Stablecoin issuer and blockchain startup Paxos has become the third crypto-native company to obtain a federal trust charter through the US Office of the Comptroller of the Currency (OCC).
The national banking regulator announced Friday he granted Paxos a preliminary charter, allowing the company to bring its new Paxos National Trust entity online as a federally regulated entity offering custody, stablecoin management, payment, exchange and other services.
With approval, Paxos joins Anchorage and ProtÃ©go by becoming one of the only national trusts born into the crypto ecosystem. Kraken and Avanti also became state-regulated crypto-banking entities after obtaining charters from special-purpose depository institutions through Wyoming.
The move is another sign that the global cryptocurrency ecosystem is becoming increasingly acceptable to regulators, who have traditionally been wary of the still young industry. In particular, the preliminary approval indicates that the OCC is comfortable with Paxos as a custodian, which is important for an industry prone to hacks or currency crises.
Becoming an OCC-regulated trust is one way for crypto exchanges to operate nationwide without the need to secure state-level licenses in each of the 49 different U.S. states (Montana has no ‘license requirement).
âThis is a preliminary conditional approval, which means the OCC approves our business plan,â said Dan Burstein, general counsel for Paxos. “It is considering that the activities that we have identified in the business plan are those that can be carried out by a national trust, that we have the right team in place and the right controls and plan in place to control our risks and operate as a national trust company.
Paxos now has a year and a half to execute its business plan and show the OCC that it can operate safely. At the end of this period, the regulator will assess Paxos’ operations and determine whether it will sign a final charter, although Burstein has said he expects this process to take place well before the end of the 18 months.
At present, Paxos’ business plan does not deviate much from its existing operations, which include its stablecoin-as-a-service offering, exchange and custody products, and crypto brokerage services. .
Paxos, who filed with the OCC in December, will set up the Paxos National Trust to operate under the OCC charter, while maintaining its Paxos Trust Co.
âOur business is not going to change immediately because of this,â Burstein said. âWe will continue to operate our existing business through our New York trust. ”
In other words, Paxos’ new trust has a âde novoâ charter, which means it’s starting from scratch, which is a more difficult process than just converting an existing trust, Burstein said.
In his view, however, the effort is worth it for Paxos customers, as they will be able to choose which entity to work with.
The new entity will borrow from the existing Paxos team as it grows.
âPaxos has a formidable team of engineers and people in our compliance, legal, infosec (information security) and other functions and [we] want to be able to benefit from their experience and ensure that the national trust can have access to the best possible resources, âsaid Burstein.
To be clear, Paxos does not form a full bank at the moment. It does not have Federal Deposit Insurance Corp. approvals. (FDIC) or Federal Reserve, which it would also need to form a full-fledged bank.
Burstein said Paxos will continue to develop its regulatory stack, but the company has yet to determine whether it will seek FDIC insurance or a charter from the Fed.
In a discussion this week on the Clubhouse audio app, OCC Senior Deputy Chief Counsel Bao Nguyen said the banking regulator had based its approach to crypto companies and charters of trust on listening sessions with tech and crypto companies that were looking for ways to offer custodial services.
Although some companies operate under state trust charters, they may be limited by what those states allow.
The OCC looked at what states such as California, New York, South Dakota and Wyoming did about digital assets when evaluating the charter trust scheme, Nguyen said, speaking generally. of the regulator’s approach and not of a specific company.
âA lot of our work was to identify that the charter of trust, which is sort of inspired by state law, allows a company to provide the kinds of services that I think crypto companies are interested in. to provide – custodial services, some shared services in terms of active customer processing, in the processing of customer transactions, “said Nguyen.
This has led to an approach focused on using existing law for trust companies, he said.
âWe have this charter that doesn’t take deposits, that shouldn’t be treated like a bank holding company that could provide all kinds of services that digital asset companies are interested in providing at the moment,â a- he declared.
Indeed, OCC approval notice Friday highlighted the similarities between Paxos’ existing state-chartered entity and the future national entity.
“Since the bank’s activities will be similar to that of an operational entity, general information about the bank’s business model and operations is publicly available,” the approval notice reads.