The Office of the Comptroller of the Currency (OCC) requires community banks to issue stablecoins
The Office for the Comptroller of Currency (OCC) stated on October 26th that it wants community banks to participate in shaping the future of the payments system, encouraging them to apply directly.
10/27/20263 min read
The order in which decisions are made is very important.
On October 21, the OCC issued a notice setting January 18, 2027, as the deadline for compliance with the final provisions of the GENIUS Act, under which existing issuers who submit complete applications before that date can request a temporary exemption that the agency would normally expect to grant. That final provision removed the assumption that third-party reward arrangements violated the statutory yield prohibition, replacing it with a case-by-case review. The American Bankers Association has made it clear that the industry is relying on that provision to close what it calls the stablecoin loophole, arguing that rewards paid on stablecoin balances act like interest on deposits and deplete the capital that community banks use for lending.
Five days later, the agency again requested that those banks become issuers. These two messages are not contradictory, and when read together, they form a fairly direct policy statement: the OCC will not protect bank deposits from stablecoin competition, so banks should compete.
The reasoning is sound, but the economic aspect is problematic.
The agency's reasoning is to prevent stablecoin payments from becoming concentrated in the hands of large banks and cryptocurrency companies, a legitimate concern. Payment infrastructure is concentrated, and a market where only a handful of large banks and two or three cryptocurrency companies are allowed to issue them would be more detrimental to the system than a more broadly participating market.
The difficulty lies in the fact that issuing stablecoins is largely incompatible with the business of a community bank. Economically, it's income from reserves on circulating funds, a large-scale business model where the marginal cost of the one hundred millionth dollar issued is nearly zero, while the fixed costs of regulatory compliance, custody, auditing, exchange operations, and blockchain infrastructure are enormous. A bank with several billion dollars in assets issuing its own dollar tokens would incur the full range of fixed costs compared to a small circulating supply, and would have to compete with issuers who have massive existing distributions.
A more viable path for most community banks is not to issue but to participate, meaning holding reserves, providing a conversion channel, or participating in a joint issuance structure where fixed costs are shared. The language of the OCC allows for subsidiaries, which creates a loophole for that. The wording, such as "issuance," sounds more appealing than the actual outcome.
What exactly does a community bank offer?
The real assets a community bank brings are its operating license and local relationships, which are crucial for certain specific use cases. A regional bank issuing tokens used for payments between its own commercial clients, within a specific industry or supply chain, is a viable product because the issuer is trusted by the users and funding is provided by the balances the bank already holds. It's a narrower product than a universal dollar stablecoin and the kind that large issuers aren't interested in building. Whether any bank will pursue that remains unclear, and it would require the kind of technical expertise most institutions of that size don't possess.
Assessment and Conclusion
The OCC has not yet begun accepting applications, which is a real hurdle for any bank that values this incentive, as the compliance deadline is January 18th and the application window is not yet open. This shortened timeframe is something to watch out for. A bank considering issuing requires board approval, vendor selection, building a compliance system, and filing an application, and the agency has issued an invitation that is not yet open for implementation.
The issue of rewards is still under review. Case-by-case review means that the argument for withdrawing deposits from community banks will be raised again each time a major transaction rewards program is scrutinized, and the OCC has the power to issue further guidance. Banks previously required to compete rather than be protected now have interests in the outcomes of those reviews that they previously did not.
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Compiled and analyzed by HCCVenture
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