Stabilized: OCC settles debate about regulatory characterization of bank-issued stablecoins

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On January 4, 2021, the Chief Counsel of the Office of the Comptroller of the Currency ("OCC") issued an interpretive letter ("IL 1174") on the permissibility of national banks to use independent node verification networks ("INVN") and stablecoins for payment activities. In particular, "[n]ational banks … may use new technologies, including … stablecoins, to perform bank permissible activities, such as payment activities." The letter, when coupled with other OCC interpretations, now firmly places the issuance and use of stablecoins as permissible bank activities. While stablecoins may also be securities under certain circumstances, there is a well-defined line of case law, including from the Supreme Court, about the factors to apply when determining whether a product that has characteristics of both a banking product and a security is one or the other (or both). Therefore, issuers and investors may now apply the age-old factors to bank-issued stablecoins and be comfortable about the regulatory characterization of the ultimate product.

What are Stablecoins?

A stablecoin is commonly understood to be a form of cryptocurrency that is designed to have a stable value.  Often, but not always, stablecoins are backed by a fiat currency, such as the US dollar. Fiat stablecoins may be exchanged at a fixed rate for the underlying currency, which is held by a custodian. Stablecoins may be then used to store, transfer, transmit and exchange value, providing core payment functions.1 

Some examples of fiat-backed stablecoins include: (i) USD Tether,2 (ii) TrueUSD,3  (iii) Gemini Dollar,4  and (iv) USD Coin.5 Other types of stablecoins include commodity-backed stablecoins6  and cryptocurrency-backed stablecoins.7

Are banks allowed to issue stablecoins?

National banks have long been permitted to act as financial intermediaries in payment activities.8 As IL 1174 describes, national banks have continually employed new technologies to engage in permissible payments activities, such as electronic funds transfer systems, real-time settlement systems and stored value systems.9 The OCC concluded that stablecoins represent new technological means by which payment systems participants can operate, and found:

We therefore conclude that a bank may validate, store and record payment transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payments activities.10

The OCC notes that "payment activities involve transmitting instructions to transfer a specified sum from one account on a ledger to another account on the same or a different ledger ..."11 INVNs allow payment instructions to be transmitted without the need for a trusted third party to relay the payment information.  Banks may then use stablecoins on INVNs to facilitate payment instructions for customers by issuing a stablecoin, and/or exchanging the stablecoin for fiat currency. Stablecoins become a mechanism of payment.

Stablecoins represent the value stored on an INVN, similar in function to other stored value systems where the information on value is stored on a chip within a payment card. As banks can use stored value systems to effect payments, they can similarly use stablecoins to do the same thing.

What does it mean for stablecoins to be permissible banking activities?

The effect of IL 1174 is to allow national banks to issue and use stablecoins to perform any permitted payments activity. In doing so, the OCC interpreted 12 U.S.C. § 24 (Seventh) to designate the described activities as part of "the business of banking."12  This interpretation then makes those activities permissible banking activities open to any national bank and federal thrift (and most State-chartered banks, as well as State and federally licensed foreign bank branches and agencies).

In performing these banking activities, banks must comply with all other laws and regulations applicable to permissible banking activities, including anti-money laundering and know-your-customer requirements. The activities are then subject to the supervision and examination of the federal banking system, a comprehensive framework of oversight designed to permit banks to perform their intended functions in a safe and sound fashion.

Permissible banking activities generate, by definition, permissible banking products. Such products may resemble non-banking products performed by non-banks but are deemed banking products subject to banking regulation by virtue of their being performed in a bank. Products could also seem to be non-bank products (such as securities) that when issued by a bank remain securities but are subject to a separate regulatory regime implemented by the banking regulators (instead of the Securities and Exchange Commission (the "SEC")).13

Can bank-issued stablecoins also be securities?

Yes. The OCC in IL 1174 specifically notes that stablecoins may be securities. In footnote 27, the OCC states:

Certain stablecoins may be securities. A bank's issuance of a stablecoin must comply with all applicable securities laws and regulations. Staff of the [SEC] has issued a statement encouraging issuers of stablecoins of the type described in IL 1174 to contact the staff with any questions they may have to help ensure that such stablecoins are structured, marketed and operated in compliance with the federal securities laws.14

As with other instruments issued by non-banks, any stablecoin issued by a bank must be measured under the Howey test to determine whether it is a security. In Securities and Exchange Commission v. W. J. Howey & Co., the Supreme Court held that the proper test to determine whether an instrument was an investment contract (and therefore a security) is whether the instrument is "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." Pursuant to Howey, a stablecoin may be an investment contract and therefore be a security.

However, there is a separate analysis required for bank-issued products. In essence, the Howey test is the beginning of the analysis. Then one must apply certain factors that have been described in a series of court cases.

When is a security not a security?

There are products that have characteristics of both securities and banking products. The ones subject to the most challenges have been certificates of deposit ("CDs"). CDs are deposits, and only banks may issue deposits.15 However, CDs are also included in the definition of a security in the Securities Act of 1933:

SEC. 2.  (a)  DEFINITIONS. When used in this title, unless the context otherwise requires: 

(1)  The term "security" means any … certificate of deposit… or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.16

So what is a CD: a security or a bank product? While CDs may only be issued by banks, the characterization of the instrument makes a significant difference regarding how it may be issued, to whom it may be issued, and the disclosure, liability and other requirements (including deposit insurance) that may attach to the product.

In Marine Bank v. Weaver, the Supreme Court addressed this issue.17  The Court applied a different test from Howey, as the issuer, as a federally regulated bank, was subject to a comprehensive set of regulations governing the entire industry. As an example, deposits are subject to reserve, reporting and examination requirements, as opposed to similar instruments issued by non-banks. The Court found that, given the comprehensive scheme of banking supervision and regulation laid out by Congress and implemented by the banking regulators, there was no particular reason to provide additional investor protection under the federal securities laws. However, the Court did not provide a blanket exemption for banking products from the securities laws; instead, it stated that each transaction must be analyzed "on the basis of the content of the instruments in question, the purposes intended to be served, and the factual setting as a whole."18

In Gary Plastic v. Merrill Lynch,19 the Court of Appeals of the Second Circuit applied the Marine Bank standard and held that insured CDs issued by a bank but acquired by a broker-dealer and then onsold to the broker's clients were securities. The Second Circuit distinguished Marine Bank based on the activities of the broker, which included selling and creating a secondary market in the insured CDs. The Second Circuit held that while the federal banking laws protected purchasers from potential abuses by the issuing banks, "absent the securities laws, [purchaser] has no federal protection against fraud and misrepresentation by the [broker] in the marketplace."20

In other words, the banking laws applied to the issuance and initial sale of the CDs; the securities laws applied once the banking laws no longer provided protection to purchasers.

So how does IL 1174 apply to these standards?

In deeming stablecoins a banking product, the OCC has triggered the Marine Bank test. This extra layer of analysis offers to banks a significant competitive advantage against non-bank issuers, who will have to deal with emerging standards from the SEC defining how stablecoins are treated under the securities laws.21

For bank issuers, the factors outlined by the Supreme Court in Marine Bank and applied by the Second Circuit in Gary Plastic offer a safe harbor from the securities laws and protection under the less enforcement-oriented banking laws.


Public analysis of IL 1174 has focused on the regularization of the use of stablecoins as a positive outcome for the stablecoin and token issuance industries. While this may be true, the more significant effect of IL 1174 may turn out to be the tilting of the stablecoin industry to potential bank issuers who no longer need to be concerned about the application of the securities laws to bank-issued stablecoins.

1 President's Working Group on Financial Markets (Dec. 2020);
8 See at page 49 et seq. (2020).
9 See examples listed in IL 1174 at footnote 10.
10 Id.
11 Id.
12 12 U.S.C. § 24 (Seventh) (2020).
13 See 12 C.F.R. Part 16.
14 See IL 1174 at footnote 27; see also
15 See Section 21 of the Glass-Steagall Act, 12 U.S.C. § 378.
16 15 U.S.C. § 77a(2(a)(1).
17  Marine Bank v. Weaver, 455 U.S. 551 (1982) ("Marine Bank"). The Court considered the Securities Exchange Act of 1934, rather than the Securities Act definition of security, but noted both definitions are "essentially the same."
18 Id at 558, 560 n. 11.
19 756 F.2d 230 (2d Cir. 1985).
20 Id. at 240.
21 As outlined by the OCC, stablecoins used in payments activities would likely pass the Howey test given the utility nature of the proposed use of the product.

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