Stablecoin issuer and blockchain startup Paxos has become the third crypto-native company to score a federal trust charter through the U.S. Office of the Comptroller of the Currency (OCC).
The national bank regulator announced Friday it had granted Paxos a preliminary charter, letting the firm bring its new Paxos National Trust entity online as a federally-regulated entity offering custody services, stablecoin management, payment, exchange and other services.
With the approval, Paxos joins Anchorage and Protego in becoming one of the only national trusts that were born in the crypto ecosystem. Kraken and Avanti have also become state-regulated crypto bank entities after securing Special Purpose Depository Institution charters through Wyoming.
The move is another sign that the global cryptocurrency ecosystem is becoming increasingly acceptable to regulators, which 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, significant for an industry prone to hacks or exchange crises.
Becoming an OCC-regulated trust is one way crypto exchanges can operate nationwide without needing to secure state-level licenses in each of the 49 different U.S. states with such regulatory regimes (Montana doesn’t have a licensing requirement).
“This is a preliminary conditional approval, which means that the OCC is approving our business plan,” said Paxos General Counsel Dan Burstein. “It’s deeming the activities that we have identified in the business plan to be 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 risk and to operate as a national trust company.”
Under the provisional approval, Paxos has a year and a half to execute on its business plan and demonstrate to the OCC’s satisfaction that it can operate safely. At the end of that period, the regulator will evaluate Paxos’ operations and determine whether it will sign off on a final charter, though Burstein said he expects this process to occur well before the 18 months are up.
Dual approach
At the moment, Paxos’ business plan doesn’t stray far from its existing operations, which include its stablecoin-as-a-service offering, exchange and custody products and crypto brokerage services.
Paxos, which filed with the OCC last December, will set up the Paxos National Trust to operate under the OCC charter, while maintaining its New York Department of Financial Services-chartered Paxos Trust Company.
“Our business is not going to change immediately because of this,” Burstein said. “We’re going to continue operating our existing business through our New York trust.”
In other words, Paxos’ new trust has a de novo charter, meaning it’s starting from scratch, which is a more difficult process than just converting an existing trust, Burstein claimed.
In his view, however, the effort is worth it for Paxos’ customers, who will be able to choose which entity to work with.
The new entity will borrow from Paxos’ existing team as it builds out, though.
“Paxos has a tremendous team of engineers and people in our compliance, legal, infosec and other functions and [we] want to be able to draw from their experience and have the national trust be able to get access to the best possible resources,” Burstein said.
To be clear, Paxos isn’t forming a full bank at this time. It does not have Federal Deposit Insurance Corporation (FDIC) or Federal Reserve approvals, which it would also need in order to form a full bank.
Burstein said Paxos would continue to build out its regulatory stack but the company has not yet determined whether it will apply for FDIC insurance or a Fed charter.
OCC charter
In a discussion this week on the Clubhouse audio app, OCC Principal Deputy Chief Counsel Bao Nguyen said the banking regulator based its approach to crypto companies and trust charters on listening sessions with technology and crypto firms, which were seeking ways to offer custody services.
While some companies operate under state trust charters, they may be limited by what those states permit.
The OCC looked at what states like South Dakota, Wyoming, New York and California did regarding digital assets as it evaluated the trust charter regime, he said, speaking generally about the regulator’s approach and not about any particular company.
“Our work was largely really identifying that the trust charter, which sort of tees off of state law, permits a firm to provide the kinds of services that I think crypto companies are interested in providing – custodial services, some shared services in terms of handling client assets, in dealing with client trades,” Nguyen said.
That led to an approach focused on leveraging existing law for trust companies, he said.
“We have this charter that doesn’t take deposits, that doesn’t have to be treated as a bank holding company that could provide all the kinds of services that digital assets companies are interested in providing at the moment,” he said.
Indeed, the OCC’s approval notice on Friday highlighted the similarities between Paxos’ existing state chartered entity and the future national entity.
“Since the Bank’s activities will be similar to those of an operating entity, general information as to the business model and operations of the Bank is publicly available,” the approval notice said.
