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New Use of Blockchain in the Banking Sector

While the Office of the Comptroller of the Currency in the United States (OCC) has just authorized banks to use stablecoins for their payment activities, it is time for banks to fully aknowledge the potential offered by the Blockchain technology. .

The Office of the Comptroller of the Currency (OCC) published this week a letter clarifying national banks’ and federal savings associations’ authority to participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank-permissible functions. While INVN may seems frightening at first, in more literary terms, they are nodes capable of verifying and validating transactions, so blocks can be added to each other in the chain. The basis of this technology which makes it immutable and secure.

The Office of the Comptroller of the American Currency was therefore explaining their decision:

«While governments in other countries have built real-time payments systems, the United States has relied on our innovation sector to deliver real-time payments technologies. Some of those technologies are built and managed by bank consortia and some are based on independent node verification networks such as blockchains.

The President’s Working Group on Financial Markets recently articulated a strong framework for ushering in an era of stablecoin-based financial infrastructure, identifying important risks while allowing those risks to be managed in a technology-agnostic way.

Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products.

Brian P. Brooks – Acting Comptroller of the Currency

A point before continuing, on the countries that have already adopted real-time payment systems and the challenges of this strategic choice. Sweden, Poland, United Kingdom, Brazil, Korea are the leading players in these real-time payment solutions, but especially China, which very quickly adapted its regulations in order to accelerate its economic growth.

Various reasons can also be cited to explain the switch to these real-time payment systems, such as attracting foreign investment, or offering an inclusive solution for unbanked or under-banked populations (as is the case cases for India and Nigeria). For Japan and the UK, it’s more about fostering innovation and competing in the payment services industry. Brazil, for its part, has certainly looked for the opportunity to reduce the use of physical liquidity and counter macroeconomic events, such as the loss of confidence in the local currency. For Sweden and Poland, it is a response to the expectations of its customers, who are very demanding of these solutions, and to the competitive threats of new entrants.

With the real-time payment system, the immediate payment of the transaction speeds up the cash flow conversion cycle, thereby generating the working capital needed to reduce the need for expensive financing on short term.

As these factors are taken into account, the national challenges induced by this switch to real-time payment solutions seem more obvious; United States has therefore chosen blockchain technology, through independent node verification networks, to strengthen the activities of banks.

Thus, the regulator’s letter concludes that a national bank or a federal savings association can validate, store and record payment transactions using INVNs. Likewise, a bank can use INVNs and associated stablecoins to perform other authorized payment activities. In deploying these technologies, a bank must comply with applicable law and with safe, sound and fair banking practices.

According to the OCC, engaging in INVN within the federal banking system may enhance the efficiency, effectiveness, and stability of payments activities. Such activities may be more resilient than other payment networks because of the decentralized nature of INVNs, which allows a comparatively large number of nodes to verify transactions in a trusted manner.

An INVN also limits tampering or adding inaccurate information to the database because information is only added to the network after consensus is reached among the nodes validating the information.

This statement clearly demonstrates the confidence of the United States for the Blockchain, and implicitly for cryptocurrencies, which also goes in the line with the recent positioning of institutional investors betting on Bitcoin.

Banks must also be aware of potential risks when conducting INVN-related activities, including operational risks, compliance risk, and fraud. New technologies require enough technological expertise to ensure banks can manage these risks in a safe and sound manner.

Banks have experience with managing such risks, which are similar to those of other electronic activities expressly permitted for banks, including providing electronic custody services, acting as a digital certification authority, and providing data processing services.

Among the compliance risks, banks should guard against potential money laundering activities and terrorist financing by adapting and expanding their compliance programs to ensure compliance with the reporting and recordkeeping requirements of the Bank Secrecy Act and to address the particular risks of cryptocurrency transactions.

The OCC letter is available here

Article: Joana Foglia – Source : Swift – OCC

Post Author: Wealth Monaco