On November 3, Acting Comptroller of the Currency, Michael J. Hsu, remarked at the American Fintech Council’s Fintech Policy Summit 2021 about the growth in the digitalization of banking including the trend and attendant risks associated with keeping cryptocurrency outside of the bank regulatory system (we discussed Hsu’s previous remarks on crypto trends and risks in an earlier Consumer Finance & FinTech Blog post here).  Hsu noted that the cryptocurrency space includes “synthetic banking providers” (SBPs) who “operate out of the reach of bank regulators and free of bank rules.”  Hsu explained that “[m]any of these universal crypto firms hold themselves out as regulated.  But this is a half-truth.”  Hsu also argued that the “rebundling” of banking activities of taking deposits, making loans and facilitating payments by fintechs and the fragmented supervision of universal crypto firms pose significant risks to consumers, businesses, and financial stability.

Hsu stated that all participants in the banking space need to “level up” including removing “the disparity between the rights and obligations of banks and the rights and obligations of synthetic banking providers by holding SBPs to banking standards.”  He emphasized that regulators must engage with each other with “less regulatory competition and more cooperation, less parochialism and more teamwork, and less go-it-alone independence and more interdependence.”   Hsu also argued that “universal crypto firms . . . should embrace comprehensive, consolidated supervision . . . and regulators should prioritize the development of policies, staff, and supervisory approaches to bring such firms safely into the bank regulatory perimeter.”

Hsu also announced that the OCC’s recent review of bank charter applications and cryptocurrency-related interpretive letters has concluded and in the coming weeks OCC determinations and feedback to bank charter applicants will be communicated.  Further, the results of the “crypto sprint” as a result of the work between the OCC, Federal Reserve and the FDIC has also concluded and the results will be communicated shortly. Hsu stated that the “content of these communications—on the chartering decisions, interpretive letters, and the crypto sprint—will be broadly aligned with the vision for the bank regulatory perimeter laid out here today.”

Putting It Into Practice:  As regulators continue to build a framework to undergird crypto offerings, banks and non-bank Fintechs that decide to offer crypto will have to develop a risk and compliance framework specific to digital assets, based on a thorough identification of risks, industry best practices, and existing regulatory expectations.  The characteristics of the framework will vary based on whether banks create, acquire, or partner with Fintechs experienced in crypto.  In any event, participants should be mindful of Hsu’s remarks and ensure that they are “leveling up” when it comes to all things crypto, including risk management capabilities and consumer practices.

In addition, Hsu’s criticisms of SBPs further signals an intention to curtail the OCC’s support of partnerships between banks and Fintechs that has fueled the rapid disruption of traditional banking services such as lending, deposits, and payments.  Hsu, a potential candidate for permanent Comptroller of the Currency should President Biden’s nomination of Saule Omarova not result in Senate confirmation, testified in August to the Senate Committee on Banking, Housing, and Urban Affairs that the OCC was exploring ways to “differentiate between harmful rent-a-charter arrangements and healthy partnerships that expand access to credit.”