Interagency Joint Statement
On November 23, 2021, the Fed, the OCC, and the FDIC issued an Interagency Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps ("Joint Statement"). A statement providing results of the "crypto-sprint" had been expected. In a recent speech, Acting Comptroller Hsu noted "Soon the federal banking agencies will be issuing a short statement that describes the interagency 'crypto sprint' that concluded recently." While this short Joint Statement appears to be the result of the "sprint", it provides little actionable information but indicates that any concrete results will be articulated sometime in the future. It suggests this might take the form of guidance that does not go through the notice-and-comment process mandated by the Administrative Procedure Act ("APA"), even though it will likely contain what in sum will be regulatory expectations.
The Joint Statement identifies topics on which the three agencies will "provide greater clarity," among other things, "on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations related to:
- Crypto-asset safekeeping and traditional custody services.
- Ancillary custody services.
- Facilitation of customer purchases and sales of crypto-assets.
- Loans collateralized by crypto-assets.
- Issuance and distribution of stablecoins.
- Activities involving the holding of crypto-assets on balance sheet."
The Joint Statement does not provide insights on how banking organizations can meet regulatory expectations regarding these issues.
Acting Comptroller Hsu had indicated beginning in May 2021, when he became Acting Comptroller, that the agencies had begun discussions about addressing digital asset issues. Six months later, the banking regulators have issued a statement indicating that they will issue guidance of some sort next year on a host of topics. In addition to issuing the Joint Statement to set expectations about future progress on regulatory guidance, the OCC issued guidance seemingly intended to narrow its past guidance on digital assets.
OCC Interpretive Letter # 1179
On the same day it co-issued the Joint Statement, the OCC also issued an Interpretive Letter #1179, entitled "Chief Counsel's Interpretation Clarifying: (1) Authority of a Bank to Engage in Certain Cryptocurrency Activities; and (2) Authority of the OCC to Charter a National Trust Bank" (the "Letter"). The OCC also provided a news release summary statement about the letter. The OCC appears to have issued the Letter to narrowly construe prior interpretive letters, discussed below, that permit banks to engage in certain cryptocurrency and related activities. Most notably, coupled with the Joint Statement, the Letter suggests that approval for these activities could be considerably slowed. This raises the question whether the OCC may intend by slow "guidance" to issue instructions that are, according to the APA, required to be issued as rulemaking, rather than just unenforceable guidance.
The Letter references three digital-asset-friendly earlier OCC Interpretive letters (Interpretive Letter 1170, Interpretive Letter 1172, and Interpretive Letter 1174) which were released in 2020 and early 2021, under former Acting Comptroller Brian Brooks' OCC tenure during the prior administration. The OCC posits that the Letter "clarifies that the activities addressed in those interpretive letters are legally permissible for a bank to engage in, 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" (emphasis in original). The OCC advises that "a bank should notify its supervisory office, in writing, of its intention to engage in any of the activities addressed in the interpretive letters. The bank should not engage in the activities until it receives written notification of the supervisory office's non-objection."
The OCC cautions that "[i]n deciding whether to grant supervisory non-objection, the supervisory office will evaluate the adequacy of the bank's risk management systems and controls, and risk measurement systems, to enable the bank to engage in the proposed activities in a safe and sound manner." A footnote in the Letter provides what might be characterized as a "grandfather clause" for banks that previously instituted crypto activities while relying on prior interpretive letters. The OCC notes that "[b]anks already engaged in cryptocurrency, distributed ledger, or stablecoin activities as of the date of publication of this letter do not need to obtain supervisory non-objection. However, consistent with the relevant interpretive letters, the OCC expects that a bank that has commenced such activity will have provided notice to its supervisory office…" While a bank engaged in the preceding activities is not required to obtain a supervisory non-objection to continue its activities, the grandfather clause does not address the standards that OCC examiners would apply in evaluating whether a bank's cryptocurrency and related activities are conducted "in a safe and sound manner." Accordingly, banks considering activity in this space should begin to build their risk frameworks sooner rather than later.
The Letter also addresses Interpretive Letter 1176, another Brooks-era letter, noting that the interpretive letter "addressed the OCC's chartering authority and did not expand or otherwise change existing banks' obligations under the OCC's fiduciary activities regulation, 12 C.F.R. Part 9." Shortly after issuing Interpretive Letter 1176, the OCC granted final approval for the charter conversion applications for Anchorage Digital Bank. But in the Letter, OCC emphasizes that it "retains discretion in determining whether an activity is conducted in a fiduciary capacity for purposes of federal law." Moreover, the OCC "retains discretion to determine if an applicant's activities that are considered trust or fiduciary activities under state law are considered trust or fiduciary activities for purposes of applicable federal law."
It remains to be seen how the Letter's clarifications will play out in practice, but the Letter appears to (1) narrow the scope of the interpretive letters discussed above, and (2) be an effort to ensure that banks engage in digital asset activities slowly and with care. It is unclear, for example, what the standards and timing are for the OCC staff to evaluate and respond to a bank's request for "non-objection" submitted to the OCC supervisory office with respect to the bank's planned crypto activities. The indefinite timing and uncertain outcome is likely to increase the degree of difficulty for banks which are in the process of building risk models and frameworks for this asset class. A more detailed Client Alert about these issues will be provided in the near future.