Introduction
In a significant development that sent ripples through the banking industry, a prominent U.S. financial organization has called on regulators to halt Sony Bank’s foray into cryptocurrency. This move comes in response to Sony’s recently unveiled initiative, which involves the creation of Connectia Trust—a federally chartered banking entity designed to issue a stablecoin pegged to the U.S. dollar. Connectia Trust aims to manage the underlying reserves, while also handling digital asset custody and management services. If authorized, this venture would place Sony among a select group of major companies, including Coinbase and Ripple, pursuing national digital bank status.
Opposition from ICBA
In a letter dated November 6 to the Office of the Comptroller of the Currency (OCC), the Independent Community Bankers of America (ICBA) expressed its firm opposition to Sony Bank’s application, arguing that it misinterprets the permissible activities of trust banks. The organization cautioned that the introduction of a dollar-pegged stablecoin could mislead consumers into thinking it functions like a traditional bank deposit, despite legislative restrictions preventing national trust banks from accepting deposits.
ICBA emphasized that trust charters are traditionally intended for fiduciary responsibilities, such as estate planning and investment management, rather than for deposit-like offerings.
Concerns Over Compliance and Ethics
ICBA’s concerns extend further, citing that Connectia Trust might operate akin to a bank without complying with key protections, such as Federal Deposit Insurance Corporation (FDIC) insurance or obligations under the Community Reinvestment Act (CRA). They categorized the anticipated structure of Connectia Trust as a maneuver to reap banking benefits while evading full regulatory scrutiny, thus raising ethical questions about its operations in low- and moderate-income communities from which it could collect funds without a requirement to reinvest.
Moreover, ICBA highlighted how the functionalities typical of stablecoins resemble those of checking accounts, capable of electronic transfers and one-to-one redemption in dollars, which are services trust banks are prohibited from offering. This led to apprehensions regarding compliance with the Bank Holding Company Act, as only entities meeting stringent criteria can avoid holding-company oversight.
Transparency Issues
The letter questioned whether Connectia’s proposed non-fiduciary custody services and payment functionalities would adhere to these stipulations, which could inadvertently place Sony’s parent corporation under additional regulatory frameworks. Additionally, ICBA pointed out grave transparency issues surrounding Sony’s application. The publicly accessible version divulges insufficient information, notably lacking details about reserve makeup, stress-based redemption processes, projected issuance volumes, and contingency strategies for potential liquidity crises or cyber incidents.
ICBA urged the OCC to ensure a more comprehensive business plan is provided before any decision is taken, warning that an approval under current obscured circumstances would set a dangerous standard.
Concerns About Regulatory Capacity
They also expressed doubts about the OCC’s ability to effectively resolve Connectia should it face insolvency. The OCC has not appointed a receiver for an uninsured national bank for nearly a century, and its regulatory framework may be ill-equipped to manage a large stablecoin issuance amidst the unpredictable dynamics of the cryptocurrency market. A run on Connectia’s stablecoin could necessitate rapid liquidation of government securities, leading to wider market distress.
The challenge of administering crypto asset custody during such a crisis could further complicate recovery efforts, placing customer funds at risk of being irretrievably lost.
Conclusion
Conclusively, ICBA’s message was unequivocal: the OCC should reject the application due to Connectia’s model straying beyond the accepted realm of trust banks, imitating demand deposits, and failing to meet conditions outlined in the Bank Holding Company Act. They maintained that granting approval would blur the historical lines between banking and commerce, consequently undermining the interests of community banks across the nation.
