The Comptroller of the Currency (the “OCC”) has been busy, and focused on technology. We discuss two recent developments: proposed regulations that would allow the OCC to grant exemptions relating to Suspicious Acivity Reports (“SARs”), and the OCC’s announcement that national banks and federal savings associations may employ both independent node verification networks (“INVNs”) and stablecoins to perform banking functions.
SAR Filing Exemptions
In late December, the OCC proposed new regulations to amend the “Suspicious Activity Report regulations to allow the OCC to issue exemptions . . . for national banks or federal savings associations that develop innovative solutions intended to meet Bank Secrecy Act requirements more efficiently and effectively.” While the Financial Crimes Enforcement Network (“FinCEN”) has long held the power to grant exemptions, the OCC does not possess equivalent authority. “As financial technology and innovation” rapidly evolve in monitoring and reporting financial crime, the OCC has determined it must create a flexible regulatory mechanism to keep pace.
Some technological changes the OCC references in explanation of its proposed rules are:
- “[E]nhanced monitoring processes using more and better data, optical scanning, artificial intelligence, or machine learning capabilities”;
- “[A]utomated or limited investigation processes depending on the complexity and risk of a particular transaction and appropriate safeguards”; and
- “[A]utomated form population using natural language processing, transaction data, and customer due diligence information.”
These technological advances would allow banks to more efficiently perform SAR monitoring, investigation, and filing functions. For example, the cited innovative approach to SAR filing—automated form population—would allow bank employees to focus on the substance of the filing while leaving the inclusion of background information to automated processes.
To receive an exemption, entities must make a written request to the OCC. And entities with SAR filing obligations under both the OCC and FinCEN would require an exemption from both bodies. Generally, the OCC will consider whether the exemption would be consistent with safe and sound banking practices, among other factors. In the course of their evaluation, the OCC may reach out to other federal banking agencies to receive comments on exemption requests. Entities will learn if they receive an exemption via written response, which will describe the scope and the time period of the exemption.
INVNs and Stablecoins
In an interpretive letter published just a few days ago, the OCC signaled its acceptance of the use of more new technology: INVNs and stablecoins. National banks and federal savings associations may now use both “to perform bank-permissible functions.” A common INVN is a distributed ledger consisting of a variety of nodes that validate transactions and store transaction history. Banks may serve as a node or use INVNs. A July interpretive letter provides more detail on distributed ledgers and nodes. Stablecoins are cryptocurrencies “designed to have a stable value as compared with other types of cryptocurrency.” Some are backed by fiat currency. A September interpretive letter describes stablecoins in more detail. Most interestingly, the OCC states a bank may issue a stablecoin. The letter caveats, however, that stablecoins “must comply with all applicable securities laws and regulations,” noting the SEC is standing by to answer questions on the issuance of stablecoins.
The OCC reasons that INVNs and stablecoins are just a new way of performing traditional banking functions. For example, INVNs are just a new means of “transmitting payment instructions and validating payments” while stablecoins are a new means of “facilitate[ing] payment transactions,” like debit cards, cashiers’ checks, or electronically stored value (“ESV”) systems. The OCC believes the use of INVNs will allow for “faster and more efficient payments” and that “using stablecoins to facilitate payments may combine the efficiency and speed of digital currencies with the stability of existing currencies.”
Even though the OCC is permitting this use to meet growing demand, any conduct must remain consistent with law and “safe and sound banking practices.” The OCC warns that new technology also presents new risks. The OCC notes these technologies present a higher degree of fraud risk, and caution banks that they should develop the technological expertise necessary to manage this risk. The letter also warns of the heightened money laundering risks of cryptocurrency and encourages banks to “adapt and expand” their Bank Secrecy Act/Anti-Money Laundering compliance programs to meet the need.
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