When Brian Brooks took on the role of currency interpreter for the Office of the Currency Controller (“OCC”) in May 2020, many in the industry knew that some of Brooks ’focus would be on fintech technology and blockchain.
Brian Brooks, OCC
OCC
Since then, the OCC has provided letters of interpretation and guidance to clarify that banks can guard cryptocurrencies and establecoins, as well as participate in stablecoin activities. The OCC also created a Letter of Payments for Special Purposes for FinTech Companies. In December, OCC chief economist Charles Calomiris published a paper entitled “Chartering the FinTech Future,” in which Calomiris outlined the benefits of the OCC providing bank letters to stablecoin providers.
Today’s interpretive letter
Today the OCC released interpretative letter 1174, which explains that banks can use new technologies, including independent and stable node verification networks (INVNs), to perform permitted banking functions, such as payment activities. Simply put, a bank can use stablecoins (cryptocurrencies designed to minimize price volatility) to facilitate payment transactions to customers.
By doing so, a bank can issue stablecoins, exchange stablecoins for fiat currency, as well as validate, store, and record payment transactions as a node in a blockchain (INVN).
Justification
Today’s OCC news is innovative and exciting. Not because it is a big pivot of how banks have traditionally worked, but because the OCC is doing a remarkable job following the changing technology and landscape. Many criticize the US for stifling innovation and not allowing companies to evolve with innovative technology that would improve our financial system. Well, the OCC does just the opposite. Brooks continues to move carefully but quickly.
As the current OCC interpretative letter points out, “over time, banks’ financial intermediation activities have evolved and adapted in response to changing economic conditions and customer needs. Banks have adopted new technologies to carry out permitted banking activities, including payment. . The changing financial needs of the economy are well illustrated by the increasing demand in the market for faster and more efficient payments through the use of decentralized technologies, such as international investments, which validate and record financial transactions. including stable currency transactions. ”
Banks have always been a place where customers could store valuables to store them and over time they became a key part of our financial and payment infrastructure. The history of the American banking system (since the passage of the National Bank Act in 1863, the Federal Reserve Act in 1913, and the creation of the FDIC in the Banking Act of 1933) tells a history of regulation that adapts to economic realities and changing technology.
HONG KONG, HONG KONG – JULY 13: A man has a smartphone with the PayPal app at … [+]
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Stephen Palley, a partner at Washington DC law firm Anderson Kill, drew the analogy with the demand for Internet banking, explaining that “the first Internet banking received OCC approval and is now ubiquitous. , despite initial concerns about the security or practice of this technology for secure banking. The OCC continues to show interest and a desire to relate to the new financial technology that consumers are demanding. “
Seen in this historical context, the latest OCC letter fits directly into the framework of a conservative prudential regulator that creates rules of the road for new and powerful technology and adapts to changing times and customer needs. .
What it really means
So what does this really mean for payment systems as we know them today?
Although the U.S. financial system operates relatively smoothly, traditional payment rails remain slow, expensive, and subject to banking hours and holidays.
The OCC guidelines open up the possibility for banks to use INVNs and stables to transfer funds between financial institutions more quickly and without the need for a government intermediary.
Kristin Smith, executive director of the Blockchain Association, pointed out to me, “The OCC’s interpretive letter shows that there are people in government who truly understand that cryptocurrency networks are the basis of a next-generation payment system. “Stablecoins, like USDC, can generate faster, 24-hour payments in a way that the existing payment infrastructure in the United States cannot handle.”
Nic Carter, a partner at Castle Island Ventures, added that this will allow banks to “take advantage of the ever-active functions of public blockchains.”
Banks that adopt the use of INV and stable can also greatly increase the efficiency of cross-border transactions, but this will require U.S. and foreign banks to implement a lot of technology.
Carter warned, “I don’t see stable currencies immediately replacing traditional financial rails, but this is a vital first step in normalizing the notion of public blockchains as an alternative liquidation infrastructure that banks can freely adopt.”
The future of finance looks bright.