OCC, SEC and Fincen crypto verdicts empower banks, but anger fintechs

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Several government agencies have made deeper moves into crypto oversight, leaving a trail of angry executives and unresolved political questions. And there's still no sign of a central bank digital currency, leaving the U.S. at risk of falling behind other countries in the race to support faster payment processing.

The Office of the Comptroller of the Currency late Monday allowed banks to use stablecoins to settle financial transactions. That means banks can support stablecoin payments and use stablecoins for other bank-regulated functions.

The OCC's action comes quickly after two unrelated moves from other regulators. The SEC is suing Ripple over claims Ripple raised funds selling XRP without registering it as a security, while the Financial Crimes Enforcement Network, or Fincen, in late December proposed new data storage regulations for crypto wallets, angering Square CEO Jack Dorsey and other fintech execs.

The OCC's move is designed to widen bank support for stablecoins, which are often used to hedge against cryptocurrency's notorious volatility, and are part of most cryptocurrency payment initiatives. The OCC's letter says banks can serve as nodes on a blockchain and store or validate payments, potentially allowing blockchains to function similarly to Swift, ACH or FedWire — a move that can benefit faster payment projects.

The letter had two different takes on risk, saying banks should be aware of fraud and other risks in using blockchain, yet saying the many nodes on a blockchain add resiliency and guard against tampering (the OCC used the more official term "independent node verification network" for blockchain).

Most immediately, the OCC's ruling would appear to be good news for JPMorgan Chase, which recently reorganized its blockchain units into Liink, a network for blockchain-supported cross-border payments; and Onyx, which includes Liink and other projects such as JPM Coin. JPM Coin is designed to improve processing for wholesale and treasury management clients, and was already creating pressure for other large banks, which have myriad blockchain patent applications in the pipeline, to expand cryptocurrency projects. JPMorgan did not provide comment for this story.

"[The OCC] will enable JPM Coin and other closed-loop ledgers to be used between banks, which expands the utility of the denominated stablecoin," said Tim Sloane, vice president of payments innovation at Mercator Advisory Group. "Missing from this is a stablecoin or digital currency directly controlled by the government."

Like most countries, the U.S. is considering a central bank digital currency to improve the government's ability to disburse funds directly to consumers and to expedite processing to support e-commerce. But the role of banks in such a system is not yet defined and is subject to political differences between Democrats and Republicans. The U.S. has also not made as much progress toward a digital currency as China, whose CBDC project has begun testing and has accelerated similar initiatives in other countries, potentially disrupting the traditional dominance of the U.S. dollar.

The OCC's Monday letter leans toward bank involvement as a way to spur private sector competition more than the government in addressing digital money and faster payments.

"It is unlikely all banks will be comfortable using JPM Coin, so a more neutral approach is likely required," Sloane said. "In the long run this will open up competition to existing and planned faster networks and it's likely the global card networks will try to find a way in which they can add value to this new regulated value chain."

The OCC's management isn't certain, creating potential headwinds for the bank-friendly crypto policy. The Trump administration late in 2020 nominated OCC chair Brian Brooks to a new term. Brooks is behind the OCC's crypto-friendly stance, and Trump's nomination is seen as a way to hamstring the Biden administration, which could fire Brooks upon taking office. And a bill from Rep. Rashida Tlaib of Michigan and other liberal Democrats seeks to impose heavier regulations on stablecoins, using the Facebook-affiliated Diem (formerly Libra) project as an example. Monday's OCC letter would make it easier for Diem to work with banks and other financial institutions. Diem did not return a request for comment.

The proposed Fincen regulations would require users to disclose personal information when sending cryptocurrencies to a private wallet, and store records for transactions totalling more than $10,000 over a specified period or any individual transaction of more than $3,000. Dorsey contends Fincen would create "know your customer" regulations for parties that are not Square's clients. Dorsey's letter claims this would drive users to use wallets outside the U.S.

Ripple CEO Brad Garlinghouse makes a similar claim about the SEC's pressure, saying treating Ripple's XRP as a security could force the company out of the U.S. Several crypto exchanges have delisted XRP since the SEC's suit.

Square is not threatening to relocate, but Dorsey is suggesting the U.S. could lose crypto business if regulators take a heavy hand. Square and Ripple did not return requests for comment.

The government action from all three agencies follows a major rally for cryptocurrency over the past year as investors poured funds into crypto to hedge against inflation risk. The regulatory environment, particularly the SEC's stance on securities, makes it necessary to ensure cryptocoins stablecoins are available for public use and are not structured to raise money for a specific issuer, said Daniel Polotsky, founder of Coinflip, an Atlanta-based bitcoin ATM producer that hopes to deploy 4,000 machines by the end of 2021.

The government action and cryptocurrency's 2020 rally draw attention to cryptocurrency as a payment method, which is generally good, Polotsky said. But there's also reason to ensure projects are structured in a way that doesn't make the cryptocurrency appear to be an investment vehicle and draw a government spotlight.

"Companies need to make sure they're decentralized, the assets immediately have value and have a use case," Polotsky said. "You don't want the crypto company and not a stock company. A crypto company can sell securities, but it has to become a broker, which is more expensive."

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Cryptocurrencies Blockchain Compliance OCC SEC FinCEN