Biden's OCC expected to chart new course for fintechs, crypto, AML

The Biden administration is closing in on its nomination for chair of the Office of the Comptroller of the Currency, a job with a dramatically higher profile given the maturation of challenger banks, cryptocurrency and security risks.

The short list includes Michael Barr and Mehrsa Baradaran, with Barr considered the favorite while Baradaran is preferred by the Democratic Party's liberal wing. Barr is dean of the University of Michigan's public policy school, and served in the Treasury Department under Clinton and Obama. Baradaran teaches at the University of California at Irvine Law School and is an expert on the racial gap in financial services.

Biden's earlier financial services regulatory picks include Rohit Chopra to head the Consumer Financial Protection Bureau and Gary Gensler to head the Securities and Exchange Commission. The Senate has confirmed Janet Yellen as Treasury Secretary.

The OCC nomination will come as companies active in the payments industry, such as Square, Stripe and Walmart, nudge closer to traditional banking. At the same time, cryptocurrency and blockchain projects abound, necessitating a new slate of regulations and protections against money laundering. And the ability of the OCC to implement policy itself is also in flux, as it considers licenses for fintechs and payment companies.

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"The coming years will be more interesting for the OCC," said Robert Hockett, a law professor at Cornell University. "New banking platforms and associated forms of fintech are forcing new regulatory decisions, and the OCC will be taking the lead role in all of that deciding."

The OCC recently allowed banks to process stablecoin payments, a move that could make it easier for banks to partner with emerging projects such as the Facebook-affiliated Diem stablecoin (formerly Libra).

The crypto-friendly stance was tied to Brian Brooks, the former acting head of the OCC under the Trump Administration, who stepped down in January.

Brooks, the former chief legal officer at Coinbase, promoted cryptocurrency during his term. In July 2020 the OCC permitted banks to hold cryptocurrency assets, and in September the OCC pushed further, allowing banks to hold cryptocurrency on behalf of clients. Brooks was also tied to the OCC's "fair access" rule, which is designed to make it harder for financial institutions to bar customers based on political opposition. The fate of that rule is in play with the change in OCC leadership.

Like Brooks, Barr has experience in the world of cryptocurrency, having served as anadvisor to Ripple, which is affiliated with the XRP token. The blockchain technology that underlays XRP has helped Ripple build an international business streamlining payments by avoiding intermediaries that manage parts of the transaction. The University of Michigan, where Barr is a dean, in 2019 received a $1 million donation from Ripple to fund fintech-related academic work. Barr has also served on the board of LendingClub and the Bill and Melinda Gates Foundation's fintech advisory council.

Baradaran, who is more closely aligned with the Elizabeth Warren/Sherrod Brown wing of the Democrats, would be more likely to take a harder stance against cryptocurrency and projects like Facebook's Diem.

"Barr is predisposed to emerging digital currencies, crypto exchanges, fintechs and more," said Charles Delingpole, CEO of ComplyAdvantage, adding Barr will likely support policies that will facilitate the use and growth of crypto and other related financial services. "That reinforces the importance of having robust 'know your bank' and 'know your customer' anti-money laundering processes and frameworks in place by crypto exchanges and wallets. To mitigate potential compliance infraction."

Regardless of the chair appointment, the function and authority of the OCC could expand or be reined in. The 6-3 conservative Supreme Court majority could curtail the OCC's ability to offer an easier path to national licensing for fintechs and payment companies, thus avoiding the need to obtain 50 state licenses. A group of states is challenging the fintech and payment charters in court. Fintech doesn't easily fit into red and blue camps, but a conservative court would be prone to limit the OCC's power in favor of more state autonomy.

The expansion of crypto and fintech are migrating money laundering and other financial crime away from cash, Delingpole said, which portends more challenging AML compliance.

"While cash is actually king for laundering, criminals will try and use these new financial services to conduct illegal activities which is why crypto companies have to prepare and look ahead and understand that governments will evolve their regulatory policies as more adoption of these services and currencies take place," Delingpole said.