OCC Grants Conditional Approval for De Novo National Bank Charter
Commentary by Thomas Delaney and Steven Lofchie
The Office of the Comptroller of the Currency ("OCC") granted conditional approval for a de novo national bank charter application.
In a conditional approval letter, the OCC authorized the formation of a full-service national bank sponsored by an affiliated holding company. The OCC also approved the merger of the holding company with and into the Bank, and granted residency waivers for several proposed directors. The OCC explained that the merger approval includes a Regulation W ("Transactions between Member Banks and Their Affiliates") exemption, allowing a subsidiary of the holding company to become a wholly owned subsidiary of the Bank.
The OCC conditioned its approval on: (i) obtaining prior written "no objection" before any material deviation from the Bank’s business plan during the organization period and first three years of operation; (ii) maintaining a minimum 12 percent Tier 1 leverage ratio throughout the same period; (iii) securing OCC "no objection" determinations before appointing senior executive officers or directors; (iv) completing all pre-opening requirements, including obtaining FDIC insurance and Federal Reserve membership, before commencing operations; and (v) meeting capitalization and opening timelines.
The OCC described the proposed Bank as a full-service institution designed to serve technology companies and high-net-worth individuals that utilize virtual currencies. A key element of the Bank’s business plan is to hold limited amounts of non-asset-backed virtual currencies on its balance sheet for the specific purpose of paying blockchain transaction fees ("gas fees") associated with its crypto-asset custody operations.
The OCC stated it approved the application because the Bank’s proposal met all regulatory requirements for chartering a national bank. The OCC determined that holding limited amounts of non–asset-backed virtual currencies to pay gas fees is permissible as an activity incidental to banking, as it supports the Bank’s crypto-asset custody services. The OCC further explained that the related merger and asset purchase satisfied standards for capital adequacy, legal compliance, and safety and soundness, and qualified for a Regulation W exemption available to newly formed banks.
Commentary
In what is likely to be a trend, the OCC conditionally approved the charter of Erebor bank today. Erebor will be a full service insured national bank that plans to target its products and services to technology companies and ultra-high-net-worth individuals that utilize virtual currencies. In issuing this approval, the OCC found that the bank’s plan to hold non-asset backed virtual currencies on balance sheets to pay block-chain transaction fees (commonly referred to as "gas fees"), is permissible under 12 USC 24 (Seventh).
Up to this point, traditional bank platforms were generally only permitted to custody digital assets. Today’s announcement represents a significant step in moving banks further along the path of dealing with digital currencies in a manner that until now was reserved to the U.S. dollar.
Commentary
The FTX debacle was arguably the direct result of the prior Administration's refusal to allow crypto to operate within a regulated environment. Had banks been permitted to provide custody of crypto asset, investors would have likely custodied with regulated banks, not with FTX.