OCC Banking Charter for FinTECH
Is this The End of State-by-State Money Transmission Licensing?
The Office of the Comptroller of the Currency, U.S. Department of Treasury (“OCC”) came out with some big news on Tuesday, July 31, 2018. Now crypto (fintech) companies can apply for special-purposes charters that act as national banking licenses. This is good for crypto on a number of levels, but primarily because it means that once a company has a bank charter, they no longer need to apply for the state-by-state money transmission licenses to engage in certain types of money services.
Not so surprisingly, the banking industry and state regulators opposed this decision, but Comptroller Joseph Otting charged ahead in favor of firms that don’t operate like traditional banks. To get this special purposes charter, the company would have to clear a lot of regulatory hurdles, but it should be much better than the onerous state-by-state applications. Bloomberg credited Stripe Inc., Social Finance Inc. and LendingClub Corp as major players in demonstrating the need to expand the traditional regulations to new financial technology companies.[1]
Who is the OCC?
The OCC supervises nearly 1,400 national banks, federal savings associations, and federal branches and agencies of foreign banks operating in the United States.[2] Their goal is to ensure these national banks operate in a safe manner and provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.[3] The Comptroller also serves as a director of the Federal Deposit Insurance Corporation and member of the Financial Stability Oversight Council and the Federal Financial Institutions Examination Council.[4]
Who is Joseph Otting?
According to his Wiki Page, he’s an Iowa boy who made it big! He did his BA at the University of Northern Iowa and worked his way up the banking industry. Prior to becoming the Comptroller for the OCC, he was the President of OneWest Bank, which was acquired by CIT Group. When Mr. Otting left in 2015, he was paid 24.9 million in compensation for 2015 and a $12 million severance payment. Two years later, the bank was fined $89 million by the Department of Justice for it’s reverse mortgage practices that were not compliant with HUD foreclosure requirements.
He was sworn in as Comptroller of the Currency on November 16, 2017, after being nominated by Trump. He is responsible for overseeing federally-chartered banks, savings associations, and federal branches of foreign banks operating in the United States.[5]
During his swearing-in ceremony, Otting stressed that his priorities include job creation and economic discrimination, reducing unnecessary regulatory burden, enhancing the value of the federal charter, and ensuring the OCC operates as effectively and efficiently as possible.[6]
How can a crypto company get a Special Purposes Charter?
Apparently several crypto companies have already reached out to the OCC and Otting said that most of them find the regulatory demands disheartening. The OCC said Tuesday that fintech applicants “will be supervised like similarly situated national banks, to include capital, liquidity, and financial inclusion commitments as appropriate,” and they’ll face an initial “heightened supervision” like any other new bank. Each application will be open for public comment, and the agency will try to make a decision within 120 days.[7]
Banking Functions vs. Money Transmission
The special purpose charter is only for companies that are engaged in a core banking functions like lending money, paying checks, or taking deposits as described at 12 CFR 5.20(e)(1).
Money transmission, on the other hand, is a license that authorizes the holder “to transmit currency, monetary value, or payment instruments, either by wire, facsimile, electronic transfer, courier, the internet, or through bill payment services or other businesses that facilitate such transfer, within this country or to or from locations outside this country.”[8] The plain version of what the MT allows you to do is “To move crypto through the internet anywhere.”
Balkanized money transmitter regulations have thus become one of the main impediments to startup growth. While federal regulations are broad, the real pain point rests with the legal minefield sown by the states. State regulations are a challenging trifecta of broad money transmitter definitions, expansive jurisdictional assertions, and inconsistent approaches to exemptions. This does not even include the wildly different requirements each state may impose on the same startup. With access to financial services shifting to mobile platforms, startups have to be prepared to serve consumers from far-flung states and comply with a unique set of regulations in each state.[9]
Now, companies who obtain this Banking Charter will be under federal banking jurisdiction through the OCC as opposed to the states Money Transmission regulations.
What does the OCC require to grant a Banking Charter?
When submitting an application for the National Bank Charter, the OCC has said the first thing it looks at is the company’s business plan, management team, and financial resources.[10] These financial resources need to be strong enough to support the bank through tough markets, and to meet the OCC’s capital requirements. The capital requirements are assessed on a case by case basis that incorporates:
· The proposed business plan and the risks inherent in that plan.
· Management’s skills, experience, and abilities relative to those required for executing the plan successfully.
· Prevailing economic conditions and competition (in the proposed market and nationally).
· The bank’s ability to raise capital in the future.[11]
A De Novo (brand new) application has to be approved by the OCC, the FDIC, and if there’s a Bank Holding Company (“BHC”) component, it also requires a filing with the Federal Reserve. If it’s a conversion application (changing an existing chartered company to a national charter) it also has to comply with Dodd Frank restrictions that require a special OCC filing.
This means, crypto will move from the wild wild west to main stream banking and all the safety and protections that come with using a chartered bank will be here too.
What happens if you are granted a Charter:
· You get special tax rates.[12]
· You get to work with the OCC and have clear and consistent set of national regulations
· You are forced to participate in community reinvestment and also subject yourself to the community reinvestment exams (ratings published for the public). [13]
· You must comply with consumer information security, privacy, anti-money laundering, and other laws that all national banks must comply with.
· You are subjected to the OCC has civil enforcement powers (aka they can levy fines on companies not in compliance) (this is good to keep the competitive landscape fair).[14]
Why did the OCC decide to include fintech companies?
Mr. Otting said, “Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”[15]
Before announcing this decision, the OCC has made several publications, and outreached to companies they thought were key stakeholders in the game. They held public comments open on their publications of Exploring Special Purpose National Bank Charters for Fintech Companies in December 2016, and Comptroller’s Licensing Manual Draft Supplement: Evaluating Charter Applications From Financial Technology Companies in March 2017.[16]
Hatorade:
John W. Ryan — President of State Regulators Group responded to the new charter by saying “An OCC fintech charter is a regulatory train wreck in the making,” The state officials “are keeping all options open to stop this regulatory overreach.”
This response is not that surprising because it would remove state jurisdiction over any company who was granted the charter. Also, people are often scared of what they don’t understand.
FDIC:
Since Mr. Otting is also the director of FDIC, it’s possible that any companies that get approved for the special purposes charter will also get approved for FDIC insurance for their cash deposits. I don’t expect crypto could ever get this insurance, as traditional investments like mutual funds have never qualified. It’s only offered on bank deposit accounts, CDs, or money market accounts for the first $250K.[17]
Since FDIC Insurance isn’t available on crypto holdings, that could have been used as a reason to keep crypto companies out of mainstream banking. However, in the OCC’s press release, they specifically carved out an exception, stating the OCC’s authority does not “require the bank to take deposits within the meaning of the Federal Deposit Insurance Act and therefore would not require insurance from the Federal Deposit Insurance Corporation.”
Conclusion:
I think this is an overall positive for the crypto space. If some of our larger companies like Coinbase, Bittrex, Gemini, and Circle could get this banking charter they would be held to a much higher standard. Likely, there would be more public confidence in their integrity and more people might trust them with their money. This could drive the price of bitcoin up, as more and more people would buy in.
Ultimately, it matters little for honey badger, because Bitcoin’s very nature is beyond the power of any one country’s regulations. However, the more regulated the access points, the harder it becomes to use Bitcoin anonymously. Also, with a bank charter, all taxes will be collected and sent to the IRS the same way it is done at a traditional bank.
[1] https://www.bloomberg.com/news/articles/2018-07-31/tech-firms-can-win-bank-charters-as-occ-unveils-fintech-policies
[2] https://www.occ.treas.gov/about/what-we-do/mission/index-about.html
[3] Joseph M. Otting.” Office of the Comptroller of the Currency. Retrieved December 4, 2017
[4] Id.
[5] https://en.wikipedia.org/wiki/Joseph_Otting.
[6] Office of the Comptroller of the Currency (November 27, 2017). “Joseph M. Otting Takes Office as the 31st Comptroller of the Currency.” OCC News Release 2017–141. Retrieved November 27, 2017.
[7] https://www.bloomberg.com/news/articles/2018-07-31/tech-firms-can-win-bank-charters-as-occ-unveils-fintech-policies
[8] See https://www.flofr.com/StaticPages/MoneyTransmitters.htm.
[9] http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1121&context=yjolt
[10] https://www.occ.treas.gov/publications/publications-by-type/licensing-manuals/becoming-a-national-bank.pdf
[11] https://www.occ.treas.gov/publications/publications-by-type/licensing-manuals/becoming-a-national-bank.pdf
[12] http://www.library.unt.edu/gpo/acir/Reports/information/M-168.pdf
[13] See the OCC’s CRA section at www.occ.gov/crainfo.htm
[14] https://www.occ.treas.gov/publications/publications-by-type/licensing-manuals/becoming-a-national-bank.pdf
[15] https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html?utm_source=dlvr.it&utm_medium=twitter
[16] https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html?utm_source=dlvr.it&utm_medium=twitter
