The Office of the Comptroller of the Currency (‘OCC’) on September 21, 2020, issued an interpretive letter (‘letter’) providing clarification on stablecoins reserves to be held by National Bank and Federal Savings Association. A stablecoin is less volatile than a cryptocurrency as it is backed by an underlying such as fiat currency. The letter provides that there is an increasing demand for such stablecoins and issuers of the same may want to place the stablecoins in a national bank for the assurance that significant assets are backing the stablecoin, for these purposes, where the stablecoin is involved in hosted wallets, the OCC deems it valid for national banks to hold stablecoins ‘reserves’ as a service to their customers. In this regard, proper due diligence requirements such as identification of the customer and compliance with the U.S. Bank Secrecy Act and the U.S. Patriotic Act shall be considered. Even though stablecoins can be backed by certain other cryptocurrencies, the OCC has considered stablecoins which are backed single fiat currency and which may be redeemable by the holder of the stablecoin on a 1:1 basis for the underlying fiat currency when a redemption request is submitted by the issuer. Another aspect to consider here is that the OCC only provides for reserves to be held for ‘hosted wallets’. A hosted wallet is a software-based wallet containing an identifiable third party that transacts cryptocurrencies and does not have, generally, direct access to the cryptographic keys. Hence, un-hosted wallets or personal wallets without identifiable third parties or where individual owners maintain ownership of cryptographic keys personally shall not be considered for the purposes of the letter. This simply means that for one to hold reserves in the national bank, one would need to transfer the stablecoins from any personal wallet to third-party service wallets.
SEC Reply
The letter is in line with the earlier release of OCC, stating that custody of cryptographic keys may be held with banks. Interestingly, the staff of the Securities and Exchange Commission (‘SEC’) associated with the Strategic Hub for Innovation and Financial Technology Staff (‘FinHub Staff’) issued a statement on September 21, 2020, itself. The statement provided by the FInHub Staff goes on to provide an interpretation of the letter in the following manner:
The letter issued by OCC only considers stablecoins which are backed with fiat currency and are redeemable on a 1:1 basis for the underlying fiat currency. Currently, whether stablecoins can be considered as securities in this regard will be dependable on a case by case basis and by applying the Howey test [1] or other judicial precedents; and
The labels and terminology of a digital asset may not necessarily align itself with the laws and rules which are administered by the SEC. Hence, while structuring any sale or engagement in activities relating to such digital assets, the market participants should contact the FinHub Staff to interpret to what extent the invocation of federal securities laws will be applicable.
From the FinHub Staff statement, it is clear that the SEC shall maintain its usual circumspection towards the governance of digital assets. Stablecoins regulations are indeed on the rise on a global scale. One of the main reasons that regulators are giving the go-ahead on stablecoins is the comparatively less volatile character of it. Moreover, the OCC has also been methodical in only granting reserves to those stablecoins which are backed by fiat currency.
[1] SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
Authored by Samaksh Khanna, Co-founder and Shivani Agarwal, Founder.
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