(Bloomberg) — A major battle between crypto firms and traditional lenders over interest and bank charter applications is poised to be decided by regulators appointed by President Donald Trump, who has been a vocal supporter of digital currencies.
The Genius Act, which requires stablecoin issuers to formally register and hold dollar-for-dollar reserves, sets in motion a rule-writing process with US regulators that will determine what qualifies as generating interest on stablecoins and how far they can go in acting like a traditional bank. Trade groups, though, are already pushing back against attempts to grant bank charters to crypto firms and find workarounds for yield-generating stablecoins.
“There’s a huge fight brewing between the banks and the nonbank stablecoin issuers,” said Caitlin Long, founder of Custodia Bank, a provider of digital-asset services.
During the first Trump administration, the Office of the Comptroller of the Currency sought to expand the services a trust bank can provide, with some saying it could include potentially making loans and settling payments.
This summer, crypto firms including Circle Internet Group Inc. and Ripple Labs Inc. have applied for national trust bank charters and the current slew of applications is now a test of that OCC interpretation. Some trade groups opposed the move in July, arguing that the OCC should not have made the determination without public comment and that the move is a “loophole” for trust banks to take advantage of the benefits of traditional banks without corresponding regulation.
“If the Applicants are successfully able to establish themselves as national trust banks that do not primarily provide fiduciary services, but instead provide traditional banking services like payments, then, as the Associations anticipated in 2021, other companies will follow, presenting material risk to the US banking and financial system,” the groups wrote in a July letter.
A spokesperson for the OCC declined to comment.
For crypto firms, these charters could provide a multitude of benefits, including no longer having to apply for licenses state-by-state to do business and a stronger degree of legitimacy.
“It’s the momentum that we need as a country to push forward,” said Stuart Alderoty, chief legal officer of Ripple and president of the National Cryptocurrency Association. “It’s a good thing for the Americans who already own crypto and for those who are crypto curious.”
The trust bank charter provides an avenue for crypto firms to better compete against banks that have long existed in the space, according to Long.
“If the OCC gives these trust charters rather than full bank charters, these banks will have ten to 15% of the capital requirements of being a fully-fledged bank and are not subject to all the regulations that apply to banks,” Long said. “If the OCC is basically back door slashing the capital requirements and the regulations on banks, why wouldn’t the banks convert to trust companies instead of being a bank as well.”
For banks, the entrance of these firms into traditional finance is both an opportunity for collaboration and intense competition. Nathan McCauley, the head of Anchorage Digital, said traditional finance dramatically increased its outreach to his company and others in the run-up to the passage of the crypto legislation. Some of the nation’s largest banks have since announced partnerships with digital asset firms, including JPMorgan Chase & Co. and Coinbase Global Inc. reaching a deal to directly link customers’ bank accounts to their cryptocurrency wallets.
But the bank industry is also nervous about competing with the crypto industry, which has a different approach to innovation compared with traditional financial institutions.
“This is an industry that doesn’t think it needs to wait for rules, unlike the banking industry,” said Karen Shaw Petrou, a managing partner of Federal Financial Analytics, where she analyzes financial firms, including lenders. “Stablecoin issuers just go for it and that’s going to unsettle the banks more than probably anything.”
Crypto firms are also looking at ways to generate fresh monetary benefits tied to stablecoins after the banking lobby successfully pushed for a ban on issuers providing interest to their customers under the Genius Act. The digital asset is primarily used by traders to get in and out of other cryptocurrencies, but is also increasingly used for payments. When that asset is not actively part of a payment, it sits in an account, and companies are now not allowed to offer users yield for depositing their tokens into yield-bearing accounts.
“Banks, and lawmakers who receive donations from banks, are very concerned that a yield-bearing stablecoin that blurs the line between savings vehicle and a payment vehicle makes it much less attractive to have a checking account,” said Zach Shapiro, head of policy at the Bitcoin Policy Institute.
Companies are now looking to expand stablecoin offerings as regulators begin the process of explicitly defining what interest looks like in the space and what is permissible for companies.
Recently, Circle announced a partnership with Binance for an off-exchange collateral where customers can park their money when they are not making a payment. The largest US crypto exchange, Coinbase, already offers a rewards program for certain consumers, which some in the banking industry argue could potentially be illegal under the no-interest provisions of the Genius Act. Coinbase disagrees, saying the program has been tailored to be in compliance with the law.
“The statutory language is vague and has room for exception, but that’s when the fun starts,” Petrou said.
–With assistance from Olga Kharif and Katanga Johnson.
(Updates with OCC declining to comment in seventh paragraph.)
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