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

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Paxos is a start-up company established 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 around $ 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 activities 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 says are licensed for a national bank, including digital asset custody services; the conservation and management of stable currency reserves in USD; payment, exchange and other agent services; other cryptocurrency services, such as trading services and allowing partners to buy and sell cryptocurrency; and “Know Your Customer” as a service, which includes customer identification, sanction screening, enhanced due diligence, customer risk assessment and other related services.

In approving the request, the OCC sided with various banking business groups who submitted a comment letter opposing the application of the charter on the basis of several arguments, including that (i) the proposed business model does not involve the types of fiduciary activities carried out by national trust banks, thus calling into question the adequacy of the trust charter and representing a fundamental break with the previous existing CBOs; and (ii) Paxos has not provided sufficient information to allow interested stakeholders to assess its new business models and operations.

In its conditional approval, the OCC asserted that it is authorized to charter a bank which limits its activities to those of a trust company and that Paxos will operate in a fiduciary capacity. The OCC further asserted that sufficient information on the current and proposed activities of Paxos was made public. The BCC also said it received sufficient information to approve the charter request, in accordance with well-established policies and procedures regarding the approval process.

Final approval and authorization for Paxos to open and engage in cryptocurrency business as a National Trusted Bank will not be granted until all pre-opening requirements are met. .

The conditional approval of the BCC established the following conditions:

• Paxos will not engage in activities that would make it a “bank” within the meaning of Section 2 (c) of the Bank Holding Company Act.
• Within three working days of opening, Paxos must enter into an operating agreement with the OCC
• Within three business days of the effective date of the operating agreement with the OCC, Paxos must enter into capital support and liquidity and capital assurance and liquidity maintenance agreements with its parent company.

The OCC said its decision to grant preliminary conditional approval was made with the knowledge that Paxos would apply to become a member of the Federal Reserve.

Further thoughts

• This OCC action is the third charter approval for a “crypto native” bank issued this year by the regulator, building on approvals previously granted to Anchoring and Protego, as well as various legal opinions issued by the OCC confirming the ability of domestic banks to perform certain “traditional” trust and custody functions with respect to crypto assets. The custody, management and trading of digital assets have been regulatory stumbling blocks for some large financial institutions, but the OCC appears to be trying to remove these barriers.
• The OCC’s decision to rely on its authority to approve trust charters under the National Bank Act as a means for banks to provide cryptocurrencies and other digital products and services may mitigate the pressure to establish a “new” fintech charter, which undoubtedly raises more complex legal aspects. problems and could ultimately be struck down by the courts.

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