Sony Bank's Crypto Banking Ambitions Face Opposition

The Independent Community Bankers of America (ICBA) is urging the Office of the Comptroller of the Currency (OCC) to reject Sony Bank’s proposal to enter the cryptocurrency market. The group's concerns center on the bank's plan to create a federally chartered institution that would issue a dollar-backed stablecoin, potentially leading to confusion among consumers and regulatory oversights.

Key Takeaways

ICBA has formally opposed Sony Bank’s application to create a dollar-pegged stablecoin via Connectia Trust.
The group argues that this venture could mislead customers by simulating banking deposits without the necessary regulatory frameworks.
Concerns have been raised about the lack of transparency in Sony's application, particularly regarding reserves and potential risks.
The ICBA believes the OCC lacks the necessary tools to manage the collapse of a large stablecoin issuer.

Sony

ICBA Urges the OCC to Reject Sony’s Crypto Banking Initiative

A significant banking group in the U.S. has called on regulators to halt Sony Bank’s efforts to enter the cryptocurrency sector. This comes after Sony’s banking division announced plans to establish Connectia Trust, a federally chartered institution designated to issue a stablecoin backed by the U.S. dollar.

Sony's announcement came as a surprise to the market last month, with its plan including not just the issuance of a stablecoin but also managing the reserves and offering digital asset custody and management. If authorized, this would place Sony alongside other prominent companies like Coinbase, Circle, Paxos, Stripe, and Ripple, all of which are pursuing national digital banking authorization.

Concerns Over Customer Misunderstanding and Regulatory Compliance

In a letter dated November 6 to the OCC, the Independent Community Bankers of America (ICBA) voiced its strong opposition to Sony Bank's application. The group pointed out that the proposal appears to rely on an inappropriate interpretation of trust bank powers.

The ICBA expressed fears that customers might confuse the stablecoin with traditional bank deposits, despite regulations preventing national trust banks from accepting deposits. The organization emphasized that trust charters should be limited to fiduciary duties such as estate planning and investment management, rather than deposit-like products. They urged the OCC to deny the application to avoid misleading customers and to mitigate potential risks in case of failure.

Furthermore, the ICBA accused Connectia of aiming to operate as a bank without the necessary FDIC insurance or Community Reinvestment Act obligations. This, they argue, would allow it to benefit from a bank charter without adhering to the full set of regulations.

Criticism of Lack of Essential Details in Sony's Application

The ICBA further criticized Sony's proposal regarding its payment functionalities. They noted that stablecoins share similarities with bank deposits such as being easily transferable, spendable at points of sale, and redeemable at face value for dollars. Such features, the ICBA points out, are not permitted for trust banks to offer.

Additionally, the application raises worries about compliance with the Bank Holding Company Act. The ICBA questions whether Connectia’s plans for custody and payment services would fulfill the strict conditions necessary to bypass holding company oversight. If the plans fail these tests, it could complicate regulatory scrutiny for Sony’s corporate parent company.

Transparency has also been a major concern. ICBA highlighted that the public version of Sony's application lacks essential information about reserve compositions, redemption processes during crises, expected issuance levels, and contingency strategies for unforeseen events.

They implored the OCC to require a more comprehensive business plan before making any decisions, arguing that approving the application without full disclosure sets a dangerous precedent.

Warnings About Regulatory Preparedness and Risk Management

The ICBA raised additional worries regarding whether the OCC possesses the required mechanisms to manage potential failures of Connectia. Notably, they've not appointed a receiver for an uninsured national bank since 1933, and the existing regulations were tailored for traditional trust companies—not for managing large stablecoin issuers linked to unpredictable crypto markets and sophisticated blockchain infrastructure.

A sudden failure of a Connectia token could lead to hasty liquidations of Treasuries, potentially causing broader economic stress. Moreover, managing crypto custody in a receivership scenario would demand coordination of critical system components, a process the OCC has not navigated before. Any misstep risks permanently locking customer assets.

In conclusion, the ICBA firmly believes that the OCC should deny Sony's application. They assert that Connectia’s business model expands beyond the typical scope of trust banks, resembles demand deposit accounts, and does not qualify for the trust exemption stipulated by the Bank Holding Company Act. If authorized, this move could jeopardize the traditional separation of banking and commerce and disadvantage community banks.