One of the fun things about jigsaw puzzles, for those of you that haven’t tried them, is the satisfying snap of pieces fitting together to reveal part of a picture. Another is watching the whole picture emerge as more pieces join.
In July of last year, the U.S. Office of the Comptroller of the Currency (OCC) said that national banks could custody crypto assets. That was a pretty big deal, as, should national banks start to offer this service, investors could in theory ask their habitual institution to custody all their holdings, be they stocks, bonds or crypto. So much easier. A major barrier to crypto investment removed.
In September, the OCC said that they could provide services to stablecoin issuers, such as holding reserves. Banks had been doing this for some time, but in an uncertain regulatory environment. Now they had official approval to do so. Stablecoins backed one-to-one by fiat held in bank reserves are not deemed a risk in one of the most regulated industries in the U.S.
And then this week, the federal banking regulator published an interpretive letter saying that national banks and federal savings associations can use public blockchains to store and validate payments. It effectively awards blockchains the status of “payment network.”
Do you see the picture emerging? It’s not just about expanding the range of products banks can offer clients. It’s not just about offering better payment services. It’s about the convergence between traditional and crypto markets. It’s also about the role of the dollar in the economies of tomorrow.
Let’s look at why this emerging picture is worth paying attention to:
- It is good news for crypto markets: a nudge to traditional banks to offer support for blockchain infrastructure and even facilitate crypto transactions. This makes crypto investments easier for traditional investors, which will bring more money into the industry, which will encourage more infrastructure development, and so on in a virtuous circle that will end up offering opportunity to an ever-wider user base. If investors can pay for crypto assets with stablecoins issued by their bank, through their bank, and have the assets automatically dropped into their bank custody account, then why not put part of your portfolio in a systemic hedge instrument? Barriers are removed.
- It is good for traditional markets, as it is likely to encourage the emergence of a new type of lower-cost and more transparent settlement system. In spite of substantial improvement over the past decade or so, traditional settlement is still hampered by reconciliation needs. Using stablecoins does not necessarily fix this (the issues are more legal than technological), but it does open the door to an alternative process which may be worth deeper investigation and which may tie in with a future market of tokenized traditional assets, new types of assets that we have not yet even begun to design, and everything in between.
- It is good for the banking…