Before the announcement regarding Anchorage early this morning, yesterday I had the opportunity to interview Brian Brooks who is serving as Comptroller of the Currency and has faced a challenging time during Covid-19 in leading the Office of the Comptroller of the Currency (OCC). Brooks shared as of last night two breaking news items:
- That the OCC’s ‘Payments Charter’ is now available for applicants as promised by the Comptroller;
- That the Comptroller has indicated a ‘National Trust Charter’ is a pathway for crypto banks;
- That, along with the Anchorage announcement today, there are additional crypto firms in the door with the OCC who are going after the Trust Charter.
It is indisputable that Brooks has been a trailblazer who has brought a very unique view to the world of banking. This position that he has taken has certainly raised eyebrows from Capitol Hill, the banking associations and from multiple states regulators. However, Brooks explained how not taking action where he did, would have left the United States behind other countries in the future of banking.
Below is my full conversation with Brooks.
Forbes: You just testified last week at the House and Senate. Would you have interest in being formally nominated for the position of OCC Comptroller? What would your opening argument be for why you should be given the reigns of this Federal Agency for the next five years?
Brian Brooks: Well, look, this is one of these things where it is an honor for my name to be considered. That is entirely up to the President. My record on this speaks for itself.
Forbes: I wanted to ask you about the Agency’s response during Covid-19. Obviously in the Lincoln Administration, the country was dealing with the Civil War when he came into office. During that Administration, the OCC was founded. With your post in this Administration during the Covid-19 pandemic and civil unrest, in leading during such a challenging time, what would you like the history books to reflect back about your role at the OCC?
Brooks: What was true in the Civil War and true during the Spanish Flu and true in the Great Depression, has also been true here. We have always looked to the banking system and the availability of credit as a way out of crisis. The reason the OCC was founded and the national banking system was created was because of the belief that if we had this decentralized network of credit providers in localities all around the country that it would make it easier for us to win the Civil War and move forward as a country.
What I found kind of puzzling when I got to the OCC was how many people were calling for to us to drop everything and not do anything that wasn’t directly related to Covid-19. Those kinds of calls misconceived the whole history of this agency. The history of this agency is if you let us do our work and build a strong banking system and think about what consumers need and what businesses need and how to make credit available, the country will come out of a crisis better. But if you tell us to stop and not do anything at all, like it is 1863 and don’t do anything but make loans to the Union Army, we wouldn’t have the strong economy necessary to get through that.
I think the legacy is that the OCC has extremely broad bandwidth, that we were able to do lots of important things at this time – not only Covid-19 PPP lending work – but also Project REACh, Community Reinvestment Act reforms which were already seeing traction on, and also marketplace lending and ‘true lender’ rules which made it easier for people outside of mainstream banking to get loans. It’s that suite of things together that made us help the country and if we had only hunkered down and focused on the crisis as opposed to focusing on the broader economy, we wouldn’t be where we are today as a country so I think that’s the legacy is we walked and chewed gum at the same time.
Forbes: One of the things I think is interesting that many people don’t realize the first OCC Comptroller McCullogh was against national banking, but then he changed his mind and became one of its biggest supporters. As you have been discussing the idea of National Bank Charters and De Novo banking and you have discussed this idea of the ‘unbundling of banking’. E. Gerald Corrigan wrote his famous ‘Are Banks Special?’ paper back in 1982 that said the three key traits of banks that make them special. They are transaction accounts, a backup source of liquidity for all other institutions, and the transmission belt of monetary policy. If the OCC issues a ‘Payments Charter’ that covers the ‘transaction accounts’ portion of Corrigan’s argument, are banks no longer special? Or could FinTechs be the new ‘special’?
Brooks: So first of all, Gerry Corrigan’s article is one of the most important articles in the history of banking. He in 1982 could not foresee future radical change because none of this can foresee that. I’m sure people will look back at us in the year 2020 that we would be living on Mars.
What was great about it was the way he talked about what makes banks special. So one of things he takes on is the question of whether deposit-taking makes banks special and he said no it really doesn’t because there are other places people can store money. The global capital markets especially for debt securities were first coming online in the late ‘70s / early ‘80s and he noted that if you wanted to earn a rate of return on an amount of money, you didn’t have to put it in the bank, you could invest it in corporate bonds or an asset-backed securities or something like that. So I think he did understand that traditional forms of banking change over time and I think you see that today. What I try to talk about is the idea that it may not be individual banks that are special because they are banks but there is definitely something distinctive about the banking system. So, we have not only talked about Payments Charters, we have also talked about Lending Charters for companies those make loans that don’t take deposits. I think the point is that the way people choose to receive their services has undeniably changed in the last 15 years. We all do it differently now. None of us goes to the bank to deposit our checks anymore, right. Very few of us actually write checks versus making wire transfers or using Venmo so that’s all changed. I think Corrigan’s point was that the thing that distinguishes a bank from a commercial company is that it is engaged in that suite of activities and with unbundling we maybe need to think more about a systemic distinction than a company distinction, and that might be true, but, still I think he was onto something by embracing substance over form.
Forbes: It is interesting that you brought up this idea regarding checks. There has been a high degree of people using their mobile phones now for depositing their checks during Covid-19. The Semiannual Risk Perspective from the OCC issued on November 9 suggests the level of interest in central banks issuing central bank digital currencies is at 80% and also reports that indicate 40 million Americans that own cryptocurrency. You’ve drawn attention from the likes of the American Banker’s Association all the way to a few progressive politicians last week who wrote a letter about the way you are paying attention to cryptocurrency. But would it be fair to say that to not be focused on this area – particularly during a time when there is a heightened level of mobile and online banking, but during a pandemic as a result of Covid-19 could also be considered negative as well? How do you determine your priorities as a leader?
Brooks: My personal belief is the role of government is to be responsive to the needs of the citizenry. To me, that is what a free market democracy looks like. What an authoritarian regime does is it decides what is good for people and it imposes that on them despite their resistance. What a free market democracy does is it looks at how people are behaving and says, OK, how do I need to respond to that to allow people to maximally pursue their happiness by having those things in a way that doesn’t hurt others or blow up the system and the society. And so, on one hand, you put it exactly right, somewhere between 40 and 60 million Americans own crypto. I don’t want to be the taxicab commission of resisting Uber. If everyone wants to ride Uber, it’s not my job to say you can’t. It’s my job to figure out what are the issues going to be, how are we going to figure out how do I make sure people aren’t getting assaulted, how do I make sure they are not getting price-gouged, that Ubers will come when they say they will come, but not prohibit Uber. Same thing with crypto. Millions of people want this and use it and value it. It’s not my job to tell them they are wrong, it’s my job to tell them to figure out what their risks are and are they managed appropriately and is it a system that people trust. Simple as that.
With respect to the letter that I got from some of the progressive House Members, what I think is sort of funny is that people are inherently conservative. Just funny when it is progressive people being inherently conservative. But the human brain is scared of change. The human brain believes that whatever exists on the day it’s born is the state of nature and any deviation is scary. One of the things I have tried to do in this role is to demystify crypto, to help people understand it is serving needs we always had and serving in a better way. But the needs being served by it are needs we always had, we need a rate of return, we need to pay each other for the goods and services we produce. Crypto does all of those things. It also stores value. You got it exactly right. When millions of Americans are doing something, we can’t pretend like they’re not.
Forbes: Is the same true for the wholesale and business applications of crypto as well as consumer?
Brooks: One of the things I look at as a real success at the OCC in the last little while is the announcement that JPMorgan is launching a crypto custody business in partnership with Fidelity Digital Assets. They are doing that precisely because we said that could potentially be adequately risk managed and then banks have a legal authority to do that. And now our largest bank is in the business. That’s a good sign. The bank is finding a niche in the future economy but it’s also a good sign for crypto investors that have a safer place to store their crypto than they did before, that’s terrific.
Forbes: Do you have anything in mind about expanding how banks might be involved in crypto?
Brooks: There is obviously some further questions we need to think about. I don’t want to pre-judge the answers but I’ll tell you some of the questions that needs to be asked. One question is if a bank can custody crypto, can it do all the things that a custodian of other assets can do? So for example, when a bank has custody of securities, it often helps make a business called securities lending for its customers so some of the people who are holding their securities at the bank might be able to earn a small rate of return for overnight borrowing of that by people who want to short the market. Should people be able to do that with crypto? These are questions that custodians will ask when they look at what businesses they can build or not in their custody platform.
There are questions having to do with stablecoins. We have talked about stablecoins in our guidance, but there is a question of well, if a bank can hold deposits to support a stablecoin, can it connect directly to the blockchain that the stablecoin is transacted on? If it can, can it mint its own stablecoin or can it only transact stablecoins issued by others? These are questions that I think will naturally come to mind.
There have been some other questions that have been asked. For example, banks have the power to sell foreign exchange. As you know, you walk into a bank exchange, you can Yen or Euros or Thai boys, you know, from your bank if you are traveling abroad. Those currencies are often volatile relative to the U.S. dollar. They are not issued by the U.S. government. Is there a reason that is a bank could or could not use its foreign exchange powers to transact cryptocurrency which have similar characteristics to some of these more exotic forms of Fiat currencies? These are questions that are being asked and we need to formulate answers to. There is also the question of whether stablecoins themselves could be acceptable as deposits or accepted by banks as payments of debts, whether algorithmic stablecoins have a role in the banking ecosystem, there are alot of questions like this that we are looking at. We are going to proceed in a cautious way that takes seriously the money laundering and other illicit activity risks that crypto like other assets present. But we are going to act as though 40-60 millions have this and are entitled to an answer.
Forbes: Can you explain a little bit of what Project REACh is about? Can FinTech play a role in supporting the unbanked and underbanked in the U.S.?
Brooks: Project REACh stands for the Roundtable for Economic Access and Change. Idea we had as the social justice movement around the George Floyd murder was getting traction. One thing we heard pretty consistently was allegations of structural inequality and systemic inequality. What structures and what systems are people talking about? If some of it has to do with the distribution of wealth in our society, then maybe we can figure out what are the structures that are reinforcing that?
We put together a group of tech executives, bankers, civil rights leaders, and others to kind of figure out what we want to do about these structural systems. We hit upon three things that was in our initial focus. There was the issue of 45 million Americans not having a credit score without which you really can’t borrow money to build wealth. You can’t start a business or buy a house if you can’t get a loan to do that and you need credit scores to do that, so what can we do about that structural requirement. And then we focused on the 20% downpayment requirement which is the common threshold for buying a house. People inherit money from their parents are more able to do that than people that don’t. White and asians are alot more likely to inherit wealth than blacks and Hispanics and what are we going to do about that.
And then we hit upon the structure of Minority Depository Institutions (MDI) and are they healthy or not or successful or not and what role they play. So we are focusing a lot on those three things as initial out of the gate projects. But crypto is part of the solution too. If you think about what keeps people are here are things like minimum account fees or inability to show identity documents that are sufficient to allow a bank to open an account even though you yourself are not a money laundering risk, so what do we do about that? So what can we do about that.
I think crypto holds a lot of promise for those kind of financial inclusion issues. With crypto of course, there are low fees. Exchanges are bidding down those fees toward zero much the way Robinhood bid them down in the broker dealer context.
They can also solve other problems. Are you the right person? Do you have the right identification? There are very promising blockchain identity verification projects out there that even if you don’t have a driver’s license they can still ascertain who you are based on the improbabilities that you would not be in other locations to figure out if you are who you really say you are and are not a risk. There are synthetic fraud solutions inside crypto-powered blockchains.
And then, if you want to take an even more simple consumer example, there are banking services being delivered on-chain that are taking huge amounts of costs out of the system and just make it cheaper. There is a company that is in the door with an application to us for a bank charter right now, a crypto company, that is in the mortgage lending business. And because they don’t rely on third-party technology vendors to record assignments of their loans and because the lending platform is powered by a token that allows users to bid for the right to make an offer on the next loan and because servicing and accreditation happens on chain all in one native crypto environment, they claim to remove 150 basis points of cost out of the mortgage origination process. Imagine a world where the effective savings passed onto the borrow means that you are paying something like a 2% mortgage rate rather than a 3% mortgage rate. That saves people enormous sums of money and makes it easier for people at the margins to buy a house. And so there are lots of use cases like that are very real and in the system today that will make the financial system inclusionary by making it cheaper and more efficient and that will make it better for everybody.
Forbes: Can you explain for crypto businesses what the Community Reinvestment Act (CRA) and what role does that play as people are looking at national charters, largely from your leadership now that people are looking at the OCC.
Brooks: CRA is the last piece of the civil rights legislation puzzle. Great civil rights laws that started being passed in 1964 to 1968. CRA was passed in 1977. The idea was banks make money by borrowing money from their depositors at a low rate of interest and then lending it out to their loan customers at a higher rate of interest. Their ability to make money depends on their extraction of deposits from local communities. The cheaper their deposits are, the more profit the bank makes. Bank deposits are a cheap way of funding themselves largely because of FDIC insurance which is a mechanism created by the Federal Government. So the idea was that banks have artificially cheap deposits, maybe as part of the social contract it makes sense to require banks to reinvest some of that low-cost funding back into the communities where they gathered them. That just sort of seems fair. What CRA does is sets forth the expectations of what banks will do to make sure they are lending and investing in those communities. We did a revision to the CRA rule because historically the definition of a bank is the area where branches were. Unfortunately over the last 20 years or so, banks have pulled more than 10,000 branches out of lower-income and rural communities. So the places that need lending investment the most ironically are the places that don’t have bank branches and thus didn’t get measured as part of the CRA bank obligations. We corrected that. We acknowledged that banks were gathering money on the internet or through mobile devices, if you are a bank that takes more than half of your deposits outside of your geographic branch network, then you are going to be required to be measured based on those places where your depositors live not where the branches are. That was the major innovation of our approach. And as a result, we think there will be more investment in low and moderate income communities regardless of where the bank chooses to locate its branches. In terms of how this effects Fintech and crypto companies, companies that don’t take deposits at all, technically the CRA doesn’t apply to you. Technically the CRA is all about deposits. But as part of our charter grant, we do expect that there will be a financial inclusion commitment that’s expected when you come in for a charter. We are still working on exactly how to structure that because as I say the CRA framework itself does not quite apply. And yet, we think it’s clear that if you are going to come in and get this special national charter with all the benefits it has, it’s only fair to expect that you will serve your whole community and not just whichever group of customers you choose to serve as a profit. So TBD on that. But CRA gives you an example of what that might look like, how much of your revenues should be invested in those things, how you assess the people you are expected to serve and the like, so it’s a good precedent even if it is not technically applicable.
Forbes: As a former regulator, I was brought up that you have optionality in a dual banking system. We have now seen Wyoming, a state that has created a new special purpose depository charter SPDI (speedy) charter; however, 99% of the way the banks are regulated now really either you have a choice at a federal level or at a state level with federal regulators involved. I know they are still working out the details in Wyoming but what are your thoughts about what might be the states creating their own systems of charters and not involving the federal regulators in the examinations.
Brooks: It’s a good question. We have seen approaches to the ILC example, now California revitalize its ILC charter. I see it as sort of analogous to that. What I think is unfortunate is the politicization of the dual banking system while that is going on. So I am all in favor of states ideating new kinds of bank structures to serve the communities. What I find puzzling is that when the OCC tries to do that for the nation, the states go bananas and say we shouldn’t do that. So my way of thinking the concept of dual banking is there is a roughly parallel set of charters available at the federal level that are available at the state level. So, for example, if you are a crypto company and you currently are getting a state money transmission license, there is a good question about why isn’t there a federal equivalent to that. They are both payments-related activities. Yet we are being sued by the states for wanting a truly dual banking system. Or if you talk about Wyoming, where I think they have a great idea and we are excited about what they are doing and it is completely appropriate and good. My guess is, however, that as we start looking at crypto bank charters and we do have some applications in the pipeline for those today, some states are going to feel like their ox is getting gored, even though all we are doing is the national equivalent of what they are doing at the state level. So I would say the dual banking system requires there be parody between state and federal options. If one company is big enough, sophisticated enough, or rigorous enough, to qualify for the federal option, they should get to choose that. But look with the states experimenting, we have a bunch of laboratories out there and if Wyoming succeeds, other states will follow.
Forbes: Do you have concern that somehow the legal battles between the Federal and state regulators might result in slowing down the adoption of crypto in the United States?
Brooks: I am certainly concerned about crypto fleeing overseas. I see that as a national security risk and economic competitive risk. On the other hand, I worked at the biggest U.S. crypto company for a period of time where I saw one of our states take six months to approve a listing of a token and then another six months to list the next token. So if the argument is maybe the OCC should stay out of it the state and federal engagement makes it complicated, I would argue that what happens when we stay out of it, some states make it, not complicated, but burdensome and slow. Historically in the analogous areas, the OCC is the advocate for financial innovation and I could give you 20 examples over the last 100 years of what was the OCC’s then-controversial activity that would never have happened that we take for granted. The concept of a certified check even or of variable annuities or competitive variable interest rate savings account tied to the stock market – that only happened because OCC was willing to cut through all the state noise level and litigate the states to establish the proposition that in America we are going to have a competitive economic climate where you can operate your business on a nationwide basis without regard to parochial state interest. I’d love it if every state was like Wyoming but unfortunately as you know it’s not. So what I am trying to do is bring some of their forward-thinkingness, to the national level.
Forbes: You have also made the point that even though you can coordinate the examinations from state to state, you still have 50 different laws that have different requirements that are sometimes competing and contradicting requirements.
Brooks: That’s exactly right. If you think back in history to where these things really matter, there are a couple of cases in the Supreme Court. There was the famous train car case where Arizona had a law that said trains could have only four cars. The problem was the Union Pacific was sending eight-car trains from Chicago to Los Angeles, so what was it supposed to do when it got to Arizona, just like de-couple those four cars? The Supreme Court said you can’t have a law like that. Or there was the mud flap case where one state had a triangular mud flap requirement and the other required squares and you are a long-haul trucker going from California to New York. What are you supposed to do? The point is, it is important both for entrepreneurs who are trying to grow their companies and for customers who don’t want to be deprived of access of something to get across a state line that we have a single national platform and that’s what federal banking regulation is all about and by extension, if we have crypto banks, which I think we will very shortly, I think it is in their interest they will have to comply with one set of rules nationwide, that’s the way markets grow.
Forbes: You had mentioned that a new Payments Charter would be issued in the Fall. Fall officially started on September 22 and ends on Monday, December 21. Obviously there are always a lot of factors as to when things might happen, but can the public expect any De Novo Payments Charters being announced over the next 30 + days?
Brooks: Well, yes and no. So, let me tell you what I mean by that. So our belief has been that companies involved in the payments business ought to have a federal charter if they want one or ought to have access to a federal charter. There are three ways that a payments company can have a federal charter right now. One is they can apply for a non-depository national bank charter that is the one we are litigating with the State of New York, and for that charter we don’t have any current applicants but we are now at a point where I think we are prepared to accept applications for that. We don’t have to though, to be clear. But if we did, we could process it and that’s what I said we would be ready to do in the Fall, and our framework would be ready and we would be open for business, and we are. We just haven’t got the applicants yet.
A second way that these companies could apply is they could come apply for or they can buy a depository institution. So if you look at our newest charter, Jiko bank which was chartered just a couple of months ago, payment company payment card that connects to an underlying basket of securities and their algorithm optimized the volume of buying and selling securities to support your payments use case. What that payment company did is they bought a small bank in Minnesota and thus they have a depository and are a full-on commercial bank, but there business is all about payments, so that’s the second example. And then the third kind of charter one could get is a National Trust Bank charter. What does a trust bank have to do with payments? Well, the answer is, as you know, a lot of crypto companies are currently operating on the basis of a state trust company charter. Anchorage, Coinbase Custody, Gemini, a lot of these companies are trust companies and that’s how they operate their crypto business instead of having a money transmission license. We do in fact have in house a number of applications from crypto companies to convert their state trust company charters into National Trust Banks, and so that’s where we see payments companies coming in the next couple of months. So again, yes and no. The magic non-depository payments charter we don’t have that yet but are ready to do it, on the others, yes absolutely, we granted one charter and will have more shortly.
Forbes: With PayPal, they announced now customers can buy and sell crypto and are a typical payments company, and the OCC has said they can custody crypto, wouldn’t a PayPal be perfect for the Payments charter based on what they just announced their activity to be involving company?
Brooks: Without commenting on specific companies, the example of the collection of Stripe, PayPal, and Square (obviously Square went to the FDIC for an ILC charter) those are the dominant payment processors in the world at the moment and I do believe the National Bank Charter is important to be made available and might be a good strategy for those companies for sure. I cannot comment on whether any one of them have approached us, but I think you are right, that kind of business would be appropriate for what we talked about.
Forbes: Last question, it is fascinating you bring up the trust charter in this instance because we do have these charters that operate at the state level, and there have been some questions about the ‘qualified custodian’ rule that now the SEC is looking at a little bit, at least at the staff level. When you think about a trust charter in New York, you don’t just have Coinbase Custody and Gemini, but you also have Bakkt that has oversight from the CFTC, it’s almost like that trust charter is almost like the utility player in baseball. I think that is fascinating that people are seeing that construct as a way of getting there. Would you say that is one of the attractive factors that people looked at the national level?
Brooks: I love your utility player analogy. I think that is a really good one. It is one that has relatively easy requirements because your typical trust doesn’t have insured deposits and is without the FDIC / Federal Reserve overlay, so it’s just a faster charter to get.
Forbes: Thank you for your time.