Bloomberg News
As more crypto firms are applying for national trust charters, banks are raising alarms.
Paxos, a crypto-focused nonbank financial firm formerly known as itBit,
But Paxos is only the latest nonbank crypto firm to seek a National Trust Charter: Ripple, which operates altcoin XRP,
That increasing interest in trust charters from crypto firms has gotten the banking industry’s attention. Last month, the American Bankers Association
“Based on the Associations’ review of the limited information included in the public portions of the Applications, the Associations believe that there are significant policy and legal questions as to whether the Applicants’ proposed business plans involve the types of fiduciary activities performed by national trust banks,” the ABA letter said. “Granting these Applications could represent a fundamental departure from existing OCC precedent, and the Associations firmly believe that such a departure demands public input.”
Critics of allowing fintechs to gain national trust charters argue the move grants crypto and fintech firms competitive advantages without the same oversight, FDIC protection, or congressional mandate that traditional banks face. Some applicants have even proposed using this authority to let customers access funds held in trust with a debit card — an idea that banking industry voices like Mickey Marshall, regulatory counsel at the Independent Community Bankers of America, say stretches the original intent of the charter.
“If you now have this National Trust Bank that’s holding funds in kind of a stable value account, investing them in securities on behalf of the client, but the client can access those funds with a debit card, that starts to look a lot more like a traditional deposit relationship,” Marshall said. “And now starts to compete with a bank for deposits in a way that trust banks traditionally haven’t.”
Trust companies are not new, but they’ve historically served a niche in the financial marketplace, allowing financial institutions to provide custodial services to their customers, like trust and estate management.
That changed after an OCC
That potentially broad remit for firms with a national trust charter is allowing those firms a new way into banking, which Marshall said could create a variety of risks for the industry as well as consumer harm. ICBA is calling for a formal rulemaking on the issue, given the charter’s scope was expanded in a relatively unilateral way.
“There should be some clear congressional intent … absent that, at the very least there should be a rulemaking so that the OCC can get feedback … basically lay out a more clear framework of rules if these national trusts are going to offer deposit-like products,” Marshall said. “‘Here are the exams we’re going to do to make sure that they hold good assets, here are the things we’re going to do to make sure they protect customer data … absent any kind of formal rulemaking, we don’t really have answers to some of those questions.”
Banking advocates are also worried that the growth of stablecoins could siphon trillions of core deposits from community banks, undermining their ability to fund local lending. An estimate from the Treasury predicts that stablecoins could grow to over $6 trillion in volume, a tectonic shift in the financial system that banks fear would pull primarily from bank deposits, reducing banks profitability and, according to Marshall, their ability to drive economic growth.
“Those deposits, when they flow out of community banks, reduce those community banks’ ability to lend in their communities,” Marshall said. “It’s less money that they have to make small business loans, small farm loans, mortgage loans, because that money is now going into these stablecoin reserves, where it’s basically buying U.S. Treasuries. And so buying U.S. Treasuries doesn’t have the same level of community impact, doesn’t create the same level of economic growth, for example, that making all business loans does.”
Fintech advocates say that national trust charters don’t create loopholes but instead promote competition and innovation. Penny Lee, president and CEO of the Financial Technology Association, which represents fintechs, argues the OCC’s framework provides a legitimate path for new business models that can better serve customers to enter the banking sector.
“National trust charters and other tailored charters foster competition and innovation within the banking sector,” Lee said. “Allowing for the emergence of new business models and specialized institutions that can better serve the evolving needs of consumers and businesses.”
Jesse Van Tol, President and CEO of the National Community Reinvestment Coalition, a consumer and community advocacy group, says that granting national trust charters to crypto firms could weaken consumer protections by allowing them to bypass stronger state-level safeguards. They argue that if the administration were to grant preemption of key consumer protection laws, trust-chartered fintechs could operate with little accountability in states where protections exceed federal standards.
“I think one major concern would be if this administration were to grant preemption of big consumer protection laws for a National Trust charter, then these companies would be able to operate with some impunity with respect to state consumer protection protection laws,” Van Tol said.
But Lee said the concerns about fintechs getting an inside track over banks are overblown and that recipients of trust charters would be under the jurisdiction of the OCC and the applicable banking laws.
“Financial technology companies operate under the same activities-based and entity-based regulatory frameworks that apply across the entire U.S. financial services industry and have done so for many decades,” Lee says. “These requirements are tailored to reduce operational, liquidity, investment, financial crime, and consumer protection risks.”
Banking trade groups also warn that the charters could mislead consumers into believing their money carries the same protections as deposits at traditional banks. Marshall counters that customers may see an OCC-regulated institution calling itself a bank and assume their funds are insured, when in reality national trust banks do not carry FDIC protection and are not supervised in the same way as insured banks.
“A customer may see this is OCC-regulated, it’s calling itself a bank and think, ‘I have the same protections here that I do with a national bank,'” Marshall said. “But that’s not the case, because it’s not technically a deposit, it’s not FDIC insured [and] the bank is not examined and supervised the same way an FDIC insured bank would be. If there’s some sort of insolvency at the institution, if there’s some fraud or hack at the institution, the customers’ funds are not going to be protected the same way they would be with a traditional bank. We’ve seen with some cryptocurrency companies like FTX that crypto companies are not immune from scams or not immune from fraud, and there could be failures there.”
Van Tol agrees that consumers could have a hard time understanding the technical difference between a national trust chartered firm and a traditional bank with deposit insurance, and added that National trust banks aren’t subject to the Community Reinvestment Act, an anti-redlining law which requires banks to lend to the diverse spectrum of clients in the communities in which they operate.
“While technically they won’t have deposit insurance, gaining the government imprimatur — the stamp of approval that a charter brings — potentially creates the perception that your money is safe if it’s held in a stablecoin with a company that has a trust charter,” Van Tol said. “The average consumer does not understand what a stablecoin is, it’s just gonna look the way most people experience their actual deposits today … a number in their account issued by a chartered institution … how is that going to be distinguished?”