US Banks Can Now Process Stablecoin Transactions

In a landmark decision issued by the US Office of the Comptroller of Currency (OCC), national banks and federal savings associations have been granted permission to participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities.

This allowance for the integration of US centralized banking with emerging, decentralized technology speaks to the ever-growing interest and demand for DeFi. It also marks a major step towards widespread adoption of cryptocurrency. 

The push to establish officially recognized stablecoin-based financial infrastructure has been championed by Acting Comptroller of the Currency (and former Chief Legal Officer of Coinbase) Brian P. Brooks. 

Removing Legal Uncertainty

“Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products,” said Brooks in the January 4th OCC press release.

The regulation will enable a bridge between decentralized and traditional finance, said early Ethereum community member and designer Richard Burton.

 “With this USDC integration, the dollar can now move across open source financial protocols like Ethereum and into the traditional banking industry,” Burton told The Defiant.

Better Rails

The decision recognizes the need for faster payments rails, which can be provided by open blockchains, according to the 10-page interpretive letter.

“Courts and the OCC have long recognized that the primary role of banks is to act as financial intermediaries, facilitating the flow of money and credit among different parts of the economy,” Senior Deputy Comptroller & Chief Counsel Jonathan V. Gould wrote.

“The changing financial needs of the economy are well-illustrated by the increasing demand in the market for faster and more efficient payments through the use of decentralized technologies, such as INVNs, which validate and record financial transactions, including stablecoin transactions.”

By presenting INVNs and stablecoins as potential technological improvements on more commonly understood elements of mainstream banking, the OCC may prime a whole new batch of DeFi outsiders for involvement in the space.

Aligned With STABLE Act

The decision goes in line with the recently proposed STABLE act which would require any stablecoin issuer and service provider to get a banking charter. While the OCC’s decision is positive as it helps connect crypto to traditional banking, allowing only banks to transact with stablecoins, as the STABLE act proposes, would be a step backwards that would put decentralized exchanges, blockchain node operators, and practically every DeFi application under regulatory risk.

The OCC explains that INVNs perform the same basic functions as established, centralized payment systems—transmitting payment instructions and validating payments—with the core difference being that, due to the decentralized nature of storing database information across multiple computers, INVNs may be faster, more efficient, and more secure than traditional alternatives.

Similarly, the OCC contextualizes stablecoins alongside debit cards, checks, and electronically stored value (ESV) systems like prepaid cards. 

“Like ESV, stablecoins can serve as electronic representations of those U.S. dollars. Instead of value being stored on an ESV card, the value is represented on the stablecoin. This distinction is technological in nature and does not affect the permissibility of the underlying activity.”

KYCL / AML

The OCC makes sure to note that banks will need to keep new technological risks in mind when engaging with INVNs, and properly guard against money laundering and terrorist financing. They also clarify that all officially recognized stablecoin arrangements “should have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.”

While mainstream DeFi adoption is still a ways off, and the insistence upon identity verification doesn’t line up perfectly with the permissionless ethos of the space, the OCC ruling is still a major move to ensure that the US stays financially competitive on the global stage.

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