OCC Proposes Stablecoin Issuer Regulation, Finalizes Rule on National Trust Banks Authority

The OCC released a proposed rule to implement the GENIUS Act, which (once effective) will generally prohibit any person other than a "permitted payment stablecoin issuer" (or PPSI) from issuing a payment stablecoin in the United States. It will also prohibit digital asset service providers from offering or selling a payment stablecoin to a U.S. person, unless the issuer is a PPSI or the issuer is a foreign payment stablecoin issuer that meets certain requirements. Today, different rules still apply.

The proposed rule is extensive and detailed, with over 200 questions seeking further comment and information. Comments are due 60 days after it is published in the Federal Reserve. This post reviews only the highlights and broad themes, with more detailed analyses to follow.

Overview of the Proposed Rule

The proposed rule would establish a regulatory framework for these payment stablecoin activities for all entities regulated by the OCC, which, under the GENIUS Act, includes some state-chartered/licensed entities and non-banks—a novel development in the multilayered maze of overlapping U.S. financial regulators. For non-banks, the proposed rule would formalize a federal supervisory perimeter analogous in rigor to a bank charter, but activities would be limited to stablecoin issuance.

The GENIUS Act specifies various regulatory and licensing requirements for PPSIs and foreign payment stablecoin issuers. The proposed rule would build on those by creating a new part 15 in the OCC's regulations as well as amend other parts: capital (part 3); prompt corrective action (part 6); assessments/fees (part 8); and the rules of practice and procedure (part 9). While it would not directly change the general filing requirements for activities (part 5) or permissible activities and operations (part 7), the new part 15 would be read together with them.

Final Rule for National Trust Bank Activities

As an aside, we also note that today, the OCC finalized a rule to clarify national trust banks' authority to engage in nonfiduciary activities in addition to fiduciary activities. The OCC has finalized the proposed rule as proposed and further clarified. Thus, we now know that these activities are broad—just not how broad or what specifically they are. The OCC has explained that it will review proposed activities in the context of applications and determine whether they are within the operations of a trust company, related thereto, or neither. Thus, operational details will be revealed in the flurry of national trust bank applications that are pending before the OCC and are expected to continue to be filed, as well as any litigation from the states that may follow.

Practical Implications of the Proposed Rule

• For national banks: Stablecoin issuance would become a clearly regulated subsidiary activity with defined reserve, redemption, and supervisory guardrails. Capital and balance sheet modeling will be essential. National banks, which today may engage in this activity directly, will have to establish subsidiaries to do it under the GENIUS Act.
• For fintech issuers: The proposal creates a federal licensing pathway, but with prudential expectations comparable to a limited-purpose bank. These likely will exceed expectations that these fintechs may have become accustomed to, but at the same time provide them with a clear, federal framework.
• For foreign issuers: OCC supervisory reach likely will apply to those with any U.S. nexus.
• For program managers and infrastructure providers: Part 15 would focus on the issuer specifically—but other custodians, technology providers, and operational partners would fall within third-party risk oversight.

Three Highlights

• Yield: Perhaps the hottest policy debate regarding digital assets and blockchain relates to whether payment stablecoin issuers may or should be able to pay yield to stablecoins holders. In the ongoing debate over the market structure bill, incumbent banks have sought to close what they perceive as a "loophole" in the GENIUS Act's restriction on the payment of yield. The crypto industry, on the other hand, has taken the position that Congress clearly left open the possibility of yield or interest being paid to customers other than from stablecoin issuers themselves.

  In the proposed rule, the OCC attempts to strike a balance by proposing a presumption that a permitted payment stablecoin issuer would be paying yield (therefore, in violation of the GENIUS Act) if the PPSI had a contract or arrangement with a third party to pay interest or yield to that third party and the third party has a contract or arrangement to pay yield to the holder of the payment stablecoin solely in connection with the holding, use, or retention of the issuer's stablecoin . However, the OCC also notes that the prohibition is not intended to prevent a PPSI from sharing in profits derived from a payment stablecoin with a nonaffiliated partner in a "white label" relationship. Even this attempt at clarification is expected to lead to substantial commentary and we will analyze this topic in greater detail in subsequent blogposts.

• Risk management: The creation of strong and robust risk-management processes was one of the key points of bipartisan agreement when the GENIUS Act was negotiated and finalized. In the proposed rule, the OCC notes that the risk-management framework with respect to stablecoins is intended to be "principles based," which is understood in other contexts (e.g., per SEC interpretations) to be flexible in nature. Thus, we can expect intense scrutiny of the nature of the "flexibility" proposed by the OCC.
• Payments activities: The OCC's language in the proposed rule's preamble still does not clarify the breadth of a national trust bank's permissible payments activities. It preserves the status quo of (strategic?) ambiguity that today's final rule on this topic maintains. Ultimately, however, this will likely be clarified through the comment process or litigation. The balkanized approach of the regulators—absent substantial clarity from a future rulemaking by the Federal Reserve—also leaves the question of Master Accounts for national trust banks that may be PPSIs potentially unresolved.

Other Areas Covered in the Proposed Rule

Powers and Structure: Part 15 would generally delineate permissible activities, and provide details on:

• Issuance of payment stablecoins.
• Custody of reserve assets.
• Applications and registrations for permitted payment stablecoin issuers subject to OCC jurisdiction (revocation, too).
• State-qualified payment stablecoin issuers transitioning to the federal regulatory framework.

The proposed rule would seek to prevent balance sheet expansion beyond the payment stablecoin function, a reflection of PPSIs' narrowly defined powers.

Financial Mechanics: In addition to other provisions, the proposed rule would include details on reserve treatment and amendments to the federal capital rules:

• Capital and operational backstop, generally tailored for each applicant and subject to a $5 million floor.
• Maintenance of specified high-quality, highly liquid reserve assets.
• Segregation and safeguarding requirements, with options for omnibus account usage.
• Ongoing valuation and reporting expectations.
• Redemption requirements.
• Restrictions on encumbrance and rehypothecation (and where the OCC would be less concerned in this space).
• Ancillary operational functions necessary to maintain peg stability.

Supervision: The proposed rule also details the supervisory framework that would apply to PPSIs. This level of supervision may be a notable change for entities not previously subject to federal financial examination.

Next Steps

The FDIC has announced that it will release a follow-up proposed rule soon, having already provided a proposed rule on applications for FDIC-supervised entities. We expect the Federal Reserve will follow shortly with its version as well.

We look forward to providing a deeper analysis of this important development.

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Max Bonici and Steve Gannon have extensive experience spanning financial compliance, regulatory counsel, and enforcement matters, providing insights to help clients navigate complex challenges in the financial services sector. For more insights, contact Max, Steve, or another member of Davis Wright Tremaine's financial services team or sign up for our alerts.