The Office of the Comptroller of the Currency (OCC), the bureau of the US Treasury Department that regulates the banking system, made an announcement on January 4, 2021 stating that banks may use stablecoins and public blockchains as a form of settlement infrastructure in the US financial system. This is extremely positive news for the digital currency landscape as a whole.
Why Stablecoins?
The benefit that stablecoins maintain is that they don’t suffer from the volatility currencies like bitcoin or ether have on a daily basis. Stablecoins are pegged to the fiat currency which they can be redeemed for, like the US Dollar.
As the stablecoin marketplace saw a surge of activity and increased interest in 2020 despite the COVID-19 pandemic, it became abundantly clear that every bank will use a form of digital currency in the future at some point. A few options already exist for the integration of banks and digital currency, whether that is utilizing an existing stablecoin on a public blockchain or creating a central bank digital currency (CBDC), which are created by nation states.
What Does The Announcement Say?
The announcement states that “engaging in an independent node verification network within the federal banking system may enhance the efficiency, effectiveness, and stability of payments activities and achieve the benefits of real-time payments.” The announcement goes on to say that these activities of using stablecoins and blockchains for payments “may be more resilient than other payment networks because of its decentralized nature.”
To help clarify, an independent node verification network is simply a distributed network like the Bitcoin blockchain where any user can act as a participant, or node, on that network. The efficiency and effectiveness of using these public blockchains offer full transparency of transaction settlement to the community in real-time.
The decentralized nature of these permissionless networks or open source protocols is clearly an advantage over the legacy financial system and should be utilized to keep up with such an emerging industry. Previously, there was hesitancy from large financial institutions about entering the digital currency and blockchain space due to the regulatory uncertainty, but this announcement is a very important step for the United States financial system in adopting this new technology.
contact a member of Withum’s Digital Currency and Blockchain Technology Group.
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