Banks may think twice on crypto after OCC tightens requirements

National banks face greater regulatory hurdles in entering the cryptocurrency market, complicating efforts to tap a potential new revenue source.

Lenders wanting to offer crypto services must now demonstrate that they have an "appropriate risk management and measurement process" in place, among other requirements, before the Office of the Comptroller of the Currency will issue a non-objection letter. The change covers cryptocurrency custody services, holding deposits in reserve for stablecoins, and using crypto technologies such as stablecoins for payments, the regulator said in a Nov. 23 interpretive letter.

The new standard "makes it easier for the OCC to say 'no' to something it doesn't like," said Carleton Goss, counsel at Hunton Andrews Kurth LLP.

The tightened requirements and uncertain approval prospects may deter banks from diving into crypto as they seek ways of offsetting compressed net interest margin and low loan demand. The sharp contrast to the Trump era — when banks could offer these crypto services without seeking official authorization — also adds to broader uncertainty about long-term regulation, particularly in light of Democrats' slender hold on Congress and the prospect of mid-term elections next year.

This change "muddles the already-murky policy waters and will almost certainly leave some banks questioning whether the juice is worth the squeeze," said Isaac Boltansky, director of policy research at BTIG, a bank consultancy.

The high degree of uncertainty at the federal level may lead some banks to opt for a state banking charter instead.

The letter "signals that the OCC is very skeptical about banks that engage in these activities," Goss said in an interview. "State regulators might be more accepting of these activities."

To receive a supervisory non-objection, a bank must demonstrate that it has processes in place to combat crypto-related threats like fraud, hacking and theft, the OCC letter said. Banks also need to demonstrate, in writing, that they understand their compliance obligations and are taking steps to ensure that compliance.

That could serve as a significant hurdle for many banks as they take their first steps into the booming cryptocurrency market, experts said.

"If you're not doing this already, I think it’s going to take a while to flesh this out," said Ian Katz, managing director at bank consultancy Capital Alpha Partners. Banks could say that "it's one more reason not to stick [our] toes in that water."

While the new requirements are "certainly a new step" for OCC-regulated banks, it is unclear "how stringent the OCC will be in implementing those requirements," according to Andrew Olmem, also a partner at Mayer Brown.

"It's an issue that banks will be watching carefully to see whether the OCC has effectively imposed a halt to those activities," he said.

Banks must also consider the possibility of Republican victories in the 2022 midterms and the 2024 presidential election, which could swing crypto regulation back to what it was under Trump.

"You could see this sort of thing changing again," Katz said. "Maybe in a few years, banks will have to deal with these shifting relationships."

Finally, the sheer number of Washington stakeholders seeking to first understand and then regulate the crypto industry could keep banks on the sidelines, Goss said.

In a Nov. 2 report, the OCC, the President's Working Group on Financial Markets, and the Federal Deposit Insurance Corp. urged Congress to pass legislation that addresses risks to crypto users and guards against runs. In the absence of legislative action, the working group called on the Financial Stability Oversight Council to take steps to address those risks.

Then on Nov. 23, the FDIC and the Federal Reserve released a cryptocurrency "roadmap" following a months-long "policy sprint." Among other things, the agencies said they plan to clarify whether certain cryptocurrency activities are legally permissible.

All of these factors are weighing on Illinois-based First Community Bank and Trust, a state-chartered bank that is considering providing a service allowing customers to buy cryptocurrency on its mobile app, President and CEO Greg Ohlendorf said.

"We've got some hurdles we've got to jump over," he said in an interview. "Getting clarity on what the rules of the game are is very important to us."