The OCC OKs Stablecoins: What Does that Mean for Banks?

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You’ve finally perfected your digital transformation strategy
that was accelerated because of 2020’s global pandemic. What
should you focus on now? Here’s an idea: stablecoin
transactions.

The U.S. Office of the Comptroller of the Currency (OCC) last
week published
Interpretive Letter 1174
detailing that banks may use
stablecoins and independent node verification networks (INVNs) to
facilitate payments for customers. That is to say, banks can
transfer stablecoins to other banks.

To catch you up to speed, INVS are distributed ledgers. And
stablecoins are a type of cryptocurrency that minimize volatility
by pegging their value to an external factor.

There are a few key things this means for traditional financial
institutions.

Transactions become decentralized

Stablecoin transactions are essentially decentralized
cryptocurrency transactions. Because of this, they enable banks to
send and receive money without a government intermediary.

Faster payments

Stablecoin transactions do not rely on traditional payments
rails, rather, they utilize public blockchains. Because of this,
stablecoins, just like other cryptocurrencies can be transferred in
near-real time from one party to the next.

On 24/7

Once again citing freedom from traditional payment rails,
because stablecoin transactions occur outside of the traditional
payments infrastructure– and because they occur instantly– they
can essentially be made at any time, including on the weekends and
holidays.

Compliance is still on the table

According to the letter, stablecoin transactions, “should have
the capability to obtain and verify the identity of all transacting
parties, including those using unhosted wallets.” So banks are
still responsible to adhere to KYC guidelines.

Additionally, banks using stablecoin transactions are
responsible for managing the multiple risks associated with
cryptocurrency transactions. Per the letter, “The stablecoin
arrangement should have appropriate systems, controls, and
practices in place to manage these risks, including to safeguard
reserve assets. Strong reserve management practices include
ensuring a 1:1 reserve ratio and adequate financial resources to
absorb losses and meet liquidity needs.”

This is positive news not only because it offers banks more
options, but also because it serves as a signal that the OCC and
the Acting Comptroller of the Currency Brian Brooks are bullish on
cryptocurrencies.

Pay attention to the cryptocurrency/stablecoin sector this year.
We’re expecting to see significant developments in the
decentralized finance area, and banks’ involvement in initial
cryptocurrency efforts will be crucial. There will be little-to-no
room for laggards in this space.

Photo bypixabay.com from Pexels

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The OCC OKs Stablecoins: What Does that Mean for Banks?

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