCC specified cryptocurrency activities) in a safe and sound manner to the OCC by providing the bank's OCC supervisory office with written notification of the bank's proposed OCC specified cryptocurrency activities.
- The criteria that the OCC will follow to evaluate the proposed bank activity and to provide a supervisory non-objection to the bank, which include:
- the adequacy of a bank’s risk measurement and management information systems and controls to enable the bank to engage in the proposed activities on a safe and sound basis;
- any other OCC supervisory considerations relevant to the particular proposed activities including consultation with OCC subject matter experts as appropriate; and
- the OCC assessment as to whether the bank has demonstrated that it understands and will comply with laws that apply to the proposed activities.
If a bank receives a supervisory non-objection from the OCC to any of these OCC specified cryptocurrency activities, the OCC will review these activities as part of its ordinary supervisory processes of the bank.