Stablecoins: OCC letter to banks could boost Facebook's Libra

The federal agency that oversees banks issued a letter on Monday that gives financial institutions a green light to hold reserves to support so-called stablecoins—digital currencies similar to Bitcoin that are backed on a one-to-one basis by real-world money.

While stablecoins have existed for years, their popularity has soared in recent months both in cryptocurrency circles and among businesses that have embraced them as an efficient way to settle international transactions.

In its letter, the Office of the Comptroller of the Currency (OCC) stated that U.S. banks can lawfully hold the fiat currency reserves of companies that issue stablecoins, provided those firms comply with federal banking laws.

According to Jeremy Allaire, the CEO of cryptocurrency firm Circle—which has issued a stablecoin called USDC alongside crypto giant Coinbase—the letter will provide legal cover for tech and finance companies that are experimenting with stablecoins.

Allaire pointed in particular to Facebook, which is backing a consortium called Libra that plans to issue a global digital currency that will be backed by U.S. dollars or by a basket of major currencies. Allaire also suggested that companies like Square, whose CEO has expressed strong support for cryptocurrency, are likely to make stablecoins part of their operations in 2021.

A spokesperson for Libra declined to comment on the OCC news. Square did not immediately reply to a request for comment.

The OCC letter is not transformative in that some U.S. banks already hold stablecoin reserves. These include U.S. Bancorp, which holds more than $2 billion of reserves that back the USDC stablecoin.

Allaire, though, says the letter will provide assurance to other banks—some of whom remain skittish about cryptocurrency ventures. He says that as stablecoin use expands and more companies seek to issue their own stablecoins, the presence of additional banks will be essential.

In its letter, the OCC qualified its support for stablecoins by noting that it applied only to ventures that comply with regulations such as know-your-customer laws, and which permit regular audits of their reserves. This would seem to exclude exotic stablecoins like Dai that are supported in part by algorithms, as well as Tether. The latter is the most popular stablecoin project, but it has been dogged by complaints about its lack of transparency.

The OCC’s pronouncement on stablecoins comes two months after the regulator opened the door for banks to store cryptocurrencies like Bitcoin on their customers’ behalf.