OCC’s First Issued Guidance for Stablecoins Brings More Questions

Earlier this week stablecoin issuers received a reassuring message from some of the top U.S. financial regulators: parking your fiat reserves in banks is a-okay. 

On Monday, the Comptroller of the Currency (OCC), under the U.S. Department of the Treasury, issued official guidance declaring that national banks and federal savings associations can hold reserve funds for stablecoin issuers. It was a signal for these issuers to continue what they already have been doing for years. 

Indeed, the dollar-backed stablecoin market nearly quadrupled in size over the past year – from around $5 billion in September 2019 to around $19 billion currently – with much of that wealth backed by reserves held in bank accounts. Much of this growth has been driven by international demand for dollars as well as the increasingly sophisticated financial tools being built on top of public blockchain technology. Since its inception, however, the stablecoin market has existed amid regulatory ambiguity.

The new ruling, the first federal guidance issued regarding stablecoins, adds legitimacy to the booming market sector and paves the way for more banks to enter the ecosystem, say industry commentators. Still, it’s unclear whether the mandate will have any short-term significance. 

“If you don’t have guidance from the banking regulator about how banks can participate in those schemes – or arrangements, rather – that would limit growth. It paves the way for growth,” Jeremy Allaire, CEO of Circle said over Zoom. “But it doesn’t change the way Circle operates today.” 

Allaire isn’t alone in his thinking. “The letter indicates a positive sentiment coming from a top government agency,” Kristen Smith, founder of the Blockchain Association, a D.C. crypto advocacy group, said. “Will it have any major practical changes for the way fiat-backed stablecoins operate? Probably not.”

Still unanswered is whether the mandate will be enough to draw in national banks. As with the OCC’s letter this summer declaring that federally regulated banks can custody crypto, simply granting permission will not necessarily make it so.

CoinDesk reached out for comment from several top U.S. banking institutions. By press time, we had yet to hear back.

“It felt like a big bang. Like, woah, Bank of America now allows you to deposit bitcoin,” Allaire said, referring hyperbolically to the crypto-custody letter.

“These are slow-burn types of things. Banks don’t move at the speed of crypto,” Allaire said. Though he does expect there to be a gradual number of banks that publicly disclose they’re entering the space, “reflecting a comfort around this financial infrastructure.”

Will it have any major practical changes for the way fiat-backed stablecoins operate? Probably not.

In a statement announcing the latest guidance, Acting Comptroller of the Currency and Coinbase alumnus Brian Brooks noted that with or without explicit permission, banks have already engaged in “stablecoin related activities involving billions of dollars each day.” 

And with the “greater regulatory certainty” his agency has provided will come billions of dollars more in stablecoin issuances and transaction volumes, the reasoning goes.

“We see a world where there are tens of billions of dollars, trillions ultimately, of value in circulation using digital dollar stablecoins,” Allaire said. “As the amount of USDC in circulation grows, we’ll need more banking capacity.”

Currently, all USDC reserves are parked in U.S. Bancorp Asset Management (USBAM), a registered investment adviser and subsidiary of U.S. Bank National Association. Allaire doesn’t see cause to immediately shake up that arrangement or add new banking partners. 

“I don’t think we’ve wrapped our heads around it yet and are ready to speak about what this means for the industry,” Becky McClain, director of communications for Paxos, another leading stablecoin issuer, said in an email. 

Other stablecoin issuers, including Gemini, did not make themselves available for comment. 

While the letter does provide some clarity around the nature of fiat-reserves for stablecoins, several industry leaders remain unsure about finer details. 

“We are still trying to figure out what exactly is going here. I will let you know when our thoughts are in order,” Neeraj Agrawal, director of communications Coin Center, a Washington D.C.-based digital asset public policy organisation, said over email. 

“I don’t think folks have realized how potentially confusing and wrongheaded this hosted wallet detail in the recent OCC interpretation might be,” Coin Center Director of Research Peter Van Valkenburgh tweeted Tuesday. 

In the guidance, the OCC writes that it is allowing banks to manage funds kept in a “hosted” wallet, an address that would essentially represent the relevant stablecoin’s reserves. The watchdog adds, “We are not presently addressing the authority to support stablecoin transactions involving un-hosted wallets.” 

“Un-hosted wallets” seem to refer to addresses individuals or businesses would control. This distinction has caused some confusion, with Coin Center’s Jerry Brito raising the question whether this points to a possible prohibition on banking firms that support un-hosted wallets.

“You have to remember the OCC has limited jurisdiction,” Blockchain Association’s Smith said. “They regulate banks.” Though Smith said the line is ambiguous, she pushes back on the idea that it could have unhelpful implications for the larger stablecoin market.

“The OCC does not regulate peer-to-peer transactions, they regulate transactions involving minting and burning stablecoins,” she said – an activity that would involve a hosted wallet. “It’s not to say you can’t have un-hosted wallets. It’s saying they don’t have authority over un-hosted wallets.”

Clearly, the technology is there, but governments will ultimately take a position on what’s an acceptable level of anonymity for digital cash.

Further questions lie around what an increased banking presence would mean for customer privacy. 

According to the guidance, stablecoin reserves held at banks will be subject to compliance standards under the Bank Secrecy Act (BSA), Patriot Act and other anti-money laundering regulations. 

In a world where stablecoins are part of “mainstream, everyday use,” there will have to be “a balance between meeting needs of national security and keeping personal and business transactions private,” Smith said. The legislation hasn’t pointed out the direction this may take.

“The debate hasn’t fully played out,” she said. Allaire agreed. 

“It’s a policy question. Clearly, the technology is there, but governments will ultimately take a position on what’s an acceptable level of anonymity for digital cash,” he said. Allaire takes a general purpose view of digital dollars: saying they could be used for anything a dollar is used for including as collateral in municipal bonds, in trade finance invoices or to buy coffee at the corner bodega. 

“They’re superpowered dollars,” Allaire said. With increased programmability comes increased utility value. “I think the use cases go well-beyond anything we’ve thought of yet.”

It’s a frame of reference that seems to comport with the U.S. Securities and Exchange Commission’s (SEC) stance on fiat-backed stablecoins as a type of “store-of-value” rather than an investment. 

Also announced Monday, the SEC said whether a particular stablecoin falls under their jurisdiction is “a facts and circumstances determination.” The agency also said it is willing to publish a “no-action” letter, which would assure the recipient that the regulator would not bring an enforcement action against the company.

“The SEC is saying fiat-backed, fully-reserved stablecoins are not securities,” Allaire said, adding that it is taking a “come talk to us and we’ll verify” approach. While this opens the door for companies like Circle to engage with the SEC, it doesn’t answer its questions directly. 

“You can’t read too much into it because it says so little,” he said, adding, “This raises more questions and concerns.” A wide range of stablecoins may in fact be securities, including those that are algorithmically derived and those that are not provably fully-backed.

Still, Allaire said: “You should expect to see a request for no action.”