On November 21, 2021, the Office of the Comptroller of the Currency (“OCC”) published a letter “clarifying” that certain cryptocurrency, distributed ledger and stablecoin activities addressed in three prior interpretive letters may be conducted only after a national bank or federal savings association receives a non-objection from its supervisory office (the “Letter”). The Letter also clarifies that a prior interpretive letter addressing the authority of the OCC to charter national trust banks did not substantively expand on, or change, banks’ existing obligations under the OCC’s fiduciary activities regulations.[1]

The Letter accompanied an inter-agency statement issued on the same day that summarized progress by the Federal Reserve Board, Federal Deposit Insurance Corporation and OCC (together, the “Agencies”) on a series of crypto-asset policy “sprints” dedicated to reviewing existing crypto policies. The statement previewed the Agencies’ next steps for addressing issues related to legal permissibility, safety and soundness, and consumer protection, among other issues.[2]

The Letter also follows remarks by OCC Acting Comptroller Michael J. Hsu at the Federal Reserve Bank of Philadelphia Fifth Annual Fintech Conference on November 16, 2021, in which he emphasized that the Agencies were “approaching crypto activities very carefully and with a high degree of caution” and that the Agencies “expect banks to do the same.”[3]

Together, the Letter and Acting Comptroller Hsu’s remarks could be interpreted as the OCC softening positions taken in prior letters issued under previous Acting Comptroller Brian P. Brooks, who had prioritized “support[ing] banks’ use of new technology, products and models.”[4]

In this Debevoise Update, we briefly summarize the Letter and discuss its effects on requirements under previous OCC letters.

Prior Letters; Focus on Safety and Soundness

Under former Acting Comptroller Brian P. Brooks, the OCC issued three interpretive letters addressing certain cryptocurrency, distributed ledger and stablecoin activities by national banks and federal savings associations. These letters include:

  • OCC Interpretive Letter 1170, addressing whether national banks and federal savings associations may provide cryptocurrency custody services;
  • OCC Interpretive Letter 1172, addressing whether national banks and federal savings associations may hold dollar deposits serving as reserves backing stablecoin; and
  • OCC interpretive Letter 1174 addressing whether national banks and federal savings associations may act as nodes on a distributed ledger to verify customer payments or engage in certain stablecoin activities to facilitate payment transaction on a distributed ledger.

Conforming to OCC precedent, the Letter reiterates the OCC’s position in previous letters by noting that banks must conduct all activities in a manner “consistent with safe and sound banking practices.” Notably, the Letter warns banks that “a proposed activity is not legally permissible if the bank lacks the capacity to conduct the activity in a safe and sound manner.” In fact, the Letter “clarifies” that the activities addressed in prior letters are legally permissible only if a national bank or federal savings association can affirmatively demonstrate to its OCC supervisory office that it has controls in place to conduct the activity in a safe and sound manner.

While it is not unusual for the OCC to require banks to consult with OCC supervisors prior to engaging in novel activities,[5] or even require non-objection with respect to new activities, the requirement for supervisory review or non-objection typically is contained in the letter describing the activity itself, rather than a subsequent “clarifying” letter, [6] and typically is not required prior to engaging in traditional custody and safekeeping activities.[7] As mentioned above, the subsequent clarification could signal that the current OCC is trying to retract positions taken by the prior OCC letters that it now considers overly-broad.

Requirement for Non-Objection

The Letter provides that, before engaging in the activities addressed in OCC Interpretive Letters 1170, 1172 and 1174, a national bank or federal savings association should notify its supervisory office, in writing, of the proposed activities and must receive written notification of a supervisory non-objection.

  • Supervisory Non-Objection. The Letter explains that, in order to obtain a supervisory non-objection, a national bank or federal savings association should demonstrate to its supervisory office that it has established appropriate risk management and measurement processes for the proposed activities, including by having adequate systems in place to identify, measure, monitor and control the risks of its activities on an ongoing basis.
    • The Letter specifically draws attention to risks associated with cryptocurrency activities, including operational risk, liquidity risk, strategic risk and compliance risk.
    • These processes would be incremental requirements, and would not replace the specific conditions, processes and controls discussed in the prior interpretive letters.
  • Basis for Non-Objection. In deciding whether to grant a non-objection, the relevant OCC supervisory office will evaluate the adequacy of a national bank’s or federal savings association’s risk measurement and management information systems and controls, as well as any other supervisory considerations relevant to the proposal.
    • Even after a bank has received supervisory non-objection for a proposed activity, the Letter emphasizes that the OCC will review the activity as part of its ordinary supervisory processes.
    • To address legal and regulatory compliance, the OCC expects banks to demonstrate, in writing, an understanding of all applicable compliance obligations, including under federal securities laws, the Bank Secrecy Act, anti-money laundering, the Commodity Exchange Act and consumer protection laws.

Standards for Chartering National Trust Banks

On January 11, 2021, the OCC issued Interpretive Letter 1176, which addressed the OCC’s authority to charter, and approve conversion to, a national trust bank. The letter clarified that 12 U.S.C. § 27(a) allows national trust banks to engage in certain activities permissible for a state trust bank under state law, even if those activities are not considered “fiduciary in nature” under federal law (e.g., non-fiduciary custody). Interpreted broadly, this clarification would have provided national trust banks something akin to a “wildcard statute” with respect to state trust bank activities, allowing such national banks to engage in activities permissible for trust banks chartered in any state.

The Letter does not contradict OCC Interpretive Letter 1176, but clarifies that the scope of the prior letter is limited to how the OCC may view 12 U.S.C. § 27(a) in the context of a charter application, and notes that although the OCC may look to state law to determine whether an applicant’s activities are those “of a trust company and activities related thereto,” activities will not “automatically be deemed to be trust activities or to be fiduciary activities solely by virtue of state law.” The Letter emphasizes that the OCC retains discretion to determine if an applicant’s activities that are considered trust company activities under state law are considered fiduciary activities under applicable federal law.

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[1] See Debevoise InDepth, “OCC Issues Latest Fintech Interpretive Letters Covering Distributed Ledger Technology in Payments and Limited Purpose Banks,” (Jan. 19, 2021) discussing Interpretive Letters 1174 and 1176, available here.

[2] See Debevoise Data Blog post, “Regulators Publish Joint Statement Summarizing Results of Inter-agency Crypto Sprint,” (Nov. 23, 2021), available here.

[3] Acting Comptroller Michael J. Hsu, “Modernizing the Financial Regulatory Perimeter,” Fifth Annual Fintech Conference, (Nov. 16, 2021), available here.

[4] OCC, “Brian P. Brooks Statement on Becoming Acting Comptroller,” (May 29, 2020), available here.

[5] For example, both OCC Interpretive Letters 1170 and 1174 specifically state that banks should consult with their OCC supervisors, and that the OCC would review the activities as part of its ordinary supervisory process.

[6] See, e.g., OCC Interpretive Letter 1160, (Aug. 22, 2018) (allowing banks to engage in customer-driven, perfectly matched, cash-settled commodity derivative transactions referencing the proposed assets, subject to Examiner-in-Charge non-objection), available here.

[7] See, e.g., OCC Custody Services Handbook (Jan. 2002) (not discussing any type of non-objection requirement); 84 Fed. Reg. 17967 (Apr. 29, 2019) (advanced notice of proposed rulemaking describing banks’ non-fiduciary custody activities); 61 Fed. Reg. 68543 note 3 (Dec. 30, 1996) (“The OCC does not treat non-discretionary custodial activities as fiduciary … [t]hose activities are authorized under 12 U.S.C. 24(Seventh).”).

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Satish Kini is a corporate partner and Chair of Debevoise’s Banking Group and a member of its Financial Institutions Group. He can be reached at smkini@debevoise.com.

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Gregory Lyons is a corporate partner and Co-Chair of Debevoise’s Financial Institutions Group. Mr. Lyons is also Chair of the New York City Bar Association Committee on Banking Law. He can be reached at gjlyons@debevoise.com.

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Alison M. Hashmall is a counsel in the firm’s New York office and a member of Debevoise's Banking Group. Ms. Hashmall’s practice focuses on advising domestic and non-U.S. banking organizations and other financial institutions on a wide range of bank regulatory, policy, and transactional matters and cryptocurrency-related issues. She can be reached at ahashmall@debevoise.com.

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Caroline Swett is a corporate counsel and a member of Debevoise’s Financial Institutions and Banking Groups. She can be reached at cnswett@debevoise.com.

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Taylor Richards is a corporate associate and a member of Debevoise's Banking Group. She can be reached at tmrichards@debevoise.com.

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Chen Xu is a counsel of the Banking Group and is resident in the New York office. His practice focuses on advising banking clients on a wide range of bank regulatory, policy and transactional matters and cryptocurrency-related issues, including in the areas of regulatory capital, liquidity and stress testing. Mr. Xu is recognized as an “associate to watch” by Chambers USA (2021), where clients say that he is “a tremendous resource” who is “just exceptional at working through the real technical nuances of capital rules and the other quantitative aspects of technical regulations.” Mr. Xu received his J.D. from Columbia Law School in 2013 and his B.A. from University of California, Berkeley in 2010. He can be reached at cxu@debevoise.com

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Amy Aixi Zhang is a corporate associate and a member of Debevoise's Banking and Financial Institutions Groups. She graduated from Harvard Law School in 2020. During her time in law school, Ms. Zhang was President and Co-Founder of the Harvard Law School Blockchain and FinTech Initiative. She authored “Regulating Crypto Assets: Securities and Commodities,” a case study published in FinTech Law: The Case Studies by Harvard University Press in July 2020 and was a fellow at a mortgage servicing fintech company before joining Debevoise in 2020. She can be reached at aazhang@debevoise.com.

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