New OCC Regulations a 'Double-edged Sword for Crypto Sector'

A week ago, the Office of the Comptroller of the Currency, a bureau of the US Treasury responsible for regulating banks, issued a letter stating that national banks can use blockchains and stablecoins for payment services.

Though the news has since been crowded out by Bitcoin’s rise and crash, as well as political revolt in the nation’s capital and a tech revolt on social media, the implications may soon be far-reaching. Banks with a national charter, said the OCC, may use blockchains and “related stablecoins” for payment activities.

Many deemed the news a win for cryptocurrency, including Circle CEO Jeremy Allaire. His company—along with major crypto exchange Coinbase—is responsible for USDC, the second-largest stablecoin by market cap.

“The new interpretive letter establishes that banks can treat public chains as infrastructure similar to SWIFT, ACH and FedWire, and stablecoins like USDC as electronic stored value,” he tweeted. “The significance of this can’t be understated.”

But the truth is more complicated, according to both crypto supporters and detractors.

Caitlin Long, the Wall Street veteran who helped craft a slate of blockchain laws in Wyoming, told Decrypt, “Net-net, I see the OCC letter as a double-edged sword for the crypto sector.”

According to Long, the guidance could allow big banks to crowd out crypto upstarts as a national bank likely won’t need approval from federal regulators before getting into stablecoins. 

“But smaller banks and crypto companies applying for bank charters need to obtain prior approval before they can dive in,” she said. “This system inherently favors large banks, and literally tomorrow we could see the biggest banks in the US enter the market and build network effects faster than smaller banks and native crypto companies.”

That could resemble a corporatocracy fueled by regulatory capture. Brian Brooks, Acting Comptroller of the Currency, moved directly from being Chief Legal Officer of Coinbase, one of the most powerful cryptocurrency companies in the US, to regulating the country’s banks at the OCC.

Rohan Grey helped draft the STABLE Act, which would require companies issuing a stablecoin to get a bank license. He told Decrypt, “The good news here, I think, is that the letter affirms that stablecoin activities are part of the business of banking, and should be properly regulated as such and restricted to approved entities.”

However, he doesn’t think “letting banks outsource payments and depository infrastructure to public blockchains and third party stablecoin issuers” is a very safe approach.

Long, though, thinks banks could run into some roadblocks on this front. “For example, banks are required to obtain acknowledgement of fee disclosures from their customers—but I know of no ERC-20 wallets designed for users to provide advance acknowledgement prior to transacting,” she said. “These are attack vectors for regulators to use against native crypto companies that have issued stablecoins, which inherently do not comply with these rules.”

But some companies are better positioned than others. Circling back around to Circle, the result might just be an OCC approach that entrenches a few well-positioned players in the crypto industry. 

“I see this as more nuanced than just traditional banks vs crypto,” Grey said. “Circle, for example, is I think quite happy with this outcome, which positions them perfectly to glob onto the side of the traditional banking system and leave its less 'mainstream' crypto competitors (Tether, Dai) behind.”