Flood of national bank trust charter applications demands policy response from OCC

While the financial services industry continues to rapidly evolve, banking policy often struggles to keep up or suffers from ill-considered changes that miss the mark.

At the front lines of this ever-present challenge is a sudden influx of applications from nonbank financial technology firms for national bank trust charters, which is an Office of the Comptroller of the Currency designation traditionally reserved for conventional trust companies.

An OCC policy shift in 2021 has resulted in a flood of applications for national trust bank charters by companies that seek to use the charter to facilitate novel business models related to stablecoins and cross-border payments. This risks allowing an inconsistent regulatory framework that could harm consumers and the broader financial system—requiring the agency to change course.

A sudden change to a traditional charter

The OCC’s authority to charter trust banks stems from the National Bank Act and has traditionally been reserved for institutions that provide custodial services for trust beneficiaries. Whereas commercial banks take deposits and make loans, trust companies focus on administering trusts and estates, meaning they don’t directly compete with commercial banks.

But the trust company role in providing for the safekeeping of customers’ assets has generated interest in the OCC’s national bank trust charter from nonbank fintech companies, particularly those involved in digital asset services. An ill-conceived OCC policy shift now threatens to enable these nonbanks to receive the traditional trust charter while engaging in activities the charter was never intended to permit.

In 2021, the OCC made a dramatic change to its national bank trust charter out of the blue with its Interpretive Letter 1176, which attempted to eliminate the agency’s longstanding requirement that applicants engage exclusively in fiduciary activities. As ICBA and other groups told the agency within weeks of the policy change, the OCC announced the shift without public review three days before the resignation of then-Acting Comptroller of the Currency Brian Brooks.

Within weeks of the announcement, the OCC conditionally approved three charters for fintechs focused on providing custodial services for digital assets: Anchorage Digital Bank, Protego Trust Bank, and Paxos National Trust, though the Protego and Paxos conditional approvals would later expire for failing to satisfy all of their pre-conversion requirements. Four years later, that initial wave of applicants continues to grow, with companies including peer-to-peer payments company Circle and blockchain tech company Ripple applying for national trust bank charters for proposed subsidiaries.

Why these applications raise concerns

ICBA has strongly opposed these nonbanks’ applications for numerous reasons that ultimately boil down to the risks they pose to consumers and the banking system.

For instance, ICBA and other groups recently urged the OCC to postpone the consideration of applications to form Ripple National TR Bank, Fidelity Digital Assets, and others, citing significant policy and legal questions over the applicants’ fiduciary activities and the significant departure from existing OCC precedent that these applications represent.

In a previous letter to the OCC, ICBA urged the agency to keep in mind several key principles when considering charter applications from digital asset providers, including their unique risks and need for sufficient supervisory and regulatory safeguards. In a national news release issued alongside ICBA’s letter, ICBA President and CEO Rebeca Romero Rainey noted trust banks are not required to meet the same kinds of regulatory and capital standards that apply to federally insured full-service banks.

Even more recently, ICBA opposed Circle’s application for a national trust bank charter, noting it would allow the proposed First National Currency Bank to offer deposit-like services without adequate regulatory oversight while exposing the banking system to deposit drainage and increased fraud.

In other words, these applicants are risky institutions looking to attract insured deposits to their uninsured deposit-like accounts with few protections for consumers—a recipe for financial instability that risks reducing consumer confidence in the banking system as a whole.

An OCC Path Forward

While there are as many concerns with this trend as there are applicants, the OCC should respond with a fresh start: by rescinding Interpretive Letter #1176 and undertaking a formal rulemaking on its national trust charter that will clarify the scope of this charter and ensure alignment with congressional intent.

The OCC’s announcement that national trust banks are permitted to engage in certain nonfiduciary activities suddenly eliminated a longstanding requirement that applicants for national bank trust charters engage exclusively in fiduciary activities. This policy shift was made without any change to the National Bank Act and without a transparent public notice-and-comment rulemaking process.

Before deciding on any new national trust bank applications, the OCC should engage in formal rulemaking, as required by the Administrative Procedure Act, to clarify the scope of the permitted nonfiduciary powers of national trusts. The OCC should ensure its policies are transparent, sound, and fully prepared to account for the unique challenges and concerns posed by digital asset companies and other nonbank fintechs.