OCC: Banks’ Stablecoin Payments & Running Nodes


Banks in the jurisdiction of the US can now perform more activities around stablecoins and nodes. A notice by the Office of the Comptroller of the Currency (OCC) issued last week further paves the way for the mass adoption of the crypto industry.

Entitled OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities, the interpretive letter offers a clearly legal bridge between banks and virtual assets, noting that “in certain circumstances, using INVNs and related stablecoins to facilitate the remittance may provide a cheaper, faster, and more efficient means of effecting the payment.”

In the notice, the OCC sought to clarify that financial institutions (FIs) in the United States are able to perform a number of blockchain native activities such as independent node verification networks (INVN) and leverage stablecoins to conduct payment activities.

“While governments in other countries have built real-time payments systems, the United States has relied on our innovation sector to deliver real-time payments technologies. Some of those technologies are built and managed by bank consortia and some are based on independent node verification networks such as blockchains,” stated Acting Comptroller of the Currency Brian P. Brooks in the letter.

“Our 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.”

What are stablecoins?

Stablecoins are digital assets typically pegged 1-to-1 with another underlying commodity or asset such as fiat currencies like the United States Dollar (USD). There are a number of stablecoins in use in today’s cryptocurrency markets. Examples of some pegged to the USD include; Tether (USDT), True USD (TUSD), Paxos Standard (PAX), USD Coin (USDC) and Binance USD (BUSD).

Stablecoins first rose to prominence as a method for speculators in the market to get in and out of positions – to ‘take profits’ – without needing to withdraw value into the traditional fiat system. In 2020, stablecoins experienced rapid growth in usage as Decentralized Finance (DeFi) protocols enabled staking of the asset to earn rewards, i.e. interest.

Related Article: Regulators Close in on Stablecoins Amid 2020 Growth 

INVN: Benefits & Risks for FIs

Running independent node verification networks is an intrinsic element of the crypto industry. As virtual assets continue to go mainstream and the industry matures, the next players to enter this market en mass are the FIs of the traditional system.

It is vital for FIs to benefit from – and drive – innovation but due to the fact that they are systematically important, operating new frameworks should be done with careful risk management analysis.

Benefits of traditional banks running blockchain node networks;

  • INVN systems are more resilient owing to having no single point of failure and can continue to operate even if a number of nodes cease to function for some reason.
  • INVNs may enhance the efficiency, effectiveness, and stability of the provision of payments.
  • INVN also acts to prevent tampering or adding inaccurate information to the database. Information is only added to the network after consensus is reached among the nodes confirming that the information is valid.

Risks of FIs running blockchain node networks;

  • Cryptocurrencies can present risks under anti-money laundering (AML) and countering the financing of terrorism (CFT) requirements set forth in applicable laws, including the Bank Secrecy Act (BSA), because cryptocurrencies may be used by malicious actors for the purposes of avoiding the financial system or engaging in other illicit activities.
  • Payment activities involving cryptocurrencies could increase operational risks, including fraud risk.
  • Depending on the nature of the payment activity, activities involving stablecoins could entail significant liquidity risks for banks.
  • New technologies require sufficient technological expertise to ensure a bank can manage them in a safe and sound manner and otherwise conduct the activities in compliance with applicable law, including applicable consumer protection laws and regulations.

What other OCC regulations on stablecoins are there?

In late 2020, the OCC released the interpretative letter entitled the OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Hold Stablecoin Reserves, which enabled federal FIs to legally hold stablecoins as a reserve asset.

What is the OCC?

The Office of the Comptroller of the Currency (OCC) is a bureau of the US Treasury which was established by the National Currency Act of 1863. 

Focused on chartering, regulating, and supervising all national banks, thrift institutions (an FI which gains funds primarily from retail savings including; co-operative banking models; building associations, mutual savings banks, etc) and federally-licenced branches/agencies of foreign banks operating under US jurisdiction.

In the past, charters would be given to banks which would purchase government securities (bonds) from the US Treasury, thereby providing security to back the paper money to be issued by the banks (redeemable for gold and silver). After the establishment of the Federal Reserve in 1913, the OCC no longer has a hand in the issuance of money but then focused solely on regulation/examination of FIs.

What does the OCC oversee now?

The Office of the Comptroller of the Currency (OCC) has a number of remits, those primarily being;

  • Maintaining the security, resilience and integrity of the US financial system.
  • Giving banks assurances to provide new products/services to foster competition.
  • Enhancing the efficiency and effectiveness of OCC supervision especially to reduce the regulatory burden.
  • Ensuring equivalent access to financial services to all Americans.
  • Enforcing anti-money laundering and anti-terrorism finance laws that apply to national banks and federally licensed branches and agencies of international FIs
  • Investigating misconduct committed by institution-affiliated parties of national banks, including officers, directors, employees, agents and independent contractors such as auditors, lawyers, etc.

What are blockchain nodes?

Nodes are computers in the blockchain network that receive new transactions and blocks, validate these transactions and blocks and spread valid transactions and blocks to connected nodes and ignore invalid transactions and blocks.

It is generally considered that the more nodes exist in the network, the more secure and resilient the system to vulnerabilities, for example to such threats as 51% attacks that control the majority of the hash rate.

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