Banks urge scrutiny of fintech trust charter applications

Key insight: Banking sector voices warn fintech firms may be using national trust charters to gain access to banking privileges without full regulation or deposit insurance protection.

Supporting data: Bank trade groups have urged the OCC to pause reviews and reassess compliance with banking law.

Forward look: The OCC's decisions will shape how far fintechs can stretch trust charters to enter banking without becoming full banks.

As the Office of the Comptroller of the Currency weighs applications from a number of crypto firms seeking national trust charters, influential banking industry voices are questioning whether the resulting businesses would align with the statutory and regulatory definition of the charter.

An industry spokesperson said the sector needs more information about what activities those seeking charters would actually engage in before deciding on next steps.

"The OCC hasn't taken any action yet," they said. "If they approve one or all of these charters, we will review what information is available, hopefully it will be more robust and we'll be able to understand more fully what these entities are engaging in[,] whether those activities are consistent with the statute and the regulations and go from there." 

Trust companies are not new, but they've historically served a niche in the financial marketplace, allowing financial institutions to provide custodial services to their customers, like trust and estate management. 

That changed after an OCC interpretive letter in 2021, written by then-OCC Chief Counsel and now-Comptroller of the Currency Jonathan Gould, opened the door for national trust banks to have broader flexibility to conduct banking and trust operations far beyond their traditional, narrowly defined fiduciary duties. The letter allows national trust banks to engage in certain noncustodial businesses as long as those businesses are related to the custodial business. 

That potentially broad remit for firms with a national trust charter is enticing a number of fintech and crypto-aligned companies — including Coinbase, Circle, Ripple and Paxos, among others — to apply for trust charters in recent months. Anchorage Digital remains the only crypto firm to have received OCC approval for a national trust bank, granted in January 2021 during the Trump administration's first term.

Critics of allowing fintechs to gain national trust charters have argued the move grants crypto and fintech firms competitive advantages without the same oversight, Federal Deposit Insurance Corp. protection or congressional mandate that traditional banks face. 

One industry analyst said it remains uncertain how stablecoin issuance in particular would be structured under proposed business plans, raising questions about how such activity fits within existing banking law. Depending on how stablecoin issuance at firms is structured, the service could be akin to deposit-taking under the Federal Deposit Insurance Act, according to the analyst. 

"A lot of these things really require careful evaluation of the law, the proposed activities, and what safeguards are in place … maybe there's appropriate safeguards that could be brought to bear," the analyst said. "But currently, the way trust companies are structured, those safeguards aren't designed for an entity seeking to take deposits and engage in a business that essentially an insured depository institution — full-service charters — would engage in."

Over the summer, the American Bankers Association sent a letter to the OCC urging the agency to pause its review of these applications pending a broader review of whether these applicants' business plans align with the purpose of the national trust charter. 

On Friday, the Bank Policy Institute raised a number of similar concerns in letters regarding multiple pending trust charters, including concerns that firms vying for charters may confuse consumers about the lack of deposit insurance on assets held in trust. 

If a firm "desires to conduct all the activities proposed in the Application, which would appear to include taking demand deposits," they argue, "the OCC should treat the Application as one seeking a full national bank charter, require [them] as a condition of approval, to apply to the Federal Deposit Insurance Corporation for deposit insurance under the Federal Deposit Insurance Act, and require [them] to apply to the Federal Reserve for approval to become a bank holding company." 

The letter emphasized that banks are not opposed to new entrants or even their connections to crypto, but rather are concerned about regulatory parity and the broader risk profile of specialized, single-focus institutions.

"It's not about the nature of the activity … it's sort of the monoline exposure," the industry source said. "Monoline entities have a history of being risky and regulators historically have not been comfortable with that business model because of the exposure to one area of activity, and if that goes south, the entity could suffer serious harm."