As regulators from across the US government continue to grapple with the rapid expansion of financial technology (FinTech) and digital assets, the Office of the Comptroller of the Currency (OCC) has adopted a welcoming position toward such technology and taken three recent steps with the potential to significantly benefit industry. First, the OCC is planning to propose a new national bank charter for payments companies, including those dealing with digital assets, that may allow such companies to obtain a single national license rather than licenses in each state in which they operate. Second, on July 22, 2020, the OCC issued an interpretive letter clarifying that national banks and federal savings associations may provide cryptocurrency custody solutions on behalf of their customers. Third, on June 4, 2020, the OCC issued an advanced notice of proposed rulemaking (ANPR) seeking comments on the digital activities of national banks and federal savings associations. All three developments have the potential for significant, positive impact on industry.
OCC to Propose Payments Charter
Acting Comptroller of the Currency Brian Brooks first floated the idea of a “payments charter” for use by companies in the FinTech and cryptocurrency industries when speaking at Consensus in May of this year. According to Brooks, the charter would allow such companies to obtain a national license and avoid the complexity of the state money transmitter licensing regimes. On June 25, 2020, Brooks appeared on a podcast for the ABA Banking Journal and offered more details on the idea. According to Brooks, the payments charter would be a “national version of a state money transmission license” and offer payments companies a “national platform with preemption.” The OCC plans to unveil this charter in the fall of 2020.
Currently, most payments companies are regulated as money transmitters under federal and state law. This means, depending on the specifics of a given business, a company may need to register with the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and apply for licenses in nearly every state and territory in which it operates (only Montana has no money transmitter licensing regime). The process of dealing with nearly 50 applications and 50 different regulators can lead to significant cost and complexity for such companies. A national payments charter obviating the need for state money transmitter licenses could go a long way toward alleviating those pain points. With that said, the charter would be a banking charter, meaning applications would likely include most of the same requirements applicable to full service banks and companies that received a charter would have ongoing compliance obligations similar to those of full service banks. Therefore, choosing between the traditional state money transmitter process and the OCC process may not be as straight forward as it sounds.
In addition, the OCC’s plan is likely to face legal challenges from state regulators. A similar special purpose national bank charter for FinTech companies, first announced in 2018, stalled after state financial regulators, led by the New York Department of Financial Services, challenged the OCC’s authority to offer such charters. That battle remains ongoing and is currently pending before the Second Circuit. A payments charter would likely face similar objections from the states, but the OCC seems unphased and is planning to move ahead despite this threat.
Authority to Custody Cryptocurrency
On July 22, 2020, the OCC published Interpretive Letter #1170, which concludes that “providing cryptocurrency custody services, including holding the unique cryptographic keys associated with cryptocurrency, is a modern form of  traditional bank activities.” The letter further clarifies that providing such services is permissible in both a fiduciary and non-fiduciary capacity. Non-fiduciary services include “safekeeping for the cryptographic key that allows for control and transfer of the customer’s cryptocurrency” and fiduciary services include acting as a trustee, executor of a will, administrator of an estate, a receiver, or an investment advisor, among other similar capacities. According to the OCC, fiduciary services must also be compliant with other OCC regulations regarding fiduciary activities and any other applicable laws, including state laws. The letter applies to both national banks and federal savings associations (FSAs).
Not surprisingly, the letter warns that national banks and FSAs engaging in new custody services “should develop and implement those activities consistent with sound risk management practices and align them with the bank’s overall business plans and strategies as set forth in OCC guidance.” This includes developing “adequate systems … to identify, measure, monitor, and control the risks of its custody services” and “effective internal controls include[ing] safeguarding assets under custody, producing reliable financial reports, and complying with laws and regulations.” Among other provisions, these systems and controls should cover accounting records, segregation of assets from the custodian’s own assets, settlement of transactions, physical access controls, and other security measures. However, the letter notes that sub-custodians may be used where the bank or savings association has determined that the sub-custodian’s operations have proper internal controls. The letter makes a point of highlighting that such systems and controls may need to be specifically tailored to cryptocurrency, particularly with respect to access controls, which the letter states “will differ from the procedures used for physical assets.” Therefore, it is important that national banks and FSAs carefully consider whether they have appropriate internal controls and related safeguards in place prior to offering such services.
How many OCC-chartered institutions will enter into this space remains to be seen. There is undoubtedly demand for safe custody solutions as many consumers and businesses report using bank safe deposit boxes for secure cold storage of digital assets. Registered investment advisers subject to the SEC’s custody rule can also struggle to find a “qualified custodian” for customer funds and securities as required by the rule.
Banks and FSAs seeking to expand offerings in this space will face competition from trust companies, broker-dealers, and a variety of FinTech companies that already provide custody solutions. However, the space is still developing, and many have suggested that reliable and reputable custody solutions would attract further institutional trading and regulated investment adviser participation. It therefore seems that an opportunity exists for bank and FSA custodians, whether through organic development or partnership with another entity.
Digital Activities ANPR
On June 4, 2020, the OCC issued an ANPR on the digital activities of national banks and federal savings associations. The ANPR is part of a “comprehensive review” of the OCC’s regulation of digital activities in the federal banking system. According to the ANPR, “The goals of this review are to evaluate whether these regulations effectively take into account the ongoing evolution of the financial services industry, promote economic growth and opportunity and ensure that banks operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” The ANPR includes ten specific questions relating to topics such as artificial intelligence and machine learning, cryptocurrency, distributed ledger technology, and new payments technologies, among others. Considering the breadth and generality of the ANPR, it is difficult to assess how the OCC is likely to update its regulations, but given the other actions discussed in this post, we anticipate the OCC is likely to continue its forward leaning posture with respect to FinTech and digital assets in its future rulemaking.
The Path Ahead
With the payments charter and digital activities rulemaking both set to proceed this fall, we anticipate it will be a busy several months for the OCC. FinTech and digital assets companies should track these developments carefully and Steptoe will continue to provide updates on this blog as developments occur.