A Fast-Approaching Crypto Deadline for the OCC
The clock is ticking for Protego, and soon thereafter for Paxos
Between January and April of 2021 the Office of the Comptroller of the Currency conditionally approved three applications from organizations seeking to operate crypto-focused national trust banks: (1) a state-to-federal conversion application from Anchorage Digital Bank, (2) a state-to-federal conversion application from Protego Trust Bank and (3) a de novo charter application from Paxos National Trust.1
In Anchorage’s case, the conditional approval was quickly followed by full approval and Anchorage opening for business as national trust bank. Anchorage’s early encounters with federal bank regulation were discussed on this blog a few months ago.
For Protego and Paxos the situation was different. Neither bank was able to open right away because each bank had further work to do before it could secure final OCC approval to begin operation as a national bank. This is not an uncommon occurrence with national bank charter or conversion applications and is not specific to crypto.2
On the other hand, although it is typical to take some time between conditional approval and consummation, the OCC does not give national banks an open-ended window to get things together and secure final approval. And for Protego and Paxos time is getting close to running out.
Protego Trust Bank, National Association
Protego’s conversion application was conditionally approved by the OCC in a letter dated February 4, 2021. After setting out the conditions Protego will be required to meet to secure final approval, including among other things Protego having in place “systems, policies, practices, procedures, and other measures, acceptable to the OCC, to ensure the safe and sound operation of the Bank,” the OCC’s letter imposed a time limit on Protego:3
If the Conversion is not consummated within 18 months from the date of this approval, the approval will automatically terminate unless the OCC grants an extension. The OCC does not grant extensions of the approval period, except under extenuating circumstances, and expects the Conversion to occur as soon as possible after approval.
Accordingly, unless an extension has been granted Protego’s conditional approval will expire on August 4, 2022, giving them only around three more weeks to open.
An undated FAQ on Protego’s website asks, “Why has it taken more than a year to launch since you received your conditional approval from the OCC?” Protego responds:
Protego Trust Bank has spent the last five years working with both state and federal regulators, and building the necessary digital asset custody, trading, lending and core banking systems to enable the bank to operate in a safe and sound manner and meet the extraordinarily high standards of the most demanding institutional clients in the world. We chose to get it done right rather than done quickly.
As perhaps further evidence of taking the time to get it right, Protego in June 2022 announced that it was adding five members to its advisory board, including former high-level executives at traditional custody banks and a former senior member of the FDIC’s staff. The June 2022 press release stated that Protego Trust Bank “plans to launch in 2022,” without providing a more specific target date.4
I assume that the individuals who recently joined Protego would not have associated themselves with the project if they were not comfortable with where Protego was heading, including in terms of whether it will be able to satisfy the OCC’s requirements and open for business.5 Still, this is one to watch, in particular with respect to any conditions the OCC imposes on Protego following final approval.6
Paxos National Trust
The situation with Paxos is broadly similar. The OCC conditionally approved Paxos’s de novo charter by letter dated April 23, 2021. The OCC’s conditional approval stated:
If the capital transaction for the Bank is not completed as described within 12 months or if the Bank is not opened for business within 18 months from the preliminary conditional approval date, this approval expires. The OCC is opposed to granting extensions, except under the most extenuating circumstances and when the OCC determines that the delay is beyond the applicant’s control. The organizers are expected to proceed diligently, consistent with their application, for the Bank to open for business as soon as possible.
Assuming the capital raising was completed7 and assuming things otherwise have not changed, the 18-month deadline to open is October 23, 2022. So a bit more time than Protego has left, but not all that much time.
I am not aware of Paxos having provided a public update on if or when it expects the national trust bank to open for business. Note that Paxos currently has and intends to keep a separate New York-chartered trust bank,8 so even if the OCC process has gone or does go awry, this state-regulated entity will continue to operate as normal.
A Possible Turning Point for a Move from Speeches to Action
The federal banking regulators’ approach to crypto under the Biden administration has been heavy on talk but comparatively light on action.9 With respect to the OCC in particular, Acting Comptroller Hsu has repeatedly given speeches raising reasonable concerns about crypto,10 but the public output of regulations, orders, interpretations, or other guidance from the agency he leads has been quite limited to this point.11
I am sure the OCC would say that, like the trust banks it may soon regulate, it is taking the time to get it right. On some level it is impossible to argue with that - who doesn’t like getting things right? - but the upcoming deadline for an OCC decision on Protego and Paxos mean that many interested parties will be watching to see how Acting Comptroller Hsu and the OCC start to put words into action.
The Anchorage conditional approval came on January 13, 2021, the second-to-last day in office for Acting Comptroller Brian Brooks. The Protego and Paxos conditional approvals were issued under Acting Comptroller Blake Paulson, an OCC employee since 1986 who served during the period between the departure of Brooks and Michael Hsu’s appointment to the role of Acting Comptroller in May 2021.
This sort of time limit is also not a new OCC requirement or one specific to crypto. See here for a letter from the OCC imposing the same 18-month deadline on a traditional bank.
A brand video released by Protego on YouTube on June 29 also does not mention a specific opening date.
Of course as recent events have again proven, you have to be cautious about overreliance on this heuristic. A press release dated February 22, 2022: “Celsius, the leading global cryptocurrency lending and borrowing platform – announced today the appointment of Rod Bolger as its new Chief Financial Officer (CFO). … Most recently, Rod served as CFO at RBC, Canada's largest bank…”
(Per last week’s bankruptcy filing, Bolger is apparently no longer in the role.)
For example, according to the OCC’s conditional approval, within three days of opening for business Protego will be required to enter into an Operating Agreement with the OCC. This same requirement will apply to Paxos National Trust if it opens for business. If the OCC makes these Operating Agreements publicly available, it will be useful to compare them to the Operating Agreement the OCC imposed on Anchorage, which Anchorage later got in trouble for violating.
It is not clear whether this is what the OCC was describing or whether it had a different planned capital raise in mind, but shortly after the April 23, 2021 OCC conditional approval Paxos on April 29, 2021 announced that it had raised $300 million in a Series D funding round valuating it at $2.4 billion.
Last month Paxos issued a press release applauding new guidance issued by the New York DFS on the issuance of dollar-backed stablecoins. The press release did not include any status update on or mention of the separate federal charter process.
It is easy for me to say this sort of thing as a blogger, but the American Banker had a good piece on this last week quoting much more sophisticated observers offering the same conclusion. Words used by people quoted in the article include “underwhelming,” “disappointing,” “surprising,” “astonishing,” “lack of urgency” and “lack[ing] an overall thesis.” To be fair, one of those quotes relates to Congressional committee leadership, rather than the regulators.
Of the 15 speeches given by Acting Comptroller Hsu so far this year, at least five of them have been fully or partially about crypto.
In my view, this situation is not really comparable to the situation with the SEC, where a significant proportion (although not all) of the calls from the industry for greater clarity strike me as thinly veiled complaints about the way that the SEC is going about applying the rules, rather than actual uncertainty about how the SEC intends to do so. In bank regulation, the uncertainty seems to me to be more genuine. And even if you think there is no uncertainty and that regulators should flatly tell banks that the law requires them to steer clear of crypto, shouldn’t you want the regulators to just do that, rather than giving more speeches or releasing more white papers?