• Towards the end of April 2023, the Catawba Indian Nation passed a new Banking and Financial Services Code as part of the Tribe's efforts to build a "Digital Economic Zone" that is tailored to attract banks and fintech companies to its small tribal reservation outside of Charlotte, North Carolina.
  • The Code is modeled on the banking laws of a combination of states, such as Wyoming, the Dakotas, and Delaware, that have been in the headlines in recent years for their combination of unique tax benefits, business friendly climates, and openness to hosting innovative fintech and digital currency operations. The self-expressed intent of the Catawba Nation is to "disrupt Delaware" by building an even more attractive and easy to navigate legal environment for banks and financial companies than the famously business friendly First State.2
  • As part of the Code, the Catawba Nation has established a legal framework to (i) charter a new tribal bank similar to the state-owned Bank of North Dakota, and (ii) establish a tribal banking commission to supervise private banks that could be established under a charter issued by the Catawba Nation.3
  • The Catawba Nation says that it plans to work with federal banking regulators to make sure that tribally chartered banks comply with federal financial laws and receive the same treatment under federal law as state-chartered banks, including the ability to obtain FDIC deposit insurance.4
  • However, significant legal uncertainties persist around the ability for Native American tribes such as the Catawba Nation to charter or regulate banks and other financial institutions. There are also legal uncertainties around the extent to which tribally chartered or controlled financial institutions can rely on tribal law to govern their interactions with individuals physically located outside of the respective tribe's territory. For example:
    • According to guidance issued by the Office of the Comptroller of the Currency in 2002, any Native American tribe that plans to create a depository institution must do so under either a federal or state charter. 5
    • Historically, only state and federally chartered banks have obtained FDIC insurance. In addition, under federal law, non-banks are generally prohibited from receiving deposits through interstate commerce, which would be a desirable activity for many banks that hope to serve the fintech community.6
    • The Federal Circuit Courts have generally ruled that Native American tribes cannot enforce tribal law in arbitrations with consumers located outside of tribal territory, with the Second, Third, and Fourth Circuits all finding that tribal choice of law clauses are unenforceable to the extent that they waive the consumer protection laws of the consumers' home states.7
  • In short, the Catawba Indian Nation's recent Banking and Financial Services Code presents a novel innovation in the e-banking industry, that, if successful, could provide a template for replication by numerous Native American tribes across the country. However, substantial legal barriers exist that will require alterations to existing law before the Catawba Nation's desire for tribally chartered banks can become a reality.

Summary

On April 25, 2023, the Catawba Indian Nation (the "Catawba Nation") passed a new Banking and Financial Services Code (the "Code").8 The Code is a first for Native American tribes and is part of a multifaceted effort by the Catawba Nation to create a "Digital Economic Zone" that will attract banks and fintech companies to incorporate and do business digitally with the Catawba Nation, with no need for a physical footprint in the tribe's territory (located outside of Charlotte North Carolina).9 While the Code may signal a new movement by Native American tribes into the growing e-banking and fintech spaces and could serve as a template to be copied by many other tribes, the Catawba Nation faces multiple significant legal hurdles before any banks or fintech companies will be able to incorporate and operate under the new Code.

The Banking and Financial Services Code

The Code is relatively extensive, totaling 153 pages, and has several principal sections.

First, the Code creates a new Banking Commission (the "Commission") that is charged with the enforcement of the Code, the supervision and examination of banks and other financial entities that are created under the Code, and cooperation with federal regulators. The Commission will consist of at least five members appointed by the Zone Authority of the Catawba Nation, and requires that, at any given time, at least one member of the Commission be an enrolled citizen of the Catawba Nation.11 The Zone Authority will also appoint a single member of the Commission to act as the Director, who will function as the executive officer of the Commission and will enforce all of the orders and decisions of the Commission.12 Amongst other things, the Commission is empowered to approve applications for the organization of new banks under the Code,13 to enforce all of the financial regulations and laws of both the Catawba Nation and the United States on banks chartered under the Code, and to act as a bank examiner for banks chartered under the Code.14

Second, the Code spells out the powers of banks and trust companies chartered under the Code, including for banks, the ability to: (i) take consumer deposits,15 (ii) issue credit and loans,16 (iii) buy and sell securities for themselves and for customers,17 (iv) facilitate digital asset and digital currency transactions, and to use digital and blockchain methods for security and transaction recording purposes,18 (v) engage in all facets of the insurance business,19 (vi) issue mortgage loans that are eligible for insurance or guaranty by federal agencies,20 (vii) operate as a trust business,21 (viii) establish branch locations outside of the Catawba Nation's territory (with permission of the Commission),22 and (ix) own "bank service corporations" that provide services such as mortgage and loan servicing, debt collection, travel services, and clerical functions.23

Third, the Code creates a new Public Bank of the Catawba Nation (the "Bank"), along the lines of the state-owned Bank of North Dakota, which holds the state's funds and has provided financial services that promote agriculture, commerce, and industry in the state since the 1920s.24 The purpose of the Bank is to meet the financial needs of the Catawba Nation and other Native American communities and to partner with government agencies and private enterprises to facilitate the economic development of the Catawba Nation.25 The Code states that the Commission will establish and manage the Bank and designates that the principal place of business of the Bank must be in the territory of the Catawba Nation.26 The Code further empowers the Bank to perform several unique functions on behalf of the Catawba Nation, including: (i) issuing charters to other banks established under the Code,27 (ii) serving as the depository institution for the governmental funds of the Catawba Nation,28 (iii) making loans to facilitate the acquisition of lands to restore or enhance the sovereign territory of the Catawba Nation,29 (iv) operate a revolving loan fund to facilitate economic or community development within the territory of the Catawba Nation,30 (v) operate a system to provide digital currency and electronic fund transfer services to its customers,31 (vi) administer higher education savings plans,32 and (vii) issue low-interest loans to health care providers involved in improving health care access within the territory of the Catawba Nation.33 In addition, under the Code, all deposits in the Bank are to be guaranteed by the Nation.34

Fourth, the Code authorizes the chartering of Special Purpose Depository Institutions ("SPDIs"), similar to those allowed under Wyoming law, which are uninsured bank-like entities which are allowed to hold digital currencies alongside standard assets on the behalf of institutional investors. 35 The Code also provides a series of regulations for SPDIs, including prohibiting them from making loans and from holding the deposits of "natural persons" (i.e. consumers),36 requiring them to maintain liquid assets valued at 100% of deposits,37 and requiring them to properly vet their clients for anti-money laundering purposes, amongst other things.38

Challenges to the Implementation of the Code

Despite the ambition of its new Code, the Catawba Nation will have to overcome multiple legal hurdles before it can successfully begin to charter new tribal banks, trust companies, and SPDIs for operation both within and outside of tribal territory.

According to longstanding guidance issued to Native American tribes by the Office of the Comptroller of the Currency ("OCC"), any tribe that plans to create a depository institution must do so under either a federal or state charter.39 The OCC guidance does not provide an option for Native American tribes to self-charter financial institutions. Additionally, under federal law, to accept deposits within the United States, a bank must be chartered under the laws of the United States, one of the fifty states, the District of Columbia, or a U.S. territory.40 Finally, multiple Federal Circuit Courts have ruled that tribal financial institutions cannot mandate the use of tribal law to resolve disputes with consumers who reside outside of the geographic jurisdiction of the tribe.41 (While at least one three-judge panel in the Ninth Circuit found that such choice of law clauses were valid, its decision was subsequently vacated pending hearing en banc and the case was subsequently settled out of court).42 Given this, even if the Catawba Nation is able to successfully charter banks and financial institutions, it is not clear how it will be able to enforce tribal law in disputes with consumers located outside of the tribe's territorial jurisdiction.

However, it is possible that these legal challenges might be overcome. For example, the Federal Reserve has recognized that Native American tribes are "unique, domestic sovereign entities that possess extensive self-government powers and have many of the attributes of a sovereign government."43 Along these lines, the Catawba Nation has stated that they plan to work with federal regulators to make sure that banks chartered under its Code are afforded the same status as other state-chartered institutions, even though the Catawba Nation is not a state (similar to banks chartered under the laws of Washington D.C.).44

In short, while there are legal hurdles that still need to be overcome before it can fully come into effect, if those hurdles are able to be crossed, the Code could present a highly attractive model for other Native American tribes to follow. This could potentially lead to a flourishing of alternative digital banking jurisdictions across the country.

Footnotes

1. ZA_Banking Code Regulation - Catawba Digital Economic Zone, https://catawbadigital.zone/za_banking-and-financial-services-code/.

2. Anna Hrushka, Catawba Indian Nation Passes Code to Woo Banks, Fintechs, Banking Dive (May 8, 2023), https://www.bankingdive.com/news/catawba-indian-nation-code-banks-fintechs-charters/649682/.

3. Id.

4. Id. Deposit insurance is intended to protect most depositors in the event of a bank's failure. See FDIC, Deposit Insurance (March 15, 2023) ("Deposit insurance is one of the significant benefits of having an account at an FDIC-insured bank-it's how the FDIC protects your money in the unlikely event of a bank failure.").

5. Office of the Comptroller of the Currency, A Guide to Tribal Ownership of a National Bank at 3 (September 2002) ("[a]ny Indian tribe that plans to create a depository institution must obtain a federal or state charter.").

6. See id.; see also 12 U.S.C. § 378(a)(2).

7. Gingras v. Think Finance, Inc., 922 F.3d 112, 117 (2d Cir. 2019); Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229, 238 (3d Cir. 2020); Hayes v. Delbert Services Corp., 811 F.3d 666, 676 (4th Cir. 2016).

8. Press Release No.9 - Catawba Digital Economic Zone Passes Banking Code (April 25, 2023), https://catawbadigital.zone/pr9-catawba-digital-economic-zone-passes-banking-code-press-release-no-9/

9. Hrushka, supra note 2.

10. Catawba Nation Banking and Financial Services Code: Chapters .20.02., .30.

11. Id. Chapter .30.04.

12. Id.

13. Id. Chapter .30.15.

14. Id. Chapter .30.16.

15. Id. Chapter .50.1.

16. Id.

17. Id. Chapter .50.2.

18. Id. Chapter .50.3.

19. Id. Chapter .50.4.

20. Id. Chapter .50.26.

21. Id. Chapter .60.2.

22. Id. Chapter .80.7.

23. Id. Chapters .90.1 - .90.2.

24. Id. Chapter .170.01.

25. Id.

26. Id. Chapter .170.02.

27. Id. Chapter .170.04.

28. Id. Chapter .170.10

29. Id. Chapter .170.18.

30. Id. Chapter .170.20.

31. Id. Chapter .170.24.

32. Id. Chapter .170.27.

33. Id. Chapter .170.28.

34. Id. Chapter .170.13.

35. Id. Chapter .180.1 - .180.3.

36. Id. Chapter .180.4.

37. Id. Chapter .180.5.

38. Id. Chapters .180.4, .180.6.

39. Office of the Comptroller of the Currency, supra note 5.

40. Id. ("Under federal law, deposit insurance is available only to financial institutions that have a federal or state charter."); see also 12 U.S.C. § 378(2).

41. See, e.g., Gingras v. Think Finance, Inc., 922 F.3d 112, 117 (2d Cir. 2019); Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229, 238 (3d Cir. 2020); Hayes v. Delbert Services Corp., 811 F.3d 666, 676 (4th Cir. 2016).

42. See Brice v. Haynes Investments, No. 19-15707 (9th Cir. Sept. 16, 2021), vacated, No. 19-15707 (9th Cir. Jun. 6, 2022), dismissed, No. 19-15707 (9th Cir. Sept. 8, 2022).

43. Mille Lacs Bancorporation, Inc., 82 Fed. Res. Bull. 336, 337 (1996); F.R.R.S. 4-422 (July 10, 1981) ("the tribe is more closely analogous to a state than to any other entities").

44. Hrushka, supra note 2.

Originally published by Fordham Journal of Corporate & Financial Law.

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