On November 23, 2021, the Office of the Comptroller of the Currency (OCC) released Interpretive Letter 1179 (the “Letter”), which is the culmination of a review of previous Interpretive Letters on cryptocurrency and related activities. . The letter sets out a process that requires notice and non-objection before a national bank or federal savings association (collectively, “banks”) can engage in such activities. On the same day, the OCC, together with the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) (collectively, the “Agencies”), issued the Joint Statement on Crypto Assets Policy Sprint Initiative and Next Steps (the “Statement”), which detailed the Agency’s policy sprint on crypto assets and the work undertaken by the Agencies to conduct an analysis of issues related to crypto assets. Taken together, and in the context of other recent government issues, the letter and statement represent an ongoing and increasingly forceful government effort to regulate crypto assets and crypto-related products and activities.
Interpretative Letter 1179
Regulation of cryptocurrency activities
After taking office in May 2021, Michael J. Hsu, Acting Controller of the OCC, announced a revision of the OCC Interpretation Letters (IL) 1170, 1172 and 1174 (collectively, the “prior letters “).
- IL 1170 (July 2020) authorized banks to provide cryptocurrency custody services, including holding crypto keys associated with the cryptocurrency.
- IL 1172 (October 2020) authorized banks to hold stablecoin reserves as a service to bank customers, subject to certain conditions.
- Weighing the eligibility of banks acting as nodes on independent node verification networks and engaging in related stable activities, IL 1174 (January 2021) announced that banks may use new technologies to perform functions authorized by banks.1
Each of the advance letters emphasized that a bank must manage risk effectively and comply with applicable law, but the advance letters have also represented a trend in OCC to enable banks to adopt new technologies and respond to demands. the demand for faster, cheaper and more efficient services. Payments.
But the OCC’s open arms policy to new technology has become somewhat of a firmer embrace with the results of Acting Controller Hsu’s review, as published in the letter. The letter clarifies that the activities authorized by the previous letters are only authorized for a bank after the bank has demonstrated, to the satisfaction of its supervisory office, that the bank has put in place adequate controls for such activities. . Specifically, before a bank can engage in certain cryptocurrency, distributed ledger, and stablecoin activities, the bank must: (1) notify its supervisory office of its intention to engage in such activities; and (2) receive written notification of no objection from the monitoring office. This so-called clarification appears to be an entirely new requirement, as none of the preliminary letters include a requirement for formal notice and no objection.2
The letter sets out a process for a bank to adequately demonstrate its understanding of applicable law, and that it has established appropriate risk management and measurement processes for the proposed activities. The letter also describes the criteria that the supervisory office will use to assess the Bank’s controls, for example, whether the Bank has demonstrated that it understands and will comply with applicable law. Once an activity receives non-objection from the OCC, the OCC will review the activity as part of its regular monitoring process.3
In the statement, the agencies noted that the emerging crypto-asset industry presents both risks and opportunities, and that agencies should provide coordinated and timely clarity to promote safety and soundness, protect consumers. and compliance with applicable laws. To achieve this goal, the agencies conducted interagency “policy sprints” in which agency staff from a variety of backgrounds and expertise analyzed issues related to crypto assets.
In particular, the sprints focused on:
- Develop a common vocabulary;
- Identify and assess the main risks, including risks related to safety and soundness, consumer protection and compliance with applicable laws;
- Considering the legal eligibility related to potential crypto-asset activities carried out by banking organizations; and
- Analyze the applicability of existing regulations and guidance and identify areas requiring clarification.
Agency staff also focused on crypto-asset activities that banking organizations may be interested in engaging in, including custody of crypto-assets, facilitating purchases and sales by clients of crypto-assets, loans backed by crypto-assets, activities involving payments, and activities that may result in the holding of crypto-assets on a bank’s balance sheet.
After identifying areas requiring clarification, the agencies developed a roadmap for crypto assets, which is included in the statement and outlines the areas in which the agencies plan to provide greater clarity on the eligibility of these activities. to banking organizations. These include:
- Crypto-asset custody and traditional custody services;
- Auxiliary childcare services;
- Facilitation of purchases and sales of crypto-asset customers;
- Loans secured by crypto-assets;
- Issuance and distribution of stable coins; and
- Activities involving the holding of crypto-assets on balance sheets.
In consultation with the Basel Committee on Banking Supervision, the agencies also plan to assess the application of bank capital and liquidity standards to cryptoassets for activities involving U.S. banking organizations.
The bigger picture
On November 1, 2021, the President’s Financial Markets Working Group (GTP),4 with FDIC and OCC, issued a Stablecoins Report,5 recommend comprehensive federal legislation, including the requirement that stablecoin issuers be insured depositories, and enforcement based on the existing regulatory authority. The Financial Crimes Enforcement Network released a series of news releases related to cryptocurrency and associated risks, most recently on November 8, 2021, identifying new trends and typologies in ransomware and associated payments, including the growing proliferation of crypto – enhanced anonymity currencies and decentralized mixers.6 In this regard, the letter and statement are just the latest government-wide efforts to clarify the new regulatory framework for cryptoassets.seven
1 Read our customer alert on IL 1174.
2 The previous standard provided for consultation with the Bank’s Supervisory Office, but not a formal notice and no objection process.
3 The letter also clarifies that IL 1176, which concerned the charter power of the OCC, did not modify the existing obligations of a bank under the regulations on fiduciary activities of the OCC, and that The OCC retains its discretion in determining whether an activity is conducted in a fiduciary capacity under federal law. .
4 The PWG is made up of the Secretary of the Treasury and the respective Chairs of the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
5 Read our Customer Alert on the PWG Report.
6 For more related information, please see our Customer Alert.
7 There is also a global trend to further develop the regulatory regime for cryptoassets, and on October 28, 2021, the Financial Action Task Force released Update
Advice for a risk-based approach for virtual assets and virtual asset service providers, which updates the guidance from 2019. Among other things, the updated guidance clarifies definitions of virtual assets and provides guidance on associated risks and risk mitigation tools.
Due to the generality of this update, the information provided here may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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