Cryptocurrencies and the Regulatory Landscape

Bitcoin is a digital currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto.[1] Although it has never clearly been stated why, the Genesis Block (the original block containing the first 50 bitcoins) had a message “The Times 03/Jan/2009 Chancellor on brink of second bailouts for banks.” Many believe that this message is a reference as to the reason Nakamoto wanted to create a pure peer-to-peer version of cash which would enable online payments to be sent directly from one party to another without any involvement of a financial institution. Instead of having a financial institution prevent the double-spend problem, Bitcoin relies on a peer-to-peer network which is now known as the hash. The idea of this network was for the network to verify transactions by hashing them into an ongoing chain of hash-based proof-of-work to form a record that cannot be changed without redoing the proof-of-work. This chain of proof-of-work is now known as the blockchain. 

As Bitcoin picked up adoption, many other variations of cryptocurrencies followed. Eventually, other types of cryptocurrencies were created, including stablecoins, and Non-Fungible Tokens (NFTs). Stablecoins were pegged to a fiat currency to fight the volatility of the price of cryptocurrencies, and NFTs were a different type of token that proved authentication rather than be used as a medium for commercial transaction.

Currently, most of the regulations do not apply to traditional banking institutions. Aside from the BSA, many additional regulations apply more so to cryptocurrency exchanges than it does to banks. The offer or sale of cryptocurrency is only regulated if the transaction (1) constitutes the offer or sale of a security under state or Federal law, or (2) is considered money transmission under state law or conduct otherwise making the person a money services business under Federal law. Additionally, the Financial Crimes Enforcement Network (FinCEN) considers exchanges and administrators of cryptocurrencies when they have the authority to both issue and redeem the virtual currency. There are Internal Revenue Services (IRS) regulations and guidance surrounding tax and reporting of virtual currency transactions but as of today, this applies to individuals and cryptocurrency companies in reporting capital gains or losses. 

In regard to the other “backend” functions of cryptocurrencies, the OCC has issued a few interpretive letters to clarify what banks are allowed to do:

  • Interpretive Letter 1170 clarified that banks can provide custody services for crypto assets.[2]
  • Interpretive Letter 1172 clarified that banks can hold stablecoin reserves.[3]
  • Interpretive Letter 1174 clarified that banks can participate in independent node verification networks and use stablecoins for payments activities.[4]
  • Interpretive Letter 1176 expanded the eligibility for the OCC National Trust Charter by removing the requirement for trust companies to operate in a fiduciary capacity.[5]

Therefore, banks are also able to provide custody services and participate in certain stablecoin transactions. However, it does not appear that many banks have been providing these services yet. 

As cryptocurrencies have gained more media attention, and the public adoption of these virtual currencies increased, the regulators have been issuing regulations and guidance on this topic. Not much of the guidance applies to the majority of traditional financial institutions, but we may see regulation increase if and when this sector matures. 

[1] See Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, Bitcoin, 1 (2009),