A US federal court in New York ruled that it had jurisdiction to consider a challenge by the NY Department of Financial Services to the authority of the Office of the Comptroller of the Currency to issue special-purpose national bank (“SPNB”) charters to financial technology companies. DFS claimed that OCC’s plan to grant so-called “fintech charters” violated the federal banking regulator’s statutory authority to license national banks in the business of banking because OCC contemplated issuing SPNB charters to entities that did not accept deposits. DFS also claimed that OCC’s action violated the US Constitution, constituting a preemption of state law that was not authorized by Congress.
OCC contemplated that, by applying its "...uniform supervision over national banks, including fintech companies, [it would] help promote consistency in the application of law and regulation across the country and ensure that consumers [we]re treated fairly." (Click here to access OCC's December 2016 publication "Exploring Special Purpose National Bank Charters for Fintech Companies.) Fintech companies, including those facilitating cryptocurrency trading and custody, had hoped that obtaining an SPNB charter might have obviated the necessity of applying state-by-state for money transmitter and equivalent licenses in order to lawfully conduct their business.
DFS filed its lawsuit against OCC in September 2018 and OCC moved to dismiss DFS’s complaint a few months afterward, claiming that the court had no jurisdiction over the matter because it was not ripe for adjudication. (Click here for background in the article “NY DFS Sues OCC Over FinTech License; Other State Financial Regulators Say Their Legal Challenge Is Right Behind” in the September 16, 2018 edition of Bridging the Week.)
In December 2017, a different judge in the same federal court granted a motion to dismiss an analogous, earlier challenge by NY DFS against OCC also claiming that DFS’s complaint was not then ripe for determination. At the time, however, OCC was solely considering the possibility of potentially processing fintech charters and had not finalized its plans. (Click here for further background in the article “Challenge to NY BitLicense and Potential OCC Fintech Charter Quashed” in the January 7, 2018 edition of Bridging the Week.)
Subsequently, OCC finalized its SPNB charter program for fintech companies and announced it would accept qualifying applications beginning July 2018. (Click here for background in the article “OCC and Fintech Charters” in the August 5, 2018 edition of Bridging the Week.) As a result, the court in the current matter held that DFS satisfactorily demonstrated that there is now “substantial risk that harm will occur” if SPNB charters were granted, mainly that state oversight of non-depository money transmitters could be eliminated and DFS could lose substantial revenue if current DFS-regulated entities give up their NY licenses for OCC licenses.
The United States operates a dual system of banking organizations, some regulated by federal authorities and some regulated by the states. Traditionally, OCC has mostly approved as banks deposit-taking institutions. Contrariwise, DFS frequently authorizes financial institutions that do not take deposits, such as money transmitters. DFS has also approved a number of entities as special-purpose trust companies that are expressly authorized to facilitate transactions in virtual currencies; as part of their approval, such companies must comply with obligations required by entities obtaining a NY Bitlicense. (Click here for background in the article “Money Service Businesses for Second Largest Virtual Currency Fined for AML Deficiencies; Bitcoin Exchange Gets First NY License as Trust Company” in the May 10, 2015 edition of Bridging the Week.)
Notwithstanding the general victory by DFS, the court granted OCC’s motion to dismiss the part of DFS’s complaint based on constitutional grounds. The court stated that, for constitutional purposes, it was not relevant whether Congress specifically authorized OCC’s action but whether the national government could authorize such action at all. DFS, concluded the court, did not allege that OCC’s proposed SPNB charter program exceeded an enumerated authority of the national government and thus its constitutional challenge could not stand.
Another lawsuit against OCC challenging its authority to grant fintech charters is pending in a federal court in the District of Columbia. The second action was filed by The Conference of State Bank Supervisors in October 2018 (click here to access the relevant complaint).
Separately, OCC proposed a new program to support innovation in the US federal banking system – the OCC Innovation Pilot Program. Among other objectives, the goal of the program is to promote the “development and delivery of more effective and efficient activities to benefit consumers, businesses, financial institutions and communities.” Eligible entities would receive regulatory input early in their development of innovative programs and would help fashion the development of “appropriate controls.” Comments to OCC’s proposed pilot program will be accepted through June 14, 2019.
My View: As I have written before, the case for a single federal regulator of cryptocurrency exchanges is overwhelming. Today, jurisdiction over such entities is practically divided among FinCEN (which generally requires exchangers of virtual currency to be registered as money service businesses), the states (many of which require such entities to register as money transmitters or in an equivalent manner, or in the case of New York, also mandate such entities to obtain a so‑called “BitLicense”) and the Commodity Futures Trading Commission (which exercises anti-fraud and anti-manipulation authority over transactions involving spot virtual currencies but does not functionally regulate such transactions day to day). To me, this hodgepodge approach is a big problem waiting to happen and creates a too-high barrier to entry for legitimate firms that wish to provide innovative cryptoasset trading solutions.
Watching states and federal agencies duke it out in court over who should regulate fintech-type banking entities – which could include non-deposit-taking financial institutions that provide fiduciary services in connection with offering virtual currency trading planforms – does not seem an optimal use of taxpayer funds. Congress must intervene and propose a comprehensive solution.