Interpretation on national bank and federal savings association authority to use independent node verification networks and stablecoins for payment activities

Interpretive Letter 1174

January 2021

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

Authority to Use Independent Node Verification Networks and Stablecoins for Payment

Activities

January 4, 2021

I.

Introduction and Summary Conclusion

This letter addresses the legal permissibility of certain payment-related activities that

involve the use of new technologies, including the use of independent node verification networks

(INVNs or networks) and stablecoins, to engage in and facilitate payment activities. National

banks and Federal savings associations (collectively referred to as “banks”) may use new

technologies, including INVNs and related stablecoins, to perform bank-permissible functions,

such as payment activities.

An INVN consists of a shared electronic database where copies of the same information

are stored on multiple computers. One common form of an INVN is a distributed ledger.1

Cryptocurrency transactions are recorded on these ledgers.2 An INVN’s participants, known as

nodes, typically validate transactions, store transaction history, and broadcast data to other

nodes.3

1 See OCC Interpretive Letter 1170 (Jul. 22, 2020) (IL 1170) (describing distributed ledger technology as a shared

electronic database where copies of the same information are stored on multiple computers. This shared database

functions as both a mechanism to prevent tampering and as a way to add new information to the database.

Information will not be added to the distributed ledger until consensus is reached that the information is valid.

INVNs represent one of the key technologies that support the novel exchange mechanism underlying

cryptocurrency. The other key technology is advanced cryptography.).

2 The OCC described many features of cryptocurrency in IL 1170

as a way to add new information to the database.

Information will not be added to the distributed ledger until consensus is reached that the information is valid.

INVNs represent one of the key technologies that support the novel exchange mechanism underlying

cryptocurrency. The other key technology is advanced cryptography.).

2 The OCC described many features of cryptocurrency in IL 1170. In addition, the OCC recently addressed the

permissibility of a national bank holding reserves for stablecoins that are backed by fiat currency on at least a 1:1

basis in situations where there is a hosted wallet. See OCC Interpretive Letter 1172 (Sept. 21, 2020) (IL 1172).

3 Nodes are generally either full nodes or light nodes. Full nodes verify transactions, maintain consensus between

other nodes, and contain a full copy of the ledger’s entire history. Light nodes generally consist of wallets that

download only the headers of blocks to validate their authenticity and save hard drive space for users by not storing

a full copy of the ledger’s history. One example of a light node may be a customer’s digital wallet on the customer’s

mobile phone. See, e.g., Josh Evans, Blockchain Nodes: An In-Depth Guide, Nodes.com (Sept. 22, 2020), available

at https://nodes.com/; Blockchain: What are nodes and masternodes?, Medium.com (Sept. 22, 2020), available at

https://medium.com/coinmonks/blockchain-what-is-a-node-or-masternode-and-what-does-it-do-4d9a4200938f. A

bank may want to serve as a full node on an INVN due to the wider range of capabilities on a full node as compared

to a light node, as described above.

ept. 22, 2020), available

at https://nodes.com/; Blockchain: What are nodes and masternodes?, Medium.com (Sept. 22, 2020), available at

https://medium.com/coinmonks/blockchain-what-is-a-node-or-masternode-and-what-does-it-do-4d9a4200938f. A

bank may want to serve as a full node on an INVN due to the wider range of capabilities on a full node as compared

to a light node, as described above.

2

A stablecoin is a type of cryptocurrency that is designed to have a stable value as

compared with other types of cryptocurrency.4 Some stablecoins are backed by a fiat currency,

such as the U.S. dollar. Fiat-backed stablecoins can typically be exchanged for the underlying

fiat currency, where one unit of the stablecoin can be exchanged for one unit of the underlying

fiat currency.5 In this regard, the stablecoin represents a mechanism for storing, transferring,

transmitting, and exchanging the underlying fiat currency value, all of which are key to facilitate

payment activities. One example of stablecoin as a mechanism to facilitate payment activities is

the payment of remittances, which often involve cross-border transfers of money.6

Courts and the OCC have long recognized that the primary role of banks is to act as

financial intermediaries, facilitating the flow of money and credit among different parts of the

economy.7 “The very object of banking is to aid the operation of the laws of commerce by

serving as a channel for carrying money from place to place, as the rise and fall of supply and

demand require, and it may be done by rediscounting the bank’s paper or by some other form of

borrowing.”8 The precedents and history9 reflect that a bank’s role as financial intermediary can

4 See IL 1172. See also President's Working Grp. on Fin. Markets Releases Statement on Key Regulatory &

Supervisory Issues Relevant to Certain Stablecoins, Treas. SM-1223 (Dec

and fall of supply and

demand require, and it may be done by rediscounting the bank’s paper or by some other form of

borrowing.”8 The precedents and history9 reflect that a bank’s role as financial intermediary can

4 See IL 1172. See also President's Working Grp. on Fin. Markets Releases Statement on Key Regulatory &

Supervisory Issues Relevant to Certain Stablecoins, Treas. SM-1223 (Dec. 23, 2020) (providing an initial

assessment of regulatory and supervisory considerations for participants in certain stablecoin arrangements and

clarifying expectations for the retail payment application of stablecoins), available at

https://home.treasury.gov/news/press-releases/sm1223.

5 IL 1172 noted that 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.

6 Facilitating cross-border payments in stablecoin may improve the speed and cost of transferring funds anywhere in

the world; traditional remittances often come with high fees and may take several days to complete. See Hugo

Renaudin, Driven by Financial Institutions, Stablecoin Acceptance Turns a Corner, Cointelegraph.com (June 14,

2020), available at https://cointelegraph.com/news/driven-by-financial-institutions-stablecoin-acceptance-turns-a-

corner.

7 See, e.g., OCC Interpretive Letter 1102 (Nov. 2008) (IL 1102); see also NationsBank of North Carolina, N.A. v.

Variable Life Annuity Co., 513 U.S. 251, 252 (1995) (“VALIC”); OCC Interpretive Letter 499 (Feb. 12, 1990).

8 Auten v. U.S. Nat’l Bank of New York, 174 U.S. 125, 143 (1899).

9 See IL 1102; OCC Interpretive Letter 892 (Sept. 8, 2000). The OCC’s view of banks as financial intermediaries

comports with the historical role of banks in the economy. See Peter Olson, Regulation’s Role in Bank Changes, 18

ECON. POL’Y REV

Co., 513 U.S. 251, 252 (1995) (“VALIC”); OCC Interpretive Letter 499 (Feb. 12, 1990).

8 Auten v. U.S. Nat’l Bank of New York, 174 U.S. 125, 143 (1899).

9 See IL 1102; OCC Interpretive Letter 892 (Sept. 8, 2000). The OCC’s view of banks as financial intermediaries

comports with the historical role of banks in the economy. See Peter Olson, Regulation’s Role in Bank Changes, 18

ECON. POL’Y REV. 13, Federal Reserve Bank of New York (2012), available at

https://www.newyorkfed.org/medialibrary/media/research/epr/2012/EPRvol18n2.pdf. As early as the Roman

Empire, banks served as intermediaries that mediated between borrowers and lenders, obviating direct contact

between them. These banks dealt with the day to day needs of their clients for cash. See Peter Termin, Financial

Intermediation in the Early Roman Empire, 64 J. ECON. HIST. 705 (2004). In the 17th century, Dutch merchant

banks, such as the Bank of Amsterdam, held deposits and transferred money between accounts; in 18th century

England, merchant banks accepted deposits and loaned money to landowners and merchants. Id. Besides deposit

taking and lending, another crucial component of financial intermediation is connecting participants in the financial

system through the processing of payments. As financial intermediaries, banks have processed payments on behalf

of their customers for centuries. For example, in ancient Mesopotamia and Egypt, customers would deposit goods

(such as grains) in palaces, temples, and private houses that served as banks. Deposit receipts for these goods were

transferable and facilitated transactions and payments between customers. See Chao Gu, Fabrizio Mattesini, Cyril

Monnet, & Randall Wright, Banking: A New Monetarist Approach, 80 REV. ECON. STUD. 636 (2013). During the

era of Medici banking in the 15th century, Italian bankers facilitated payments by book transfer on the instruction of

oral or written orders. See Raymond de Roover, The Rise and Decline of the Medici Bank, Harvard University

ents between customers. See Chao Gu, Fabrizio Mattesini, Cyril

Monnet, & Randall Wright, Banking: A New Monetarist Approach, 80 REV. ECON. STUD. 636 (2013). During the

era of Medici banking in the 15th century, Italian bankers facilitated payments by book transfer on the instruction of

oral or written orders. See Raymond de Roover, The Rise and Decline of the Medici Bank, Harvard University

3

take many forms: providing payments transmission services, borrowing from savers and lending

to users, and participating in the capital markets. As the recognized intermediaries between

other, non-bank participants in the financial markets and the payment systems, banks possess the

expertise to facilitate the exchange of payments and securities between, and settle transactions

for, parties and to manage their own intermediation position.

Over time, banks’ financial intermediation activities have evolved and adapted in

response to changing economic conditions and customer needs. Banks have adopted new

technologies to carry out bank-permissible activities, including payment activities.10 The

emergence of new technologies to facilitate payments, support financial transactions, and meet

the evolving financial needs of the economy has led to a demand for banks to use INVNs to carry

out their traditional functions. The changing financial needs of the economy are well-illustrated

by the increasing demand in the market for faster and more efficient payments through the use of

decentralized technologies, such as INVNs, which validate and record financial transactions,

including stablecoin transactions.11

Industry participants recognize that using stablecoins to facilitate payments may combine

the efficiency and speed of digital currencies with the stability of existing currencies.12 As

discussed below, stablecoins can provide a means of transmitting value denominated in an

Press, at 2 (1963)

s INVNs, which validate and record financial transactions,

including stablecoin transactions.11

Industry participants recognize that using stablecoins to facilitate payments may combine

the efficiency and speed of digital currencies with the stability of existing currencies.12 As

discussed below, stablecoins can provide a means of transmitting value denominated in an

Press, at 2 (1963). In medieval times, Venetian bankers accepted commodities on deposit that were used to facilitate

transactions, and deposit receipts began circulating in place of cash for payments in early 17th century. See Gu,

Mattesini, Monnet, & Wright, supra. During the second half of the 17th century, goldsmith bankers in London

operated a system of payments through mutual debt acceptance and interbanker clearing. See Stephen Quinn,

Goldsmith-Banking: Mutual Acceptance and Interbanker Clearing in Restoration London, 34 EXPLORATIONS IN

ECON. HIS. 411 (1997).

10 For example, and as discussed below, banks have adopted new technologies in their development and operation

of electronic funds transfer systems, real-time settlement systems, and stored value systems. See OCC Interpretive

Letter 890 (May 15, 2000) (IL 890): OCC Interpretive Letter 854 (Feb. 25, 1999) (IL 854); OCC Interpretive Letter

1157 (Nov. 12, 2017) (IL 1157); OCC Interpretive Letter 1140 (Jan. 13, 2014) (IL 1140); OCC Conditional

Approval Letter 220 (Dec. 2, 1996); OCC Conditional Approval Letter 568 (Dec. 31, 2002); OCC Interpretive

Letter 737 (Aug. 19, 1996) (IL 737).

11 See, e.g., Michael del Castillo, Visa Partners with Ethereum Digital-Dollar Startup that Raised $271 Million

(Dec. 2

); OCC Interpretive Letter

1157 (Nov. 12, 2017) (IL 1157); OCC Interpretive Letter 1140 (Jan. 13, 2014) (IL 1140); OCC Conditional

Approval Letter 220 (Dec. 2, 1996); OCC Conditional Approval Letter 568 (Dec. 31, 2002); OCC Interpretive

Letter 737 (Aug. 19, 1996) (IL 737).

11 See, e.g., Michael del Castillo, Visa Partners with Ethereum Digital-Dollar Startup that Raised $271 Million

(Dec. 2. 2020), available at https://www.forbes.com/sites/michaeldelcastillo/2020/12/02/visa-partners-with-

ethereum-digital-dollar-startup-that-raised-271-million/?sh=30afc9ac4b1f; Advancing Our Approach to Digital

Currency: Visa’s Outlook on New Digital Currency Payment Flows (July 22, 2020), available at

https://usa.visa.com/visa-everywhere/blog/bdp/2020/07/21/advancing-our-approach-1595302085970.html; Helen

Partz, Japanese Banking Giant to Issue Its Own Stablecoin in Late 2020, Cointelegraph.com (July 14, 2020),

available at https://cointelegraph.com/news/japanese-banking-giant-mufg-to-issue-its-own-stablecoin-in-h2-2020;

Marie Huillet, Japanese Banking Giant Mizuho to Launch Its Yen-Pegged Stablecoin in March (Feb. 21, 2019),

available at https://cointelegraph.com/news/japanese-banking-giant-mizuho-to-launch-its-yen-pegged-stablecoin-in-

march; Press Release, Wells Fargo & Co., Wells Fargo to Pilot Internal Settlement Service Using Distributed Ledger

Technology (Sept. 17, 2019), available at https://newsroom.wf.com/press-release/innovation-and-technology/wells-

fargo-pilot-internal-settlement-service-using; Press Release, JP Morgan Chase & Co., J.P. Morgan Creates Digital

Coin for Payments (Feb. 14, 2019), available at https://www.jpmorgan.com/global/news/digital-coin-payments.

These examples are descriptive only. This letter expresses no view on the permissibility of, or other considerations

related to, the activities described therein.

12 See, e.g., Advancing Our Approach to Digital Currency: Visa’s Outlook on New Digital Currency Payment

Flows (July 22, 2020).

or Payments (Feb. 14, 2019), available at https://www.jpmorgan.com/global/news/digital-coin-payments.

These examples are descriptive only. This letter expresses no view on the permissibility of, or other considerations

related to, the activities described therein.

12 See, e.g., Advancing Our Approach to Digital Currency: Visa’s Outlook on New Digital Currency Payment

Flows (July 22, 2020).

4

existing currency using INVN technology. Stablecoins thus provide a means by which

participants in the payment system may avail themselves of the potential advantages associated

with INVNs. Billions of dollars’ worth of stablecoin trade globally, and demand for stablecoin

continues to grow.13

As discussed below, INVNs and related stablecoins represent new technological means of

carrying out bank-permissible payment activities. We therefore conclude that a bank may

validate, store, and record payments transactions by serving as a node on an INVN. Likewise, a

bank may use INVNs and related stablecoins to carry out other permissible payment activities.

A bank must conduct these activities consistent with applicable law and safe and sound banking

practices.

As noted in a recent statement of the President’s Working Group on Financial Markets,

stablecoin arrangements “should have the capability to obtain and verify the identity of all

transacting parties, including for those using unhosted wallets.”14 “The stablecoin arrangement

should have appropriate systems, controls, and practices in place to manage these risks, including

to safeguard reserve assets. Strong reserve management practices include ensuring a 1:1 reserve

ratio and adequate financial resources to absorb losses and meet liquidity needs.”15

II.

Discussion

The OCC has recognized that bank-permissible activities may be conducted with new and

evolving technologies

appropriate systems, controls, and practices in place to manage these risks, including

to safeguard reserve assets. Strong reserve management practices include ensuring a 1:1 reserve

ratio and adequate financial resources to absorb losses and meet liquidity needs.”15

II.

Discussion

The OCC has recognized that bank-permissible activities may be conducted with new and

evolving technologies. Banks may use electronic means or facilities to perform any function, or

provide any product or service, as part of an authorized activity.16 Consistent with this

precedent, banks may serve as a node on an INVN and use INVNs and related stablecoins to

conduct permissible banking activities, including authorized payment activities.

National banks may engage in payment-related activities as activities within the business

of banking.17 The OCC has found that “[p]ayment system activities (e.g., electronic payments

message transmission, electronic payments processing, and payments settlement among

members) are clearly within the business of banking and are functionally consistent with the

primary role of banks as financial intermediaries.”18 Similarly, FSAs may engage in payment-

13 See, e.g., Zack Voell, Stablecoin Supply Breaks $10B as Traders Demand Dollars Over Bitcoin, Coindesk.com

(May 12, 2020) available at https://www.coindesk.com/stablecoin-supply-breaks-10b-as-traders-demand-dollars-

over-bitcoin; USD Coin, Coinmarketcap.com (last accessed Jan. 4, 2021), available at

https://coinmarketcap.com/currencies/usd-coin.

14 President's Working Grp. on Fin. Markets Releases Statement on Key Regulatory & Supervisory Issues Relevant

to Certain Stablecoins, Treas. SM-1223 (Dec. 23, 2020).

15 Id.

16 See 12 C.F.R. § 7.5000 et seq.; 12 C.F.R. § 155.200.

17 See, e.g., IL 1157; IL 1140; OCC Interpretive Letter 1014 (Jan. 10, 2005); OCC Interpretive Letter 929 (Feb. 11,

2002); OCC Interpretive Letter 993 (May 16, 1997) (IL 993); IL 737; OCC Conditional Approval Letter 220.

18 IL 1140, at 3 n

pervisory Issues Relevant

to Certain Stablecoins, Treas. SM-1223 (Dec. 23, 2020).

15 Id.

16 See 12 C.F.R. § 7.5000 et seq.; 12 C.F.R. § 155.200.

17 See, e.g., IL 1157; IL 1140; OCC Interpretive Letter 1014 (Jan. 10, 2005); OCC Interpretive Letter 929 (Feb. 11,

2002); OCC Interpretive Letter 993 (May 16, 1997) (IL 993); IL 737; OCC Conditional Approval Letter 220.

18 IL 1140, at 3 n. 12.

5

related activities and may transfer customer funds “by any mechanism or device,” including

through electronic means.19

The OCC has repeatedly recognized that banks may conduct permissible payment

activities using new and evolving technologies. As discussed above, banks may use electronic

means or facilities to perform any function, or provide any product or service, as part of an

authorized activity.20 Moreover, the OCC has explicitly permitted national banks to adopt new

technologies as a means of executing payment services, consistent with safe and sound banking

practices and applicable law. For example, the OCC has concluded that national banks may

engage in activities related to electronic funds transfer systems,21 real-time settlement systems,22

and stored value systems as part of their permissible payments-related activities.23 Courts have

similarly recognized that banks’ authority to engage in payment activities encompasses new and

evolving payment technologies.24 These precedents are consistent with the fundamental

principle that national bank powers “must be construed so as to permit new ways of conducting

the very old business of banking.”25

Using INVNs to facilitate payments transactions represents a new means of performing

banks’ permissible payments functions. At their core, payment activities involve transmitting

instructions to transfer a specified sum from one account on a ledger to another account on the

same or a different ledger (either at the same bank or at different banks)

cting

the very old business of banking.”25

Using INVNs to facilitate payments transactions represents a new means of performing

banks’ permissible payments functions. At their core, payment activities involve transmitting

instructions to transfer a specified sum from one account on a ledger to another account on the

same or a different ledger (either at the same bank or at different banks). Established payment

systems typically use a trusted, centralized entity to validate payments. Serving as nodes on

INVNs is a new means of transmitting payment instructions and validating payments.26 Rather

19 See 12 C.F.R. § 145.17. As discussed above, FSAs are also permitted to use, or participate with others to use,

electronic means or facilities to perform any function, or provide any product or service, as part of an authorized

activity. See 12 C.F.R. § 155.200. For example, the Office of Thrift Supervision explicitly permitted FSAs to

invest in electronic funds transfer networks. See OTS Op. Ch. Couns. (Dec. 22, 1995); OTS Op. Ch. Couns. (Sept.

15, 1995).

20 See 12 C.F.R. § 7.5000 et seq; 12 C.F.R. § 155.200.

21 See, e.g., IL 890; IL 854.

22 See, e.g., IL 1157; IL 1140.

23 See, e.g., OCC Conditional Approval Letter 220; OCC Conditional Approval Letter 568; IL 737.

24 State of Illinois v. Continental Illinois National Bank, 536 F.2d 176, 178 (7th Cir. 1976) (“Any order to pay

which is properly executed by a customer, whether it be check, card or electronic device, must be recognized as a

routine banking function. . .”); Independent Bankers Association of America v. Smith, 534 F.2d 921, 944 (D.C. Cir.

1976) (“We conclude that Congress envisioned all account withdrawals when it used the shorthand phrase ‘checks

paid’ in section 36(f)

7th Cir. 1976) (“Any order to pay

which is properly executed by a customer, whether it be check, card or electronic device, must be recognized as a

routine banking function. . .”); Independent Bankers Association of America v. Smith, 534 F.2d 921, 944 (D.C. Cir.

1976) (“We conclude that Congress envisioned all account withdrawals when it used the shorthand phrase ‘checks

paid’ in section 36(f). If future technological innovations render paper checks totally obsolete, section 36(f) will still

include within its broad standard those facilities that permit bank customers to perform the traditional banking

function of withdrawing funds from their accounts.”).

25 M & M Leasing Corp. v. Seattle First Nat. Bank, 563 F.2d 1377, 1382 (9th Cir. 1977) cert. denied, 436 U.S. 956

(1978).

26 While the technology is new, the concept of using distributed ledgers to validate ownership and title is not. See

e.g., Oliver Smith, Forbes, Blockchain’s Secret 1,000 Year History (Mar 23, 2018), available at

https://www.forbes.com/sites/oliversmith/2018/03/23/blockchains-secret-1000-year-history/#4484e42818d2; Kristin

Sommer, Phys.org, Team puts an ancient spin on a new digital currency (June 11, 2019), available at

https://phys.org/news/2019-06-team-ancient-digital-currency.htmlhttps://phys.org/news/2019-06-team-ancient-

6

than utilizing a centralized entity, nodes on the shared network validate the transfers. However,

the basic functions are the same: transmitting payment instructions and validating payments.

Accordingly, the same legal analysis applies, and a bank therefore may serve as a node on an

INVN to facilitate payments transactions

digital-currency.htmlhttps://phys.org/news/2019-06-team-ancient-

6

than utilizing a centralized entity, nodes on the shared network validate the transfers. However,

the basic functions are the same: transmitting payment instructions and validating payments.

Accordingly, the same legal analysis applies, and a bank therefore may serve as a node on an

INVN to facilitate payments transactions.

Likewise, a bank may use stablecoins to facilitate payment transactions for customers on

an INVN, including by issuing a stablecoin,27 and by exchanging that stablecoin for fiat

currency.28 In this context, stablecoins function as a mechanism of payment, in the same way

that debit cards, checks, and electronically stored value (ESV) systems convey payment

instructions. Banks have long used cashiers’ checks, travelers’ checks, and other bearer

instruments as a means of facilitating cashless payments.29

Twelve C.F.R. 7.5002(a)(3) expressly provides that a national bank may offer ESV

systems. In an ESV system, cash is exchanged for ESV. That ESV is stored on a computer chip

within a card. The cardholder makes payments by transferring that ESV to another party who

may then redeem the ESV for cash. When codifying the authority of a national bank to offer

ESV systems, the OCC noted that the “creation, sale, and redemption of [ESV] in exchange for

dollars is part of the business of banking because it is the electronic equivalent of issuing

circulating notes or other paper-based payment devices like travelers checks.”30 As the OCC had

previously explained in Conditional Approval Letter No

When codifying the authority of a national bank to offer

ESV systems, the OCC noted that the “creation, sale, and redemption of [ESV] in exchange for

dollars is part of the business of banking because it is the electronic equivalent of issuing

circulating notes or other paper-based payment devices like travelers checks.”30 As the OCC had

previously explained in Conditional Approval Letter No. 220, banks may engage in activities

related to developing and operating an ESV system because ESV systems are an element of the

payment system, and the issuance and redemption of ESV is a new way of conducting one aspect

digital-currency.html; Sam Auch, rsmus.com, Blockchain and the Island of Yap, available at

https://rsmus.com/what-we-do/services/blockchain-consulting/featured-topics/blockchain-basics/blockchain-and-

the-island-of-yap.html.

27 Certain stablecoins may be securities. A bank’s issuance of a stablecoin must comply with all applicable

securities laws and regulations. Staff of the Securities and Exchange Commission (SEC) has issued a statement

encouraging issuers of stablecoins of the type described in IL 1172 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), available at

https://www.sec.gov/news/public-statement/sec-finhub-statement-occ-interpretation.

28 The OCC previously addressed the permissibility of a national bank holding reserves for stablecoins that are

backed by fiat currency on at least a 1:1 basis. See IL 1172

oke the application of the federal

securities laws. See SEC FinHub Staff Statement on OCC Interpretation (Sept. 21, 2020), available at

https://www.sec.gov/news/public-statement/sec-finhub-statement-occ-interpretation.

28 The OCC previously addressed the permissibility of a national bank holding reserves for stablecoins that are

backed by fiat currency on at least a 1:1 basis. See IL 1172. In addition, the OCC has previously determined that a

national bank may facilitate a customer’s cryptocurrency and fiat currency exchange transactions. See IL 1170 n.

39.

29 See, e.g., Arnold Tours, Inc. v. Camp, 472 F.2d 427, 438 (1st Cir. 1972). National banks may cash and process

checks; issue, collect, and process cashiers’ checks and money orders; and sell travelers’ checks and certified

checks. 12 U.S.C. 24(Seventh); 12 U.S.C. 4001 et seq; Conditional Approval No. 307 (April 1999). Banks may

cash checks for non-customers. See OCC Interpretive Letter No. 1094 (Feb. 27, 2008); Interpretive Letter No. 932

(May 2002).

30 Electronic Activities, 67 FR 34,992, 34,966 (May 17, 2002).

7

of payments: issuing and circulating notes.31 The OCC further noted that ESV-related clearing

and settlement activities are similar to those already being performed by banks in connection

with the large volume of transactions using checks, drafts, travelers’ checks, credit cards, debit

cards, and electronic transfers of funds within and through the payments system.32

Like ESV, stablecoins can serve as electronic representations of those U.S. dollars.

Instead of value being stored on an ESV card, the value is represented on the stablecoin. This

distinction is technological in nature and does not affect the permissibility of the underlying

activity

, credit cards, debit

cards, and electronic transfers of funds within and through the payments system.32

Like ESV, stablecoins can serve as electronic representations of those U.S. dollars.

Instead of value being stored on an ESV card, the value is represented on the stablecoin. This

distinction is technological in nature and does not affect the permissibility of the underlying

activity. Banks may use new technologies that afford a new means of carrying out permissible

banking functions, such as providing payments services and facilitating payments.33 Using

INVNs and related stablecoins to facilitate payments is merely a new means of performing that

function.

Just as banks may buy and sell ESV as a means of converting the ESV into dollars (and

vice versa) to complete customer payment transactions, banks may buy, sell, and issue

stablecoin to facilitate payments.34 For example, one entity (payer) may wish to remit a payment

of U.S. dollars to a second entity (payee). Rather than using a centralized payment system, the

payer converts the U.S. dollars to stablecoin and transfers the stablecoin to the payee via the

INVN. The payee then converts the stablecoin back into U.S. dollars. In one common version

of this fact pattern, the payment is a cross-border remittance. In certain circumstances, using

INVNs and related stablecoins to facilitate the remittance may provide a cheaper, faster, and

more efficient means of effecting the payment. The bank may serve several potential roles in

31 See OCC Conditional Approval Letter No. 220. Specifically, the OCC permitted banks to invest, via operating

subsidiaries, in a company (Mondex LLC) that created, sold, and redeemed ESV. The OCC also permitted banks to

serve as members in the ESV system. As described in the letter, members would issue ESV cards to individuals in

exchange for dollars. These cards were intended to become a new element of the payment system substituting ESV

for cash and small checks in consumer transactions

operating

subsidiaries, in a company (Mondex LLC) that created, sold, and redeemed ESV. The OCC also permitted banks to

serve as members in the ESV system. As described in the letter, members would issue ESV cards to individuals in

exchange for dollars. These cards were intended to become a new element of the payment system substituting ESV

for cash and small checks in consumer transactions. Mondex LLC would create and sell ESV to members in

exchange for dollars. Mondex LLC would invest the dollars in government securities, cash, and cash equivalents. If

a member tendered ESV to Mondex LLC, Mondex LLC would redeem the ESV at par. Members would sell ESV to

individuals and participating retailers in exchange for dollars. ESV would be loaded onto the individual’s card or

retailer or retailer’s “purse carrier device.” Members would also purchase ESV from retailers and individuals.

32 See id.

33 See, e.g., State of Ill. ex rel. Lignoul v. Cont'l Nat. Bank & Tr. Co. of Chicago, 536 F.2d 176, 178 (7th Cir. 1976)

(concluding that debit cards constituted checks under the National Bank Act, despite technological differences

between the two because “[t]he check is merely the means used by the bank to attain the desired objective, i.e.,

the payment of the money to its customer. The card serves the same purpose as the check. It is an order on the bank.

Any order to pay which is properly executed by a customer, whether it be check, card or electronic device, must

be recognized as a routine banking function when used as here. The relationship between the bank and

its customer is the same.”); Smith, 534 F.2d at 944 (“We conclude that Congress envisioned all account withdrawals

when it used the shorthand phrase “checks paid” in section 36(f) [of the National Bank Act]

is properly executed by a customer, whether it be check, card or electronic device, must

be recognized as a routine banking function when used as here. The relationship between the bank and

its customer is the same.”); Smith, 534 F.2d at 944 (“We conclude that Congress envisioned all account withdrawals

when it used the shorthand phrase “checks paid” in section 36(f) [of the National Bank Act]. If future technological

innovations render paper checks totally obsolete, section 36(f) will still include within its broad standard those

facilities that permit bank customers to perform the traditional banking function of withdrawing funds from their

accounts.”).

34 Moreover, buying, selling, and issuing stablecoins to facilitate payments responds to customer demand and

benefits customers by offering faster and more resilient payment mechanisms. In addition, providing payment

services using INVNs and related stablecoins may allow banks to offer services to a more diverse customer base.

Finally, the risks associated with buying, selling, and issuing stablecoins are similar to those that banks assume in

other permissible payment activities, including the provision of ESV systems.

8

this type of transaction: supporting the INVN by validating transactions as a node on the INVN,

facilitating the conversion from U.S. dollars to stablecoin (and vice versa), and issuing the

stablecoin.

III.

Benefits and Risks

While the OCC neither encourages nor discourages banks from participating in and

supporting INVNs and stablecoins, the recent adoption of INVNs and stablecoins by a major

payment system operator,35 coupled with the rapid market adoption of INVNs and stablecoins,36

indicates that banks should evaluate the appropriateness of INVNs and stablecoin participation in

order to ensure banks’ continuing ability to provide payment services to their customers in a

manner that reflects changing demand.

INVNs and stablecoins present both benefits and risks

ns by a major

payment system operator,35 coupled with the rapid market adoption of INVNs and stablecoins,36

indicates that banks should evaluate the appropriateness of INVNs and stablecoin participation in

order to ensure banks’ continuing ability to provide payment services to their customers in a

manner that reflects changing demand.

INVNs and stablecoins present both benefits and risks. Among the potential benefits is

the fact that INVNs may enhance the efficiency, effectiveness, and stability of the provision of

payments. For example, they may be more resilient than other payment networks because of the

decentralized nature of INVNs. Rather than relying on a single entity (or a small number of

parties) to verify payments, INVNs allow a comparatively large number of nodes to verify

transactions in a trusted manner. Simply put, these networks may be more resilient because they

have no single point of failure and can continue to operate even if a number of nodes cease to

function for some reason and may be more trusted because of their consensus mechanisms

requiring more nodes to validate the underlying transactions. In addition, an INVN also acts to

prevent tampering or adding inaccurate information to the database. Information is only added

to the network after consensus is reached among the nodes confirming that the information is

valid.

The use of stablecoins to facilitate payments allows banks to capture the advantages that

INVNs may present in a manner that retains the stability of fiat currency.37 INVNs can transfer

multiple different cryptocurrencies including but not limited to stablecoins. Stablecoins serve as

a means of representing fiat currency on an INVN. In this way, the stablecoin provides a means

for fiat currency to have access to the payment rails of an INVN.

Although the use of INVNs may provide certain advantages over other technologies, it

may also present new risks

INVNs can transfer

multiple different cryptocurrencies including but not limited to stablecoins. Stablecoins serve as

a means of representing fiat currency on an INVN. In this way, the stablecoin provides a means

for fiat currency to have access to the payment rails of an INVN.

Although the use of INVNs may provide certain advantages over other technologies, it

may also present new risks. Banks that seek to use these networks should ensure that they

understand these risks, as well as the risks generally associated with the underlying activity.38 In

addition, banks seeking to use these networks must conduct the activities in a safe and sound

manner. These banks should also conduct a legal analysis to ensure the activities will be

35 See supra n. 11.

36 See supra n. 12.

37 See, e.g., Advancing Our Approach to Digital Currency: Visa’s Outlook on New Digital Currency Payment

Flows (July 22, 2020).

38 See, e.g., Comptroller’s Handbook on Payment Systems and Fund Transfer Activities (March 1990); New,

Modified, or Expanded Bank Products and Services: Risk Management Principles, OCC Bulletin 2017-43.

9

conducted consistent with all applicable laws, including applicable anti-money laundering laws

and regulations and consumer protection laws and regulations.

Payment activities involving cryptocurrencies could increase operational risks, including

fraud risk. Depending on the nature of the payment activity, activities involving stablecoins

could entail significant liquidity risks for banks.39 Moreover, new technologies require sufficient

technological expertise to ensure a bank can manage them in a safe and sound manner and

otherwise conduct the activities in compliance with applicable law, including applicable

consumer protection laws and regulations. Banks have experience developing such expertise in

analogous areas

lecoins

could entail significant liquidity risks for banks.39 Moreover, new technologies require sufficient

technological expertise to ensure a bank can manage them in a safe and sound manner and

otherwise conduct the activities in compliance with applicable law, including applicable

consumer protection laws and regulations. Banks have experience developing such expertise in

analogous areas. These risks are similar (though potentially greater in degree) to those of other

electronic activities expressly permitted for banks, including providing electronic custody

services,40 acting as a digital certification authority41 and providing data processing services.42

Risk management should be commensurate with the complexity of the products and services

offered. New activities should be developed and implemented consistently with sound risk

management practices and should align with banks' overall business plans and strategies.43

Cryptocurrency payment activities could also raise heightened compliance risks. In

particular, cryptocurrencies can present risks under anti-money laundering (AML) and

countering the financing of terrorism requirements set forth in applicable laws, including the

Bank Secrecy Act (BSA), because cryptocurrencies may be used by bad actors for the purposes

of avoiding the financial system or engaging in other illicit activities. However, banks have

significant experience with developing BSA/AML compliance programs to assure compliance

with the reporting and recordkeeping requirements of the BSA and to prevent such usage of their

systems by bad actors.44 The OCC similarly would expect banks engaged in providing

cryptocurrency services to customers to adapt and expand their BSA/AML compliance programs

to assure compliance with the reporting and recordkeeping requirements of the BSA and to

address the particular risks of cryptocurrency transactions

recordkeeping requirements of the BSA and to prevent such usage of their

systems by bad actors.44 The OCC similarly would expect banks engaged in providing

cryptocurrency services to customers to adapt and expand their BSA/AML compliance programs

to assure compliance with the reporting and recordkeeping requirements of the BSA and to

address the particular risks of cryptocurrency transactions.

A bank may validate, store, and record payments transactions by serving as a node on an

INVN and use INVNs and related stablecoins to carry out other bank-permissible payment

activities, consistent with applicable law and safe and sound banking practices. A bank should

consult with OCC supervisors, as appropriate, prior to engaging in these payment activities. The

OCC will review these activities as part of its ordinary supervisory processes.

Sincerely,

39 See IL 1172.

40 See Comptroller’s Handbook on Custody Services at 70 (Jan. 2002).

41 12 C.F.R. § 7.5005.

42 Id.

43 See OC Bulletin-2017-43.

44 See, e.g., 12 U.S.C. § 1818(s); 12 C.F.R. § 21.21; 31 C.F.R. § 1020.210; see also FFIEC, FFIEC BSA/AML

Examination Manual, available at https://bsaaml.ffiec.gov/manual (database of BSA/AML policies and procedures).

10

/s/

Jonathan V. Gould

Senior Deputy Comptroller & Chief Counsel