Trump regulator gave quiet legal blessing to crypto trading by banks
A top regulator quietly determined during the final days of the Trump presidency that banks are legally allowed to trade cryptocurrencies on behalf of clients, in what could be a major breakthrough for the digital assets, according to people familiar with the matter.
The decision by staff at the Office of the Comptroller of the Currency — which has never been made public — could open the door to a whole range of lucrative activities by banks in the red-hot virtual currency market by allowing them to briefly hold crypto assets on their own books to facilitate trades. It also serves as a window into the type of internal documents at financial regulatory agencies that shape policy behind the scenes.
“Cryptoassets have grown exponentially over the last several years,” financial industry groups recently told global central banks in a letter arguing for lower capital requirements to hold crypto. Banks' limited access to them "is neither desirable nor sustainable,” they said.
A formal move to green-light crypto trading by banks would probably be met with resistance by advocates of tough financial rules. The value of cryptoassets can shift dramatically — Bitcoin is up about 400 percent from last year — making it potentially risky for both banks and depositors to trade in them.
Michael Hsu, the current acting head of the national bank regulator, has been reviewing the OCC’s stance on crypto since he took office in May, he has said publicly. But the internal legal decision by the chief counsel’s office already played a role in the consideration of at least one charter application from a crypto bank that received preliminary approval before Hsu arrived, sources say. The OCC declined to comment for this story.
The crypto market, envisioned as an alternative to traditional finance, has soared in size and popularity, leading to interest from banks in meeting client demand in buying and selling the assets. They have been waiting for additional guidance from regulators.
In January, the OCC chief counsel’s office determined that banks are legally permitted to hold crypto momentarily to trade for their customers, once they’ve lined up a buyer or seller on the other side of the transaction, the people familiar with the matter said. This determination was later part of deliberations for preliminary charter approval given to crypto trust bank Paxos, they said, though the firm doesn’t currently hold crypto in its own account.
“That is not something we’ve considered doing nor have the ability to as based on our supervisory agreements with the OCC,” Paxos spokesperson Rebecca McClain said in a statement. “We definitely do not hold crypto on balance sheet to facilitate trades and cannot do that as a regulated entity.” Paxos, which can have custody of crypto owned by clients, is overseen by the New York Department of Financial Services.
Any activity that is permissible within the business of banking for one firm could be done by other banks as well.
Next steps on both the overall policy on crypto trading by banks, and on final approval for Paxos, are pending.
The revelations provide insight into the legacy of former acting Comptroller of the Currency Brian Brooks, who bookended his tenure with stints as an executive at two top crypto firms and during his time in office took several sweeping actions to allow banks and the upstart virtual currency industry to become more intertwined. That included his push to provide national charters to companies engaged in payments .
The legal decision itself has several nuanced implications. It was never issued as an “interpretive letter,” a type of formal reading of the law from agency lawyers that holds weight as policy. Still, the standard for overturning an internal decision like the one on crypto at the OCC would be higher than if no previous legal opinion had been given, and the memo could hold weight in court, according to legal experts.
Under Brooks’ watch, the agency did issue an interpretive letter allowing banks to process payments on a blockchain, a ledger for cryptocurrency transactions, which could also build the legal foundation for crypto trading activities by banks.
Still, the OCC would have to separately make a decision as to whether crypto trading could be done by banks in a way that wouldn’t threaten the health of those firms, which would give the agency room to limit this activity.
Bao Nguyen, a partner at law firm Skadden, Arps who recently left the OCC, would not comment on any specific actions by the agency but said as a general matter, the policy decisions are more complex than the legal ones surrounding crypto, given that banks can already trade other assets for clients.
“What is the risk, what is the nature and magnitude of that risk, and can we regulate it?” he said. “Those are not legal questions. Those are all hard policy questions that regulators are struggling with.”