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Crypto Goes Mainstream: OCC Says Banks Can Provide Crypto Custody Services

On Wednesday, July 22, 2020, Acting Comptroller of the Currency Brian Brooks reaffirmed his interest in being seen as an agent of modernization in a letter clarifying the authority of national banks and federal savings associations to provide cryptocurrency services for customers.

The letter from the Office of the Comptroller of the Currency (“OCC”) discusses the increasing acceptance of cryptocurrency, and especially Bitcoin, as a method of payment and form of investment. It acknowledges a correlating growing demand for “safe places, such as banks, to hold unique cryptographic keys associated with cryptocurrencies on behalf of customers and to provide related custody services.” Three reasons – a safe way to hold cryptocurrency keys; a secure storage service; and custodian services for assets managed by investment advisors – are cited in the letter as driving the demand for cryptocurrency custody services.

The safekeeping services are described as a modernization of special deposit and safe deposit boxes, falling within “longstanding authorities to engage in safekeeping and custody activities.” Thus, “the authority to provide safekeeping services extends to digital activities and, specifically, that national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”

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Can Standards and Voluntary Certification Help Community Banks and Fintechs Grow, Together?

July 28, 2020

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COVID-19 has laid bare the need to have good technological solutions for the systems and services upon which we rely. In the financial sector, perhaps more than many others, the pace of innovation is beholden to regulatory parameters, but there is some optimism that Fintechs can help fill the gap in traditional financial products, especially in emerging markets. As in our in recent post about digital banking modernization by the OCC, regulators are feeling out the interest in certain programs. On Monday, July 20, 2020, the FDIC announced a request for public input on a certification program to “promote the efficient and effective adoption of innovative technologies at FDIC-supervised financial institutions.”

More specifically, the FDIC is seeking input regarding whether the development of relevant standards in connection with a voluntary certification process could be applied to third-party models and whether such standards would allow more financial institutions, particularly community banks, to engage with third parties that provide these models, including Fintechs. Such a voluntary certification program could, in theory, reduce costs of doing business for both the financial institutions and providers of models and permit FDIC supervision resources to be used more efficiently and effectively.

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OCC Continues Digital Banking Modernization

The Office of the Comptroller of the Currency’s (“OCC”) attention to modernizing regulation to better accommodate innovative products and industries is continuing full steam ahead since our recent post about a potential payments charter. In the weeks since we posted that article, Brian Brooks has become the acting Comptroller of the Currency, so it should come as no surprise that his goals are garnering some attention.

On Thursday, June 6, the OCC issued a notice of proposed rulemaking seeking public comment to update its rules for national bank and federal savings association activities and operations and an advance notice of proposed rulemaking seeking comment on rules on national banks’ and federal savings associations’ (banks) digital activities. These releases confirm that the agency is “reviewing its regulations on bank digital activities to ensure that its regulations continue to evolve with developments in the industry.”

As part of a substantial modification of the regulatory system, the OCC seeks comment on additional flexibility for banks with respect to permissible derivatives activities, tax equity finance transactions, corporate governance, anti-takeover provisions, capital stock issuances and repurchases, and participation in financial literacy programs.

In addition, the OCC seeks comment on a significant number of banking issues related to digital technology and innovation. The OCC asks whether current legal standards are sufficient flexible, whether they create undue hurdles, and whether there are other areas they should cover. Their requests for comments also touch on current questions, namely whether the pandemic has brought any concerns to light and what issues are unique to smaller institutions – which performed well with the rollout of the SBA’s Paycheck Protection Program, but may encounter hard times to come.

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Coming Up: A National Non-Depository Payments Charter?

Brian Brooks, Chief Operating Officer of the Office of the Comptroller of the Currency (“OCC”) said on Monday that he believes the OCC should investigate the viability and utility of a non-depository payments charter: “One of the things I think we have to ask ourselves as an agency is, if it makes sense to have a non-depository lending charter, which was the original fintech concept, would it also make sense to have a non-depository payments charter?”

In his talk, given as part of the Consensus: Distributed virtual conference, Brooks focused on cross-border concerns that are particularly salient to crypto companies. He notes that we may have come to a point where the traditional state-federal divisions of licensing and oversight authority are less relevant, particularly in the crypto space. Brooks says there is an argument that “crypto looks a lot like banking for the twenty-first century,” in which case a single national license may provide modern update to the current patchwork of laws, which is burdensome and time-consuming for both payments companies and state regulators.

Brooks said “one of [his] missions at the OCC . . . is to investigate the extent to which over time it makes sense to think of crypto companies like banks and to think of charter types that might be appropriate for crypto companies.” While Brooks’ comments focused on crypto in mentioning a payments charter, he noted Stripe and PayPal as non-blockchain payments companies, which would presumably also be covered by such a payments charter.

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The Paycheck Protection Program: Managing Fair Lending Risks

The past few weeks have seen increasing scrutiny of the lenders and borrowers participating in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), including by the Treasury Department, SBA Inspector General, U.S. Department of Justice, and Congress with the Special Inspector General for Pandemic Recovery surely soon to follow.

Against this backdrop, the Consumer Financial Protection Bureau (“CFPB”) has recently raised concerns related to fair lending for lenders participating in the PPP. On May 6, 2020, the CFPB issued guidance related to the timing for Equal Credit Opportunity Act (“ECOA”)-mandated adverse action notices under the PPP. On April 27, 2020, the CFPB published a statement in which the Bureau emphasized that lenders must comply with ECOA when extending small business credit, outlining key bases for discrimination claims under ECOA and encouraging women and minority-owned businesses who feel they have suffered lending discrimination to submit complaints to the CFPB through its complaint portal.

The CFPB’s recent focus on institutional fair lending compliance accords with that of federal banking regulators. For example, on April 27, 2020, the Office of the Comptroller of the Currency released “OCC Bulletin 2020-45,” which, among other things, encourages institutions to “prudently document their implementation and lending decisions” under the SBA’s PPP.

Given recent regulatory focus on fair lending compliance in connection with PPP lending, banks and other lenders should consider the following proactive risk mitigation steps.

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SBA PPP April 14 Interim Final Rule Guidance

April 16, 2020

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On April 14, 2020, the SBA published an interim final rule that provides additional guidance regarding topics of confusion among both Payroll Protection Program (“PPP”) lenders and borrowers. This new rule supplements the first interim final rule, which was issued by the SBA on April 2, 2020, and specifically addresses the eligibility of self-employed individuals, partnerships, director-owned businesses, and legal gambling businesses. This post covers the updates detailed in the new interim final rule, based on the latest guidance from the SBA as of April 16, 2020.

Self-Employed Individuals

Eligibility

The new interim final rule makes clear that an individual may be eligible for a PPP loan if the individual:

  1. was in operation as a business on February 15, 2020;
  2. is an individual with self-employment income (such as an independent contractor or a sole proprietor);
  3. has a principal place of residence in the United States; and
  4. filed or will file a Form 1040 Schedule C for 2019.

The SBA has communicated that it will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.

We note that individuals should be aware that participation in the PPP may affect eligibility for state-administered unemployment compensation or unemployment assistance programs.

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