Legal Scholar Rohan Grey Gives Mixed Opinions On Recent OCC Developments

As the stablecoin industry continues to grow, regulation is inevitable. But does a bill that was recently proposed to Congress line up with new regulations from the country’s bank watchdog? Together, will the two encourage more institutional money to flow into the sector?

In early December of last year, three U.S. House Democrats unveiled new proposed legislation which would provide a strict regulatory framework for the stablecoin industry called the STABLE Act requiring, amongst other things, stablecoin issuers to provide 1:1 reserves of tokens as well as a bank charter, and for nodes which process stablecoin transactions to be chartered banks.

Naturally, the crypto industry was not happy with the legislation with a consensus forming around the opinion that it would be incredibly damaging to the industry. It was with some surprise, however, that in early January the Office of the Comptroller of the Currency (OCC) issued a letter giving the green light to chartered financial institutions to use stablecoins and run the requisite nodes for the respective blockchain networks. 

The OCC recently followed up on this with acting head Brian Brooks announcing that the regulator will soon unveil the first national “crypto bank charter.”

“We’re not necessarily trying to make it so the big banks can dominate the crypto market, we’re trying to tell crypto participants that a bank charter might be the right form for you to do what you’re doing,” Brooks said in a webinar.

One might think that now everything is aligned: the OCC prepares a regulatory framework for a law that’s coming down the regulatory pipe. Crypto banks, which largely operate offshore, now have a pathway to set up shop in the US. But is that really the case?

‘Going Backwards’

Rohan Grey, a law professor that helped author the bill, says the OCC’s letter is “consistent with the broad thrust of the STABLE Act” and concedes with the core claim that stablecoins should be regulated as any other financial product. But Grey also believes that this is still all net harmful to the safety of the industry at large. 

“[The OCC letter] allows banks to use public blockchains and externally issued stablecoins in their day to day operations, and that’s going backwards in terms of safety and soundness of banking system infrastructure,” Grey told Blockworks. “It turbocharges the existing practice of outsourcing payments infrastructure to fintech companies.”

Grey argues that the intention of saying ‘stablecoin issuance should be the purview of banks’ wasn’t so that banks would then piggyback off of unregulated crypto infrastructure, but, rather, for them to stop relying on that infrastructure for activities that should be within regulated banking systems.

“I don’t think you’re going to find too many banks that are over the moon about the STABLE Act, precisely because it makes it harder for them to play their own quasi-shadow banking games with fintech partners by forcing them to bear the risk and keep such activity in-house,” he said. 

Even though the OCC letter, which follows the direction of the STABLE Act would allow for chartered financial institutions to run nodes, which in theory would be a much more friendly environment for institutional capital to come in, Grey doesn’t think that institutional money is going to be overly interested.  

“I’m not sure whether institutional money would be over the moon either — they want yield. If they can invest in crypto but also benefit from it becoming too big to fail and ultimately receiving a bailout like other shadow banking industries have in the past, they get all the yield on the upside and little risk on the downside,” he said. 

“That’s far more attractive to them than a more heavily regulated stablecoin industry where the yield potential is lower because it’s not a wild west casino.”

Does Brooks Have the Authority to Create a Crypto Bank Charter?

The OCC’s recent announcement that a crypto bank charter is in the works seems like a logical conclusion to its prior letter allowing banks to embrace blockchain. After all, crypto banks currently exist — it’s trivially easy to sign up for an account that lets you link a crypto wallet to an issued debit card — but they are all based offshore.

But Grey doesn’t think this plan will go ahead, calling the licensing strategy a “poor one”.

“Brooks is pushing the OCC to do this unilaterally without the support of the FDIC/Fed, which is basically a non-starter because access to the Fed and a Fed master account is a critical part of being a bank, as is a proper deposit protection scheme,” he said. “What he really means is that the OCC, under his very cryptofriendly leadership, should be able to proceed unilaterally to create a weird, sub-tier charter that doesn’t actually provide the full federal protections a bank is supposed to have.”

Grey questions if Brooks has the statutory authority to do this under the OCC’s legal mandate.

“So it’s basically a rogue agency trying to do unilaterally what requires real federal coordination because he’s trying to ram through his pet companies from a singular vantage point.”