The Office of the Comptroller of the Currency, an independent bureau of the Department of the Treasury, announced in December its intention to explore the possibility of creating special-purpose national bank charters for financial technology companies.
Financial technology includes an array of services from blockchain and crowdfunding platforms to payment and remittance applications.
National bank charters allow institutions to originate loans and in a financial technology company’s case, access to payment systems without third-party banks. Shortly after the OCC published a licensing manual for how these special-purpose national charters would be evaluated and accepted, state bank regulators filed a lawsuit against the OCC’s charters.
Banks in the United States have historically been able to choose between a national or a state charter, a dual banking system regulated at different levels. Typically, state charters are considered to monitor banks with more scrutiny because they are regulated by the state chartering authority as well as by either the Federal Deposit Insurance Corporation or the Federal Reserve.
National banks are only regulated by the OCC but must be a member of the Fed.
Admittedly, financial technology doesn’t necessarily equate to banking. The move to charter financial technology companies seems well-intentioned, but the spectrum of financial technology the OCC is trying to include under its supervision and regulation is huge.
The recent efforts by the Securities and Exchange Commission to regulate Initial Coin Offerings, even though it is still an industry in its infancy, was much smaller in scope.
The ability for an innovative financial technology company to have a legal jurisdiction would legitimize digitized financial operations in the eyes of the public and lead to more consumers adapting alternative means of financial transactions.
Legislation is always a doubled-edged sword, but the main issue with the OCC as a national charter pre-empting state laws is the Fed. A bank can attain a national charter only if it is a member of the Fed, which is not a necessary requirement to attain a state charter.
Much of the financial technology world, particularly cryptocurrencies, was founded on the principal of decentralization. While this does not include all the business models that fall under the umbrella of “financial technology,” decentralization in financial technology gives power to individuals in a free market economy backed by mathematical formulas.
The Federal Reserve System is the ultimate example of a centralized bank and controls the monetary supply in the U.S. through interest rate and reserve ratio changes. Membership to the Federal Reserve System would also nationalize a potential borderless financial technology operation.
The principle of immutability is important to many financial technology companies, and while it may cause wild fluctuations in demand, the supply of a lot of cryptocurrencies is fixed.
A “special-purpose” national bank charter requires an entity to perform fiduciary activities, which include “receiving deposits, paying checks or lending money.” Regulation and supervision has its own set of pros and cons, but unlike the Federal Reserve System, the FDIC is a corporation that provides deposit insurance.
State laws would allow the FDIC to supervise banks with a state charter, but as of now, federal pre-emption is the standard. Unless the licensing manual becomes more specific, the idea that the OCC would be the only governing body in the U.S. granting bank charters for financial technology companies should be viewed with skepticism.
Opinion columnist Nicholas Bell is an MBA graduate student and can be reached at [email protected]
