US Banking Regulators Release Roadmap for Crypto-Related Activities by Banks
- US banking regulators issued a joint statement that sets forth a roadmap for the agencies to provide legal clarity on banking organizations’ authority to engage in five crypto-related services and activities.
- Concurrently, the OCC issued a new legal interpretation that scales back several previous legal interpretations with respect to OCC-related institutions engaging in certain crypto-related activities and establishes new requirements for these activities.
- In this Legal Update, we briefly summarize these regulatory announcements and provide some insights on steps banking organizations should take to comply with the new requirements and to anticipate future actions by regulators.
On November 23, 2021, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC,” collectively with the Federal Reserve and the OCC, the “Federal Banking Regulators”) released a roadmap for a joint effort to clarify the legal authority for banking organizations to engage in crypto-related activities (the “Roadmap”).1 The same day, the OCC released Interpretive Letter 1179 (the “OCC Letter”), which clarifies and narrows the scope of three OCC interpretative letters on the permissible cryptocurrency activities by national banks and federal savings associations (collectively, “OCC-regulated banks”) from 2020 and 2021 and reinterprets an OCC interpretative letter on the agency’s chartering authority with respect to trust companies.2 Significantly, the OCC Letter specifies new requirements for OCC-regulated banks to engage in the activities covered by the 2020 and 2021 interpretative letters, including, going forward, obtaining a written notice of non-objection by the OCC, and indicates that OCC-regulated banks already engaging in these activities are subject to a retroactive requirement to provide notice of such activities to the agency.
The Roadmap sets up a process for the Federal Banking Regulators to clarify the legal parameters for banking organizations engaging in, and the application of federal banking laws to, crypto-related activities. Although the Roadmap provides an opportunity to resolve some of the legal uncertainty currently surrounding crypto-related activities, the content and tone of the OCC Letter suggest that the Federal Banking Regulators may take a very cautious approach to opening the gates for banking organizations to engage in crypto-related activities.
In this Legal Update, we summarize the Roadmap and the OCC Letter and provide thoughts on the Federal Banking Regulators’ next steps.
Roadmap
The Roadmap describes the activities the Federal Banking Regulators have taken with respect to banking organizations engaging in crypto-related activities. In contrast to earlier initiatives that were undertaken independently by the FDIC3 and the OCC,4 the Roadmap emphasizes that the Federal Banking Regulators are now seeking to closely coordinate the development of a uniform policy on the scope and prudential requirements for banking organizations’ crypto-related activities.
The Roadmap states that the Federal Banking Regulators have so far focused on developing a lexicon for bank organizations’ use of crypto-assets, understanding key risks and analyzing the application of the existing law governing banking organizations’ participation in crypto-related activities. Further, the Federal Banking Regulators have determined that banking organizations may be interested in engaging in a number of crypto-related activities, including custody, customer trading, collateral, payments and on-balance sheet exposures.
The Roadmap also states that the Federal Banking Regulators have determined that there are a number of issues surrounding banking organizations’ participation in crypto-related activities that warrant further supervisory guidance. Therefore, the Federal Banking Regulators plan to release regulatory materials throughout 2022 that will provide (i) greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible and (ii) expectations for safety and soundness, consumer protection and compliance with existing laws. In particular, this guidance will address:
- Crypto-asset safekeeping and traditional custody services
- Ancillary custody services
- Facilitation of customer purchases and sales of crypto-assets
- Loans collateralized by crypto-assets
- Issuance and distribution of stablecoins
- Activities involving the holding of crypto-assets on balance sheet
Further, the Federal Banking Regulators plan to evaluate the application of capital and liquidity standards to crypto-assets for activities involving US banking organizations and will continue to engage with the Basel Committee on Banking Supervision on its consultative process in this area.5
OCC Letter
In 2020 and early 2021, the OCC issued three interpretive letters (Interpretative Letters 1170, 1172 and 1174) that determined that the provision of custody services, holding of deposits that serve as reserves for certain stablecoins and offering of certain payment facilitation services were permissible activities for OCC-regulated banks.6 The OCC Letter is framed as a review of these earlier interpretative letters on crypto-related activities.
In its reassessment of the prior interpretative letters, the OCC Letter pulled back its prior interpretations by stating that an OCC-regulated bank may engage in the activities addressed in the earlier letters only if it “can demonstrate, to the satisfaction of its supervisory office, that it has controls in place to conduct the activity in a safe and sound manner.” The OCC Letter goes on to instruct OCC-regulated banks to notify their OCC supervisory office in writing prior to engaging in crypto-related activities and receive written non-objection from the agency. It also states that the OCC supervisory office will expect the bank to demonstrate the adequacy of its risk measurement and management information systems and controls and satisfy any other supervisory considerations relevant to the activity. For example, the bank will need to demonstrate, in writing, an understanding of any compliance obligations related to the specific activities the bank intends to conduct, including any applicable requirements under the federal securities laws, the Bank Secrecy Act, anti-money laundering, the Commodity Exchange Act and consumer protection laws.
In its 2020 and 2021 interpretative letters, the OCC did not require a written submission and non-objection prior to engaging in an activity nor specify regulatory requirements that OCC-regulated banks must demonstrate to the agency’s satisfaction. Nevertheless, the OCC Letter also states that the OCC has a retroactive expectation in that such banks already engaged in crypto-related activities should have provided notice to the agency, though they do not need to obtain agency non-objection to continue engaging in those activities.7
Additionally, the OCC Letter addresses another piece of guidance that the OCC issued in January 2021, OCC Interpretive Letter 1176, which relates to the agency’s authority to charter national trust banks that engage in trust activities permissible under state law but that are not considered fiduciary in nature under federal law (e.g., certain custody services).8 Specifically, Interpretive Letter 1176 states that the OCC will look to state law to determine whether a state-chartered entity seeking an OCC charter is engaged in a fiduciary activity if state-authorized activities are not explicitly considered fiduciary in nature under applicable federal law. OCC Interpretative Letter 1176 is significant for crypto-related businesses because Anchorage Digital Bank, which provides custody services for cryptocurrency and other digital assets, received its OCC charter in reliance on Interpretative Letter 1176.
In the OCC Letter, the OCC explains that Interpretative Letter 1176 merely addressed the authority to charter a national bank and does not change the obligations of existing OCC-regulated banks that exercise fiduciary powers under the OCC’s rules.9 In addition, it states that the agency retains its discretion to determine if a state-charted entity’s activities that are considered trust or fiduciary activities under state law are considered trust or fiduciary activities for purposes of applicable federal law. These statements indicate that the OCC will take a more skeptical approach to approving conversions of state-chartered entities engaged in crypto-related activities under state law to national banks and will not solely look to state law.
Takeaways
The Roadmap certainly provides an opportunity for the Federal Banking Regulators to formally delineate the authority of banking organizations to engage in crypto-related activities and thereby address the uncertainty that currently exists surrounding if and how banking organizations can engage in crypto-related activities. It also provides an opportunity for market participants to explain to the Federal Banking Regulators why particular activities should be authorized. However, although it is very likely that the Roadmap will result in the Federal Banking Regulators authorizing banking organizations to engage in at least some crypto-related activities, the OCC Letter and other recent statements and policy documents by the Federal Banking Regulators indicate that any such authorization will likely be narrow in scope and/or subject to significant prudential regulatory conditions, such as possibly prior approval from the appropriate Federal Banking Regulator.10
Until the Roadmap yields further regulatory guidance, banking organizations should look to the OCC Letter to ensure that they have the necessary regulatory approvals for their crypto-related activities. Accordingly, OCC-regulated banks that already are engaged in crypto-related activities should promptly confirm that there is a written record demonstrating prior notice to the OCC. In some cases, this may involve filing retroactive notices. In accordance with the OCC Letter, OCC examiners are now likely to ask to review copies of these notices and evidence of appropriate risk management practices. OCC-regulated banks that are considering crypto-related activities in the future should prepare a risk management plan that demonstrates their capacity to act in a safe and sound manner and notify any nonbank partners of the extended timeframe that may be required to obtain the necessary approvals.
Finally, banks that are not regulated by the OCC should also consider reading the OCC Letter as if it were issued by the Federal Reserve or the FDIC. State banks generally may engage only in activities that are permissible for a national bank,11 and bank participation in crypto-related activities is no different in this regard. Accordingly, state banks may want to discuss with their Federal Banking Regulator the applicability of the OCC Letter before engaging in any crypto-related activities.
1 Press Release, Agencies issue joint statement on crypto-asset policy initiative and next steps (Nov. 23, 2021).
2 OCC, Bull. 2021-57 (Nov. 23, 2021).
3 Press Release, FDIC Issues Request for Information on Digital Assets (May 17, 2021).
4 OCC, Bull. 2020-59 (June 4, 2020).
5 Please see our Legal Update on the consultative process: https://www.mayerbrown.com/en/perspectives-events/publications/2021/06/basel-committee-seeks-public-comments-on-prudential-framework-for-cryptoassets.
6 OCC, Interp. Ltr. 1170 (July 22, 2020); OCC, Interp. Ltr. 1172 (Sept. 21, 2020); OCC, Interp. Ltr. 1174 (Jan. 4, 2021).
8 OCC, Interp. Ltr. 1176 (Jan. 11, 2021).
9 Further, Interpretive Letter 1176 implied that an activity that is considered a trust or fiduciary activity under state law would be subject to the OCC’s Part 9 regulation regardless of whether it was historically considered a fiduciary activity for purposes of federal law. The OCC Letter clarifies that for existing national banks, the division of activities between the fiduciary and non-fiduciary capacities under federal law and the application of Part 9 to only fiduciary activities is not affected by Interpretive Letter 1176.
10 E.g., OCC, Acting Comptroller Discusses Regulatory Perimeter (Nov. 3, 2021), Press Release, President’s Working Group on Financial Markets Releases Report and Recommendations on Stablecoins (Nov. 1, 2021).
11 State “wildcard” authority may allow state banks to engage in activities that are explicitly permitted only under federal law. However, state law cannot authorize insured state banks to engage in activities that are prohibited by federal law.
