Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insight on policy and regulation.
Crypto has a way of generating intrigue around the most esoteric of institutions. How else could Rostin Behnam, the chair of the decidedly unglamorous Commodity Futures Trading Commission, become one of the most sought-after speakers after the collapse of FTX?
The latest government group thrust into the limelight is the Office of the Comptroller of the Currency, an obscure Treasury bureau tasked with overseeing federal banking. Fears are growing that the government is trying to strangle crypto by cutting off its access to banking. Investor Nic Carter described the move as a “well-coordinated effort to marginalize the industry,” comparing it to Operation Choke Point, an initiative from 2013 where the Department of Justice investigated banks serving what it deemed to be questionable ventures. The OCC sits at the center of the current panic, with unfounded rumors swirling about the fate of crypto companies in its grasp.
Until recently, the OCC’s crypto claim to fame was briefly playing host to Brian Brooks—a figure who later gained notoriety for an even more fleeting stint as the CEO of Binance US. Brooks was the acting head of the OCC for an eight-month period ending in January 2021 and used his short tenure at the traditionally cautious institution to shove through a flurry of pro-crypto directives.
These included a decision by the OCC to approve Anchorage Digital’s application to become the first federally chartered crypto bank, which, in practical terms, allowed it to custody digital assets, along with other credentialing privileges that would make it more appealing to clients. Two more crypto companies followed: In February 2021, the OCC granted conditional approval to the Washington-based Protego to convert into a national trust bank, with Paxos gaining conditional approval two months later for a national trust bank charter.
Unlike Anchorage, the final status of Protego and Paxos's petitions remains uncertain. The OCC has dragged out the approval process—and with it, the companies' ability to operate as national banks—beyond the 18-month deadline. During this time, a new acting OCC comptroller, Michael Hsu, took over and indicated that he would roll back the Brooks pro-crypto policies, ordering a review of the agency’s actions.
Both companies’ applications faded from public view until the precipitous events of the past two weeks, with the Federal Reserve rejecting the crypto bank Custodia from joining its hallowed membership ranks in late January.
The Federal Reserve and the OCC may be distinct institutions, but many seemed convinced their decisions were linked. Several industry participants, with varying (but confidently high) levels of confidence, told Fortune on the condition of anonymity that the OCC had followed suit and asked Paxos and Protego to withdraw their applications—an act that would send shockwaves through the industry, by dashing the crypto-focused financial institutions plans to become federally regulated entities.
The rumor has spread widely in the crypto industry, but both Paxos and Protego denied to Fortune that they had received any communication of the sort from the OCC. Protego’s founder and executive chair Greg Gilman described it as “categorically untrue,” although he did add that Protego’s new deadline for approval from the OCC was coming up at the end of February. An OCC spokesperson said that the bureau does not comment on pending applications.
After a tweet disseminated Tuesday night alleging the OCC had denied Paxos's application, other sources with knowledge told Fortune that they did not believe Paxos had been asked to withdraw their application and or been denied. Gilman said the same about Protego.
Whether the origin of the rumors is general agitation about the fate of the industry, or old-fashioned competitive sabotage, as two people speculated, its wide reach reflects a new reality for crypto: The government’s gloves have come off.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
Additional reporting by Luisa Beltran.
