The epic battle of state regulators versus federal agencies for the right to regulate online financial services shows no sign of ending soon. In 2019, a federal New York district judge found that the Office of the Comptroller of the Currency (OCC) lacks the authority to grant non-depository fintechs special purpose charters. Such charters would enable fintechs providing online financial services to operate as “special purpose national banks” under the National Bank Act without collecting customer deposits and thus largely be regulated by the OCC instead of state regulators. Little wonder the New York Department of Financial Services, which commenced the New York federal action against the OCC, took exception.
Oral argument on the OCC’s appeal of the ruling to the Second Circuit took place this past March, and although there has not yet been a decision, the OCC has continued to exercise its chartering powers in nontraditional spaces, especially cryptocurrency.
Crypto Charters are in Bloom
It all started in Summer 2020, when Varo – a fintech that accepts customer deposits – became the first consumer fintech to receive a national bank charter. Since then, the OCC has been on a charter-granting binge in the cryptocurrency space, without showing any signs of slowing down.
- Anchorage – a cryptocurrency custodian – in January 2021 became the first national crypto bank the OCC conditionally approved to receive a national trust charter. Its federal trust charter does not require approval by the FDIC since Anchorage does not plan on accepting customer deposits.
- Next up, in February 2021, Protego became the second such conditionally approved crypto custodian. Protego is not just a custodian; it plans to offer a trading platform for clients, a service for issuing new digital assets, and a peer-to-peer lending platform.
- In April 2021, despite opposition from the American Banking Association, the OCC conditionally approved Paxos, another crypto custodian, for a national trust banking charter. Although BitPay – a crypto custodian and payments processor – applied for a national bank charter around the same time, it has not yet received OCC approval.
Challenges to the OCC’s Crypto Binge
It’s not all coming up roses, however, for the crypto industry. The December 2020 national bank charter application of blockchain lending startup, Figure, has been the subject of several challenges. Shortly after Figure’s application was filed, the Conference of State Bank Supervisors (CSBS) sued the OCC in the D.C. District Court, alleging that the OCC was using Figure as a means to get around the 2019 ruling. If the charter is approved, Figure would not take FDIC-insured deposits, but it could take uninsured deposits of over $250,000 from accredited investors.
Figure’s application has also received strong opposition in the banking industry, particularly from the American Bankers Association. Figure’s charter would allow it to preempt state interest rate laws, while avoiding oversight by the Federal Reserve Board and the FDIC. Figure would also avoid obligations normally imposed by the Community Reinvestment Act.
Looking Ahead
The OCC’s recent decisions to grant charters to cryptocurrency companies (and its series of interpretive letters opining that existing rules allow banks to provide crypto custody services) shows the OCC’s commitment to granting charters in nontraditional financial spaces. However, it will be interesting to see if the newly installed acting Comptroller Michael Hsu (or the next permanent head if Mr. Hsu is replaced) alters course. Mr. Hsu has already said that he plans to place the OCC’s crypto guidelines offered over the past year under review.
Some have claimed that Congress is not looking to restrict nontraditional charters, and a lack of Congressional action here will likely result in further expansion by nontraditional firms into the banking sector. These commentators may have spoken too soon. Chairman of the Senate Banking Committee Sherrod Brown (D-OH) recently urged Michael Hsu to reassess the OCC’s recent conditional bank charter approvals for cryptocurrency companies, as the approvals have underscored concerns that nonbank companies are trying to gain access to bank-level privileges without meeting bank-level regulatory and consumer protection requirements.
Ultimately the courts may have the final say. Even if the OCC prevails in the pending Second Circuit appeal and lawsuit by the CSBS, fintech charters will likely continue to face legal roadblocks from other state regulators and organizations.
We surely have not yet seen the full effect of the technological disruption caused by digital money. Looking further into the future, it’s not inconceivable we’ll find ourselves in a world with fewer private banks altogether and using government or central-bank digital currencies directly through central banks. Who regulates fintechs could become as moot of an issue as rewinding rental VCR tapes.
Adam Levy, an associate in the Insolvency, Creditors’ Rights and Financial Products Group, contributed to this post.
