Withdrawing guidance permitting banks to engage in cryptocurrency-related activities won’t address the risks presented by nonbank crypto firms and won’t promote a safer marketplace for consumers and investors, two trade groups wrote last week in a letter to the Office of the Comptroller of the Currency’s (OCC) acting chief, Michael Hsu.
Friday’s letter from the Bank Policy Institute (BPI) and the American Bankers Association (ABA) comes roughly two weeks after four senators, led by Elizabeth Warren, D-MA, requested that the OCC rescind three interpretive letters issued by Hsu’s predecessor and a piece of November joint guidance the senators said “may have exposed the banking system to unnecessary risk” given “turmoil” in the crypto market.
The ABA and BPI, however, disagreed with Warren, arguing “the recent events in the crypto market were wholly unrelated to banks’ involvement in the traditional banking activities described in the OCC Interpretive Letters.” Their rescission, the groups added, “would not enhance the protections of bank investors, consumers, or the financial system in connection with cryptocurrency activities.”
Further, the public and the financial system benefit from banks’ involvement in crypto-related activities because banks are “subject to comprehensive and robust risk management, supervision, and examination processes, and have substantial experience with incorporating new technologies into the business of banking,” the groups said.
In Interpretive Letters 1170, 1172 and 1174, then-Acting Comptroller Brian Brooks determined that banks were authorized to engage in certain crypto related activities, including providing cryptocurrency custody service for customers, holding deposits that serve as reserves for certain stablecoins, and operating independent node verification networks and stablecoins for payment activities.
A month into taking the OCC’s top post last year, Hsu said the OCC would review the Brooks-era letters, and in November published Interpretive Letter 1179, confirming that it was “legally permissible for a bank to engage in [crypto activities], provided the bank can demonstrate, to the satisfaction of its supervisory office, that it has controls in place to conduct the activity in a safe and sound manner.”
Warren’s concerns follow this year’s “crypto winter,” a period of market cooling, highlighted by the bankruptcies of crypto lender Celsius and brokerage Voyager Digital over “extreme market conditions” that resulted in steep drops in the price of Bitcoin and other cryptocurrencies.
The ABA and BPI pointed out, however, that much of this year’s crypto tumult stemmed from trading — an activity the interpretive letters don’t authorize. Further, this year’s meltdown wasn’t the result of trading involving any OCC-regulated bank, the groups said.
Warren this month wrote that the interpretive letters were “problematic,” adding that she and her fellow senators were “concerned that the OCC has failed to properly address the shortcomings of the preceding interpretive letters and the risks associated with crypto-related banking activities, which have grown more severe in recent months.”
The risks highlighted in Warren’s letter should be addressed through the regulation of nonbank crypto firms and products “that are currently largely unregulated,” the ABA and BPI asserted. Prohibiting well-regulated banks from engaging in crypto activities would merely leave consumers looking to unregulated or lightly regulated entities for those services, the groups said.
They ended their letter by encouraging the OCC and partner regulators to follow through on a promise for more guidance that they made in November.
“Failure to provide clarity regarding the expectations for all banks engaging in crypto activities is hindering the ability of banks to engage in responsible innovation in this space, thereby requiring consumers to look solely to unregulated or lightly regulated nonbank financial service providers and limited-purpose, uninsured banking institutions for digital asset products and services, instead of banks,” the ABA and BPI cautioned.
Enthusiasm for the crypto sphere is palpable among banks that have tiptoed into the space. Wells Fargo, in a report this month, called digital assets “a transformative innovation on par with the internet, cars, and electricity.” The bank began offering crypto investment services in May 2021.
“They are likely to be the building blocks of a new large digital network that moves money and assets, and that network is open for anyone in the world to use,” the bank said. “Traditional finance is beginning to embrace open networks, and we expect the adoption of digital assets to continue to accelerate over the coming years.”
Several other large U.S.-based banks stepped into the crypto world in 2020 and 2021. JPMorgan Chase began providing cash-management services for cryptocurrency in May 2020, and BNY Mellon began holding, transferring and issuing cryptocurrencies on behalf of its asset-management clients in February 2021.