I. INTRODUCTION
The Office of the Comptroller of the Currency (OCC) has issued an Interpretive Letter addressing 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.
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.
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.
II. DISCUSSION
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. Rather 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, and by exchanging that stablecoin for fiat currency. 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.
III. BENEFITS AND RISKS
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. 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. 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 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. 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, acting as a digital certification authority and providing data processing services. 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.
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. 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.