Interpretation on national bank and federal savings association authority to hold stablecoin reserves

Interpretive Letter #1172

October 2020

OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association

Authority to Hold Stablecoin Reserves

September 21, 2020

I.

Introduction and Summary Conclusion

This letter addresses the authority of a national bank to hold deposits that serve as

reserves for certain “stablecoins.” Generally, a stablecoin is a type of cryptocurrency designed to

have a stable value as compared with other types of cryptocurrency, which frequently experience

significant volatility. One type of stablecoin is backed by an asset such as a fiat currency.

Reports suggest stablecoins have various applications, including the potential to enhance

payments on a broad scale,1 and are increasingly in demand.2 As described further below,

stablecoin issuers may desire to place assets in a reserve account with a national bank to provide

assurance that the issuer has sufficient assets backing the stablecoin in situations where there is a

hosted wallet.3 For the reasons discussed below, we conclude that a national bank may hold such

stablecoin “reserves” as a service to bank customers.4 We are not presently addressing the

authority to support stablecoin transactions involving un-hosted wallets. In addition, this letter

only addresses the use of stablecoin backed on a 1:1 basis by a single fiat currency where the

1 See, e.g., Marc Di Maggio and Nicholas Platias, Is Stablecoin the Next Big Thing in E-Commerce?, Harv. Bus.

Rev. (May 21, 2020), available at https://hbr.org/2020/05/is-stablecoin-the-next-big-thing-in-e-commerce.

2 See, e.g., Antonio Madeira, On Solid Ground: Stablecoins Thriving Amid Financial Uncertainty,

Cointelegraph.com (Aug. 2, 2020), available at https://cointelegraph.com/news/on-solid-ground-stablecoins-

thriving-amid-financial-uncertainty

ecoin the Next Big Thing in E-Commerce?, Harv. Bus.

Rev. (May 21, 2020), available at https://hbr.org/2020/05/is-stablecoin-the-next-big-thing-in-e-commerce.

2 See, e.g., Antonio Madeira, On Solid Ground: Stablecoins Thriving Amid Financial Uncertainty,

Cointelegraph.com (Aug. 2, 2020), available at https://cointelegraph.com/news/on-solid-ground-stablecoins-

thriving-amid-financial-uncertainty.

3 “Cryptocurrencies are generally held in ‘wallets,’ which are programs that store the cryptographic keys associated

with a particular unit of digital currency.” OCC Interpretive Letter No. 1170, at 5 (July 22, 2020), available at

https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf (IL 1170). A hosted

wallet is an account-based software program for storing cryptographic keys controlled by an identifiable third party.

These parties receive, store, and transmit cryptocurrency transactions on behalf of their accountholders; the

accountholder generally does not have access to the cryptographic keys themselves. In contrast, an un-

hosted or personal wallet is one where an individual owner of a cryptocurrency maintains control of the

cryptographic keys for accessing the underlying cryptocurrency.

4 These conclusions apply only to the deposit activities of national banks and Federal savings associations (FSAs).

This letter expresses no conclusion on the application of any other laws to the stablecoin activities discussed in this

letter or on the permissibility of these activities for any institutions other than those supervised by the OCC.

accessing the underlying cryptocurrency.

4 These conclusions apply only to the deposit activities of national banks and Federal savings associations (FSAs).

This letter expresses no conclusion on the application of any other laws to the stablecoin activities discussed in this

letter or on the permissibility of these activities for any institutions other than those supervised by the OCC.

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bank verifies at least daily that reserve account balances are always equal to or greater than the

number of the issuer’s outstanding stablecoins.5

A bank providing services in support of a stablecoin project must comply with all

applicable laws and regulations and ensure that it has instituted appropriate controls and

conducted sufficient due diligence commensurate with the risks associated with maintaining a

relationship with a stablecoin issuer. The due diligence process should facilitate an

understanding of the risks of cryptocurrency and include a review for compliance with applicable

laws and regulations, including those related to the Bank Secrecy Act (BSA) and anti-money

laundering. In this regard, the review should include, but not be limited to, customer due

diligence requirements under the BSA6 and the customer identification requirements under

section 326 of the USA PATRIOT Act.7  A national bank or FSA must also identify and verify

the beneficial owners of legal entity customers opening accounts.8 A national bank or FSA must

also comply with applicable federal securities laws.9

II.

Stablecoin Reserves

Cryptocurrencies—also known as “digital currencies” or “virtual currencies”—are often

designed to work as a medium of exchange and are created and stored electronically.10 As we

previously described, cryptocurrencies are enabled by two technologies: cryptography and

distributed ledger technology.11 Cryptography and distributed ledger technology are both rapidly

evolving technologies

eserves

Cryptocurrencies—also known as “digital currencies” or “virtual currencies”—are often

designed to work as a medium of exchange and are created and stored electronically.10 As we

previously described, cryptocurrencies are enabled by two technologies: cryptography and

distributed ledger technology.11 Cryptography and distributed ledger technology are both rapidly

evolving technologies. As described above, “stablecoin” often refers to a particular type of

digital coin that is backed by another asset, such as a fiat currency.

Like cryptocurrencies more broadly, stablecoins are an evolving technology. Different

types of stablecoins may share certain characteristics, but there are variations in the way various

5 The current stablecoin activities discussed in this letter would not contribute to the global and systemic risks noted

by the Financial Stability Board in its recent consultation. See Fin. Stability Board, Addressing the Regulatory,

Supervisory and Oversight Challenges Raised by “Global Stablecoin” Arrangements (Apr. 14, 2020), available at

https://www.fsb.org/wp-content/uploads/P140420-1.pdf.

6 31 C.F.R. § 1020.210(b)(5).

7 12 C.F.R. § 21.21(c)(2); 31 C.F.R. § 1020.220. See also OCC Bulletin 2016-10, Prepaid Cards: Interagency

Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of Prepaid Cards

(Mar. 21, 2016), available at https://occ.gov/news-issuances/bulletins/2016/bulletin-2016-10.html.

8 31 C.F.R. § 1010.230.

9 We note that staff of the Securities and Exchange Commission (SEC) has issued a statement encouraging issuers

of stablecoins of the type described herein to contact the staff with any questions they may have to help ensure that

such stablecoins are structured, marketed, and operated in compliance with the federal securities laws

bulletins/2016/bulletin-2016-10.html.

8 31 C.F.R. § 1010.230.

9 We note that staff of the Securities and Exchange Commission (SEC) has issued a statement encouraging issuers

of stablecoins of the type described herein to contact the staff with any questions they may have to help ensure that

such stablecoins are structured, marketed, and operated in compliance with the federal securities laws. The

statement notes that the staff stands ready to engage with market participants, and, depending on the particular facts

and circumstances, to assist them and consider providing, if appropriate, a “no-action” position regarding whether

activities with respect to a specific stablecoin may invoke the application of the federal securities laws. See SEC

FinHub Staff Statement on OCC Interpretation (Sept. 21, 2020).

10 The OCC recently described many features of cryptocurrency. See IL 1170.

11 IL 1170, at 2.

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cryptocurrencies described as “stablecoins” work. Cryptocurrencies referred to as “stablecoins”

may be backed by a fiat currency, a commodity, or another cryptocurrency. Fiat-backed

stablecoins are typically redeemable for the underlying fiat currency, where one unit of the

stablecoin can be exchanged for one unit of the underlying fiat currency. Other types of

cryptocurrencies described as “stablecoins” may be more complex, backed by commodities,

cryptocurrencies, or other assets but with values that are pegged to a fiat currency or managed by

algorithm. 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. We are only opining on those facts and circumstances at this

time.

Companies that issue stablecoins often desire to place the funds backing the stablecoin, or

reserve funds, with a U.S. bank

sted 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. We are only opining on those facts and circumstances at this

time.

Companies that issue stablecoins often desire to place the funds backing the stablecoin, or

reserve funds, with a U.S. bank. Public independent auditors’ statements of several stablecoin

issuers indicate reserve funds are placed as deposits with U.S. banks. Several of these issuers

promote these reserves—and the fact that they are held by banks—to support the trustworthiness

of their stablecoin. In light of the public interest in these reserve accounts, this letter addresses

the legal authority of national banks to hold stablecoin reserves on behalf of customers.

III.

Discussion

We understand that some stablecoin issuers may desire to place the cash reserves backing

their issued stablecoin with a national bank. In the most basic example, a stablecoin issuer may

seek to place its reserve funds in a deposit account with a national bank. National banks are

expressly authorized to receive deposits.12 Receiving deposits is recognized as a core banking

activity.13 As the OCC recently reaffirmed, national banks may provide permissible banking

services to any lawful business they choose, including cryptocurrency businesses, so long as they

effectively manage the risks and comply with applicable law, including those relating to the BSA

and anti-money laundering.14 Accordingly, national banks may receive deposits from stablecoin

issuers, including deposits that constitute reserves for a stablecoin associated with hosted wallets.

In connection with these activities, a national bank may also engage in any activity incidental to

12 12 U.S.C. 24(Seventh).

13 See, e.g., 12 C.F.R. § 5.20(e).

14 See IL 1170, at 1

the BSA

and anti-money laundering.14 Accordingly, national banks may receive deposits from stablecoin

issuers, including deposits that constitute reserves for a stablecoin associated with hosted wallets.

In connection with these activities, a national bank may also engage in any activity incidental to

12 12 U.S.C. 24(Seventh).

13 See, e.g., 12 C.F.R. § 5.20(e).

14 See IL 1170, at 1. In IL 1170, the OCC reaffirmed its view that banks determine the levels and types of risks that

they will assume. Banks that operate in compliance with applicable law, properly manage customer relationships

and effectively mitigate risks by implementing controls commensurate with those risks are neither prohibited nor

discouraged from providing banking services. As the federal banking agencies have previously stated, banks are

encouraged to manage customer relationships and mitigate risks based on customer relationships rather than

declining to provide banking services to entire categories of customers. See Joint Statement on Risk-Focused Bank

Secrecy Act/Anti-Money Laundering Supervision, at 2 (July 22, 2019), available at https://www.occ.gov/news-

issuances/news-releases/2019/nr-ia-2019-81a.pdf.

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receiving deposits from stablecoin issuers.15 Likewise, an FSA is authorized to take deposits,16

including from an issuer of stablecoin associated with hosted wallets.

As with any deposit product, a national bank or FSA that accepts reserve accounts should

be aware of the laws and regulations relating to deposit insurance coverage, including deposit

insurance limits,17 and the requirements for deposit insurance to “pass through” to an underlying

depositor, if applicable.18 Stablecoin reserve accounts could be structured as either deposits of

the stablecoin issuer or as deposits of the individual stablecoin holder if the requirements for pass

through insurance are met.19 Accordingly, a national bank or FSA should provide accurate and

appropriate disclosures regarding deposit insurance coverage

rance to “pass through” to an underlying

depositor, if applicable.18 Stablecoin reserve accounts could be structured as either deposits of

the stablecoin issuer or as deposits of the individual stablecoin holder if the requirements for pass

through insurance are met.19 Accordingly, a national bank or FSA should provide accurate and

appropriate disclosures regarding deposit insurance coverage. A national bank or FSA must

ensure that its deposit activities comply with applicable laws and regulations, including those

relating to the BSA and anti-money laundering. Specifically, a national bank or FSA must

ensure that it establishes and maintains procedures reasonably designed to assure and monitor its

compliance with the BSA and its implementing regulations, including but not limited to

customer due diligence requirements under the BSA20 and the customer identification

requirements under section 326 of the USA PATRIOT Act.21 A national bank or FSA must also

identify and verify the beneficial owners of legal entity customers opening accounts.22 A national

bank or FSA must also comply with applicable federal securities laws.

15 12 C.F.R. § 7.4007 (permitting “any activity incidental to receiving deposits, including issuing evidence of

accounts, subject to such terms, conditions, and limitations prescribed by the Comptroller of the Currency and any

other applicable Federal law”).

16 See 12 U.S.C. 1464(b).

17 See generally 12 U.S.C. 1821; 12 C.F.R. Part 330.

18 12 C.F.R. Part 330; FDIC General Counsel’s Op. No. 8 (Nov. 13, 2008), available at

https://www.govinfo.gov/content/pkg/FR-2008-11-13/pdf/E8-26867.pdf. For example, in the context of prepaid

cards, OCC guidance has explained that, according to FDIC General Counsel’s Opinion No

other applicable Federal law”).

16 See 12 U.S.C. 1464(b).

17 See generally 12 U.S.C. 1821; 12 C.F.R. Part 330.

18 12 C.F.R. Part 330; FDIC General Counsel’s Op. No. 8 (Nov. 13, 2008), available at

https://www.govinfo.gov/content/pkg/FR-2008-11-13/pdf/E8-26867.pdf. For example, in the context of prepaid

cards, OCC guidance has explained that, according to FDIC General Counsel’s Opinion No. 8, “stored value

(electronic cash) issued by banks will be insured if the funds underlying the electronic cash remain in a customer's

account until it is transferred to a merchant or other third party, who in turn collects the funds from the customer's

bank. However, bank-issued electronic cash does not result in an insured deposit when the underlying funds are

placed in a reserve or general liability account held by the issuing bank to pay merchants and other payees as they

make claims for payments.” OCC Bulletin 1996-48 (Sept. 3, 1996), https://www.occ.gov/news-

issuances/bulletins/1996/bulletin-1996-48.html.

19 12 C.F.R. Part 330; FDIC General Counsel’s Op. No. 8 (Nov. 13, 2008). The general requirements for pass-

through deposit insurance coverage are: (1) the account records at the bank must disclose the existence of the third-

party custodial relationship; (2) the bank’s records or records maintained by the custodian or other party must

disclose the identities of the actual owners of the funds and the amount owned by each such owner; and (3) the

deposits actually must be owned (under the agreements among the parties) by the named owners.

20 31 C.F.R. § 1020.210(b)(5).

21 12 C.F.R. § 21.21(c)(2); 31 C.F.R. § 1020.220. See also OCC Bulletin 2016-10, Prepaid Cards: Interagency

Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of Prepaid Cards

(Mar. 21, 2016).

22 31 C.F.R. § 1010.230.

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deposits actually must be owned (under the agreements among the parties) by the named owners.

20 31 C.F.R. § 1020.210(b)(5).

21 12 C.F.R. § 21.21(c)(2); 31 C.F.R. § 1020.220. See also OCC Bulletin 2016-10, Prepaid Cards: Interagency

Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of Prepaid Cards

(Mar. 21, 2016).

22 31 C.F.R. § 1010.230.

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New bank activities should be developed and implemented consistently with sound risk

management principles and should align with banks’ overall business plans and strategies.23

Bank management should establish appropriate risk management processes for new activity

development and effectively identify, measure, monitor, and control the risks associated with

new activities. In particular, reserves associated with stablecoins could entail significant

liquidity risks. The OCC expects all banks to manage liquidity risk with sophistication equal to

the risks undertaken and complexity of exposures.24 A bank may also enter into appropriate

contractual agreements with a stablecoin issuer governing the terms and conditions of the

services that the bank provides to the issuer.25 Such agreements may include contractual

restrictions or requirements with respect to the assets held in the reserve account. The agreement

may also specify the respective responsibilities of the parties, such as the steps the parties will

take to ensure the appropriate party will be deemed the issuer or obligor of the stablecoin. For

example, the bank should have appropriate agreements in place with an issuer to verify and

ensure that the deposit balances held by the bank for the issuer are always equal to or greater

than the number of outstanding stablecoins issued by the issuer

the parties, such as the steps the parties will

take to ensure the appropriate party will be deemed the issuer or obligor of the stablecoin. For

example, the bank should have appropriate agreements in place with an issuer to verify and

ensure that the deposit balances held by the bank for the issuer are always equal to or greater

than the number of outstanding stablecoins issued by the issuer. Such agreements should include

mechanisms to allow the bank to verify the number of outstanding stablecoins on a regular

basis.26 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.27

23 See OCC Bulletin 2017-43, New, Modified, or Expanded Bank Products and Services: Risk Management

Principles, available at https://www.occ.gov/news-issuances/bulletins/2017/bulletin-2017-43.html.

24 See Comptroller’s Handbook on Liquidity (June 2012), at 4, available at https://occ.gov/publications-and-

resources/publications/comptrollers-handbook/files/liquidity/pub-ch-liquidity.pdf. For example, a critical

component of an institution’s ability to effectively respond to potential liquidity stress is the availability of a cushion

of unencumbered highly liquid assets without legal, regulatory, or operational impediments that can be sold or

pledged to obtain funds in a range of stress scenarios. Id. at 30.

25 OCC guidance has previously recognized the importance of contracts in establishing responsibilities and liability

in the context of prepaid cards. In describing the responsibilities of national banks participating in then-emergent

prepaid card systems, the OCC said: “A bank should be clear as to who bears the responsibility at each stage of an

electronic cash transaction. Thus far, transactional rules for some electronic cash systems are not well established

by current law

responsibilities and liability

in the context of prepaid cards. In describing the responsibilities of national banks participating in then-emergent

prepaid card systems, the OCC said: “A bank should be clear as to who bears the responsibility at each stage of an

electronic cash transaction. Thus far, transactional rules for some electronic cash systems are not well established

by current law. Accordingly, in many important respects, the transactional rules for such systems must be

established by contract.” OCC Bulletin 1996-48 (Sept. 3, 1996). See also OCC Bulletin 2016-10, Prepaid Cards:

Interagency Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of

Prepaid Cards (Mar. 21, 2016). Similarly, a bank that receives deposits from a stablecoin issuer should enter into

appropriate contracts to define the responsibilities of the parties.

26 Banks are subject to capital and reserve requirements intended to ensure that banks have sufficient liquidity and

are able to meet the needs of customers, including by satisfying withdrawals and cashing checks. See generally, 12

C.F.R. Part 204 (reserve requirements); 12 C.F.R. Part 3 (capital requirements). See also Comptroller’s Handbook

on Cash Accounts (Mar. 1998), available at https://www.occ.treas.gov/publications-and-

resources/publications/comptrollers-handbook/files/cash-accounts/pub-ch-cash-accounts.pdf; Comptroller’s

Handbook on Depository Services (Aug. 2010), available at https://www.occ.gov/publications-and-

resources/publications/comptrollers-handbook/files/depository-services/pub-ch-depository-services.pdf.

27 See OCC Bulletin 2016-10, Prepaid Cards: Interagency Guidance to Issuing Banks on Applying Customer

Identification Program Requirements to Holders of Prepaid Cards (Mar. 21, 2016).

omptroller’s

Handbook on Depository Services (Aug. 2010), available at https://www.occ.gov/publications-and-

resources/publications/comptrollers-handbook/files/depository-services/pub-ch-depository-services.pdf.

27 See OCC Bulletin 2016-10, Prepaid Cards: Interagency Guidance to Issuing Banks on Applying Customer

Identification Program Requirements to Holders of Prepaid Cards (Mar. 21, 2016).

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A bank should consider all relevant risk factors, including liquidity risk and compliance risk,

before entering any agreement or relationship with a stablecoin issuer.

/s/

Jonathan V. Gould

Senior Deputy Comptroller and Chief Counsel