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The OCC granted preliminary conditional approval on April 23 to an application to charter Paxos National Trust (Paxos) as an uninsured national trust bank. Paxos, which currently operates as a New York state-charted limited liability trust company regulated by the New York Department of Financial Services and has indicated in public statements that it intends to maintain both federal and state licenses, will be permitted under the OCC approval to provide “a range of services associated with digital assets,” including custody, payment, exchange, and other agent services related to cryptocurrency.

Summary

Paxos is an early-stage company formed in 2012 to capitalize on a wave of interest in blockchain-related investments by developing financial technologies designed to buy, sell, trade, and manage digital assets. According to public reports, it has raised approximately $235 million from investors such as Paypal, Ken Moelis, and Mithril Capital Management and has 150 employees as of March 2021.

Under the conditional approval, Paxos will operate as an uninsured national bank whose operations would be limited to those of a trust company and related activities. It will provide “a range of services associated with digital assets,” which the OCC has stated are permissible for a national bank, including custody services for digital assets; custody and management of USD stablecoin reserves; payment, exchange, and other agent services; other cryptocurrency services, such as trading services and enabling partners to buy and sell cryptocurrency; and “know your customer” as a service, which includes customer identification, sanctions screening, enhanced due diligence, customer risk rating, and other related services.

In approving the application, the OCC has sided against various bank trade groups that submitted a comment letter opposing the charter application based on several arguments, including that (i) the proposed business model does not involve the types of fiduciary activities performed by national trust banks, thus calling into question the suitability of the trust charter and representing a fundamental departure from existing OCC precedent; and (ii) Paxos did not provide sufficient information to allow interested stakeholders the opportunity to evaluate its novel business models and operations.

In its conditional approval, the OCC asserted that it is authorized to charter a bank that limits its activities to those of a trust company and that Paxos will perform its activities in a fiduciary capacity. The OCC further asserted that sufficient information about Paxos’s current and proposed activities were made publicly available. The OCC also stated that it has received sufficient information to approve the charter application, consistent with well-established policies and procedures regarding the approval process.

Final approval and authorization for Paxos to open and engage in cryptocurrency activities as a national trust bank will not be granted until all preopening requirements are met.

The OCC’s conditional approval established the following conditions:

  • Paxos shall not engage in activities that would cause it to be a “bank” as defined in Section 2(c) of the Bank Holding Company Act
  • Within three business days after opening, Paxos must enter into an operating agreement with the OCC
  • Within three business days after the effective date of the operating agreement with the OCC, Paxos must enter into capital and liquidity support and capital assurance and liquidity maintenance agreements with its parent company

The OCC stated that its decision to grant preliminary conditional approval was made with the understanding that Paxos will apply for Federal Reserve membership.

Further Thoughts

  • This action by the OCC is the third charter approval for a “crypto native” bank issued this year by the regulator, building on approvals previously granted to Anchorage and Protego, as well as various legal opinions issued by the OCC confirming the ability of national banks to engage in certain “traditional” trust and custody functions in relation to crypto assets. The safekeeping, management, and trading of digital assets have been regulatory stumbling blocks for some large financial institutions, but the OCC appears to be attempting to remove such obstacles.
  • The OCC’s move to rely upon its authority to approve trust charters under the National Bank Act as a vehicle for banks to provide cryptocurrency and other digital products and services may alleviate the pressure to establish a “new” fintech charter, which arguably raises more complex legal issues and ultimately could well be invalidated by the courts.