The regulatory authority of the Financial System in the United States is decentralized. The FED, the CFTC, the SEC has control of different areas of financial markets and banks. This fact can cause turf wars and regulatory tussles when certain innovations fall between the established and prevalent definitions of existing instruments and structures. Of these institutions, the OCC is one of the oldest, established in 1863-64 as part of the national currency act and the national banking act. OCC’s actions in the form of interpretive letters have been very friendly to the institutional adoption of blockchain based payment services, particularly stable coins.
The OCC is responsible for chartering, licensing, examining and supervising all national banks and federal savings associations. They have continuous engagement with banks that they charter in the form of routine examinations and supervision, OCC periodically releases regulations based on reviews of existing or new legislation. In Title 12 (Banks and Banking) of the Code of Federal Regulations, OCC related Regulations are in the first chapter, before the Federal Reserve (Chapter 2). This shows OCC’s primacy in banking regulation. Crypto-friendly Brian Brooks, formerly chief legal officer of Coinbase is the acting comptroller of currency. He may not get confirmed by the senate before January 20th and may be replaced by Biden. What this bodes for the future crypto-friendliness of the OCC is hard to say.
The OCC released an interpretive letter today (Jan 4, 2021) clarifying that banks they regulate can participate in an independent node verification network (INVN). Although this terminology seems to be a neologism coined by the OCC. A common form of INVN is a distributed ledger. The purpose of this infrastructure is to use new technologies, including INVNs and related stable coins, to perform bank-permissible functions, such as payment activities. An INVN’s participants are nodes, typically validate transactions, store transaction history, and broadcast data to other nodes. The interpretive note praises the resilience of blockchain based systems and is a continuation of the thought process contained in the statement released by the president’s working group on stable coins. The note goes on to situate stable coins in the continuum of the banks activities, with particular parallels to ESV (Electronic Stored Value) Card and the now defunct Mondex system. Similar to ESV banks may buy, sell, and issue stable coin to facilitate payments.
Several facts jump out from the series of recent regulatory moves with stable coins as the center-piece. Today, stable coins are not used primarily as peer-to-peer payment rails. Adoption of public stable coins is driven primarily as a facilitator of frictionless trading of crypto currencies and may even have been one of the causes of the vertiginous rise of bitcoin and ethereum in 2020 continuing into 2021. Peer to peer payments have not been one of their highpoints. Does this letter along with other noises from the regulators auger well for bank issued stable coins like JPM Coin? JPM coin, primarily issued to facilitate wholesale payments in the JPM based network, could tick all the boxes for OCC, other regulators and even the StableAct calls for a banking license to issue a stable coin. These interpretive letters, the SEC no-action letter and legislation may also be directed at efforts like Diem (formerly Libra). Running full nodes on public blockchains can cause all sorts of transactions to be stored on bank infrastructure, including dark-money, money laundering, ransom payments and so on. Does this mean that this could be the beginning of a stable coin focused Quorum network to be approved for generic payment infrastructure?
The language in the interpretive letter reads like a prelude to more guidance on digital securities. Leading directly to the banking operations around digital security capital markets. Once banks can run full nodes on a blockchain to support payments using stable coins; it is not a long distance to travel to the issuance, bookrunning, trading, clearing and settlement of securities including equities and bonds on the blockchain. With an integrated payment rail already taken care of, capital markets may be ripe for digital assets. Of course not to mention what this means with central bank digital currencies.
The new interpretive letter has to be seen for what it really is. In contrast to what crypto-twitter says; including that it is crypto-currencies eating fiat, it is quite the contrary; establishing the beachhead of decentralized dlt technologies inside banks firmly based on fiat. Stablecoins gain legitimacy by being based on fiat, not the other way around.
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