OCC Greenlights Bank Stablecoins: Opens TAM of ~200B Annual Public Blockchain Transactions = Good For Crypto
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Yesterday afternoon, the U.S. Office of the Comptroller of the Currency (OCC) issued interpretive guidance clarifying that federally chartered banks may participate in independent node verification networks (INVN i.e., public blockchains/crypto networks) and use stablecoins for payment activities. Bitcoin and crypto prices have fallen modestly since the news. While some may be tempted to view the possibility of banks entering the blockchain space as a competitive threat for crypto valuations, we do not hold that view. We see the news as a long term positive for the crypto industry but think it could create other financial sector winners and losers.
● OCC Issues Guidance Clarifying Banks May Use Stablecoins For Payments: Stablecoins, which are digital blockchain tokens often pegged to ownership of a fiat currency like dollars held in a bank account, have been a fast-growing segment of the crypto industry, with a market cap today standing at ~$30B compared to ~$5B a year ago. To date, fiat backed stablecoins have mostly been issued by crypto exchanges, while banks awaiting greater regulatory certainty have stuck to accepting deposits on behalf of issuers. Following OCC guidance that banks may validate, store, and record payments transactions by serving as a node on a public blackchin crypto network, we believe that will start to change (Slide 2).
● Intranet -> Internet = On Prem -> Cloud = Private Blockchain -> Public Blockchain: As there was initial hesitance and then mass adoption during the transitions from intranet to internet and from on prem to cloud computing, we believe open public crypto networks will follow a similar path. Most leading banks have been testing blockchain initiatives for many years now but have opted for private permissioned blockchains instead of public permissionless blockchains like Bitcoin or Ethereum due to regulatory uncertainty. The OCC’s guidance shows a keen understanding of how the technology works in our view, and while there will be a learning curve that will take time before it ultimately gets adopted with traditional financial institutions, we see this as a turning point and catalyst for the tech forward banks to start using public blockchain crypto networks.
● Guidance Opens TAM ~200B Annual Public Blockchain Transactions: Stablecoins offer several benefits to traditional payment systems, such as transaction speed and cost reduction by probably reducing errors and fraud. Using Federal Reserve Payments Study data, we estimate there to be a Total Addressable Market (TAM) of ~200B annual U.S. payment transactions that could be digitized and tracked on a public blockchain. While it will take time for adoption to take hold, capturing related fee revenue share from the use case would be a materially positive fundamental development for crypto (Slide 3).
● Tech & Reg Shift Good For Crypto But May Create Possible Winners & Losers: Bank issued stablecoin adoption would likely impact several areas of the payments sector. We believe such a move would eventually benefit global GDP, blockchain tech firms, blockchain analytics firms, public blockchain smart contract platforms (although it’s too early to pick winners), and big banks. We currently see the impact as relatively neutral for cryptocurrencies like Bitcoin, offshore stablecoins, fintech and big tech. Those negatively impacted by such a shift may include corporate stable coins, smaller regional banks, money transfer services, and global payment networks (Slide 4).
● What are the risks? Banks may be slow to adopt public blockchain networks, the technology may prove not mature enough to handle the scale required by banks and other large financial institutions, the industry competitive landscape may change.
Bottom Line: We see greater regulatory clarity unfolding across the crypto space. OCC stablecoin guidance is a net neutral for assets like Bitcoin today and bodes well for crypto blockchain adoption and prices over the long term.
Key Slides from this report….
OCC Guidance: Banks May Use Stablecoins For Payments (Slide 2)…
Opens TAM of ~200B Public Blockchain Transactions (Slide 3)…
Tech & Regulatory Shift Creates Potential Winners & Losers (Slide 4)…
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