Community bank group sues OCC over crypto trust charters

The Independent Community Bankers of America has filed a lawsuit against the Office of the Comptroller of the Currency, challenging the federal agency’s authority to grant national trust bank charters to cryptocurrency firms. The trade group argues that the OCC is exceeding its statutory limits by allowing entities engaged in high-risk digital asset activities to enter the banking system under a regulatory framework that is significantly less rigorous than that applied to traditional depository institutions. The legal action seeks to rein in what the group describes as a permissive regulatory posture that places community banks at a severe competitive disadvantage.

In its filing, the ICBA stated that during the current presidential administration, the OCC has approved or conditionally approved 21 national trust bank charters, with 13 of those specifically designated for crypto companies. The lawsuit contends that the national trust bank designation allows these firms to preempt many state law requirements and avoid the federal obligations typically imposed on depository institutions. According to the group, this regulatory divergence enables crypto firms to operate with lighter oversight, thereby creating an uneven playing field for established community banks that must comply with a broader range of federal and state regulations.

The ICBA highlighted the financial burden placed on smaller community banks, citing two member institutions with assets under $2.5 billion. These banks reportedly spend approximately $1.5 million annually on regulatory compliance, including Federal Deposit Insurance Corp. assessments and adherence to Community Reinvestment Act requirements. The lawsuit alleges that these community banks have already lost hundreds of thousands of dollars in business this year to cryptocurrency companies that have received conditional trust charters. Rebeca Romero Rainey, the ICBA’s president and CEO, stated that Congress did not create the national trust charter as a side door into the banking system. She emphasised that any non-fiduciary firm seeking the benefits of a federal bank charter should be held to the same standards as community banks.

The lawsuit criticises the OCC for becoming dramatically more permissive in regulating crypto companies, aligning with the administration’s stated goal of making the United States the global capital for cryptocurrency. The group argues that the OCC acted quickly to rescind previous guidance, adopting positions far more accommodating to the crypto industry. The legal challenge specifically targets an OCC rule adopted in March and an interpretive letter issued in 2021 by former OCC head Michael J. Hsu, both of which form the basis for the agency’s current trust charter approvals. The ICBA asserts that there is no statutory basis for the OCC’s position that it can charter crypto trust banks that are neither depository nor fiduciary.

The complaint also focuses on Protego, a crypto company that received conditional approval for a charter in February. The lawsuit claims that Protego, which had FTX among its investors, has a history of severe financial problems and appears to have insufficient capital and liquidity support. While contacts for Protego could not be reached for comment, the company’s website was reportedly not functioning at the time of the report. In response to the lawsuit, Ji Hun Kim, CEO of the Crypto Council for Innovation, described the ICBA’s action as an attempt to resist innovation and competition in financial services. He argued that restricting banking to legacy business models would not stop the demand for financial innovation and that the OCC has historically adapted its oversight frameworks as the financial sector evolves.

Former OCC head Michael J. Hsu has previously defended the agency’s approach, stating that the regulator no longer maintains a zero-risk tolerance. He noted that the statute requires a reasonable chance of success for applications, which is how the agency evaluates them. Hsu, who previously served as chief legal officer at blockchain firm Bitfury, has stated that crypto is no longer viewed as separate from traditional finance. However, this stance has created tension with bank trade groups, who contend that allowing crypto and fintech companies to offer bank-like products under a less rigorous charter could increase risks to consumers and the broader financial system.