U.S. regulator's approval of stablecoin payments provides regulatory building block, compliance challenge

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A representation of virtual currency Bitcoin and U.S. One Dollar banknote are seen in front of a stock graph in this illustration taken January 8, 2021.

A new interpretive letter from the Office of the Comptroller of the Currency allowing the use of stablecoin cryptocurrency for bank payments opens a pathway for mainstream finance to live-test digital assets in a relatively safe corner of the market. The decision greenlights what some see as “training wheels” enabling the creation of compliance controls for more expansive uses of digital currencies in the future.

Banks already have been using stablecoin, whose value is pegged directly to assets such as the U.S. dollar or traded commodities, in limited ways. They are likely to expand their operations to build expertise in areas such as anti-money laundering and cyber security that pose significant challenges. Such experience could serve as compliance models for exchanges and users.

For the cryptocurrency marketplace and the banking industry the OCC action was taken as a landmark event, and helped spur bitcoin prices to record levels last week. The OCC’s decision, however, had no direct relevance to bitcoin, which unlike stablecoin is not linked to an asset.


The new interpretive letter on stablecoin clarified the OCC policy following a conditional approval it gave banks last year.

The OCC update issued January 4[] says banks may enter into “independent node verification networks,” or INVNs, which are shared electronic databases that store the same information on multiple computers. They are also known as blockchain networks. The “distributed ledgers” used to record cryptocurrency transactions are a form of INVN, in which participants validate transactions, store transaction history and broadcast data to other nodes, OCC said.

The bank regulator compared risks and activities involving stablecoin operations to those involving digital certificates that are used to identity banks and their customers on long-established electronic transaction platforms and to checking accounts that guarantee the transactions are backed by cash holdings. It said banks must follow existing regulations covering money laundering, cyber security and other risk protections.

Acting Comptroller Brian Brooks said the interpretive letter “removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products.”


The adoption of stablecoin poses new challenges for banks to create controls around an electronic payment system far more complex than existing systems. The digital assets store coin ownership and transaction records on a computerized, cryptographically protected database. Since stablecoin has many of the same design features as the popular bitcoin and other digitial currencies not backed by an asset, it could help banks develop the fintech capability to serve the unregulated crypto firms.

“Banks have been building stablecoin infrastructure that has been solving a lot of issues like KYC and AML,” Max Dilendorf, of Dilendorf Law Firm PLLC told Regulatory Intelligence. “The biggest issue is security.”

Among other challenges, banks must hold the cash reserves to back the value of the stablecoins.

The digital asset relies on numerous interrelated actions for transactions that will be difficult to audit, since the entity being audited may not have ultimate control over the transaction data on the multiple platforms needed for currencies, digital assets and end user accounts used by counterparities, said the accounting trade group AICPA in a recent white paper.

Banks are likely to use the stablecoin opportunity to build controls for a broader cryptocurrency market that last week topped $1 trillion for the first time, according to Coingecko a digital asset data aggregator.

Bitcoin comprises nearly two-thirds of the total digital assets traded on more than 6,000 exchanges. Stablecoin, which lack the speculative appeal of bitcoin, represents just a small sliver of digital currencies. But demand from institutional investors has led to a tripling in its total last year and ten-fold increase in the past two years.

Facebook’s proposed Diem stablecoin, renamed from Libra, could lead to a much wider base of users over its 2.7 million members.

Some banks, most notably JPMorgan and Goldman Sachs, have been investing significantly in digital currency projects while at the same time citing the risks of digital assets.

“Banks can no longer afford to ignore this opportunity,” Boston Consulting Group said in a study released in November[here]. “Of course, they have reason to be cautious.”


OCC will also find itself on a learning curve. Overseeing digital assets requires new expertise as well as the navigation of any regulatory overlaps. The Federal Deposit Insurance Corp, for example, has not approved any direct insurance for digital assets.

U.S. lawmakers, however, have proposed strict regulation under the Stablecoin Tethering and Bank Licensing Enforcement (Stable) Act[here], which would require FDIC insurance or Federal Reserve deposits to back up the stablecoin.

The act also would allow only banks to issue stablecoin, which would pressure them to move quickly to create compliant platforms.

Some see the cryptocurrency industry seeking to move quickly and relocating to other jurisdictions such as the Bahamas, whose central bank recently backed its own digital “Sand Dollars” for use in retail transactions.

U.S. regulators are working to balance between providing a regulatory framework and steering clear of legitimizing a currency designed to avoid transparency. With the growth of digital currencies the crypto industry has fueled new demand for traditional bank services such as currency trading, dollar deposits, money laundering controls, KYC services and cyber protection, and growing uncertainty over banks that can interact with them.

The Federal Deposit Insurance Corporation and OCC have recognized the need of banks to remain relevant. In addition to the new OCC letter, the FDIC recently issued guidance for interactions between regulated banks and third parties. A federal interagency group in December issued a statement of principles related to stablecoin. It said: “Digital payments, including U.S. dollar-backed and other stablecoin arrangements used as payment systems, have the potential to improve efficiencies, increase competition, lower costs, and foster broader financial inclusion.

“Digital payments systems, including stablecoin arrangements, should be designed and operated in a responsible manner that effectively manages risk and maintains the continued stability of the U.S. domestic and international financial and monetary systems.”

The steps by regulators could help banks take a much larger role as a service provider to digital currency participants for the foreseeable future. The explicit language of the new OCC interpretive letter marks the first time the bank regulator has allowed the use of digital coinage in transactions. The OCC action gives their efforts a push forward but in a limited scope, since it does not expose them to any of the wild price fluctuations and less exposure to theft and fraud than bitcoin by focusing entirely more predictable stablecoin space.


“The interpretive letter is not a huge development, but it will be important to banks to stay up to date before their business model is wiped out,” said Dilendorf. The OCC cited remittances as an area where banks would likely find immediate use of the stablecoin payments.

The Financial Action Task Force, the global standard-setter for anti-money laundering controls, in a study said that “stablecoins have the potential to spur financial innovation and efficiency and improve financial inclusion.” While “stablecoins so far only been adopted on a small-scale, new proposals have the potential to be mass-adopted on a global scale, particularly where they are sponsored by large technology, telecommunications or financial firms.”

But it cautioned that “as any other large-scale value transfer system, this propensity for mass-adoption makes them attractive to criminals and terrorists to launder their proceeds of crime and finance their terrorist activities.”

(Reporting by Richard Satran, Regulatory Intelligence)

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This article was produced by Thomson Reuters Regulatory Intelligence - - and initially posted on Jan. 12. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters