The Federal Reserve Board, FDIC, and OCC (collectively, the âAgenciesâ) issued a short Joint Statement on Crypto Assets Policy Sprint Initiative and Next Steps (âJoint Statementâ), which announced – without further concrete details – that it had drawn up a âcrypto-asset roadmapâ to further clarify in 2022 banks on the legality of certain crypto-asset activities. Only the previous week, the head of the OCC published Interpretive Letter # 1179, which confirmed that a national bank or federal savings association could engage in certain cryptocurrency, distributed ledger, and stablecoin activities – in accordance with earlier OCC letters – as long as a bank shows that ‘It has sufficient controls and first obtains a written “no objection” notice from its supervisory office. This article will discuss both publications.
There is a great overlap between the banking activities referenced in the Joint Statement and Interpretive Letter 1179. The clarity of 2022 promised by the âroadmapâ will likely replace, once published, Interpretation Letter 1179. , which appears to work as a general stopgap until the 2022 posts hopefully provide more detail on exactly how banks can achieve compliance.
Federal banking regulators have been busy in this space. These declarations come in the wake of a Stablecoins Report released earlier in November by Agencies and the President’s Financial Markets Task Force, which delineated the perceived risks associated with the increased use of stablecoins and highlighted three concerns: Risks to rules governing compliance with the fight against money laundering (âAMLâ), risks to market integrity and general prudential risks.
A ‘crypto asset roadmap’ promising future clarity
In the joint statement, the agencies say they “recognize that the molten cryptoasset industry presents potential opportunities and risks for banking organizations, their customers and the entire financial system.” Accordingly, âit is important that [the Agencies] provide coordinated and timely clarity, where appropriate, to promote safety and robustness, consumer protection and compliance with applicable laws and regulations, including [AML] and the status and rules of illicit financing. The joint statement therefore provides a âcrypto asset roadmapâ – the five points set out below – regarding the topics on which the agencies âplan to provide greater clarityâ. [throughout 2022] on whether certain crypto-asset related activities carried out by banking organizations are legally permitted, and expectations for safety and soundness, consumer protection and compliance with applicable laws and regulations[.]The five themes of the âroadmapâ are:
- Crypto-asset custody and traditional custody services.
- Auxiliary child care services.
- Facilitation of customer purchases and sales of crypto-assets.
- Issuance and distribution of stablecoins.
- Activities involving the holding of crypto-assets on the balance sheet.
In other words: While the joint statement does not provide any concrete details, stay tuned for further clarity throughout 2022 for banks regarding crypto assets and the associated security and soundness concerns. In theory, this potential regulatory clarity looks promising – but of course, the devil is in the details, and the end product will have to be judged by its actual usefulness. The joint statement also notes that the agencies will assess banks’ capital and liquidity standards for crypto assets for activities involving U.S. banking organizations.
Interpretative clarification of the OCC
OCC Interpretation Letter 1179 refers to three previous OCC Interpretation Letters:
- Interpretive letter OCC 1170, published on July 22, 2020 and indicating whether banks can provide cryptocurrency custody services;
- Interpretive letter of OCC 1172, published on September 21, 2020 and indicating whether banks can hold dollar deposits used as reserves backed by stablecoins in certain circumstances; and
- Interpretation OCC 1174, published on January 4, 2021 and indicating (1) whether banks can act as nodes on an independent node verification network (e., distributed ledger) to verify customer payments, and (2) whether banks can engage in certain stablecoin activities to facilitate payment transactions on a distributed ledger.
The three interpretative letters above concluded that banks could carry out the activity in question, if certain conditions were met. Distilled, the interpretative letter n Â° 1179 confirms that the activities described in the preceding interpretative letters are âlegally authorized to engage for a bank, provided that the bank can demonstrate, to the satisfaction of its supervisory office, that it has controls in place to carry out activities in a safe and healthy manner. Above all, a national bank or a federal savings association wishing to engage in one of the activities described above must inform its supervisory authority in writing and must not engage in such activities before having received a written notification of âno objectionâ from the supervisory authority. As always, the adequacy of the bank’s risk management systems will be critical to this determination. To obtain a supervisory no-objection, a bank must demonstrate in writing that it understands all relevant compliance obligations, including under bank secrecy law, federal securities laws, federal law on the commodity exchange and consumer protection laws. Once a bank has received a prudential no-objection, the OCC will review these activities as part of its regular supervisory process. It’s unclear exactly how regulators will act – or not – on no-objection requests before agencies release the clarity promised by the âroadmapâ sometime in 2022.
Interpretive Letter 1179 provides that banks already engaged in cryptocurrency, distributed ledger, or stablecoin activities as of the date of the letter do not need to obtain a supervisory no-objection, in assuming that they have previously notified their oversight offices and have adequate systems and controls in place to ensure that they are operating in a safe and sound manner.[View source.]