The OCC will allow banks to use public blockchain and stablecoin networks

On Monday the U.S. Treasury Office of the Comptroller of the Currency (OCC) issued new advice stating that national banks are able to run independent nodes for distributed ledger networks. This includes public blockchains and stablecoin networks.

According to the statement, banks "may use new technologies, including INVNs and related stablecoins, to perform bank-permissible functions, such as payment activities."

The news was seen as a big win by the crypto ecosystem as it validates the use case for stablecoins and provides a meaningful pathway for integration into the settlement infrastructure of the U.S. financial system.

Jeremy Allaire, the CEO of Circle says the interpretive letter establishes that banks can treat public blockchains as infrastructure similar to SWIFT, ACH, and FedWire, and stablecoins like USDC as electronic stored value. “The significance of this can’t be understated,” he tweeted. “Decentralized, permissionless, open-source and internet-mediated software is becoming the foundation for not just the US financial system but for the global economy. We are on a path towards all major economic activity being executed on-chain. It is tremendous to see such forward-thinking support from the largest regulator of national banks in the United States.”

The news generated so much traffic to the OCC website that the server crashed under the strain and remained inaccessible for an hour. The site has since been restored.

However, the note by the OCC also warns that there are risks associated with the adoption of new technology. "Banks must also be aware of potential risks when conducting INVN-related activities, including operational risks, compliance risk, and fraud," said the note. "New technologies require enough technological expertise to ensure banks can manage these risks in a safe and sound manner."

Crypto pushes back against FinCEN

While the above “forward-thinking support from the largest regulator of national banks in the United States” was greeted with widespread enthusiasm by the crypto ecosystem, this is in stark contrast to proposed new legislation by FinCEN.

In the week before Christmas, FinCEN, part of the U.S. Treasury Department, proposed new KYC/AML regulations that would directly impact the crypto asset industry. The proposed legislation states that users who send crypto assets from an exchange to a private wallet would have to provide personal information about the owner of that wallet to the exchange if the amount sent is greater than $10,000 in a single day. The exchange would also need to maintain records involving transactions over $3,000.

The legislation was authored by FinCEN and the outgoing United States Secretary of the Treasury, Steven Mnuchin. It was released just days before Christmas and the crypto industry was given just 15 days to respond with feedback, instead of the usual 60 days, a move seen by the industry as cynical.

The deadline for public comments is today, and despite the short notice and the holiday period, by Sunday FinCEN had received 5,633 responses to its proposed rule.

One of the responses was submitted by Square, the U.S. based financial services company that owns the Cash App. Square is firmly opposed to the proposed FinCEN regulations.

In its response, Square says that with this rulemaking, “FinCEN seeks to expand reporting and Know Your Customer (KYC) type obligations to parties who are not our customers. Instead of leveraging blockchain tracing with wallet addresses (which to date has proven effective in tracking the unlawful activity cited in the Proposal leading to indictments and convictions), FinCEN proposes a static requirement that would have us collect names and physical addresses from non-customers. To put it plainly — were the Proposal to be implemented as written, Square would be required to collect unreliable data about people who have not opted into our service or signed up as our customers.”

According to Square, this would create unnecessary friction and perverse incentives for cryptocurrency customers to avoid regulated entities for cryptocurrency transactions, driving them to use non-custodial wallets or services outside the U.S. to transfer their assets more easily. By adding hurdles that push more transactions away from regulated entities like Square into non-custodial wallets and foreign jurisdictions, FinCEN will actually have less visibility into the universe of cryptocurrency transactions than it has today.

“The impact of the Proposal would not only hamstring law enforcement capabilities,” said Square, “but also limit American innovation by hindering our ability to create a competitive service that allows customers to seamlessly transfer and transact in cryptocurrency the way the technology was designed. The burdensome information collection and reporting requirements deprive U.S. companies like Square of the chance to compete on a level playing field to enable cryptocurrency as a tool of economic empowerment.”

Jack Dorsey, the CEO of Square, summed up the company’s response with a tweet stating that “We believe this rule will do the opposite of what it intends, will leave people out of participating fully in the economy, and that it being rushed prevents better solutions.”

The U.S. crypto exchange Gemini, founded by Cameron and Tyler Winklevoss also submitted feedback to FinCEN’s proposed rule regarding unhosted wallets.

Cameron Winklevoss wrote on Twitter that “While we recognize that the proposed rule raises topics of appropriate regulatory and law enforcement interest, we are concerned about the substance of the rule and the process by which it is being rolled out. We encourage FinCEN to consider the issues we’ve raised in our letter and to rethink the very abbreviated comment period — 15 days over the holidays is far too short to assess a proposal this complex and important for the crypto industry.”

In its statement, Gemini highlighted what it called three primary deficiencies of the proposed rule.

Firstly, the exchange argues that the rule as conceived won’t meet FinCEN’s stated intention of stemming illicit financial activity. Instead, said the exchange, this rule will drive bad actors to first systematically withdraw their crypto from existing regulated U.S. exchanges into their personal wallets and then to proceed with whatever illicit activity they contemplated — all while imposing substantial compliance burdens on the U.S. crypto industry without commensurate law enforcement benefit.

Secondly, the exchange says the proposed rule is “replete with ambiguity, which will undermine good faith compliance efforts and also impede promising innovation, including in DeFi.”

Finally, the exchange says there are procedural deficiencies with the rulemaking process. FinCEN has provided for a comment period of only 15 days, over two holiday weekends — far shorter than the typical 60-day comment period.