On Friday, March 7, 2025, the Office of the Comptroller of the Currency (“OCC”) issued Interpretive Letter 1183, OCC Letter Addressing Certain Crypto-Asset Activities, reiterating the OCC’s prior guidance regarding the activities in which national banks may engage related to crypto-assets, including crypto-asset custody, certain stablecoin activities, and participation in independent node verification networks such as distributed ledgers. Each of these activities were previously addressed and permitted pursuant to OCC Interpretive Letters 1170, 1172, and 1174, respectively. Interpretive Letter 1183 also rescinds Interpretive Letter 1179, which required national banks to receive a “supervisory nonobjection and demonstrate that they have adequate controls in place before they can engage in these cryptocurrency activities.”
Additionally, “consistent with Interpretive Letter 1183,” the OCC’s news release notes that the OCC withdrew its participation in the joint statement on crypto-asset risks to banking organizations and the joint statement on liquidity risks to banking organizations resulting from crypto-asset market vulnerabilities.
Taken together, Interpretive Letter 1183, the recission of Interpretive Letter 1179, and the withdrawal from the two joint statements on specific risks to banking organizations related to crypto-asset activities result in a much friendlier approach to these activities by national banks. This release also potentially signals a forthcoming expansion of the market for banks to engage in such activities.
But for now, national banks are able to engage in crypto-asset activities such as: (1) “holding” digital currencies on behalf of customers by taking custody of the unique cryptographic keys associated with such digital currencies (Interpretive Letter 1170); (2) holding deposits from stablecoin issuers, including deposits that constitute reserves for a stablecoin associated with hosted wallets, including any activities incidental to receiving deposits from stablecoin issuers (Interpretive Letter 1172); (3) validating, storing, and recording payments transactions by serving as a node on an independent node verification network (Interpretive Letter 1174); and (4) using independent node verification networks and related stablecoins to carry out other permissible payment activities (Interpretive Letter 1174).
Each of these Interpretive Letters, as is consistent with OCC precedent, acknowledge that these activities are natural outgrowths of a national bank’s traditional role as a financial intermediary and that any such crypto-asset activities should be “developed and implemented consistently with sound risk management practices and should align with banks’ overall business plans and strategies.” The OCC further expects national banks to “conduct a legal analysis to ensure the activities will be conducted consistent with all applicable laws, including applicable anti-money laundering laws and regulations and consumer protection laws and regulations.”
Finally, we think it is important to recognize that each of Interpretive Letters 1170, 1172, and 1174 were drafted under the guidance of (and executed by) Jonathan V. Gould, then Senior Deputy Comptroller and Chief Counsel, but recently nominated by the Trump administration to be next Comptroller of the Currency. We expect more on the crypto-related activities of national banks from the OCC in the future, especially if Mr. Gould is approved as Comptroller in this administration that wants the US to be the “Bitcoin Superpower.”
With SAB 121 Rescinded, Can Banks Now Hold Crypto?
For almost three years, Staff Accounting Bulletin 121 of the Securities and Exchange Commission effectively prevented banks from holding crypto on behalf of customers by indirectly requiring them to maintain a capital loss reserve equal to the full value of the crypto even though the bank does not own the crypto. The announcement by SEC Acting Chairman Mark T. Uyeda on January 21, 2025 of a new crypto task force to be led by pro-crypto Commissioner Hester Peirce foreshadowed a change in the Commission’s attitude towards crypto. Two days later, the SEC issued Staff Accounting Bulletin 122 rescinding SAB 121 effective as of January 30, 2025. If the dry and formal language of SAB 122 left any doubt as to the attitude shift, Commissioner Peirce’s post on X later that day, “Bye, bye SAB 121! It’s not been fun” spoke volumes.
With this substantial financial impediment on banks lifted, it would be easy to assume that banks are now free to offer crypto custody and other digital asset services to customers. However, although the SEC took the lead over the last several years, there are other regulators that have a more direct impact on the banking system- the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. In large part, these institutions have also discouraged banks from engaging in crypto activities, but they have been able to do so more quietly given the SEC’s more aggressive stance. On January 29, 2025, Federal Reserve Chair Jerome Powell offered some hope, stating at the Federal Open Markets Committee meeting that “we’re not against innovation,” and that banks are “perfectly able to serve crypto customers.”
In our recent Alert, we discuss some of the implications of the rescission of SAB 121 and the bank regulatory challenges to come.
Coinbase Enters Crypto Lending Market for Second Time with Morpho Labs Collaboration
By Rubina Karapetyan, Joseph Silvia and Mauro Wolfe
Earlier this month, Coinbase, the largest cryptocurrency platform in the U.S., partnered with Morpho Labs, the biggest onchain lending platform on Coinbase’s Base network, to introduce a bitcoin-backed loan service. This new service, which operates on Base, Coinbase’s Ethereum layer-2 network, lets users borrow up to $100,000 in USD Coin (USDC) by using their Bitcoin as collateral and is available to all U.S. residents, except those in New York.
Borrowing USDC against Bitcoin has been possible on platforms like Morpho and other DeFi services for some time. However, with this new collaboration, Coinbase has integrated Morpho’s lending services directly into its own interface, which it believes will attract borrowers with easier access and a more user-friendly experience. The service aims to close the gap between holding crypto assets for the future and putting them to use today. Although it currently will only support Bitcoin, Coinbase plans to eventually extend the service to other crypto tokens.
Coinbase merely facilitates the exchange; it does not directly issue loans. Borrowers can always choose when they want to pay off their loans because there are no set repayment schedules. Interest rates are adjusted by Morpho based on real-time market conditions. Unlike traditional loans that depend on credit scores, crypto loans instead require substantial collateral. Morpho’s platform ensures a minimum collateral ratio of 133%. If the loan balance, including accrued interest, reaches 86% of the collateral’s value, liquidation is automatically triggered, as well as repayment and penalty fees. Borrowers are allowed to adjust their loan-to-value ratio whenever they want as long as the ratio stays above the required threshold. Through the Coinbase app, Coinbase will share liquidation trigger warnings if the loan balance reaches the threshold, giving borrowers a chance to cure.
According to the Coinbase website, to access the service, borrowers can go to the Cash tab within their Coinbase app, click on “Borrow,” and enter the amount of USDC they want to borrow against their Bitcoin. After confirming the amount, the bitcoin that is pledged as collateral is converted to Coinbase Wrapped BTC (cbBTC) token, a bitcoin-backed token issued by Coinbase, and then transferred onchain to a Morpho smart contract. Morpho will then disburse the USDC loan, which borrowers will be able to see instantly in their Coinbase account.
This launch marks Coinbase’s second entry into the Bitcoin lending market. In November of 2023, the platform officially ended its “Borrow” program, which allowed borrowers to get cash loans backed by their bitcoin.
The new service has advantages as well as risks. Selling bitcoin can result in capital tax gains or losses. For this reason, as well as others, many crypto traders are hesitant to sell their holdings. Now, they can instead borrow against their Bitcoin and use their digital assets, likely avoiding a sale and tax consequences. However, the tax implications remain unclear, mainly because the conversion from bitcoin to cbBTC might be deemed a taxable event in the future. In addition, the volatility of bitcoin prices could affect the value of the pledged collateral, possibly leading to liquidation if the required thresholds are not satisfied. Finally, while using a DeFi platform like Morpho may offer greater transparency, smart contracts historically carry risks, such as bugs and hacks. We will continue to watch these and related developments as the industry continues to mature and work through challenges.
FDIC Extends Comment Period for Proposed Rule on Brokered Deposits
On October 8, 2024, the Federal Deposit Insurance Corporation (“FDIC”) announced an extension to the comment period on its notice of proposed rulemaking (“NPR”) regarding brokered deposits. Originally, the comment period for the PR was to close on October 22, 2024, but is now planned to close on November 21, 2024.
The original NPR, “Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions,” was published by the FDIC this past August. The NPR would revise 12 C.F.R. Parts 303 and 337 with a goal of improving the analysis of “deposit brokers” and ensure accurate reporting of such deposits.
The NPR seeks to achieve these goals with a few key revisions, among others. First, the FDIC is proposing to update the definition of a “deposit broker, ” particularly with respect to the analysis of the “primary purpose” exception to the definition, which is critical for anyone trying to avoid brokered deposit classification. Second, the NPR continues to exempt well-capitalized institutions from brokered deposit restrictions, but will generally enhance the rules for other insured depository institutions to “strengthen the safety and soundness of the banking system by ensuring that less than well-capitalized institutions are restricted from relying on brokered deposits to support risky, rapid growth.”
The NPR can be found at https://www.federalregister.gov/documents/2024/08/23/2024-18214/unsafe-and-unsound-banking-practices-brokered-deposits-restrictions.
Changes to Bank Merger Review Process Announced by Federal Agencies
On September 17, 2024, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) separately finalized previously proposed policy statements on their review of bank mergers under the Bank Merger Act (BMA) and its implementing regulations. Noticeably missing in action was the Board of Governors of the Federal Reserve System, who has not issued any policy statement that would update or amend its review of bank mergers. Also on September 17, 2024, the Department of Justice (DOJ) formally withdrew from the 1995 joint Bank Merger Guidelines and issued commentary on its plans to transition to the 2023 Merger Guidelines for its review of bank mergers.
Read the full Alert on the Duane Morris LLP website.
Has Your State Passed the Crypto UCC Amendments?
There’s less than a year to go until the proposed implementation of the Uniform Commercial Code amendments relating to cryptocurrencies and other digital assets. The drafters of the amendments contemplated a gradual phase-in of the rules over a period of at least a year, but no earlier than July 1, 2025, to give secured parties time to assess their secured status and take any necessary actions. Many states that have approved the amendments opted for a July 1, 2025 start date, but some of them selected a later date. In addition, slightly more than half of the states have not yet approved the amendments. It’s likely that these states will also choose a later start date.
For a secured lender operating in multiple states, keeping track of the implementation dates can be confusing. Losing track of them can potentially lead to significant consequences, including loss of priority in crypto assets. For an overview of the adoption of the UCC amendments by the various states so far, take a look at our recent Alert.
Congressional Disapproval of SAB 121 Vetoed
On May 31, 2024, the President vetoed H.J.Res 109, which evidenced the disapproval by Congress of Staff Accounting Bulletin 121 of the Securities and Exchange Commission. This followed several years of industry and bipartisan efforts in Congress to blunt the effect of or nullify the rule.
On its face, SAB 121 is fairly innocuous. Crypto assets held in custody by an SEC reporting company for its clients must be reported both as an asset and as a liability on its balance sheet. From an accounting perspective, this is balance sheet neutral since the asset and liability cancel each other out.
For regulated banks that want to expand their traditional client custody business from securities and other financial assets to crypto, this is a departure from the standard accounting treatment that can be prohibitively expensive. Assets held in custody are usually balance sheet neutral to a bank since they belong to the bank’s customers and are not included on the bank’s balance sheet. Adding the asset and subtracting it as a liability is mathematically neutral. However, treating crypto in custody as a liability of the bank triggers the minimum capital requirements that banks are required by regulators to maintain to manage investment risk and prevent a collapse if there is a run on the bank.
Why did the SEC change the rule for crypto assets in custody? Did they have the authority to do so? Why does it apply to banks? We discuss these and other questions in our recent Alert.
Happy Bitcoin Pizza Day!
In case you haven’t heard of it, today marks the 14th anniversary of the first recorded use of bitcoin to pay for goods and services, the delivery of two large pizzas. With the price of bitcoin currently hovering around $70,000, it is shocking to hear that the price paid was 10,000 bitcoins. However, at the time, bitcoin was worth less than half a cent, around $0.0041, making the purchase price about $41.
While Bitcoin Pizza Day is a fun milestone for the cryptocurrency community to celebrate, in many ways the commercial use of bitcoin in the United States has not evolved much since 2010. Buying, holding and using bitcoin is generally not illegal, and the Financial Crimes Enforcement Network of the US Department of the Treasury has acknowledged that a seller may accept payments in bitcoin as a medium of exchange. However, bitcoin is still not legal tender (except in El Salvador). Sellers in the U.S. are not required to accept bitcoin, and most of them do not.
For banks that want to facilitate crypto payments by their customers, there are a number of hurdles to overcome. Pursuant to a joint statement on January 3, 2023 by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, banks are “neither prohibited nor discouraged from providing banking services to customers of any specific class or type.” Nonetheless, the regulators believe that the holding of crypto assets by banks “is highly likely to be inconsistent with safe and sound banking practice,” and they are continuing to assess whether crypto activities “can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.”
Alternatively, there are now a number of non-bank apps and other payment services that will convert bitcoin into dollars for purposes of facilitating payments. These services tend to be treated as money services businesses or money transmitters subject to strict anti-money laundering rules under the Bank Secrecy Act, FinCEN regulations and state law. Different states take varying views on the use of crypto, and these services may not be licensed to operate in every state.
In addition to these challenges, a buyer has to be careful of the tax law consequences of using cryptocurrencies to make purchases. Under Internal Revenue Service notice 2014-21, cryptocurrencies are property, and capital gains tax is due if the fair market value of the property or services purchased exceeds the purchaser’s adjusted basis in the cryptocurrency used to make the purchase. In other words, if a person bought one bitcoin in 2010 and used that bitcoin in 2024 to splurge for a Porsche (or a Bored Ape Yacht Club NFT) for $70,000, that person would owe capital gains tax on $70,000 (minus the $0.0041 cost of buying the bitcoin).
With all that in mind, spend your crypto wisely.
UCC Amendments for Digital Assets Effective in DC
On May 3, 2024, Law L25-0158 was published in the District of Columbia Register. Titled the “Uniform Commercial Code Amendment Act of 2024,” it is the codification in Washington, DC of the 2022 Amendments to the UCC drafted by the Uniform Law Commission and the American Law Institute. The 2022 Amendments hold out the promise of establishing uniform rules (at least in the US) for transferring digital assets such as cryptocurrencies and non-fungible tokens, and granting lenders a security interest in those assets that can be perfected by control.
Although the DC law is effective as of April 20, 2024, per the uniform transition rules adopted by the law, the provisions will not have substantive effect until July 1, 2025. This time delay was built into the rules to give market participants time to learn and adjust to the new rules and implement any changes that the new rules will require. Washington, DC is not the first jurisdiction to adopt the 2022 Amendments, but it is arguably the most important. Under the uniform choice of law rules in the 2022 Amendments, the UCC in effect in the District of Columbia will govern most, if not all, matters relating to perfection and priority of security interests in digital assets, at least for the foreseeable future.
Many questions and challenges are posed by the 2022 Amendments. Are all digital assets covered? Are cryptocurrencies money? Are digital tokens securities? What does it mean to perfect a security interest in a bunch of ones and zeros that only exist on a decentralized blockchain that isn’t located on a particular server or controlled by any particular entity? We will explore these and other issues in the coming weeks and months.
Department of Justice Adopts New Focus on Bank Merger Assessments
On June 20, 2023, Assistant Attorney General Jonathan Kanter addressed the Brookings Institute to discuss the 60-year anniversary of a seminal Supreme Court of the United States case concerning bank mergers: United States v. Philadelphia National Bank. Kanter used the opportunity to announce a new approach by DOJ to its assessment of bank mergers consistent with President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy. The new approach removes predictability from the merger review process and adds uncertainty as to how DOJ will assess competitive harm in bank mergers in a similar fashion to DOJ’s recent withdrawal of support for three policy statements that had permitted certain “safety zones” in the healthcare sector.
To read the full text of this alert, please visit the Duane Morris website.