Since 2020, the U.S. banking industry has begun to experience accelerated development in the provision of encrypted digital currency-related financial services.
Original title: “The Office of the Comptroller of the Currency is accelerating the encryption and digitization of the U.S. banking industry”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry
Before 2020, the service of encrypted digital assets in the U.S. banking industry has been slow. There are only scattered efforts in the market to provide services for the encrypted digital currency field. Companies that provide encrypted digital currency transaction services obtain money transmitter licenses from each state to legally operate in each state. There are also some companies that provide custodial services for encrypted digital currencies by obtaining trust licenses. However, the overall banking system of the United States has not begun to provide services related to encrypted digital assets. However, since 2020, the U.S. banking industry has begun to experience a comprehensive acceleration of development in providing encrypted digital currency-related financial services. And this accelerated development is the result of the top-down promotion of the US banking industry. Specifically, it is the result of the promotion of Brian Brooks, the new leader of the Office of the Comptroller of the Currency (OCC).
Before analyzing the changes in this aspect of the U.S. banking industry, first introduce the financial institutions related to encrypted digital currencies.
The structure of the U.S. banking market is a federal structure, including the U.S. national and state levels. Financial-related policies can be formulated at the national level and implemented nationwide. Financial institutions established at the national level can operate nationwide without state restrictions. Each state can formulate its own related financial policies, but the scope of business is limited to the state. In terms of financial institutions, the U.S. banking system is divided into two layers, the national bank and the state bank. National banks can operate nationwide, while state banks can only operate in their state. In addition to the banking system, financial institutions related to encrypted digital currencies also include trusts and money service agencies (Money Services Business, MSB). Trusts can only provide asset custody services, and cannot provide a full range of financial services. MSB is an institution approved by each state. The barrier to becoming an MSB is not high. In terms of supervision, the main institution that supervises U.S. banks is the OCC. The OCC supervises the federal banking system, including the National Bank, the Federal Savings Association, and the branches and institutions of foreign banks in the United States. The total number of these institutions is 1,200. These institutions hold 70% of the total assets of the US banking system.
Due to regulatory and conceptual restrictions, the U.S. banking industry has made very slow progress in providing encrypted digital asset services. In terms of supervision, the strict supervision of the US financial industry makes every financial institution cautious, lest there be violations, leading to strict penalties by financial supervision. Any business that may be suspected of violating regulations, they are shunned. Encrypted digital asset business is one such business. Encrypted digital currency is considered by many to be a tool for Ponzi schemes and speculation. More importantly, encrypted digital currency is also used as a money laundering tool. Therefore, due to the above reasons, US financial institutions are too late.
Conceptually, encrypted digital currencies are also despised by practitioners of mainstream financial institutions. For example, Buffett publicly believes that Bitcoin is the square of rat poison. He claimed that he does not hold encrypted digital currency now and will never hold it in the future. The CEO of Chase Morgan also believes that Bitcoin has no value. Some influential economists also have a very negative attitude towards encrypted digital currencies. Therefore, under the influence of financial supervision and concepts, financial institutions in the US banking industry have been reluctant to get involved in the field of encrypted digital assets.
In the past few years, encrypted digital currency trading companies usually obtained operating licenses in various states by obtaining MSB. They need to obtain such a license in each state. In addition, some encrypted digital currency trading companies carry out related businesses by obtaining trust licenses, but these companies can only provide custody services for encrypted digital assets and cannot provide users with all aspects of financial services.
In 2020, after two years of planning, the US state of Wyoming took the lead in issuing an encrypted digital bank license in its state. Its name is SPDI, Special Purpose Depository Institution. Two companies have now been approved to obtain such licenses.
These aspects are the beginnings of the state level and relatively small financial institutions. Before 2020, the U.S. banking market has not made any progress at the national level. But this situation will begin to change at an accelerated pace in 2020. The U.S. banking industry has begun to accelerate the development of encrypted digital monetization. Such a change began with the appointment of Brian Brooks as acting director of the OCC.
In March 2020, Brian Brooks was appointed as the Chief Operating Officer and First Deputy Administrator of the OCC. Two months later, he was promoted to acting director. After joining OCC, Brian Brooks began to focus on promoting the development of the U.S. banking industry to the direction of encrypted digital assets. Before joining OCC, Brian Brooks served as the Chief Legal Officer of Coinbase, a major cryptocurrency trading platform in the United States. He joined Coinbase in September 2018. Prior to this, he has been working in the legal and financial industries. During his tenure at Coinbase, he directly felt the slow development of the banking industry in the field of encrypted digital currency and the restrictions on the development of the encrypted digital currency industry.
Compared with his experience in specific business, more importantly, Brian Brooks believes from the concept that the current financial industry is undergoing fundamental changes, and such changes are the same as changes to the world by the Internet. The example he often cited is the change of the Internet to the post office. Before the advent of the Internet, communication between people needed to be completed through a centralized node such as a post office. And each communication requires a postage of 44 cents. But after the advent of the Internet, people can communicate directly with each other in time, and no longer need a centralized node such as a post office. Moreover, due to the emergence of Internet technology, more types of rich communication tools have appeared, and the communication content is much richer than text. Now the emergence of blockchain technology allows people to exchange value directly with each other without having to go through a centralized node such as a bank. The content and form of future value exchange will also be richer. The changes brought about by blockchain technology to value exchange will be the same as the changes brought about by the Internet to information exchange. Therefore, the banking industry must make corresponding changes to adapt to this new technological change. He believes that banks are institutions that have emerged in modern times. It did not exist before, and it will not necessarily continue to exist in the future. People need to continue to do financial business, but financial business does not necessarily need to be completed through banks.
Under the guidance of this philosophy, after joining OCC, Brian Brooks began to promote the transformation of the U.S. banking market in this direction. In July 2020, the OCC issued a statement letter clearly stating that the U.S. Federal System Bank can provide custody services for encrypted digital currencies, and at the same time reiterated that the National Bank can provide financial services to any legal entity including encrypted digital currency companies. In September 2020, the OCC issued a statement letter confirming that the National Bank and the Federal Reserve Association can provide users’ stablecoin products with reserve custody services. Also in 2020, OCC is establishing a nationwide payment charter to allow institutions that do not take deposits to provide payment services. Such a move will elevate the current money transfer services in each state to the national level. In this way, any company planning to provide payment services nationwide no longer needs to apply for operating licenses in every state. Such a move also affected the interests of the bank. Currently there are only payment services provided by banks, but since then they are no longer limited to banks. Any institution, including encrypted digital currency and other types of technology companies, can also provide payment services across the United States after obtaining this license. In Brian Brooks’ view, although banks currently provide three basic services: deposit absorption, lending and payment, this arrangement is not always the same. When there is demand in the market, some of these services can be undertaken by other types of institutions. At present, he obviously thinks that payment services can be handed over to other types of institutions.
The characteristics of blockchain technology make it very suitable for developing financial business on top of it. In fact, it will become the infrastructure of the digital financial world in the future. At present, the business in the banking industry and the securities industry will be carried out on the same financial market infrastructure (Financial Market Infrastructure, FMI) (see my related article). So far, various efforts in the market have been moving in this direction. But most of these efforts are initiated and promoted by market forces, and few financial regulatory agencies are pushing from the top down. The OCC under the leadership of Brian Brooks is one of the few cases in this regard. Given the size of the U.S. banking system, the promotion of such financial regulators in this regard is even more distinctive. According to the current way of advancement, the process of encryption and digitization of the US banking industry will accelerate.
In accordance with the current development trend, the traditional banking industry has begun to provide encrypted digital currency related services, and encrypted digital currency companies have begun to provide services that previously belonged to banks. The two tend to merge. For any of them, if it is still based on the traditional centralized technology system to carry out business, it is of little significance. For example, banks began to provide custody services to encrypted digital currency companies. Such a business can help banks increase their income, but it will not produce a qualitative change. Only when financial services are carried out on the basis of the support of distributed accounting technology, will this bring substantial changes to the financial industry. Take the payment business as an example. If a financial technology company starts to provide stablecoin-based payment services based on blockchain technology, this will bring a paradigm change to the US financial industry. The infrastructure for providing payment services is parallel to the bank’s existing payment system, and because it is based on distributed accounting technology, it is superior to the existing bank payment system in terms of efficiency and cost. More importantly, such an infrastructure not only supports the circulation of digital currency, it can also support the generation, registration, circulation, transaction and settlement of digital financial products, and it adopts digital currency to use DVP for transaction settlement. This will form a digital financial market parallel to the existing banking and securities industries. This will not only compete with existing institutions in banks, but also with institutions in the securities industry.
Now, under the leadership of Brian Brooks, OCC is advancing the development of this process. First, mainstream banks can start to provide financial services related to encrypted digital currencies. Second, OCC is formulating policies to allow financial technology companies to provide payment services across the United States. After such a process begins, distributed accounting technology will be introduced as a market infrastructure, and more encrypted digital financial services will be developed on this market infrastructure. Of course, such a development process will be full of obstacles. Now there are financial industry associations writing letters urging OCC to act cautiously. The US presidential election may also lead to changes in the personnel of various departments of the US government. Therefore, there are still very big variables in the development of the US banking industry in the direction of encryption and digitalization. But its subsequent development is very worthy of attention.
