The OCC is a US Treasury agency responsible for the supervision of US national banks. On 4 January 2021, it issued an interpretive letter^[2] authorising (i) US banks to operate nodes within a distributed ledger; and (ii) to use stablecoins to provide payment services. This publication is a significant step forward as it legitimises the use of blockchain technology in payment-related activities. It recognises that this technology, thanks to its intrinsic characteristics, is likely to facilitate financial intermediation and thus constitutes a new means for banks to conduct certain authorised activities, such as payment activities.

The publication of the OCC approves two ways of using blockchain technology to carry out payment activities.

Firstly, banks under the supervision of the OCC will be able to approve, store and record payment transactions by serving as a node on the blockchain^[3]. The U.S. supervisor explains that the core of the payment business is the transmission and recording of transfer instructions from one account to another. Traditional payment systems are centralised trusted entities that validate and record payments. Unlike the operation of traditional structures, transfers within a blockchain are made via a distributed validation system consisting of access nodes. However, the basic functions of a payment system continue to be carried out, i.e. ensuring the transmission of payment instructions and validating payments. Therefore, the same legal framework applies and banks may serve as nodes on the blockchain to facilitate payment transactions^[4].

Secondly, banks will be able to use stablecoins to facilitate transactions for customers within a blockchain environment. In particular, a bank will be able to issue a stablecoin and exchange that stablecoin for fiat currency. A stablecoin is defined by the OCC as a type of cryptocurrency designed to have a stable value (unlike other types of cryptocurrencies)^[5]. Some stablecoins are backed by fiat currencies, such as the US dollar, with a 1:1 parity. The OCC explains that these instruments thus provide a mechanism for storing, transferring, transmitting and exchanging value. All these functions are central to facilitating payment activities. The OCC concludes that stablecoins are Electronically Stored Value Systems, which, according to US banking regulations, US banks are permitted to develop and operate^[6].

The OCC concludes by emphasising the benefits and risks of using blockchain technology. The benefits include efficiency and effectiveness in the provision of payment services. It is also stated that the use of these innovations is in response to growing customer demand for faster and more resilient payment services. For banking players, such innovations are also likely to broaden their customer base. The OCC also recognises that operating a payment system using blockchain technology could be more resilient than a traditional system given the decentralised nature of the network. In addition to the risks traditionally associated with payment activities (in particular the risk of money laundering), the OCC points out that the use of cryptocurrencies could increase operational risks and that activities involving stablecoins could impact liquidity risk for banks^[7].

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By taking an extremely positive approach to the use of blockchain technology in payments, the US banking supervisor is sending a strong signal not only to its regulated entities but also to the international community of financial supervisors. The OCC also counteracts the criticism that sometimes opposes the use of blockchain and the sustainability of the historical financial institutions, thus opening the door to enhanced cooperation between both worlds. By indicating that the current legal framework continues to apply to payment activities based on blockchain, the OCC thus clearly encourages banking players to invest in new solutions that could improve and/or enhance the efficiency of payment operations. This publication also comes at a pivotal moment in particular in Europe, where the European Commission has published a regulation proposal specifically targeting stablecoins^[8] and has renewed its strategy for payment activities^[9].

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[1] The OCC publication refers to Independent Node Verification Networks ("INVNs"), of which the Distributed Ledger is one possible form.
[2] OCC, Interpretive Letter 1174, OCC Chief Counsel’s Interpretation on National Bank and Federal Savings Association Authority to Use Independent Node Verification Networks and Stablecoins for Payment Activities, 4 January 2021.
[3] OCC, Interpretive Letter 1174, p.4.
[4] OCC, Interpretive Letter 1174, p.6.
[5] OCC, Interpretive Letter 1174, p.2.
[6] OCC, Conditional Approval Letter No. 220.
[7] OCC, Interpretive Letter 1174, p.9.
[8] Communication from the European Commission on a Retail Payments Strategy for the EU, September 2020..
[9] Proposal for a regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937.

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