Covington advising as OCC approves Paxos charter
Blockchain platform Paxos is set to be the first crypto firm to hold both national and state bank charters in the US, after the Office of the Comptroller of the Currency granted its charter application preliminary conditional approval in the face of industry backlash.
The OCC published its decision on 23 April.
It approved Paxos to become an uninsured national bank, its operations limited to those of a trust company. It will provide services for digital assets such as payment, exchange, custody, and cryptocurrency trading services, subject to the company obtaining Federal Reserve membership among other further conditions.
Michael Nonaka, partner and co-chair of the financial services group at Covington & Burling, is advising Paxos on the matter.
The decision comes in the face of opposition from a coalition of banking industry trade groups – including the American Bankers Association, Credit Union National Association, Consumer Bankers Association, Independent Community Bankers of America, National Association of Federally-Insured Credit Unions, and The Clearing House – which wrote to the OCC in January to argue against the Paxos charter.
In their letter, the trade groups stated that the OCC’s statutory authority did not extend to licensing companies such as Paxos, which conduct fiduciary activities outside those normally conducted by national trust banks.
It said an approval would “fly in the face” of a recent order from the US District Court for the Southern District of New York, which ruled in 2019 that the OCC had no authority to issue so-called “fintech charters” to non-banks.
That decision is currently under appeal before the Second Circuit, which heard oral arguments last month. “By granting non-depository entities like [Paxos] national trust bank charters, the OCC would sidestep that pending litigation,” the letter argues.
They argued that granting Paxos a charter would “represent a fundamental departure from existing OCC precedent” that required public input. If Paxos could establish itself as a national trust bank that provided payments but not fiduciary services, “other companies will follow”, they said, including from lenders or commercial enterprises with “no intention of providing fiduciary services at all”.
The letter also complained that the application failed to make public Paxos’s proposed business model.
Responding to the letter, the OCC said the charter fell within its remit and that Paxos would not have to make public any information not routinely made public for other applications. “The OCC believes it is important for it to adhere to its existing policies and procedures and not to engage in arbitrary and capricious actions by changing the rules for one applicant as suggested by the commenters,” it argued.
The OCC’s decision added that Paxos’ national operations will be similar to those already taking place in its New-York-chartered arm. “Since the bank’s activities will be similar to those of an operating entity, general information as to the business model and operations of the bank is publicly available.”
Paxos’ charter will be the third national charter granted by the OCC to crypto companies. Anchorage, a chartered trust company based in South Dakota, was granted conditional charter in January, making it the first federally chartered digital asset bank. In February a second trust company was approved for a conditional national license; Protego Trust Company.
But while the former two companies converted their state trusts to national ones, Paxos will be the first to run both state and federal trusts separately, after obtaining its state trust charter for digital assets from the New York Department of Financial Services (NYDFS) in 2015. That charter was itself the first such to be issued by the NYDFS.
In a blog post for Paxos’ website, Daniel Burstein, the company’s General Counsel and Chief Compliance Officer, described “significant benefits in having both a nationally and state regulated bank”, which he said was part of Paxos’ “mission” to change the infrastructure of the financial market to allow the movement of any form of asset.
Counsel to Paxos
- Covington & Burling
Partner Michael Nonaka in Washington, DC
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