• Senators ask the Office of the Comptroller of the Currency (OCC) to rescind interpretive letters clarifying banks’ authority to engage in crypto-related activities.
• Despite efforts adding controls to crypto activities, senators still believe crypto-related activities pose too great a risk for national banks and federal savings associations.
• Senators ask OCC to coordinate with Federal Reserve and FDIC on crypto regulation.
• Continued regulatory uncertainty and a hostile tone toward crypto in banking means majority of activity will remain in lesser-regulated sectors of the financial system.

Overview of the Senators’ Request

On August 10, Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), Sheldon Whitehouse (D-RI), and Bernie Sanders (I-VT) sent a letter asking acting Comptroller of the Currency Michael Hsu to withdraw a series of interpretive letters related to bank crypto activities.

Three of the interpretive letters were issued during the previous administration under then acting Comptroller Brian Brooks. The Brooks interpretive letters clarified that banks have legal authority to engage in crypto-related activities, including providing custody services, holding deposits backing stablecoin, and using stablecoins for payments activities. Since the issuance of these interpretive letters, some U.S. banks have begun to engage in these activities and nonbank companies offering these services have sought to become federal banks.

After taking office, Mr. Hsu announced a review of the previous administration’s interpretive letters and actions. The review culminated in Interpretive letter #1179 issued by the OCC in November of 2021, which clarified that national banks and savings associations can engage in crypto activities detailed in previous interpretive letters if a bank notifies its supervisory office of its intent and the bank receives written notification of the supervisory office’s non-objection.

Despite that review and additional oversight, the senators stated that “the OCC has failed to properly address the shortcomings of the preceding interpretive letters and the risks associated with crypto-related banking activities, which have grown more severe in recent months.” The senators also objected to the most recent letter’s allowing banks already engaged in crypto activities to continue without seeking supervisory nonobjection.

The senators then asked the OCC to disclose information regarding which banks are engaged in activities covered by the letters and which have requested and received OCC “permission.” Most notably, the senators also asked Mr. Hsu to withdraw all four crypto-related interpretive letters and coordinate with the Federal Reserve Board and the Federal Deposit Insurance Corporation “to develop a comprehensive approach that adequately protects consumers and the safety and soundness of the banking system.”

Continued Challenges for Banks and Regulatory Ambiguity for Crypto Activity  

This letter continues a hostile atmosphere toward innovation involving blockchain, cryptocurrency, and digital assets, particularly with federal banks and savings associations. While several states have implemented rules and regulations that apply to state-chartered and licensed companies, the national framework remains an inconsistent patchwork of rules across the many jurisdictions. Regulatory uncertainty has chilled the natural migration of this technology and existing consumer activity from the wilderness into regulated federal banks, where crypto activities could be more thoroughly integrated into the mainstream U.S. financial system.

Although Mr. Hsu has expressed concerns with fragmentation in crypto regulation and activity outside of the bank regulatory perimeter, the senators’ letter may slow adoption of blockchain and crypto activity until federal regulators can further coordinate their approaches. That situation will encourage activity to remain in state-regulated and lesser regulated parts of the system, which historically has created a regulatory blind spots, exacerbated risk, and exaggerated market events like this spring’s crypto sell off.

Banks should monitor activity related to the letter closely as pressure to limit crypto activity in the federal banking system will likely continue. The senators’ request for information regarding which banks have engaged and crypto activities and what activities they are engaged in signals that Congress and the OCC may further scrutinize particular banks who have operated under the interpretive letters. Any release of what the OCC has previously considered confidential supervisory information will also result in public advocacy pressure on those institutions.

Despite regulatory risks, banks need to innovate to compete with nonbanks and international institutions already engaged in these banking activities. Part of banks’ innovation could be demonstrating and integrating additional consumer and anti-money laundering protections the regulated system offers customers in other products and communicating these advantages to the public, regulators, and Congress.

Put Patomak’s Crypto Expertise to Work 

Patomak has deep experience in helping banks and other financial institutions assess emerging risks related to public policy developments and market opportunities in the digital assets space. Contact us to learn how Patomak can help you navigate these challenges and help you meet your business goals.

Links

• Press Release: Senators Warren, Durbin, Whitehouse, and Sanders Ask OCC to Rescind and Replace Cryptocurrency Guidance.
• Letter from Senators Warren, Durbin, Whitehouse, and Sanders to the OCC.
• OCC Interpretive Letter #1179 (Hsu): Chief Counsel’s Interpretation Clarifying (1) Authority of a Bank to Engage in Certain Cryptocurrency Activities; and (2) Authority of the OCC to Charter a National Trust Bank.
• OCC Interpretive Letter #1170 (Brooks): Authority of a National Bank to Provide Cryptocurrency Custody Services for Customers.
• OCC Interpretive Letter #1172 (Brooks): Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves.
• OCC Interpretive Letter #1174 (Brooks): Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities.