Key insight: The OCC’s conditional approval of five crypto-focused national trust bank charters has spawned a debate over whether digital-asset custody and stablecoin-related activities fit within Congress’ vision for trust banks
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Supporting data: OCC approved applications from First National Digital Currency Bank, Ripple National Trust Bank, BitGo Bank & Trust, Fidelity Digital Assets, and Paxos Trust Company on Friday
Forward look: State regulators and trade groups are expected to scrutinize trust application approvals.
The Office of the Comptroller of the Currency’s recent conditional approval of five crypto companies’ applications for national trust bank charters is stoking lingering questions about whether those firms fit within the legal scope of the charter.
The OCC issued
Rebeca Romero Rainey, President and CEO of the Independent Community Bankers of America, said in a statement Tuesday that the approvals — and a 2021 interpretive letter undergirding them — represent a change in policy, and one that brings with it heightened risks to financial stability.
“Trust banks are not required to meet the same kinds of regulatory and capital standards that apply to federally insured full-service banks. The conditional approvals of five national trust bank charters from the OCC further stretches the national trust bank charter beyond its statutory and historical purpose, endangers consumers, and creates institutions the OCC is not equipped to resolve in an orderly way,” Romero Rainey said. “The OCC’s dramatic policy change under Interpretive Letter #1176 is a departure from the role of conventional trust companies and allows for an inconsistent regulatory framework that threatens financial instability — requiring the agency to change course.”
Comptroller of the Currency Jonathan Gould, who penned Interpretive Letter 1176 in 2021 while serving as OCC General Counsel, has said that the letter
State bank regulators also see potential for danger ahead. Brandon Milhorn, President and CEO of the Conference of State Bank Supervisors — a group that represents state-level banking regulators — said in a statement that while the OCC’s conditional approvals appear limited to fiduciary digital-asset custody, any expansion into more traditional banking activities could trigger violations of state banking or money-transmission laws.
“Based on the OCC’s conditional approvals, it appears these uninsured national trusts will primarily engage in fiduciary activities related to digital assets, and certain related custodial activities,” Milhorn said. “The states will continue to monitor final OCC approvals for these entities and the future financial activities of the firms, and any affiliates, to ensure that they do not exceed the authority of the OCC relative to national trusts. For example, activities related to deposit taking, lending, or payments could violate state banking or money transmission laws.”
The American Bankers Association raised their own concerns, warning that the move to issue trust charters to crypto firms for non-fiduciary activities could stretch the definition of the charter under law, saying it “raises important questions about the scope and oversight of these institutions.”
“While innovation in financial services can benefit consumers, it is critical that any chartered entity operates under a regulatory framework that appropriately addresses its activities and risks,” ABA president Rob Nichols wrote in a statement following the decision. “We are concerned that expanding the trust charter in this way, particularly for entities that may not engage in traditional fiduciary activities, could blur the lines of what it means to be a bank and create opportunities for regulatory arbitrage. Clear answers are needed to ensure the public and policymakers understand how these charters will be supervised and how risks will be mitigated.”
Dante Disparte, Chief Strategy Officer for digital asset firm Circle — which is among the firms with national trust charter applications pending with the OCC — argued that narrow stablecoin issuance and custody belong in the national trust charter framework, because their risk profiles are fundamentally different from full-service banking. If those firms applying for national trust charters today find they are too limited in the future, they can always apply for a more full-service charter, he said.
“If the activity is that narrow, then, in our view, the trust is the right home,” Disparte said. “If, over time, stablecoin issuers or other institutions want to do additional activities, they may want to consider alternative banking charters.”
Disparte added that Circle’s pursuit of a trust charter long predates the current regulatory moment, but the current regulatory moment seemed ripe to take the plunge.
“We’ve long had a company ambition of pursuing this trust charter, this banking license pathway,” Disparate said. “The regulatory environment has merely caught up to that long term ambition that the company has had.”
Jaret Seiberg, an analyst at TD Cowen, said that pulling crypto further into a regulated framework could ultimately benefit banks, despite their present discomfort.
“Banking groups criticized the approval as they do not believe crypto entities will have enough oversight,” Seiberg wrote in an analyst note. “We … believe, in the long term, this may be positive for banks as it brings crypto into a regulated sphere where banks have an advantage. And it opens the door for banks to get more into crypto.”