OCC Says Banks May Engage in Riskless Principal Crypto-Asset Transactions
Commentary by Thomas Delaney and Tim Byrne
The Office of the Comptroller of the Currency ("OCC") confirmed that national banks possessed the authority to engage in riskless principal transactions involving crypto-assets for their customers.
In an Interpretive Letter, the OCC addressed a request for confirmation regarding whether national banks could conduct riskless principal crypto-asset transactions as part of the business of banking. The OCC Chief Counsel determined that because national banks were legally permitted to engage in riskless principal transactions involving securities under 12 U.S.C. § 24 (Seventh) ("Corporate powers of associations"), they were inherently permitted to conduct such transactions with crypto-assets that qualified as securities.
The OCC extended this analysis to crypto-assets that were not securities, finding the activity to be a logical outgrowth of recognized banking activities like brokerage and custody services. The agency concluded that these transactions strengthened banks by offering customers a regulated venue for crypto-asset transactions and involved settlement risk that were similar to those that banks already assumed in traditional financial intermediation.
The OCC stipulated that any national bank conducting these transactions must operate in a safe and sound manner and comply with all applicable laws. In addition, the agency stated that it would examine these activities as part of its ongoing supervisory process.
Commentary
The OCC’s decision to allow national banks to engage in riskless principal crypto asset transactions is another significant step among several taken lately by the national bank regulator toward integrating crypto assets into the traditional financial system. As reflected in the underlying interpretive letter, the OCC views this action as a logical outgrowth of established precedent in terms of riskless principal authority for national banks. The ability to engage in riskless principal transactions will enable national banks to keep pace with other nonbank intermediaries in terms of serving the growing crypto asset market. Recognizing that valuations of crypto assets can be more volatile than those of other assets in which national banks act as riskless principal, it will be interesting to see what guardrails, if any, the OCC will expect banks to erect in order to protect against market risks associated with failed crypto asset trades.
Commentary
The OCC’s Interpretive Letter is another step in expanding the regulatory authority of banks to engage in crypto-related activities. By determining that riskless principal crypto-asset transactions are incidental to the business of banking, the OCC continues to build on its recent crypto-related guidance. Specifically, see Interpretive Letter #1186 which confirmed that national banks may pay blockchain network fees and hold the necessary inventory of crypto-assets as principal to facilitate those payments. The OCC can be expected to continue to expand the authority that national banks have to engage in crypto activities. As previously noted, these OCC precedents are also relevant to state-chartered banks and the U.S. branch offices of non-U.S. banks.
In a somewhat related development, the New York Governor signed legislation amending the Uniform Commercial Code to govern controllable electronic records, including digital assets, and updated the rules regarding security interests in those assets.
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