OCC Greenlights the Use of Stablecoin by Federal Banks

The Office of the Comptroller of the Currency (“OCC”), the largest regulator of federal banks in the US on Monday published Interpretive Letter 1174, which marks the beginning of a new era for the American Banking systems. The letter declares that the banks may incorporate the use of emerging fintech technology such as independent node verification networks (INVNs) and stablecoins to facilitate transactions.

1/ Breaking major news from US Treasury OCC, the largest US banking regulator (@USOCC), with new guidance allowing US banks to use public blockchains and dollar stablecoins as a settlement infrastructure in the US financial system. https://t.co/gQFWISWUnc

— Jeremy Allaire (@jerallaire) January 4, 2021

The decision by the OCC is quite historic as it formally inducts the use of digital currencies (stablecoins) in the American Banking system. The emergence of the fintech industry in the past couple of years has pushed many nations to take digital currencies seriously. The rapid development made by China in developing their national sovereign digital currency also pushed many nations to start working towards their regulations.

What New Regulation Means For Banks?

The new interpretive letter from OCC establishes that federal banks can treat public blockchains as infrastructure similar to SWIFT and FedWire, and stablecoins like USDC as electronic stored value. The significance of this can’t be understated.

The new set of regulations would lead to our traditional banks settling transactions on-chain just as bitcoin and most other cryptocurrencies do at present. This would also bring stablecoins such as USDC and USDT under the full jurisdiction of the authorities which means regular audits for most of the issuers of these stablecoins, something that has been called for long as many current private stablecoin issuer specially Tether has been under scrutiny for its opaque audits.

Is it Good News For Stablecoin Issuers?

Not necessarily, currently, Tether had the largest market share among stablecoins and it does not hold a cordial relationship with authorities and is already facing a lawsuit from NYAG. Tether had earlier claimed that its USDT stablecoin is pegged 1:1 against the US Dollar, however later that turned out to be false as the company during the lawsuit revealed that only 70% of their tokens are backed by US Dollar reserves.

Looking at the past friction between private stablecoin issuers and authorities, the new regulations would lead to more private players and institutions launching their stable coins against using the existing one.

3 – You think the winners are existing stablecoins but they may not be. The regulation effectively opens the gates to a host of #WallStreet stablecoins. Most banks would want to run their own #stablecoin, manage their own reserves, have an added income stream. 6/n

— Tanvi Ratna (@tanvi_ratna) January 5, 2021

Facebook’s Diem Could Become a Reckoning Force in the Retail Market

Facebook’s dream of launching a universal stablecoin was met with heavy criticism from across the globe, and Congress also let their displeasure known leading to critical changes to their whitepaper as well as a name change from Libra to Diem. Facebook in the past hearings before Congress has drawn attention towards China’s massive development in the field and even warned that if they won’t be allowed to take the lead China definitely will.

The new OCC interpretive letter could also mark the beginning of Facebook’s journey as a financial facilitator. The social media giant with over 2 billion combined customers worldwide could start a trend of digital payments quite similar to China.

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