Exclusive: ICBA sues OCC over trust charters

• Key insight: The Independent Community Bankers of America alleges in a new lawsuit that the Office of the Comptroller of the Currency has exceeded its authority in widening its ability to grant trust charters. 
• What's at stake: The ICBA says that chartering crypto companies as trust banks could drain deposits away from the banking system and put them in institutions that have no obligation or history of lending to local businesses and communities. 
• Expert quote: "This vast expansion of power creates a gaping hole in financial regulation." —ICBA lawsuit

WASHINGTON — Community bankers are suing the Office of the Comptroller of the Currency over their granting of trust charters to a number of fintechs and crypto firms, according to a lawsuit obtained by American Banker. 

Under the Trump administration, the OCC has approved a wave of trust charters to crypto companies, including the Trump family-linked World Liberty Financial, Coinbase and Circle. Banks have long argued against the charters and the agency's granting of them, and the lawsuit escalates those efforts. 

The Independent Community Bankers of America allege in the new lawsuit that the agency has exceeded its authority under the National Bank Act to charter trust banks that perform fiduciary activities. The group is challenging a rule the OCC finalized earlier this year that banks say significantly widened the agency's ability to grant trust charters. The rule codifies an interpretive letter from President Donald Trump's first term, written by now-Comptroller Jonathan Gould when he was the OCC's chief counsel. 

"American consumers reasonably expect a federally chartered bank to carry federal protections. Digital assets held at a crypto firm operating under a national trust charter do not carry those important safeguards," said ICBA President and CEO Rebeca Romero Rainey in a statement. "ICBA is asking the court to return the OCC to its statutory limits. Any non-fiduciary firm seeking the benefits of a federal bank charter should meet the same standards as community banks." 

The lawsuit is being filed in the U.S. District Court for the District of Columbia. 

The ICBA is arguing the OCC's interpretive letter and its final rule "assert sweeping new powers to charter national trust banks that are not authorized by the National Bank Act." According to the filing, the OCC has approved, conditionally or otherwise, 21 trust banks during the Trump administration. At least 13 of those banks are crypto companies. 

"The OCC has far exceeded its limited statutory authority to charter trust banks that perform certain fiduciary activities," the ICBA said in the lawsuit. "This vast expansion of power creates a gaping hole in financial regulation." 

The OCC has seen a sharp uptick in applications for trust charters from crypto companies after Trump signed into law a stablecoin bill, known as the GENIUS Act. The new law made trust charters more desirable for crypto firms because it allows the firms to become federal qualified payment stablecoin issuers. 

State-qualified issuers are capped at $10 billion in outstanding stablecoins, so any stablecoin issuer that wants to facilitate stablecoin use at scale would have an easier path with a national trust charter from the OCC. But these trust charter banks aren't treated as banks under the Bank Holding Company Act, and the Federal Reserve doesn't have the authority to supervise their parent companies as they would with a traditional bank.

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"The rule effectively permits the OCC to charter uninsured national trust banks that engage substantially in non-fiduciary crypto-related activities while avoiding the regulatory framework applicable to traditional banks," said Lee Reiners, a lecturing fellow at Duke University, in a blog post from May. 

ICBA specifically called out the approval of an application from Protego Holdings Corporation earlier this year. The ICBA opposed Protego's approval by the OCC, saying that Protego and other crypto companies had "severely flawed risk and control functions and governance structures that lack independent oversight." 

"They are thus at serious risk of failure if the volatile cryptocurrency market crashes," ICBA said in the lawsuit. "And the OCC's untested receivership framework would struggle to resolve an uninsured institution of Protego's and other crypto companies' proposed scale and complexity." 

For years, banks have complained that granting crypto companies trust charters confuses consumers, who expect banks to have certain consumer protections in place, including deposit insurance. Crypto companies with trust charters could also drain away deposits from the community banks that support local economies by lending to businesses and individuals in smaller communities across the country. 

"Chartering crypto trust banks endangers community banks and the services they provide to local communities," ICBA said. "As national trust banks, crypto companies can offer many services similar to community banks, allowing them to compete with those banks. And because crypto trust banks are not subject to the same costly regulatory requirements as community banks, they will have lower operational costs. This exemption from federal regulation puts community banks at an unfair disadvantage." 

The group also points to the separation of banking and commerce, and the potential risk that granting these trust charters could pose to that principle, and said that trust charter crypto companies offer fewer consumer protections. 

"Consumers at national trust banks will lack many of the protections that apply to traditional banks, including deposit insurance, the separation of banking and general commerce, and prohibitions on transactions with hedge funds and other risky investments," the group said. "They will also lack the safeguards that come with state banks, including consumer protection." 

ICBA's legal challenge rests on the Administrative Procedures Act. The end of Chevron deference — a legal precedent that, until a Supreme Court ruling in 2024, instructed judges to defer to federal regulatory agencies' interpretation of ambiguous statutes except in certain, narrow circumstances — will likely factor in heavily to how courts consider this case. 

The group argues that the OCC lacks the statutory authority to charter banks that are neither depository nor fiduciary. The rule is also arbitrary and capricious, the lawsuit alleges, because the OCC hasn't meaningfully responded to comments about the dangers the rule could pose to the banking system. At minimum, the agency must acknowledge in its rulemaking that it is changing its previous position on trust charters, and show there are good reasons for a new policy.

Comptroller of the Currency Jonathan Gould has maintained that the trust charter was always envisioned as having a non-fiduciary scope. 

"Although the proposed activities of some new charter applicants, specifically those in the digital or fintech spaces, could be viewed as new activities for a national trust bank, custody and safekeeping services have been happening electronically for decades," Gould said in an appearance at a crypto event last year. "For example, banks, including current national trust banks, routinely hold rights by electronic means to company shares in custody for their customers. There is simply no justification for considering digital assets differently."

The ICBA is challenging the interpretive letter published by the OCC during Trump's first term for similar reasons to the final rule, and also because the letter was issued without public notice and opportunity for comment. It should have done so, the ICBA argues, because the letter should have met the definition of a rule under the APA.