The Office of the Comptroller of the Currency (OCC) today published a letter which addresses the legal permissibility of certain payment-related activities that involve the use of new technologies, including the use of independent node verification networks (INVNs or networks) and stablecoins, to engage in and facilitate payment activities.
The OCC has found that payment system activities (e.g., electronic payments message transmission, electronic payments processing, and payments settlement among members) are clearly within the business of banking and are functionally consistent with the primary role of banks as financial intermediaries. The payment activities are conducted using stablecoins which is a type of cryptocurrency that is designed to have a stable value as compared with other types of cryptocurrency. In this regard, stablecoins represent a mechanism for storing, transferring, transmitting, and exchanging that can typically be exchanged for the underlying fiat currency, like the U.S Dollar, where one unit of the stablecoin can be exchanged for one unit of the underlying fiat currency.
The letter concludes by discussing the objective of INVNs which is to facilitate a new means of transmitting payment instructions through an established payment system that becomes a trusted, centralized entity to validate payments. Thus, a national bank or federal savings association may validate, store, and record payment transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payment activities. In deploying these technologies, a bank must comply with applicable law and safe, sound, and fair banking practices.
Benefits and Risks
INVNs may enhance the efficiency, effectiveness, and stability of the provision of payments. Rather than relying on a single entity to verify payments, INVNs allow a comparatively large number of nodes to verify transactions in a trusted manner. An INVN also acts to prevent tampering or adding inaccurate information to the database.
Along with the benefits, payment activities involving cryptocurrencies could also increase operational risks, including fraud risk. Depending on the nature of the payment activity, activities involving stablecoins could entail significant liquidity risks for banks as well. Cryptocurrency payment activities could also raise heightened compliance risks and can present risks under anti-money laundering (AML) and countering the financing of terrorism requirements. Thus, while the OCC neither encourages nor discourages banks from participating in and supporting INVNs and stablecoins, banks should evaluate the appropriateness of INVNs and stablecoin participation in order to ensure banks’ continuing ability to provide payment services to their customers in a manner that reflects changing demand.
This guidance allowing settlement through stablecoins is exciting but it comes with many side effects.There are threads that link it to the Bitcoin price and ATHs, Tether, Libra, JPMorgan Wall Street, and DCEP. The following are 6 aspects of the same:
1. What most have caught on to is that stablecoins getting linked to banks will eventually make them more regulated and justify full AML/KYC disclosures. This will eventually be required everywhere and not just in the US. Another impact would be on reserve management.
2. There are few credible audits on the reserves of stablecoins. This will have implications on the Bitcoin price. Many are aware that Bitcoin rice pumps are often correlated to heavy Tether minting and movements from whale wallets. Tether is able to freely mint in huge volumes, because the collateral backing of these tokens is not verified. A 1:1 backing to USD was assumed but a 2019 US District court case revealed that Tether has about 70% backing to the dollar, some of it being affiliate loans. If stablecoins will now be strictly pegged to the dollar and monitored, we can expect a lot of pump and dump activity in token prices to subside which is good, but it also means the rising ATH prices will come down as well.
3. You think the winners are existing stablecoins but they may not be. The regulation effectively opens the gates to a host of Wall Street stablecoins. Most banks who would want to run their own stablecoin, manage their own reserves, have an added income stream. There will be a flurry of stablecoin creation from major banks and FinTechs, those with existing market share and network effects that can increase adoption, could again dominate and crowd out the competition. Blockchain then becomes less of a free market.
4. Enter Libra Diem, slated to launch this month with an approval in Switzerland. Their focus is on retail customers, but what if they decide to start out in the US with a wholesale/institutional model? They can get banking charters in all states to satisfy a STABLE Act. If this happens and Diem gets the retail usage approvals as well, then we will move from FinTech to TechFin – most banks and financial institutions will become irrelevant and Facebook, with wholesale and retail usage, will become the biggest financial institution in the world.
5. Does this signal a move to a digital dollar? On the surface, it seems the opposite of that. Because if the digital dollar was coming all USD stablecoins would be made redundant, so why do it? It could perhaps work as a trial run for a wholesale version of the dollar.
6. On the inside, a lot of this could be driven by geopolitics and the threat being perceived by the DCEP and China. As we’ve evidenced in our 4-part report series on the Digital Yuan, the DCEP will not just impact the dollar but also Wall Street.
What are your thoughts?
Leave us a comment telling us what you think! And keep on the lookout for our next blog post coming soon.