Banking News

U.S. Comptroller stablecoin letter gives green light for banks

dollar stablecoin

Yesterday the U.S. Office of the Comptroller of the Currency (OCC) gave the green light to national banks and federal savings associations to hold stablecoin reserves. The wording of the interpretive letter seems to clear the path for the likes of the JPM Coin and others issued by banks. Initially, the main objectives of bank issued coins are to enable blockchain settlement of transactions.

From the OCC letter’s description, the sort of stablecoins it covers is pretty close to the e-money definition in Europe. 

“For purposes of this letter, we consider a ‘stablecoin’ to be a unit of cryptocurrency associated with hosted wallets that is backed by a single fiat currency and redeemable by the holder of the stablecoin on a 1:1 basis for the underlying fiat currency upon submission of a redemption request to the issuer.”

Not purely for bank issued stablecoins

The letter isn’t limiting the stablecoin issuer to being a bank: “National banks may receive deposits from stablecoin issuers, including deposits that constitute reserves for a stablecoin associated with hosted wallets.” In this case it assumes that the bank will audit that the reserves are sufficient on a regular basis.

“In the analogous context of prepaid cards distributed and sold by third-party program managers, interagency guidance specifically contemplates that banks would enter into contracts with third-party program managers permitting banks to audit the third-party program managers.”

But the big restriction is the hosted wallet definition. Because most public blockchain stablecoins support self managed wallets where the token owner manages their own keys. 

This limitation is important because one of the benefits of blockchain is the potential for efficiencies, which in some cases means disintermediation. With this definition of a stablecoin, not only is there a bank account, but there’s also potentially an additional intermediary for the wallet hosting. On the flip side, it provides the banking system and government with a significant amount of influence and control.

Regarding federal deposit insurance, whether or not insurance applies depends on the mechanics. If the stablecoin is just used for a transaction, but the rest of the time, the money is in a bank account, then it will be covered by insurance. But if there’s a global reserve account, there’s no insurance.

The OCC also highlighted potential liquidity risks for banks given the stablecoins are fully redeemable, but it didn’t go into detail. Not mentioned in the letter, but there’s an upside to a stablecoin in a bank run. One might expect banks to make it hard to redeem cash. But given the stablecoin should be tradeable, desperate holders may be able to sell their stablecoins, even if it’s for cents on the dollar. 

SEC coordination

There was a simultaneous announcement by the SEC noting the OCC letter and stating that some stablecoins may be structured so that they’re not securities. But it suggests engaging with SEC Finhub Staff, which if appropriate, may issue a “no-action” position.

Given the OCC letter is quite clear, it would have been great if the SEC could have provided similar clarity by giving an example of a restrictive stablecoin that might get a no-action opinion. It could have had caveats that each stablecoin needs to be assessed. 

The Facebook factor?

Part of why the SEC didn’t take this step might be that the regulators want to make it relatively easy to issue stablecoins depending on who you are. Perhaps they are less keen to make it easy for Facebook’s Libra and other BigTech firms. If they describe what’s okay in too much detail, Libra could work its way around any rules. 

In the meantime, Libra is trying to travel down a road with many large potholes. And the further it proceeds, the more potholes that appear.