Might 21, 2021
This week, there have been vital digital foreign money developments at two of the principal federal banking businesses, the Workplace of the Comptroller of the Foreign money (OCC) and the Federal Deposit Insurance coverage Company (FDIC). Each of those developments occurred because the markets for digital currencies confirmed substantial volatility. First, in testimony earlier than Congress on Wednesday, Appearing Comptroller of the Foreign money Michael Hsu expressed issues concerning the OCC’s current actions for digital foreign money corporations and acknowledged that he had “requested workers to evaluation these actions.” Second, the FDIC revealed a request for info (RFI) about digital belongings and the banking system. Feedback on the RFI are due by July 16, 2021.
I. Workplace of the Comptroller of the Foreign money
Previous to Appearing Comptroller Hsu’s appointment by Treasury Secretary Yellen, the OCC was the federal banking company that had taken the lead on digital currencies, not too long ago approving three purposes by digital foreign money corporations. Of those actions, Appearing Comptroller Hsu acknowledged his “broad concern . . . that these initiatives weren’t accomplished in full coordination with all stakeholders. Nor do they seem to have been a part of a broader technique associated to the regulatory perimeter.”
The OCC approvals concerned two purposes for conversion from state belief corporations to nationwide belief banks, these of Anchorage Digital Financial institution, Nationwide Affiliation, and Protego Belief Financial institution, Nationwide Affiliation, and one software for a brand new nationwide belief financial institution constitution, for Paxos Nationwide Belief. Every approval subsequently concerned a sort of nationwide financial institution particularly licensed by Congress, and never a particular goal “fintech” constitution.
The actions that the OCC acknowledged have been permissible for nationwide banks within the approvals lined many digital foreign money actions, together with:
- fiduciary custody of digital belongings
- custody of consumer money deposits
- offering on-chain governance companies permitting shoppers to take part within the governance of the underlying protocols on which their digital belongings function
- working validator nodes
- offering staking as a service
- offering shoppers the power to delegate staking to third-party validators
- settling transactions facilitated by associates, third-party brokers and shoppers
- figuring out that clients ought to declare forked belongings
- custody and administration of U.S. greenback stablecoin reserves
- fee, trade, and different agent companies
- buying and selling companies and enabling companions to purchase and promote cryptocurrency
- “know your buyer” as a service, together with buyer identification, sanctions screening, enhanced due diligence, buyer danger score, and different associated companies
It isn’t clear what type the OCC workers evaluation mandated by Appearing Comptroller Hsu will take. It does seem from the remainder of his testimony, nevertheless, that the OCC will now not “go it alone” on the subject of digital belongings. As Mr. Hsu – previously a profession supervisor on the Federal Reserve – acknowledged, “[r]ecognizing the OCC’s distinctive authority to grant charters, we should discover a solution to think about how fintechs and funds platforms match into the banking system, and we should do it in coordination with the FDIC, Federal Reserve, and the states.” Mr. Hsu additionally warned of the potential of systemic danger from digital actions, stating that he was feeling “some déjà vu,” having seen the monetary disintermediation of the late Nineteen Nineties and 2000s that contributed to the Nice Recession.
II. Federal Deposit Insurance coverage Company
If the OCC seems to be placing on the brakes, the FDIC – the first federal supervisor for insured state banks, together with industrial banks, that aren’t members of the Federal Reserve system, the U.S. deposit insurer, and the U.S. financial institution decision authority – signaled that it needs to know extra about digital belongings and the banking system. On Might 17, it issued a request for info, soliciting feedback relating to insured depository establishments’ (IDIs) present and potential digital asset actions. The FDIC famous that banks are exploring a number of roles within the digital asset ecosystem, with digital use circumstances and associated actions doubtlessly falling into the next classes:
- Know-how options, corresponding to these involving closed and open fee methods, different token-based methods for banking actions apart from funds (g., lending), and performing as nodes in networks (e.g., distributed ledgers)
- Asset-based actions, corresponding to investments, collateral, margin lending and liquidity amenities
- Legal responsibility-based actions, corresponding to deposit companies and the place deposits function digital asset reserves
- Custodial actions, corresponding to offering digital asset safekeeping and associated companies, corresponding to secondary lending, in addition to performing as a professional custodian on behalf of funding advisors
- Different exercise together with market-making and decentralized financing
Present and Potential Use Instances
The RFI seeks info relating to present and potential use circumstances of digital belongings, together with classes of digital belongings and associated actions, actions or use circumstances that IDIs are at the moment partaking in or contemplating, and the demand for digital asset-related companies.
Threat and Compliance Administration
The RFI asks for remark relating to danger and compliance administration, together with IDIs’ present danger and compliance administration frameworks; distinctive dangers which are difficult to measure, monitor, and management for the assorted digital asset use circumstances; distinctive advantages to operations from the assorted digital asset use circumstances; the combination of operations associated to digital belongings with legacy banking methods; potential advantages and distinctive dangers of specific digital asset product choices or companies to IDI clients; and the combination of recent applied sciences into present cybersecurity capabilities.
Supervision and Actions
The RFI requests info relating to supervision and actions, together with the distinctive facets of digital asset actions that the FDIC ought to consider from a supervisory views; areas wherein the FDIC ought to make clear or increase present supervisory steerage to deal with digital asset actions; the distinction between the custody of digital belongings and the custody of conventional belongings; and the interplay of digital belongings with the FDIC’s Half 362 software procedures, which cowl purposes by insured state nonmember banks to conduct principal actions that haven’t been permitted for nationwide banks.
Deposit Insurance coverage and Decision
The RFI asks for info relating to deposit insurance coverage and backbone, together with steps to make sure clients can distinguish between uninsured digital asset merchandise and insured deposits; distinctions or similarities between fiat-backed stablecoins and saved worth merchandise the place the underlying funds are held at IDIs and for which pass-through deposit insurance coverage could also be out there; and complexities that is likely to be encountered in valuing, advertising and marketing, working, or resolving digital asset exercise within the decision course of or in a receivership capability.
This week’s actions reveal that, because the Biden Administration takes form, there’s a change in banking company strategy to digital belongings and that addressing the problems raised by digital belongings stays a substantial regulatory precedence. It seems that the OCC, Federal Reserve Board and FDIC will take a extra coordinated strategy to digital belongings, one results of which can be that sure state financial institution regulatory businesses could take the lead on modern proposals within the quick time period. For instance, a lot of the actions that the OCC permitted in its digital foreign money approvals earlier than Appearing Comptroller Hsu was appointed had beforehand been deemed permissible for state-licensed belief corporations.
 Letter from Stephen A. Lybarger, Deputy Comptroller Licensing, OCC, to Nathan McCauley, President & Director, Anchorage Trust Company, Application by Anchorage Trust Company, Sioux Falls, South Dakota to Convert to a National Trust Bank (Jan. 13, 2021); Letter from Stephen A. Lybarger, Deputy Comptroller Licensing, OCC, to Greg Gilman, Founder & Executive Chair, Audaces Fortuna Inc., Application by Protego Trust Company, Seattle, Washington, to Convert to a National Trust Bank (Feb. 4, 2021); Letter from Stephen A. Lybarger, Deputy Comptroller Licensing, OCC, to Daniel Burstein, General Counsel and Chief Compliance Officer, Paxos, Application to Charter Paxos National Trust, New York, New York (Apr. 23, 2021).
 See id., available at https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-6a.pdf; https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-19a.pdf; and https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-49a.pdf.
 FDIC, Request for Information and Comment on Digital Assets (May 17, 2021), available at https://www.fdic.gov/news/press-releases/2021/pr21046a.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery.
The next Gibson Dunn legal professionals assisted in getting ready this consumer replace: Arthur Lengthy and Samantha Ostrom.
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