Ultimate Resource For Crypto-Friendly Banks (#GotBitcoin)
Silvergate Bank, a crypto-friendly bank, officially began selling shares on the New York Stock Exchange Thursday. Ultimate Resource For Crypto-Friendly Bank (#GotBitcoin)
Roughly a year after it first filed for its initial public offering, Silvergate began its “IPO day” on the NYSE, according to the stock exchange’s Twitter account. The news comes a day after Silvergate received a “notice of effectiveness” from the U.S. Securities and Exchange Commission, indicating its long-running IPO bid had been accepted.
The bank currently serves more than 750 firms in the crypto space, including exchanges, investors and others, according to an updated IPO prospectus filed in September 2019.
This is up significantly from the 542 clients it reported in March 2019. At the time, while the bank saw its client base grow between November 2018 and March 2019, the assets it held shrank marginally, falling from nearly $1.6 billion to $1.5 billion in the last quarter of 2018.
In September’s filing, these numbers grew again, holding $1.55 billion in deposits.
SIlvergate priced its stock pricing at $12 per share on Nov. 6, and is planning to offer 3,333,333 shares of Class A common stock. Just under 1 million of these shares are being offered directly by Silvergate, while shareholders are offering the other 2.5 million, according to a press release.
These numbers are more conservative than an updated S1 filing dated late October 2019, where the company priced each share at a maximum of $15 and sought to raise roughly $65 million overall. If it sells the 3.3 million shares for $12 each, the company will more likely raise approximately $40 million.
The bank is hoping to sell these shares under the “SI” ticker by Nov. 12.
Silvergate could not be immediately reached for comment.
Silvergate Bank Plans To Offer Cryptocurrency-Collateralized Loans
The holding company of cryptocurrency-friendly Silvergate Bank, Silvergate Capital Corporation, announced that the firm plans to offer cryptocurrency-collateralized loans.
In an S1/A form filed with the United States Securities and Exchange Commission on Aug. 15 the bank notes:
“We believe there may be attractive opportunities to provide digital currency borrowing facilities to deepen our high quality customer relationships and further enhance our interest income.”
In the document, the firm states that it found significant demand for cryptocurrency-related borrowing. The service would consist of the client providing crypto assets or U.S. dollars as collateral in exchange for significantly greater credit.
The bank would then “set a conservative aggregate lending amount to refine the product, and will develop a risk framework to minimize risk and further develop lending models over time.”
The company stated that it anticipates to offer the crypto-related credit product to institutional clients later this year. Silvergate also notes that it found significant desire from its clients for the bank “to be involved in the custody and transfer of digital assets between customers.”
Owler estimates Silvergate Bank’s annual revenue to be $30 million.
As Cointelegraph reported in March, Silvergate Bank signed on a slew of new cryptocurrency customers including cryptocurrency exchanges and miners, custodians and global investors, among others in the fourth quarter of 2018.
In 2018, Silvergate’s deposits derived from cryptocurrency customers reportedly increased by $150.4 million, or around 11.4%.
Winklevoss Twins’ Gemini Exchange Joins Silvergate Crypto Lending Network
Gemini, a cryptocurrency exchange co-founded by Tyler and Cameron Winklevoss, announced it will join the crypto-lending Silvergate Exchange Network (SEN).
Through the network, Gemini’s institutional clients are now able to transact in U.S. dollars “24 hours a day, 7 days a week, and 365 days a year,” according to a statement made Aug. 27. This activity was previously prohibited by the traditional hours of operation for banks, which “shackled” fiat withdrawals and deposits.
By integrating with the cloud-based SEN API, the exchange can form counterparty relationships with other members of the network to make instantaneous transfers. Silvergate Bank, an industry financial service provider, supports the network of digital currency exchanges and digital currency investors, to facilitate the movement of U.S. dollars between participants.
According To The Bank’s Form S-1 Filing:
“The SEN has a powerful network effect that makes it more valuable as participants and utilization increase, leading to 374% growth in SEN transaction volumes in the first six months of 2019 compared to the first six months of 2018.”
The SEN launched in early 2018 and has since enrolled approximately 77 percent of Silvergate’s eligible commercial clients.
Silvergate serves some of the cryptocurrency industry’s biggest firms including Coinbase, Bitstamp, Genesis Trading and Blocktower Capital.
Crypto Exchange CEX.io Boosts US Push With Silvergate’s Payment Network
U.K.-based cryptocurrency exchange CEX.io has joined the Silvergate Exchange Network (SEN), the payment rail connecting major customers of Silvergate, the go-to bank of the crypto space.
In an interview with CoinDesk, Steve Gregory, chief compliance officer and corporate counsel of CEX.io Corp, called Silvergate “the gold standard” when it comes to U.S. crypto compliance, and said joining SEN meant being included in a kind of institutional crypto “club”.
By participating in SEN, CEX.io is connected directly to big institutional crypto players like Coinbase Prime, Cumberland, Kraken OTC, BitStamp, Jump and Circle, to name a few.
CEX.io, which began offering services to US customers in 2015, established a headquarters in Jersey City, NJ, and now holds some 17 state licenses to operate its exchange. The company has 250 staff and operates in 180 countries.
Gregory was formerly a compliance officer at Gemini, the New York Department of Financial Services (NYDFS)-regulated exchange founded by Tyler and Cameron Winklevoss, which also recently joined SEN.
He Told CoinDesk:
“We are in the club now. Silvergate is the biggest bank in the space and with the SEN and we can facilitate trades to some of those larger institutions that are members.”
SEN provides Silvergate’s large institutional clients an instant fiat payment rail, 24 hours a day, seven days a week. This means if a proprietary trading house such as Cumberland, for example, wants to move a few million dollars to CEX.io, this can be done without using a wire transfer.
Silvergate’s internal online banking uses an API to transfer the funds instantly on an internal ledger. “Instead of doing a wire and then a wall to wall transaction, we can just have Silvergate move our balance of USD,” Gregory said.
Although there is no hard data on how many firms are in the SEN and regularly using its internal payment rail (Silvergate is currently in an IPO quiet period and unable to comment), users of the service say the number of transactions is significant.
Removing counterparty risk from OTC crypto trades and enabling them to be always on is a good idea, which is also being explored by the likes of BitGo and OTC desk Genesis, as well as Kingdom Trust and trading firm OTCXN.
There’s a short list of banks that will handle crypto companies. CEX.io US also recently became a customer of Nevada-licensed trust company Prime Trust, which now provides the fiat on-ramp and banking relationship for Binance U.S. Signature Bank is another popular crypto bank, which CEX has worked with.
“Signature Bank has been great to us and has been efficient and seamless to work with,” said Gregory. “Signature does have the unfortunate limitation that they cannot process retail wire and ACH transfers under $50,000 without batching the transactions.”
Based on this limitation, he said CEX.io “will use Silvergate for retail, under $50,000, ACH and wire deposits or withdrawals.”
In addition to the 16 or so U.S. states that don’t require a license, CEX.io has acquired licenses to operate in: Alaska, Florida, Georgia, Iowa, Kansas, Maryland, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island, South Dakota, Vermont, and West Virginia.
The firm applied for a BitLicense in the spring and held initial meetings with the NYDFS, said Gregory. A CEX.io spokesman added that the anticipated approval would be “in a few months from the NYDFS which administers the Bitlicense and the New York Money Transmitter License.”
Speaking to the “high barrier to entry” when setting up shop in the U.S, Gregory pointed out that setting up surety bonds in order to operate in each state is expensive, especially while having to wait to get a license application looked at, concluding:
“It makes it tough to disrupt some of the bigger exchanges that are already established.”
Deposits at crypto-friendly Signature Bank grew by $4.11 billion, an 8% increase, in the third quarter of 2020. Over the past year, deposits have grown by $15.28 billion, or nearly a 40% increase, according to the bank’s earnings release. Signature reports $54.34 billion in total deposits. “Crypto firms are often a rich source of low-cost deposits for the few banks that openly serve the sector. As such, analysts have paid close attention to deposit growth at Signature, Silvergate Bank and Metropolitan Commercial Bank,” CoinDesk’s Nathan DiCamillo reports.
Silvergate Bank CEO Bets On Higher Crypto Price Volatility After $40M IPO
Crypto-friendly Silvergate Bank is spending cash from its initial public offering this month to expand its offerings, anticipating higher cryptocurrency price volatility will fuel rising trading volumes and deposits.
In an interview, Silvergate CEO Alan Lane said the IPO is providing fresh capital for new products to meet the rising demand from institutions for full cryptocurrency lending and deposit solutions.
Lane said that greater price volatility could bring more price differentials and profit opportunities to crypto markets. That would lead traders to increase dollar deposits with Silvergate.
“We don’t predict when it will happen but we know that there might be an additional period where the volatility drives up volumes, and want to make sure that we can help our customers when that happens,” he said.
One potential catalyst could be the bitcoin block reward getting cut in half in the next year, Lane said, with the idea that a decrease of new supply could boost the price. Other events might include regulatory approval of exchange-traded funds for crypto, hard forks that create new breakaway currencies such as bitcoin cash, or high-profile hacks of crypto exchanges that affect sentiment.
“In our experience, it’s not so much about the absolute price of the asset, but rather the volatility in the price where we actually see potential changes in the behavior of some of our customers,” Lane said.
Expanding Product Line
The California-based commercial bank plans to launch a cryptocurrency lending product in the fourth quarter and settlement and custody services for fiat currencies and digital assets by June 2020 at the latest.
Two of its biggest profit generators are transaction fees from trading and yields on the investments it makes using client deposits, Lane said, with the fresh capital offsetting its investment in new products for those areas.
The new lending product, set to be launched in fourth quarter 2019, would be part of the Silvergate Exchange Network (SEN) – a payment system designed for crypto exchanges and their big clients to transfer funds in the network.
It would enable clients to borrow fiat currencies from the bank using bitcoin holdings as collateral, according to Lane.
The bank decided to add the settlement and custody services within six months after launching the lending product because of the growing demand from its client base, he said.
“We’ve already been working with the New York DFS, and submitted an application with them to form a New York licensed trust company for our settlement and custody services,” Lane said. Other New York-chartered trust companies in the crypto market include Coinbase, Gemini, Paxos, Bakkt and Fidelity Digital Asset Services.
Overall, Silvergate is among a very short list of U.S. financial institutions that are banking crypto institutions. They include Metropolitan Commercial Bank, Signature Bank, and Cross River Bank.
Silvergate’s clientele is approximately 60 percent U.S. and 40 percent international entities, Lane said.
Silvergate Bank was formed as a traditional commercial bank in Southern California in 1988, but started pivoting in 2013 to serve crypto exchanges, startups and institutional investors.
Lane said that the decision to enter the crypto market was simple: “Our loans were growing faster than our deposits, we were just looking for other sources of deposits.”
He said that today its balance sheet is still deep enough to support much more loan volume from crypto customers.
The bank doubled deposits in 2017 and more than tripled the client base since it started banking crypto-related businesses, according to its IPO filing.
Prior to the IPO, Silvergate had raised $114 million through a private placement in February 2018. Nine months later, Silvergate agreed to sell its San Marcos, CA, retail branch and its business lending team to Seattle-based commercial bank HomeStreet.
That sale, completed in March 2019, included the reduction of $115.4 million in loans and $74.5 million in deposits, but resulted in a pre-tax gain of $5.5 million, according to the IPO filing.
Lane said the deal was part of the bank’s effort to shift more toward its crypto businesses, as well as pay for investments to bolster that side.
“We’re essentially bringing the legacy banking system that only operates 40 hours a week during business hours into the 24/7 crypto markets that never sleep,” he said.
Silvergate Bank listed its shares on the New York Stock Exchange under the trading symbol SI, via a $40 million initial public offering on Nov. 7.
The bank completed its IPO on Nov. 12, raising approximately $10 million from issuing 824,605 common shares, while existing shareholders reaped $30 million from selling 2.5 million of their shares.
The shareholders, which include Bankcap Partners, a Dallas, TX,-based private equity firm and Park West Asset Management, may exercise a greenshoe option to sell up to 499,999 additional shares in November, according to the IPO filing.
Silvergate Bank’s shares debuted at $12 on the NYSE and were trading at $16.35 on Wednesday, valuing the company at $319 million.
“We know that the last time there was a big bull market in crypto, our deposits surged and that’s part of the reason to go public, in case we have another big growth spurt and we need capital,” Lane said. “Now that we’re public, we have more efficient access to capital to support our growth.”
Kraken, One of Oldest Bitcoin Exchanges, Joins Silvergate Exchange Network
Kraken, one of the largest and oldest Bitcoin (BTC) exchanges in the world, has joined the Silvergate Exchange Network (SEN). By joining SEN, the United States-based cryptocurrency exchange enables its clients to deposit and withdraw U.S. dollars from Silvergate accounts with no fees, the firm announced Nov. 27.
According to the announcement, the depositing process will be different based on whether Kraken users have a Silvergate account. If they have an account at Silvergate, Kraken users will simply have to enable SEN funding on their Kraken account before using the option.
Those who do not have a Silvergate account will have to apply separately at bank.
Silvergate’s Crypto Client Base Continues To Grow
Silvergate Capital is a California-based commercial bank focused on digital currency businesses. The Silvergate’s SEN is a network of crypto exchanges and investors that enables transactions of U.S. dollars between SEN members.
As reported, Silvergate’s customers include crypto exchanges, miners and custodians, among others. The crypto-friendly bank saw its number of digital currency customers grow from 655 as of June 30, 2019 to 756 as of Sept. 30, 2019, as Silvergate stated in a filing with the U.S. Securities and Exchange Commission.
In August 2019, the SEN added another important crypto partner, the Winklevoss brothers-founded exchange Gemini, enabling faster transfers in U.S. dollars.
Earlier this month, Silvergate Bank launched its shares for trading on the New York Stock Exchange under the ticker NYSE:SI.
Elliptic Launches Tool To Connect Banks With Cryptocurrency Exchanges
London-based cryptocurrency compliance firm Elliptic has launched a new tool that allows banks to work more closely with crypto exchanges.
Dubbed Elliptic Discovery, the product collects detailed profiles of more than 200 global crypto exchanges to enable banks to manage risks associated with crypto transactions, Business Insider reports Dec. 11.
Elliptic Discovery includes data collected since 2013
Designed specifically for banks, Elliptic Discovery reportedly provides compliance teams with necessary insights to identify flows of funds on crypto assets and assess risks including money laundering. The tool is reportedly based on Elliptic’s data that was collected since 2013 and offers a wide range of identifiers and risk indicators in terms of exposure to crypto-assets through exchanges, the report notes.
James Smith, CEO and co-founder at Elliptic, noted that the new tool is created to address the existing lack of visibility into the crypto-asset ecosystem by banking institutions.
Banks’ lack of visibility to crypto ecosystem has caused “zero-tolerance”
According to Smith, this lack of access to the crypto industry has resulted in “zero-tolerance” to the new asset class and frustrated customers, while banks “have remained blind to the actual risks posed by their exposure to crypto-assets.”
Smith pointed out that there are different types of crypto currency exchanges, which would be taken into account by the banks while assessing the risks. He said:
“Elliptic Discovery changes that by enabling banks to shine a light on their customers’ crypto-asset activity and take a risk-based approach […] Not all crypto-asset exchanges are alike and Elliptic Discovery will allow banks to make this distinction and seize the opportunity to work more closely with these businesses, based on an evidence-based assessment of the risk.”
As the company has not specified what banks have already signed up for Discovery or expressed interest in doing so in the report, Cointelegraph has contacted Elliptic team for comment. This article will be updated pending any new information.
Elliptic Is A Partner Of Major Crypto Exchanges Such As Coinbase And Binance
Backed by Japanese banking giant SBI Group and Santander’s venture capital arm Santander InnoVentures, Elliptic is a major global crypto forensics and analysis firm. The company is known for providing its services to American crypto exchange Coinbase and has been a partner of Binance, one of the world’s biggest crypto exchanges, since May 2019. In November 2019, Elliptic issued a report tying about $400 million worth XRP tokens to illegal transactions.
Earlier this year, Elliptic refuted allegations that it was collecting and selling clients’ user data to third parties for financial gain.
Rivals Signature Bank and Prime Trust Team To Offer Instant Payments for Institutions
Crypto banking competitors Prime Trust and Signature Bank have partnered in a bid to appeal to institutional clients.
Signature announced Monday it would be linking its Signet payments platform to Prime Trust’s multi-asset settlement platform, creating a new service offering “real-time” settlements for digital asset trades.
“Any Signature Bank commercial client participating on the Signet platform has the ability to make instantaneous payments in U.S. dollars, any time without transaction fees,” said Joseph DePaolo, Signature Bank president and CEO in a press release. “The relationship we have forged with Prime Trust will allow their clients to immediately settle their transactions through the revolutionary Signet platform.”
The service will allow institutional clients from both companies to make payments directly to one another at any time, without third parties or transaction fees.
The Signet system launched in December 2018 after winning approval from the New York State Department of Financial Services (NYDFS). It opened to Signature’s commercial clients, who need a minimum account balance of $250,000, on Jan. 1, 2019. By February, the bank already claimed to have on-boarded more than 100 clients who were sending each other millions of dollars in crypto transactions daily.
State-licensed trust company Prime Trust launched its settlement network back in July as an alternative to Signature. Having generally attracted an exchange clientele, including Bittrex and Huobi, it is the only publicly known financial services provider for Binance.US, Binance’s American partner company.
The list of banks willing to work with cryptocurrency companies remains short over compliance and risk concerns. Hence, market share is mostly concentrated in a handful of specialized providers at which competition is heating up.
The cryptocurrency exchange CEX.io, which uses Signature Bank, moved some of its retail and smaller payment operations to rival banking provider Silvergate back in November. Prime Trust dropped custodial fees to zero last January, undercutting most of its rivals that charge between four and 10 basis points per month.
Crypto-Related Deposits Drop by Half At Metropolitan Commercial Bank
Metropolitan Commercial Bank’s deposits from digital currency businesses have steadily declined for more than a year, a sign competition is heating up in a field where the bank was once one of the only games in town.
Over the course of 2018, the New York-based lender’s deposits from the industry shrank by 52 percent, to $104 million on Dec. 31, according to an investor presentation the bank put out last week. Digital currency clients accounted for 4 percent of the bank’s total deposits at year’s end, down from 13 percent a year earlier.
Metropolitan is one of a handful of banks that openly services the sector. In the presentation, the bank still advertises a diverse set of global payment clients including crypto payments processor Bitpay, crypto-asset platform Crypto.com, crypto exchange Coinbase and crypto brokerage Voyager. But the business is well off from its peak in the second quarter of 2018 when Metropolitan’s deposits from digital currency firms averaged $369 million.
While that decline may partly reflect the 2018-2019 crypto bear market, it also suggests the bank faces stiffer competition in a field where most financial institutions have historically feared to tread.
At Metropolitan’s rival Silvergate Bank, for example, crypto deposits declined at a slower rate, just 22 percent on a year-over-year basis, to $1.29 billion on Sept. 30, the most recent date for which figures are available. Over the same 12-month period, the La Jolla, Calif.-based bank’s crypto clientele increased by 273 firms to 756 in total, and they account for 70 percent of its $1.8 billion of deposits.
Silvergate, which went public last year, is set to report fourth-quarter results Wednesday.
A few players have entered the market for banking crypto businesses in the last year, such as Massachusetts-based Provident Bank and Quontic in New York.
Rather than fight to retain deposits, Metropolitan was likely content to let some of this business go, said Christopher O’Connell, a bank stock analyst at investment firm Keefe, Bruyette & Woods.
“As more [bank] competitors get into the space, some of the overall fee rates that they can charge have changed,” O’Connell said. “Since they have a solid [deposit] pipeline … the bank may not want to pay for a larger portion of this business.”
Revenue from digital currency customers has steadily hovered around 1 percent of Metropolitan’s total ever since foreign exchange conversion and cash management fees from the sector spiked in Q4 2017 and Q1 2018, said O’Connell. That period coincided with the peak of the last crypto bull market.
Metropolitan declined to comment. In its fourth-quarter earnings release, the bank pointed to a decrease in fees from digital currency customers when explaining why non-interest income had decreased by $1.5 million for the full year compared to 2018.
Silvergate Bank Adds 48 Crypto Clients In Q4 Even As Deposits Slip 4%
Silvergate Bank, one of the few U.S. banks openly serving crypto-related businesses, added more crypto clients in the fourth quarter of 2019 but saw deposits and fee income from those clients drop.
The La Jolla, Calif.-based bank, which went public on the New York Stock Exchange under the trading symbol SI in November, released its earnings report before the market open on Wednesday.
The report lists a 4 percent decrease in deposits from the crypto industry despite the addition of 48 crypto clients. The commercial bank’s overall deposits decreased by 1.8 percent in the same quarter (Silvergate also serves non-crypto businesses).
In a press release, CEO Alan Lane attributed these new clients to the growth of the Silvergate Exchange Network (SEN), which allows commercial customers to instantly move U.S. dollars between different crypto exchanges. SEN transactions topped 14,400 in the fourth quarter, a 17 percent increase from Q3 2019.
The cost of deposits for the bank, which holds $2.1 billion in assets, increased from 0.5 percent to 0.84 percent. The bank earned $1.4 million in fee income from its crypto customers, down 12.5 percent from $1.6 million last quarter.
The bank added 11 digital currency exchanges (including over-the-counter trading desks), 21 institutional investors and 16 crypto businesses (i.e. mining operations or crypto application companies).
Silvergate’s net income decreased by around 45 percent, from $6.6 million in the third quarter to $3.6 million.
In 2013, Silvergate pivoted from traditional commercial banking to serving the cryptocurrency community as a rich resource of non-interest bearing deposits. The bank then converts these deposits into interest-bearing deposits at other banks, investment securities and loans.
Earlier this month, Silvergate launched the SEN Leverage product, which allows proprietary traders to put up bitcoin as collateral for fiat loans that they can then use to buy more bitcoin, similar to margin lending in the traditional markets.
Silvergate also made its first hire directly from the crypto industry, bringing on former Blockstream exec Benjamin Richman as director of digital currency.
Few Banks Will Touch Crypto Firms, But Silvergate Wants To Touch Bitcoin Itself
Silvergate Bank is venturing even further into a field where few financial institutions dare to tiptoe.
The La Jolla, Calif., lender made a name for itself providing hard-to-come-by U.S.-dollar banking services for businesses that deal in cryptocurrency. But now Silvergate wants to handle digital assets themselves.
While the bank has no such services on its roadmap yet, it has applied for the New York trust license with the aim of providing custody and settlement for crypto. One example of this might look like “providing settlement services for their bitcoin trades,” Silvergate CEO Alan J. Lane said.
In this scenario, Silvergate would be the intermediary ensuring settlement of a fiat-for-bitcoin exchange between two participants on its Silvergate Exchange Network (SEN), a payments platform that allows commercial customers to instantly move U.S. dollars between crypto exchanges.
“In order for us to be able to be that trusted intermediary, we have to be able to touch the digital assets ourselves,” Lane said. “Think about it as if Silvergate also had the ability to be the SEN for bitcoin.”
The service, almost certainly the first of its kind offered by a U.S. commercial bank, wouldn’t apply to retail investors or institutional investors that are already comfortable with bitcoin as an asset class.
“It’s folks that aren’t quite ready to be in the business, and part of the reason is because this doesn’t exist,” Lane said, emphasizing the bank doesn’t yet have a product in mind to solve the problem. “Our current customers, they’ve already figured out a way to get comfortable with this, but they tell us there are other counterparties out there that they’re not yet doing business with because they don’t have a trusted way to settle.”
Lane spoke to CoinDesk Thursday after Silvergate’s first conference call as a publicly traded company. Earlier in the day it had reported fourth-quarter results, including a 6 percent increase in crypto clients and a 4 percent decrease in deposits from those clients.
Silvergate Bank’s 2020 will be characterized by staff getting the bank’s bitcoin-collateralized margin lending running well and solving other pain points in the digital asset industry, Lane said.
Salary expenses climbed nearly 6 percent from a year earlier to $8.7 million in the fourth quarter. The majority of this went toward customer service and software engineers, Lane said when asked what share of the expenses was from compliance costs.
The bank does spend money on compliance, of course: Silvergate uses both Chainalysis and Elliptic, Lane said. These vendors analyze the public blockchains to flag suspicious activity, which banks are required under Federal Reserve regulations to report.
With $2.1 billion in assets, Silvergate is a relatively small institution, 0.07 percent the size of JPMorgan. The asset side of its balance sheet looks like a traditional community lender, composed mainly of real estate loans. But that may start to evolve soon.
In the immediate future, Silvergate’s biggest focus is its pilot of the SEN Leverage product, which allows proprietary traders to put up bitcoin as collateral for fiat loans they can then use to buy more bitcoin.
Since the 90-to-180-day pilot will include only SEN participants, the bank will be able to monitor SEN Leverage loans more closely than it could other types of loans.
“We will be able to monitor the loan, the collateral underlying the loan and the balance of the loan, 24 hours a day, seven days a week,” Lane said. “We’ll be able to monitor this much more closely than we can monitor just about any other loan we make.”
In response to questions from analysts in the company’s earnings call about yield on SEN loans, Lane said, “The way we’ve thought about this initially is this would likely be a high single-digit type of cost to the borrower.”
In the interview, Lane emphasized the bank wouldn’t take advantage of crypto customers on SEN loans just because other banks aren’t offering the same product. “We’re certainly not going to poke their eyes out on what we’re charging them,” Lane said.
Silvergate is also working to increase the number of fiat currencies it supports for foreign exchange transactions on the SEN to include at least the top five to 10 major global currencies. From fourth-quarter 2018 to fourth-quarter 2019, volume on the SEN increased by 150 percent to an all-time high of 14,400 transactions handling $9.6 billion.
“Our customers are saying, ‘We’d love to have the SEN for the euro and the SEN for the yen,’” Lane said. “That involves having correspondent banking relationships with banks in those areas where those currencies are predominant and then being able to create a similar type of network as to what we’ve created with the SEN.”
Taking Silvergate public has given the crypto industry a clearer window into the bank’s business. It also positions Silvergate to more easily raise capital should the need arise.
Currently, Silvergate has a 10.5 percent leverage ratio, meaning the bank has more than twice the amount of capital required by banking regulators (5 percent).
“On that metric alone, we could double the size of the bank and not run out of capital,” Lane said. “That’s just one metric, and I’m not suggesting we would do that … but if we saw that leverage ratio going down to 8 percent, we would look to raise additional capital.”
Crypto Banks Answer the Call Amid Coronavirus-Fueled Economic Decline
The coronavirus pandemic is a make-or-break situation for crypto banks as many see opportunities despite the obvious setbacks.
As 2020 staggers on, the scourge of the coronavirus is showing no sign of relenting any time soon. Since the reality of the pandemic took hold, it has revealed itself to be a black swan the likes of which have never before been seen.
Cryptocurrencies suffer from volatility in the best of times, and markets have spent most of the last two years in the red. But companies, markets and entire economies all over the world are tanking. So, is cryptocurrency’s notorious Achilles’ heel affecting its banking and payments sector?
SoftBank Posts Hard Landing
There’s not a business in the entire world unaffected by the coronavirus. Never have companies been faced with such a sudden onslaught of unforeseen pressures, with supply chains interrupted and customers and employees alike locked down worldwide.
Crucially, many crypto firms are committed to decentralization, meaning that working from home has been a relatively easy shift. But some of the industry’s biggest names have been snarled up in the fallout from the coronavirus. SoftBank Group Corp., the parent company of Fortress Investment Group, is expected to rack up a $12.5 billion loss for the financial year that ended in March.
Founded by Masayoshi Son, a Korean-Japanese billionaire tech entrepreneur, investor and philanthropist, SoftBank Group Corp. is one of the most prominent crypto holding companies operating in Asia. But it appears that the Vision Fund, an investment fund in which SoftBank has a $33 billion stake, is proving to be a major drain on the company’s profits. The group announced that it was set to lose $17 billion after its fateful investment.
But this isn’t the first time that the bank’s CEO has been burned by crypto. Son allegedly lost $130 million after a poorly judged Bitcoin (BTC) investment. He reportedly bought in when crypto’s most famous token was soaring high back in 2017.
Galaxy Digital Fails To Shine
But SoftBank isn’t alone in struggling with its crypto-related business. With yet another net loss in the fourth quarter of 2019, it seems that Galaxy Digital’s stars are far from aligned. Galaxy Digital is a major cryptocurrency investment bank founded by ex-Goldman Sachs partner Mike Novogratz with the ambitious vision of institutionalizing the crypto industry.
The industry has seen a huge influx of institutional interest, varying from utility, to coins, to central bank digital currencies, but Galaxy Digital has struggled to balance its books, with nearly constant quarter-on-quarter losses.
As per an April 8 announcement, the company reported a net loss of $32.9 million in the fourth quarter of 2019, citing “realized loss on digital assets” and operating expenses as the reason for the loss. The disappointing financial results are the latest in a string of poor performances, with losses of $134 million and $68.2 million in the first quarter of 2018 and the third quarter of 2019, respectively. Despite the quarterly loss, Galaxy Digital reported that it had not been that badly affected by the coronavirus crash and has asked all employees to work remotely:
“Nonetheless, the Covid-19 pandemic has caused global economic uncertainty and is likely to impact the Company’s investments and business activities in the coming months, with offsetting potential benefits to the Company from increased volatility and expansive global monetary and fiscal policy.”
Despite the company’s claims of weathering the COVID-19 storm with relatively little turbulence, some reports have suggested that Galaxy Digital has cut its workforce by no less than 15% this year.
Is Crypto Banking Worse Off Than Traditional Banking?
Crypto markets are buffeted about by myriad factors, as well as deep philosophical divides. Regardless of whether or not the philosophical diversity of investors is a good thing, those who had hoped prices would skyrocket when traditional markets were in dire straits were left disappointed. So too were those who maintain crypto, notably Bitcoin, as a store of value above anything else.
Prices have crept up again, but they took a battering along with traditional markets in the initial stages of the pandemic’s unstoppable spread, leading some to argue that cryptocurrencies are now largely correlated assets. But the question of whether crypto banks are better or worse off in times of crisis has sparked debate among investors and observers alike.
Mathias Imbach, the co-founder of Sygnum — a major institutional crypto bank — and CEO of its Singapore branch, told Cointelegraph that instability equally affects both traditional financial markets and digital asset markets, but this does not necessarily have a uniquely negative effect:
“The fragility of the current system could also drive further interest in digital assets, which has historically demonstrated a low correlation to traditional asset classes (with the exclusion of immediate sell-offs during market shocks), and offers a potential hedge to financial markets. Empirical data from last month on our platform sustains this argument.”
Bill Zielke, the chief marketing officer of BitPay, a United States-based Bitcoin payment service provider, said that neither the nature of cryptocurrencies themselves nor the coronavirus were notably risky for the firm:
“We do understand that that crypto has a risk with price fluctuations, but BitPay’s business model is to remove that risk for merchants along with fraud and identity theft found with traditional credit cards. Merchants receive the full value of the purchase minus BitPay’s 1% fee.”
Crypto Banking: What’s The Impact?
Due to the uneven and rapid spread of the coronavirus around the world, businesses and governments alike have responded in different ways. One thing interesting to note is that crypto and blockchain businesses were often quick to implement protective measures. Many of the crypto conferences that took place around the world prior to the current state of the nearly global shutdown were marked by absences and low attendance, with travel bans being put in place and companies jumping to battle stations preemptively.
The digital asset bank Sygnum was one such company, telling Cointelegraph that management has put in place an action plan to protect employees and customers, stabilize operations, plan profit and loss scenarios, defend revenue loss driven by the macroenvironment, and plan potential cost takeouts to conserve cash.
Sygnum’s Imbach explained to Cointelegraph that, as the company operates in fully decentralized mode, it has been able to continue operations under lockdown conditions. Imbach said that since the crisis began, it has actually witnessed increased customer demand and has continued to launch new products:
“As a natively digital business we have been able to continue normal operations in decentralised mode, with our team across Switzerland and Singapore working remotely. We are still launching new products, and clients can onboard digitally or access our services through an e-banking portal.”
Monolith, a decentralized banking company based in the United Kingdom, is another company that is seeing the bright side of the rapidly developing financial crisis. A spokesperson for the company said that because this is not a traditional bear market, it is not witnessing the usual behavior. By offering a variety of digital assets, the spokesperson told Cointelegraph that crypto banks can keep investor capital flowing:
“Those who would typically hold, are now seeking more liquidity in their assets as a response to the unpredictable nature of a global systemic problem.
Where previously people would look to offset market collapse by committing to mainstream assets, the advent of more current solutions such as stable currencies offer them the hedge they want today using a reliable transacting finance facility.”
Like all unexpected, high-impact events, the coronavirus pandemic has left many businesses facing tough decisions. For some, this may mean closure, but Imbach says this difficult climate could serve as a catalyst for positive development in crypto finance:
“We believe COVID-19 brings challenges also for us, at the same time it also feels we’re witnessing a ‘fast forward’ mentality, more people thinking about the viability of today’s traditional financial system, many people reviewing their portfolio allocations etc.”
How Are Crypto Bank Customers Behaving?
Few investors are likely to have forgotten the chaos wrought across global stock exchanges only a few weeks ago. Headlines share the doomsaying prophecies of statisticians and economists about the prospects of many of the world’s most vital economies. But it seems that while many of the key token prices have taken a hammering, it’s not all doom and gloom as far as crypto banking is concerned.
Imbach told Cointelegraph that the nearly global work-from-home restrictions have actually led to an increase in customer onboarding and transaction activity. Imbach added that customers have been increasingly concerned about counterparty risk and the degree to which their assets are segregated, along with having questions about Bitcoin as digital gold and requests for information about asset reallocation.
Imbach also mentioned that geographic sensitivity has increased, taking into account the regulatory status of counterparties, adding that this has come to be a major differentiating factor for Sygnum as both a regulated Swiss bank and a capital markets services licensed entity in Singapore. Imbach said that he has witnessed a change in managerial behavior among clients, which is perhaps not unusual given the unique stresses faced by many companies, adding that: “We do not believe that current events will reduce institutional investors’ interest in digital assets mid-term, on the contrary.”
A spokesperson for Monolith told Cointelegraph that the firm views the current climate as an opportunity for crypto banks to offer decentralized solutions to clients in order to help them manage their funds more effectively. The firm also added that while it is witnessing an increase in stablecoins flowing into the platform, customers are not spending them at the rate they used to:
“This crisis has created an alignment between users searching for better options to save and DeFi offering them a more sustainable way to do so. Behavior on our platform has reflected this movement in a few unique ways. […] Where previously people would use our platform to load their Monolith VISA card to spend, they are now using it to hedge. This behavior of converting into fiat and holding is not something we’ve witnessed in the past, and though a byproduct of circumstance, also shows faith in our feasibility as a genuine alternative to traditional banks.”
Conversely, Bitpay’s Zielke said its customers are still spending, albeit in an online capacity. Video games, delivery services and domain hosting are the prime areas, which is not entirely surprising given the state of lockdown for most customers: “Additionally, people have been buying more gift cards from the BitPay app or gift card sites like eGifter.com for purchases at Amazon, Whole Foods, Uber and Home Depot.” Despite the coronavirus, Zielke said that the first quarter of 2020 has been an improvement of over nearly 10% in terms of dollar volume as more people stay at home:
“Comparing Q4 last year to Q1, 2020, BitPay processed almost 10% more volume ($). Key verticals driving this increase were financial services, currency exchange, computer software & engineering and IT services which saw increases ranging from 11-40%. And crypto is crucial to people who do not have access to credit cards or a bank account.”
While many businesses are forced into taking a conservative outlook for future prospects, it seems that at Monolith is confident that the COVID-19 climate is a fertile environment for crypto banking and financial technology innovation:
“We currently have the largest holding of crypto that we’ve ever had and are in a strong position to continue innovating for another year and a half, as the dust settles, with no need to touch our crypto reserves.”
Silvergate Adds 46 More Crypto Clients In Q1 While Existing Customers Increase Deposit Levels
Silvergate Bank added 46 crypto customers in the first quarter and saw fee income and deposits increase from those customers because of “Black Thursday,” according to its earnings report released before market open on Wednesday.
“The increase in total deposits from the prior quarter was driven by an increase in deposit levels from our digital currency customers who maintained excess capital with Silvergate as a result of the dislocation taking place in the digital currency markets during March,” the bank wrote in its earnings release.
The publicly traded La Jolla, Calif.-based bank is one of the few U.S. banks willing to serve crypto-related businesses and has most of its deposits from the crypto sector.
The bank went public on the New York Stock Exchange under the trading symbol SI in November. With $2.3 billion in total assets, it’s less than 1% the size of JPMorgan Chase’s $3.1 trillion in assets.
The bank now has 850 digital currency customers, including 61 exchanges, 541 institutional investors and 248 other customers.
The largest customer segment increase was in institutional investors, which increased by 32. The bank also claims to have more than 200 prospective clients in its pipeline.
Deposits from digital currency customers increased by 35% to around $1.7 billion, making up the majority of the bank’s total $2 billion deposits. Other deposits at the bank decreased by around 45%.
Average balance of deposits was up by only $100 million while deposits for period end were up $400 million, because of institutional investors putting more cash back into their accounts, CEO Alan Lane said on an earnings call Wednesday.
The bank’s cost of deposits continued to rise from .84% in the fourth quarter of 2019 to .87% in the first quarter of 2020. This is around the average for mid-cap commercial banks and is up from the first quarter of 2019 when the cost of deposits was .08%.
Fee income from digital currency customers increased by more than $300,000. In an earnings call, Lane said that each of the fees for the bank remained flat or increased this past quarter. Last quarter fee income and deposits dropped, even while the bank was adding more customers.
The bank’s net income was $4.4 million, up by 22% from last quarter but down 53% from the same time last year.
The bank’s Silvergate Exchange Network (SEN) handled 31,405 transactions in the first quarter compared to 14,400 transactions in fourth quarter of 2019. This was more than triple what the number of transactions were on the SEN a year ago. SEN’s volume increased by $7.8 billion to $17.4 billion total in the first quarter.
The network allows commercial customers to instantly move U.S. dollars between different crypto exchanges and remains open on nights and weekends, unlike traditional markets.
The bank plans to add more products to the SEN in the future, including a bitcoin-on-margin lending feature called SEN Leverage which is currently in pilot mode. The bank has approved $12.5 million in bitcoin collateralized loans so far and plans to roll out the product in 2020.
In the earnings call, Lane said the bank continues to explore product options around crypto custody and settlement. In response to analyst questions, Lane also said the bank is exploring whether or not it should play a “more active role” in the stablecoin space, beyond just offering basic banking services to stablecoin issuers.
In answer to a question about how Silvergate might benefit from the launch of Libra, Silvergate executive vice president of corporate development Ben Reynolds said that the bank offers cash management products for quickly transferring fiat to stablecoin.
“I think it’s fair to characterize this as we’re investigating it and keeping our options open in working with all stablecoin participants,” he added.
The bank also kept a high risk-based capital ratio – total capital to risk-based assets – in the first quarter, staying around 26% where other banks are normally around 12% to 14%, said Mike Perito, a bank stock analyst at investment firm Keefe, Bruyette & Woods.
The bank also established a referral partnership with Seacoast Commerce Bank in National City, Calif., for customers seeking assistance under the U.S. government’s Paycheck Protection Program. Neither Silvergate nor Seacoast broke out how many, if any, of Silvergate’s crypto clients applied for PPP loans.
Silvergate also increased its provision for loan losses to $400,000, compared to no provision for the fourth quarter of 2019. While the bank serves the crypto industry on the deposit side, it turns those deposits into interest-bearing deposits at other banks, investment securities and loans.
Like many traditional banks, Silvergate’s largest segment of loans are made up of commercial real estate and one- to four-family real estate loans. Because of the bank’s low loan-to-value margins and its low exposure to the hospitality and retail space, none of its modified loans have been considered troubled debt under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Lane said.
Silvergate holds a fiscally conservative position so it can focus on building out products for the crypto sector, he added.
“While the outlook of the economy remains uncertain, our first-quarter results clearly demonstrate the steps we have taken to prepare for a digital world,” Lane said.
World’s First Crypto Bank Adds Support For Ripple’s XRP
Sygnum Bank will allow its users to invest in Ripple’s XRP token via their e-banking portal.
Sygnum Bank, the first crypto bank licensed by FINMA, announced on April 30 that Ripple’s XRP tokens are now available through its banking services platform. Users can access deposit, exchange, and credit services using the popular digital currency.
Based in Switzerland, the bank will now allow the third most capitalized digital token behind Bitcoin (BTC) and Ethereum (ETH) to be used by clients seeking to diversify their direct investments in digital tokens, in conjunction with other asset management products offered.
Sygnum customers can use deposits in traditional currencies, such as the Swiss franc, the Euro, the Singapore dollar, and the US Dollar, to buy, hold and trade XRP tokens backed by the Ripple protocol.
Increasing Liquidity In The Banking Portfolio
Additionally, customers can transfer XRP tokens to their Sygnum deposit account or increase their liquidity in traditional fiat currencies with a Lombard loan granted against XRP.
Mathias Imbach, Co-Founder Of Sygnum, Praised The Announcement And Commented As Follows:
“We were impressed with Ripple’s excellent performance globally – they now have more than 300 financial institutions in their global payments network, RippleNet. The XRP-based solutions developed by the company resolve weak spots in the growing global remittance market of $ 700 billion. The low cost of transfers makes it an ideal tool to facilitate payments in emerging economies.”
The bank also highlighted that the Ripple protocol provides instant cross-border transfers at a low cost, rather than the traditional way of sending money abroad.
Sygnum’s customer assets are held in separate, highly secure individual portfolios. They are available in one click from each customer’s e-banking platform, and accessible anywhere in the world.
Interest In Banks Towards Ripple’s Protocol
It is not the first time that a bank incorporates Ripple’s protocol in its operations. Cointelegraph reported on April 10 that Azimo, a digital money service, partnered with Siam Commercial Bank in Thailand to launch an instant cross-border payment service through RippleNet.
MoneyGram said in February that it received funds from the blockchain-based payments firm, Ripple Labs, to continue scaling the use of blockchain capabilities in its services.
Bitcoin Suisse Seeks $50M To Become A Crypto Bank Unicorn
Bitcoin Suisse is looking for almost $50 million of funding from investors to pursue expansion plans, which include moving into the banking sector.
Swiss crypto broker Bitcoin Suisse is seeking almost 50 million Swiss francs ($51.5 million) in funding to support its plans for expansion into the banking sector.
According to a new report published on May 8, the company is telling investors that it could reach unicorn status, i.e. have a valuation of 1 billion francs ($1.03 billion) by 2025.
Ambitions To Bank Switzerland And The EU
The company has already raised 20 million francs ($20.5 million) in an initial funding round, and has now opened funding up to other investors until mid-June. It hopes to secure at least 46 million francs ($47.4 million), boosting its capital base to 100 million francs ($103 million).
The additional capital is earmarked for the company’s expansion plans, which include a move into the banking sector.
As Cointelegraph reported, Bitcoin Suisse applied for banking and securities dealing licenses from the Swiss regulators in July last year. It also wishes to convert its operations in Lichtenstein into a bank in order to access clients in the European Union.
Other Future Plans
Bitcoin Suisse also intends to improve its proprietary trading and credit business, and hold some funds for further acquisitions.
Last October the firm purchased a minority stake in CoinRoutes, a provider of pan-exchange smart order routing and algorithmic trading software.
It also has plans to hold a security token offering, or STO, in 2021 and get listed on a stock exchange the following year.
Silvergate – The Bank That Wasn’t Scared
Crypto’s first IPO was a 30-year-old bank.
Southern California’s Silvergate Bank, which went public in November 2019, is one of just a handful in the U.S. willing to bank cryptocurrency firms. Since November, it’s spent part of the $40 million from its initial public offering to create products to serve the industry as price volatility drives trading volumes and deposits.
Silvergate wants to be the premier bank for crypto, and until Wyoming’s special depository institutions are chartered Silvergate is the only one that has most of its deposit business devoted to the industry.
This post is part of the CoinDesk 50, an annual selection of the most innovative and consequential projects in the blockchain industry. See the full list here.
Founded in La Jolla, in 1988, the bank pivoted to crypto in 2013. At that time, the bank’s loans were growing faster than its deposits and it transitioned to accepting the crypto community’s excess fiat capital, which brings in a stream of non-interest bearing deposits. It then converts these deposits into interest-bearing deposits at other banks, investment securities and loans.
The backstory gives Silvergate social capital among crypto companies.
“The bank was among the first U.S. financial institutions to fully embrace the industry,” said Dave Ripley, COO of the Kraken cryptocurrency exchange. “Many U.S.-based crypto companies would have had significantly more difficulty operating without Silvergate’s services.”
Silvergate’s focus on becoming the premier bank for crypto exchanges and institutional investors is reflected in its balance sheet, said KBW analyst Mike Perito. Its risk-based asset ratio – total capital to risk-based assets – is around 26%, compared to 12% to 14% at other banks. Its leverage ratio – or the measure of a bank’s core capital to its total assets – is around 11%, against a more typical (and more risky) 9% or 9.5% at its peers, he said.
This conservatism gave the bank stability during the market crash in March, while it saw deposits and fee income rise after institutional investors dropped more excess cash into their accounts in the first quarter of 2020.
The Future Of Banking Crypto
Having moved faster than any other U.S. bank in the space, Silvergate aims to stay ahead by creating products and services clients request.
Through the Silvergate Exchange Network (SEN), which allows customers to instantly move dollars between different crypto exchanges and is open even on weekends, the bank is piloting new features such as bitcoin margin lending. The product is called SEN Leverage.
“Their SEN is probably the most useful service that they offer and what sets them apart from every other bank,” said Michael Gilman, manager of treasury at MG Stover, a fund administration firm. “So giving their clients the ability to transact with other blockchain counterparties 24/7 is what separates from the pack.”
Without the SEN, crypto companies would be bound to the Fedwire system on which banks settle transactions.
Silvergate’s clients have also expressed interest in custody and settlement services for bitcoin trades, CEO Alan Lane told CoinDesk after reporting earnings for the fourth quarter of 2019.
Lane said the bank is exploring whether or not it should play a “more active role” in the stablecoin space, beyond just offering basic banking services to stablecoin issuers. When asked about how the Facebook-backed libra might benefit the bank, Ben Reynolds, executive vice president of corporate development, touted Silvergate cash management products that allow for the quick transfer of fiat to stablecoins.
That could mean stablecoin products for larger customers. “If the history of banking tells you anything, people are willing to pay for a higher level of service, especially in the institutional segment,” Perito said.
Wyoming To Host World’s First Cryptocurrency Bank
In just a few months, what will likely be the first cryptocurrency “bank” will be operating in Wyoming.
I’m sure you are used to the idea of a bank having a vault with actual cash and other valuable things on hand. Now, welcome to the digital age, where the score keeping for money is all in a computer. The vault will be a virtual one to keep hackers out.
According to Wyoming Business Report this potential bank will manage what is known as “blockchain technology”. “Blockchain is a ledger platform to administer cryptocurrency transactions. These records consist of pieces, or “blocks,” of information like date, time, dollar amount and participants in a transaction.”
As with any form of currency there are advantages to bitcoin and disadvantages. Those in the business industry acknowledge the downsides and are looking for ways to solve those problems.
Wyoming was the first to build a legal framework for cryptocurrency and is now the first to create legal framework for a new banking cryptocurrency.
It was in 2019 when the state legislature passed a bill establishing “Special Purpose Depository Institutions (SPDIs).”
If you think about it, most transactions today are digital. Credit and debit cards and online baking have made it so. Most financial exchanges worldwide are just numbers passing through the internet. Cryptocurrency, therefore, is just the natural result of what is already happening.
Applications for banks are now being accepted. So where will the first bank be? Or does that matter? It’s all online. The answer is that a few companies, such as Avanti Financial Group, say that they will probably be based in Cheyenne.
Crypto-Friendly Arival Bank Is Launching Today For Those Willing To Disclose Their Bags
After two years of laying the groundwork, crypto-friendly Arival Bank is launching in beta Thursday. (Yes, even a bank can “launch in beta” these days.)
To be precise, Arival is more of a fintech startup than a bank in the traditional sense. A team of 20 with offices in Singapore, Puerto Rico and Miami, Fla., it plans to provide banking accounts to crypto startups via its sponsor bank, Puerto Rico-based San Juan Mercantile Bank and Trust.
But there’s a catch: if you want to bank with Arival and you own crypto you also need to show what’s in your wallet.
The firm is using tools from the blockchain analysis firm Elliptic to scan the crypto addresses that onboarding clients provide and see if there are any suspicious transactions.
“To the extent that Arival will be servicing crypto customers, we take very seriously the need to complete due diligence to ensure they are regulated and legally compliant issuers. Arival has no intention of servicing non-compliant entities or bad actors,” such as those under the U.S. sanctions, co-founder and chief operating officer Jeremy Berger said.
The conditions are a stark reminder of the cryptocurrency industry’s uneasy relationship with the legacy banking system. Traditional institutions have largely been loath to provide even basic accounts to the young sector’s startups, for fear of enforcement actions if they even inadvertently facilitate money laundering, sanctions violations or other financial crimes.
The revenue from the relationships often isn’t enough to justify the risk in bankers’ minds, and the few willing to do business with crypto firms, therefore, take a belt-and-suspenders approach to customer due diligence.
While monitoring a client’s crypto dealings, Arival’s compliance department would pay attention to things like where the clients and their own customers come from, transaction volume on the wallets, “specific cryptocurrencies utilized, conducting a transaction with a shell company” and other factors, Berger said.
The clients are obliged to report if they own crypto, and Arival will be looking out for publicly available information pointing at that, he said. “We do media checking so we see if the client has involvement in the crypto space, and then we make an educated guess that they do have a crypto wallet.”
A failure to report the fact of owning crypto would put a client “in a high-risk category” and potentially lead to suspending the account “until further investigation and receipt of corroborating information,” Berger said.
In the “beta” stage, clients will only be able to open a business account with Arival, park their funds and transfer it around the world if they need it, with more options coming later this year, Berger said.
In the pipeline for the coming months are individual accounts, card issuance, analytics products for businesses and remittances in different currencies. Arival is also aiming to introduce lending and deposit and savings products down the road.
According to Berger, there are around 3,000 prospects on Arival’s waiting list, and the firm will now start onboarding those clients. They come mostly from U.S., U.K, E.U., Hong Kong, Singapore and more than 60 other countries.
Potential clients, Berger said, include new venture-backed crypto and fintech startups; crypto exchanges overseas that want to allow dollar deposits but have a hard time opening a U.S. bank account; independent contractors; and micro-businesses of three to five employees.
All of those businesses can open an account with Arival without visiting a physical office, Berger said. Crypto disclosures aside, the know-your-customer (KYC) procedure is quite painstaking, he said: a potential client needs to submit a selfie, a video, and three types of identifying documents.
Then, Arival runs the data through multiple datasets, from social media monitoring to face-recognition tools.
Arival applied for a Puerto Rico International Financial Entity (IFE) license in August 2018, because it is easier to get than a U.S. bank charter. However, the process turned out to be far from easy anyway: Arival has only received a preliminary approval (“permit to organize”) so far.
Part of the reason was that the Puerto Rico authorities have been dealing with hectic times recently, with U.S. regulators cracking down on the country’s banking industry last summer and the coronavirus pandemic leaving government offices shut for almost two months this year, Berger said.
However, Arival is on its way for a full IFE license and has made overtures in other jurisdictions as well: the firm applied for a digital wholesale banking license in Singapore and an electronic money institution (EMI) license in Lithuania, Berger said.
Igor Pesin, Arival’s co-founder and chief financial officer, said that having a variety of licenses will help the firm become “a borderless digital bank and banking-as-a-service partner for global fintech startups.”
Arival was founded more than two years ago by a small team of fintech professionals from Russia and the U.S. with a focus on crypto entrepreneurs and gig economy workers, who may find it hard to get business accounts with traditional banks.
The company raised $2.4 million via a crowdfunding campaign at SeedInvest and is now raising its Series A round, Berger said.
Wyoming-Based Avanti To Open In October With A New Bank-Issued Digital Asset
Avanti Financial expects to open its doors this October with a new bank-issued digital asset.
Led by Wyoming blockchain advocate Caitlin Long, the crypto-friendly bank announced Thursday its application was accepted by the Wyoming Division of Banking on July 15. Avanti will open in the fall because the regulator accelerated the timeline of its application process.
In the same announcement, Avanti revealed its plans to issue Avit, a programmable digital asset that can only be issued by banks and will be treated as a cash equivalent. With Blockstream as the bank’s technology partner, Long said in an interview that “one could presume that the Bitcoin blockchain will be involved,” but could not comment further.
If Avanti’s charter application is approved in October, the bank will be the only financial institution capable of issuing Avit. While Avit would not be pegged one-to-one to the U.S. dollar – because it’s a new digital asset, not a digital representation of a real-world asset – the currency would be 100% backed by a reserve of liquid traditional U.S. assets. (The bank requires this reserve for all the assets it custodies.)
Avanti claims Avit will not have the same delayed settlement and chargeback issues that traditional fiat payments face.
Because an automated clearing house (ACH) transaction can be reversed several weeks after a payment has been made, exchanges and other asset service providers often hold traders’ cash for several days, Long said.
“There’s a lot of counterparty risk in OTC trading of digital assets,” Long said. “Everyone wants to settle second. What we’re doing is offering the ability for both sides to settle simultaneously.”
The bank also claims Avit will not have the legal, accounting or tax issues associated with stablecoins.
“No one knows the legal enforceability of digital assets in the U.S. because they fall through the cracks,” Long said. “The legal clarity of all stableicons is not there. Tax and accounting is also far from clear.”
Long argued that despite the Office of the Comptroller of the Currency (OCC) letter clarifying that U.S. banks may provide crypto custody, the special purpose depository institution in Wyoming is still the most advanced framework for crypto custody in the U.S.
“The OCC and 49 other states do not yet have in place the comprehensive legal structure necessary for enabling digital asset custody without significant legal risk,” Long said in a press statement, adding:
“They also do not have a roadmap for courts to adjudicate disputes involving digital assets and do not provide the certainty in bankruptcy that Wyoming provides for digital asset custodians. Its prudential standards make Wyoming the only jurisdiction in the U.S. where digital asset custody in a bank can truly be executed in a safe and sound manner.”
Signature Bank’s Crypto Deposits Grew $1B In Q2
Out of the nearly $8 billion in deposit growth that Signature Bank saw in the second quarter of 2020, $1 billion was raked in by the firm’s digital assets team, according to the bank’s most recent earnings report.
While Signature doesn’t break out its total deposits by business line, the increase is a record for the New York-based, crypto-friendly bank. On an earnings call, Signature CEO Joseph DePaolo also attributed deposit growth to an increase across every business line in the bank, including the blockchain-based payment platform Signet.
The crypto industry is often a rich source of low-cost, non-interest bearing deposits for crypto-friendly banks like Signature, Silvergate Bank and Metropolitan Commercial Bank, and analysts have paid close attention to Signature’s deposit growth as a result.
“This is now the fourth consecutive quarter exceeding $1 billion in both total and average deposit growth, non-interest bearing deposits of $16.1 billion still represent a high 32% of total deposits since the second quarter of last year,” DePaolo said on an earnings call on Tuesday.
The cost of those deposits also decreased to 56 basis points from 98 basis points because of the low interest rate environment, the CEO added. For the sake of improving profitability, the bank wants to get the cost of deposits down around 40 basis points, the CEO said.
The company’s executive vice president of corporate and business development, Eric Howell, commented on the earnings call that the bank’s net interest margin will be up if the bank gets back to a more “stable” deposit growth of between $500 million to $1 billion a quarter.
The bank earned around $117 million in second quarter 2020, a significant decrease from the $147 million in second quarter 2019 after putting up a provision for credit losses of $93 million this last quarter.
Notably, the bank made Paycheck Protection Program (PPP) loans to nine crypto companies.
Custody provider Copper announced on Monday that it had integrated with the bank’s blockchain payments platform, Signet.
The integration means Copper clients like crypto exchanges will now get to use Signet for faster payments and settlement times in U.S. dollar transactions.
“Previously, the process of paying and settling transactions was far more complex,” Copper CEO Dmitry Tokarev said in an emailed statement. “In order to route fiat currencies, customers had to go from their exchange account, back to Signature Bank, then back to their exchange account. Now, both fiat and digital assets can be moved within the Copper platform.”
Copper offers multi-signature custody and prime brokerage to its clients. This is provided by Copper’s Walled Garden infrastructure, giving clients access to trading facilities without taking digital assets out of custody.
Silvergate’s Bitcoin-Backed Lending Product Grew 80% In The Last Quarter
Silvergate Bank continued to add a steady drip of crypto customers in the second quarter of 2020 but its issuance of bitcoin-collateralized loans grew by $10 million, outperforming the growth of its real estate loan book by 10x.
According to its latest earnings report, released Monday morning, the bank’s traditional loan portfolio – a real estate–heavy loan book of about $1.1 billion – only increased by $1 million from the first quarter. Bitcoin-collateralized loans through the bank’s SEN Leverage product surged by $10 million in the first quarter.
The uptick from $12.5 million to $22.5 million represents 80% quarter-over-quarter growth for the product, which is part of the Silvergate Exchange Network (SEN).
The publicly traded La Jolla, Calif.-based bank is one of the few U.S. banks willing to openly serve crypto-related businesses and has most of its deposits from the crypto sector. The bank went public on the New York Stock Exchange under the trading symbol SI in November. With $2.34 billion in total assets, Silvergate is less than 1% the size of JPMorgan Chase, a $3.1 trillion behemoth.
Key Stats From The Earnings Report Include:
* Activity on the SEN increased by 28% since last quarter to more than 40,000 transactions.
* The volume running over the SEN increased by 29% quarter-over-quarter to $22.4 billion.
* Silvergate reaped $2.4 million in total fee income from digital currency customers.
* The bank’s risk-based capital ratio – total capital to risk-based assets – fell by half a percentage point to 25.54% from 26.05% in the first quarter.
The bank continues to have a steady pipeline of more than 200 customers waiting to be onboarded, Silvergate CEO Alan Lane said in a press release.
State-Run Bank In Switzerland To Launch Crypto Services
Swiss cantonal bank Basler Kantonalbank becomes the first bank in Switzerland to announce its crypto plans.
Basler Kantonalbank, or BKB, a government-owned commercial bank in Switzerland, is planning to launch cryptocurrency services through its banking subsidiary.
According to an Aug. 3 report by local news agency Finews, BKB’s subsidiary and a national banking group, Bank Cler, are working on services that will allow customers to trade and store cryptocurrencies. BKB holds a majority stake in Cler, though the subsidiary possesses its own banking license separate from BKB.
Access To Financial Products
A spokesperson at BKB confirmed the news to Cointelegraph. They also noted that the bank plans to launch these products in response to an increased demand for crypto services in the country.
The BKB Representative Said:
“In the BKB Group, we are working to offer our clients a solution for the trading and deposit of selected cryptocurrencies. As an established regional (Basler Kantonalbank) and indeed national (Bank Cler) banking group, we wish to give our clients secure access to these new financial products.”
The spokesperson did not specify what types of cryptocurrencies will be available through BKB. Development is currently at an early stage and there is not yet a tentative date for launch.
Ahead Of The Pack
These plans make Basler Kantonalbank the first government-backed bank in Switzerland to enter the crypto industry. “This topic is being driven forward within the BKB Group by the digital competence centre of Bank Cler,” a BKB spokesperson said regarding the matter.
Home to the infamous “Crypto Valley,” Switzerland is known as one of the most crypto-friendly jurisdictions in the world. In August 2018, Swiss SIX Exchange-listed bank, the Hypothekarbank Lenzburg, became the first Swiss bank to provide company accounts for blockchain and crypto-related fintech companies. Maerki Baumann, an unlisted family-owned bank in Switzerland, reportedly became the second bank to accept crypto in August 2018.
Julius Baer, a top-five Swiss bank, saw its net profit surge over 30% after listing Bitcoin and other cryptos in the first half of 2020, as reported on July 20.
Bequant, Now in Crowded Prime Brokerage Race, Adds Signature Bank Integration
Ferrari sells cars so it can go racing; Bequant built a crypto exchange to get into prime brokerage.
That’s the analogy offered by the firm’s head of institutional services, Alex Mascioli, when asked about a new banking relationship with Signature’s blockchain-based payments platform, Signet, first revealed to CoinDesk this week.
Prime brokerage, Mascioli said, was always Bequant’s race to win.
Prime brokers are facilitators for financing and trading for deep-pocketed institutional investors. While the digital asset space doesn’t have a lot of prime broker options currently, several crypto firms including Coinbase, BitGo and Genesis Trading have announced in recent months their intent to build prime brokerage wings.
Bequant was building a prime brokerage service for crypto before it was cool, said CEO George Zarya.
“When we started building the prime brokerage product almost two years ago, nobody was doing it,” Zarya said. “There were a couple of players that called themselves prime brokers, but what they were doing was aggregating liquidity.”
To compete in a newly crowded market, Bequant’s connection to Signature Bank’s Signet will allow the firm to more easily settle fiat for more clients. Bequant is also connected to the Silvergate Exchange Network, Globitrex Exchange and U.K.-based electronic money institution BCB Group, Zarya said.
“It’s an important transition between the legacy financial markets and the new digital markets,” he added.
The variety of banking and payments relationships allows Bequant to serve clients that use a variety of onramps to the U.S. dollar, because no U.S. bank has emerged as a clear leader in the digital asset space, Zarya said.
The firm now boasts a list of services that includes capital introduction, fund administration, securities lending, multi-exchange direct market access, custody, collateral management, leveraged trade execution, over-the-counter block trading, risk management and smart order routing.
According to Zarya, clients care most about easy access to spot and derivatives markets, lending, managing collateral across exchanges, having analytics on top of their portfolios and APIs that can let them connect to multiple exchanges at once. The products that cost the most for the firm to build were custody and collateral management, he added.
Blockforce Capital CEO Eric Ervin said capital introduction is where prime brokers in traditional markets can stand out. (Ervin uses Tagomi as Blockforce’s prime broker.) In the traditional world, investment banks like Goldman Sachs and Morgan Stanley connect clients to hedge funds, pension funds and endowments.
Bequant is connected to 11 sources of liquidity currently including HitBTC, Binance, OKex, Huobi, Bittrex, Bitifnex, Deribit and Bequant’s own exchange and plans to expand it’s exchange connections to a dozen by the end of the year. The other four sources of liquidity are unnamed OTC desks.
“These exchanges are venues that our team has one-on-one relationships with,” Mascioli said. “This isn’t as simple as dropping in APIs.”
When Bequant launched its exchange two years ago, Zarya said he recognized there was a need for an institutional-grade exchange offering high-frequency trading services. Most exchanges are still built to serve primarily retail customers, he added, meaning their infrastructure struggles to keep up with high trading volumes.
“One of the issues that we’ve had with some of our exchanges is the rate per second allocation,” Zarya said. “If you trade a high-frequency trading strategy, you may want to opt into a higher rate-per-second allocation.” Bequant’s internal trading averages around 400 microseconds per trade, which is close to the London Stock Exchange’s 150 microseconds.
The firm is currently planning to raise a round of venture capital to beef up operating capital on its lending side.
“We’ve managed to build a great product by bootstrapping,” Zarya said. “Our exchange business turned profitable within the first 12 months. … It took us about $2.5 million to get it up and running.” Zarya expects the prime brokerage side of the business to be profitable within the next six months.
Signature Bank Gave Dozens More PPP Loans to Crypto Firms Than Previously Reported
Signature Bank extended dozens more loans under the federal Paycheck Protection Program (PPP) to cryptocurrency businesses than was previously reported.
Around $20 million of the $1.9 billion in PPP loans the bank extended was given to roughly 40 firms in the digital asset space, said CEO Joseph DePaolo.
The executive would not name the firms it gave PPP loans to or give an exact number of firms who took out a loan through the relief program. (Signature’s $1.9 billion in loans accounts for roughly .55% of the entire $350 billion that was disbursed through the U.S. Small Business Administration.)
Public records show that Signature issued loans to a number of prominent firms in the space, including Ethereum venture studio ConsenSys, VC firm Polychain Capital and crypto lender Celsius Network.
DePaolo said the bank’s crypto PPP loan volume was due to other banks serving crypto not having the resources to offer the same kind of program. Previously, CoinDesk reported that at least $30 million had been extended to crypto companies by several banks including JPMorgan Chase, Silicon Valley Bank, Cross River Bank and others. (CoinDesk also reported Signature had extended only nine PPP loans to crypto firms.)
The news further reveals a deeper need in the crypto industry for relief in the wake of the global economic crisis caused by the COVID-19 pandemic. Likewise, Signature’s program proves the bank’s commitment to the digital asset space.
While Signature’s business is primarily focused on serving high-net-worth individuals and it does not call itself a crypto bank or refer to its digital asset team as a crypto banking division, the bank did rake in $1 billion in deposits from the sector in the second quarter 2020 alone.
“I believe I said it about a year and a half ago, that if you weren’t into blockchain technology and the digital world in five years, you would have a problem as a bank. There’s three and a half years left, and it may be sooner,” DePaolo told CoinDesk in a recent interview.
“I think the situation we have right now with this pandemic and the quagmire, it’s going to make the public look at digital currencies.”
Signature Bank’s Crypto Awakening
In January 2018, the bank hired Joseph Seibert as the senior vice president for its digital asset banking team. Seibert started with three employees and has grown the team to 12 as of August 2020. He was previously a vice president at similarly crypto-friendly Metropolitan Commercial Bank.
The bank’s Signet payments platform is a proprietary blockchain based on the Ethereum protocol which allows for fee-less instant fiat settlement.
While it’s popular within the digital asset space, firms outside of the space, such as renewable energy companies, use Signet to settle thousands of transactions a day without dealing with the payment friction between suppliers and wholesale distributors.
Seibert added that Signet has the same capabilities as the Silvergate Exchange Network but is built on blockchain versus the bank’s internal systems.
“We have the same ecosystem they have and did it in under three years,” he said.
The bank started out by serving exchanges, which Seibert calls “the octopus” because of how many firms that need banking services in crypto are tied directly to the exchanges. The bank now serves proprietary traders, hedge funds, custody firms, mining farms and other verticals in the space, he said.
Signature does treat firms in the digital asset space carefully, to offset transactional costs for traditional payment rails (wires and ACH payments). For instance, digital asset exchanges on Signet have to keep 30% of their balance in a non-interest bearing account.
Signature’s PPP program and recent growth in deposits from crypto customers makes it confident as a leader in the cryptocurrency banking space, Seibert said.
“There’s more bank competition overseas, but they are always going to need the U.S. dollar on-ramp,” he said.
The bank is now looking to expand its Signet offering beyond U.S. dollars with the launch of a foreign currency exchange wallet sometime in the near future.
A number of the bank’s clients are FX liquidity providers, and Seibert believes foreign exchange is a large component of the crypto space, with some FX trades still taking weeks to settle if a bank is not crypto-friendly.
“Ideally we would like to launch that sooner rather than later, hopefully next year,” Seibert said of the new forex service.
Kraken Becomes First Crypto Exchange To Become A US Bank
Kraken is the first cryptocurrency firm to become a bank.
On Wednesday, the Wyoming Banking Board voted to approve the San Francisco-based crypto exchange’s application for a special purpose depository institution (SPDI) charter. Kraken is now the first SPDI bank in Wyoming. According to the Wyoming Division of Banking’s general counsel, Chris Land, Kraken will also be the first newly chartered (de novo) bank in the state since 2006.
“By becoming a bank we get direct access to federal payments infrastructure, and we can more seamlessly integrate banking and funding options for customers,” said David Kinitsky, a managing director at Kraken and the CEO of the newly formed Kraken Financial. (Kinitsky has run Grayscale Investments, was the first digital assets hire at Fidelity and was most recently head of business development at payments startup Circle.)
In the wake of a July letter from the U.S. Office of the Comptroller of the Currency giving national banks the go-ahead to custody crypto, the Division of Banking also announced it has been working with Promontory Financial Group, a prominent Washington, D.C.-based consulting firm made up of lawyers and former government regulators.
In October, the division along with Promontory will publish the first manual for banks regarding procedures and policies for handling digital assets, Land said.
In addition to more products, Kraken Financial will give Kraken the ability to operate in more jurisdictions, Kinitsky said. As a state-chartered bank, Kraken now has a regulatory passport into other states without having to deal with a patchwork state-by-state compliance plan.
Kraken has been silent about its application until now. The first hint the exchange was interested in the Wyoming charter was in December when it opened a position for the job Kinitsky has now.
“We would expect to offer a host of new products as we get established,” Kinitsky said. “Those will range from things like qualified custody for institutions, digital-asset debit cards and savings accounts all the way to new types of asset classes. We can engage with securities and commodities and things like that as a bank. So a lot more TBD there.”
Kraken expects its major revenue drivers to be fees and services, Kinitsky said. SPDIs are not allowed to lend, and each bank has to hold 100% of its assets in reserve. Kraken wouldn’t say how much equity capital the firm raised for its application, but the Division of Banking is encouraging applicants to raise between $20 million and $30 million, similar to the equity capital kept at a de novo bank.
Initially, Kraken Financial will play the same function as third-party banking relationships that Kraken has already formed, Kinitsky said. Eventually, the subsidiary will become the U.S. customer service provider, with Kraken affiliated services offered on the back end.
Having received the charter, Kraken will focus on building out operations and personnel for the bank, aiming to have 10 to 25 department heads to start out, Kinitsky said. The exchange has hired its board and C-suite and expects to have the rest of its permanent hires in place by the end of the month.
The statutes undergirding the SPDI charter reconcile digital assets with the U.S. uniform commercial code by making the safekeeping of digital assets a bailment, which is the same legal relationship that valet drivers have to the cars they park, said Wyoming blockchain pioneer Caitlin Long.
SPDI banks can hold digital assets but will never have legal ownership over those assets. This means that even if a SPDI bank goes bankrupt, those assets have to be returned to customers, whereas a trust company can have its assets claimed by a judge during bankruptcy.
Long has her own SPDI bank application underway, called Avanti Financial, which she expects to open in October with new bank-issued digital assets. She expects SPDIs to diversify the crypto banking sector, which has been historically underserved.
The Division of Banking is currently working with six companies that are applicants or potential applicants for the charter, and each company could be chartered by the end of 2021.
Long also expects the SPDI charter to pressure crypto companies to offer proof of reserves to customers and the industry at large.
“SPDI banks have to provide a Merkle tree to their auditor so they can cryptographically verify that their reserves are there,” she said. “We have zero insight into whether the service providers are solvent or not and they’re not even audited in most cases.”
Silvergate Bank: How Deep Is the Moat?
While not often in the limelight, Silvergate Bank serves as an integral part of the cryptocurrency ecosystem.
It’s often claimed by crypto enthusiasts that bitcoin will eventually displace the financial system as we know it. As it stands today, however, banks still play the pivotal role of fiat on/off ramps for exchanges and investors.
CoinDesk Research presents an in-depth look into San Diego-based Silvergate Bank, a leading bank serving the cryptocurrency industry. With over 880 digital asset clients with an aggregate balance of $1.5 billion in deposits, Silvergate is one of the market leaders within this niche market.
* Due to increased levels of risk and higher compliance requirements, there exist only a handful of U.S. banks, including Silvergate, who provide banking services to cryptocurrency customers.
* Silvergate sets itself apart through its deep list of industry connections as well is its unique products that cater to the digital asset industry such as its instant payment network, SEN.
* The total number of customers continues to increase, but Silvergate’s deposits have failed to grow over the past two years. Despite the utility of SEN, management notes the bank has experienced deposit outflows to competitors offering yield on deposits, unlike Silvergate whose deposit base is almost exclusively non-interest bearing.
* As the space matures, it’s likely more banks will feel compelled to service the crypto market, just as JPMorgan recently announced its acceptance of Coinbase and Gemini as its first digital asset customers. This type of development could be a major cause for concern for Silvergate as it competes with much larger financial institutions with more access to capital. Should this become the case, it will become crucial for Silvergate to deepen its competitive moat by boosting SEN’s utility.
Avanti Launches Crypto-Friendly Bank In Wyoming
The Wyoming State Banking Board voted unanimously to grant Avanti a bank charter.
According to an Oct. 28 announcement from Avanti, The Wyoming State Banking Board voted 8-0 to grant the financial institution a bank charter. The approval will allow Avanti to operate the new crypto-friendly bank under the name Avanti Bank & Trust as well as its “tokenized U.S. dollar” Avit, designed to modernize USD payments.
Avanti said it planned to open for customers in early 2021, but will be limited to high minimum balance accounts. Retail clients will have to wait.
“Avanti’s process from company formation to application to charter is lightning fast,” founder and CEO Caitlin Long told Cointelegraph. “Typically bank charters take 1-2 years from start to finish, but ours took 10 months. We recognize that time is of the essence and we needed to move fast, since the crypto market moves quickly.”
“Wyoming’s regulators are the only bank regulators that have a supervisory and regulatory oversight program nearly in place. All other states, and the OCC [Office of the Comptroller of the Currency], are not yet ready to supervise banks engaging in digital asset activities.”
The Wyoming Division of Banking first accepted Avanti’s application for a bank charter in July, shortly before the bank announced it would be releasing Avit. The firm stated it would issue Avit on Bitcoin’s Liquid sidechain as well as the Ethereum (ETH) blockchain and will consider issuing it “on other blockchains in the future.”
In September, San Francisco-based crypto exchange Kraken received a Wyoming bank charter, making it the first cryptocurrency business allowed to operate as a bank in the United States.
Wyoming Is Crypto’s ‘Wild West,’ Which Is Exactly What We Need
In the world of financial regulation, it may seem like progress is slow and arduous. But then there are weeks in which a lot happens, and pieces fall into place with loud clangs and reverberations.
This past week was one of those, and the pieces in question are being largely overlooked as they are settling into place in a relatively small corner of the crypto landscape.
Yet, their impact is significant even at this early stage. And, as part of the bigger picture, these pieces are forming the base of a new crypto-based financial system whose influence is likely to extend further than many currently realize.
I’m talking about what’s happening in Wyoming. This week saw two significant announcements originating from the state which, together with other proactive legal initiatives, are creating long-awaited bridges between traditional markets and crypto markets.
This week the Wyoming Division of Banking issued a “no-action” letter to Two Ocean Trust, a Wyoming-chartered trust company that provides wealth management services to high-net-worth individuals, family offices and advisers. This authorizes it to custody crypto and traditional assets under Wyoming law.
That in itself is interesting, as it means that clients will be able to include crypto assets in a diversified portfolio without looking for a supplementary manager or custodian. This goes a long way toward overcoming the “hassle” barrier to crypto investing, at which investors’ enthusiasm for the idea is dampened by the additional steps needed.
But the no-action letter goes further: it classifies Two Ocean Trust as a “qualified custodian” under the Investment Advisers Act of 1940, making it the first firm to get official clearance to use this term specifically when it comes to crypto asset custody.
This is a big deal because, under the SEC Custody Rule, investment advisers are required to store customer assets with a “qualified custodian.” The crypto markets have not, until now, had official clarity on how the definition of “qualified custodian” as set out in the Investment Advisers Act of 1940 could apply to blockchain-based assets.
Several notable firms offer crypto custody services through state-chartered trust companies. This makes them “qualified” and it makes them “custodians,” but it does not guarantee that they meet the definition as set out in the Advisers Act. This states that “qualified custodians” include banks, savings associations, registered broker-dealers and futures commission merchants.
Trust companies can be considered banks if, according to Section 202 the Act, “a substantial portion of the business … consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks.”
Not all of the current cohort of crypto custodian trust companies do, so technically they’re not “qualified custodians”, according to the Advisers Act. The thing is, that doesn’t really matter when it comes to bitcoin (BTC, -2.45%), ether and other decentralized cryptocurrencies, because the qualified custodian requirement only applies to securities. Investment managers who want to handle bitcoin and ether for their clients don’t have to use a “qualified custodian.”
But they would probably want to, given the opportunity, for the regulatory support. And official confirmation on where cryptocurrencies and other digital assets stand when it comes to custody requirements has been eagerly awaited, given the risk investment advisers could run if their clients’ assets are mishandled.
What is significant here is not that a trust company is offering digital asset custody. That’s not new. The big deal is the legal clarity. A state regulator has officially recognized the custody of digital assets as a regulated activity, filling a gap that has been rife with unclear definitions and confusing boundaries.
The scale is still very small – this is one no-action letter for one new and relatively small company in one sparsely populated state.
But in terms of potential reach, it is a big step. Regulation in the U.S. tends to build on regulation. A precedent has been set, and both clients and other service providers will no doubt take note.
The other main news of the week was the approval by the Wyoming State Banking Board of a Special Purpose Depositary Institution (SPDI) charter for Avanti Financial, making it the second company to become, effectively, a “crypto bank.” Avanti will be able to accept and custody fiat and digital asset deposits, while being designated a “bank” for regulatory purposes.
Kraken was the first a few weeks ago, and Avanti not only broadens the field; it is also pushing the boundaries in terms of innovative service.
Like Kraken, Avanti is a crypto- and traditional-asset custodian that will have access to the federal window once a few more requirements are met. For institutions, this access to emergency funding is an added layer of assurance, and the official authorization to custody digital assets provides further validation of cryptocurrencies as an investable asset group.
What’s more, Avanti will not benefit from FDIC protection for its deposits, nor will it be able to make loans, so its deposits will be 100% backed by custodied assets.
Beyond granting the charter, the Wyoming State Banking Board also approved the future issue of the Avit, a blockchain-based token that represents “programmable electronic cash,” according to Avanti founder and CEO Caitlin Long.
This innovative approach to asset-backed value in theory will remove some of the legal uncertainty regarding stablecoin settlement enforceability, in that it represents a token 100% backed by bank assets.
There are still a few legal hoops for Avanti and Avit to jump through, and reciprocity in key financial states such as New York is unclear. Also, as Wyoming Governor Mark Gordon told CoinDesk earlier this week, it is unclear how the federal government will respond to the state’s initiatives.
But a legal precedent has been set that could form the basis of future lawmaking. What’s more, the clarity and support for financial innovation (Avanti’s charter request was approved by a unanimous commission) could attract both traditional and crypto businesses as well as clients to Wyoming, further encouraging regulatory progress even beyond the state’s borders.
Financial law is a complicated plate of entwined definitions and delegated authority that lacks the detail needed for innovations to take comfortable root. Wyoming seems to be tackling this confusion head on, paving the way for clarity to extend to other jurisdictions and applications.
Not that long ago, crypto markets were referred to as the “Wild West.” According to Wikipedia, Wyoming is sometimes known as the “Cowboy State.” The metaphor is both fitting and misleading – it’s not the land of the lawless, it’s the land that makes laws appropriate for the territory.
To further underline the symbolism, the state’s official nickname is the “Equality State.” Yesterday was the 12th anniversary of the Bitcoin whitepaper, which offered a glimpse of a decentralized system of financial transfers that had equality and censorship resistance at its core. Bitcoin was nurtured in its early years by a group of idealists that hoped to change finance from the remote edges of influence.
Wherever they are now, I like to think that they would be both encouraged and astonished to see it actually happening. Sure, the impact is beholden to laws, institutions and centralized authority. But it is originating in the least populous state in the world’s largest economy, far from the traditional centers of power.
Can you think of anything more “crypto” than that?
Binance.US Joins SEN, Silvergate’s 24/7 Crypto Trading Club
Binance.US, the American affiliate that shares a name with the world’s largest crypto exchange, has joined the Silvergate Exchange Network (SEN), a 24/7 instant settlement network used by some of the largest trading entities in the space.
SEN, which replaces clunky wire transactions by allowing corporates to instantly move U.S. dollars between crypto exchanges including on nights and weekends, saw its volume increase $7.8 billion to $17.4 billion in the first quarter, according to a recent Silvergate Bank earnings call.
Existing members of Silvergate’s SEN payment network include Gemini, Kraken and ErisX.
“We’ve launched SEN for our corporate clients so now they’re able to move dollars through Silvergate around the clock instantaneously,” Binance.US CEO Catherine Coley said in an interview. “It’s a huge advantage for clients that are trying to get funds into Binance.US to be able to buy and sell cryptocurrencies, and we’re excited to see the impact on the rest of our liquidity.”
Coley said all the API integrations with SEN had gone smoothly, having conducted testing with around a dozen or so clients.
“We’ve seen about five times the growth of their current trading behaviors on the platform by just the testing of SEN,” she said.
Binance.US has been working hard, jumping through various regulatory hoops to reach this point. The company had also been working with Nevada-based Prime Trust, which remains a dollar custody solution for retail customers of Binance.US, Coley said.
“We are thrilled to welcome Binance.US to our rapidly growing Silvergate Exchange Network,” Alan Lane, Silvergate CEO, said in a statement. “We are confident the SEN will accelerate their vision and bring value to their business.”
Binance.US’s relationship with Binance, the octopus-like crypto conglomerate of global partnerships and affiliations, has been the subject of some scrutiny. In a recent Forbes article, the U.S. division was alleged to be little more than a kind of regulatory decoy.
“Binance.US has from day one operated as a regulated entity and we’re fully compliant both at a federal and a state level,” said Coley. “We focus heavily on our BSA [Bank Secrecy Act] and AML [anti-money laundering] program.”
A great part of being in SEN, said Coley, is that it opens up Binance.US to a number of businesses that had been blocked from using the exchange until now.
“Now we have SEN, this is unlocking a lot of access for folks that have been wanting to work with but haven’t been able to because we were not kind of operating in their style,” she said.
Galaxy Digital Makes Twin Acquisitions In Bid To Strengthen Institutional Appeal
Cryptocurrency merchant bank Galaxy Digital has purchased two firms as it seeks to become the “go to” platform for institutional access to digital assets, the firm said Friday.
* Announced in a press release, the newly acquired firms are DrawBridge Lending, a “white glove” service for borrowing and investing in digital assets, and Blue Fire Capital, which focuses on providing two-sided liquidity for futures markets and digital assets.
* The terms of the deals were not disclosed, but Galaxy did say the move would bring DrawBridge’s over $150 million in third-party assets to the firm.
* “Galaxy Digital’s mission is to bring cryptocurrency to traditional finance and vice versa,” according to said Christopher Ferraro, president of Galaxy Digital.
* The acquisitions “will enable us to further amplify our strong position as a go-to trading desk in digital assets and more rapidly grow our innovative portfolio of trading products and services,” he said.
* The news came hours after Galaxy, which was founded by Mike Novogratz, announced net income of $44.3 million for Q3 2020 – well up from a loss of $68.2 million in the same quarter last year.
* Volume at subsidiary Galaxy Digital Trading (GDT) was up 75% compared with Q3 2019 to a record $1.4 billion, which the firm put down to the soaring bitcoin (BTC, +0.52%) market.
* Novogratz said the acquisitions would help the firm “further meet what we believe will be an even bigger wave of institutional demand.”
Silvergate Capital Tanks As Board Member Dumps Shares
SI stock has plunged over 16% from its recent all-time high.
Shares of Silvergate Capital (NYSE:SI) are in freefall this week, while the U.S. Securities and Exchange Commission, or SEC, has revealed a large liquidation of company stock by board member Thomas Dircks.
The security regulator’s Form 4 documentation shows Dircks sold 60,000 Class A Common Stock over eight transactions on Dec. 8. The largest transaction was the disposal of 37,192 shares at a price of $40.72.
In total, the sales netted Dircks over $2.4 million.
Dircks is listed as a member of the board for Silvergate Bank, which provides lending and deposit services for “innovative businesses in fintech and cryptocurrency.” He is also a managing director to Charterhouse Strategic Partners, which invests in numerous ventures from cryptocurrency to healthcare and up to wireless infrastructure.
Dircks, who is listed as a 10% owner in Silvergate via Charter Digital and a “family foundation,” appears to have initiated the sale shortly after SI reached new all-time highs earlier in the week.
Silvergate closed at $44.53 on Monday, the eve of the dump, which was a new all-time high. It has since declined 16.4% over two trading days, including an 8.9% fall on Wednesday where it closed at $37.21. Year-to-date, SI has more than doubled. At its peak, it was up nearly three times since the start of 2020.
The sale triggered heavy volatility in SI stock on Wednesday, with trade volumes more than three times higher than normal.
As Cointelegraph reports, Silvergate went public in Nov 2019 following a successful IPO. At the time, the company boasted of more than 750 cryptocurrency customers.
BitPay Files With OCC To Become National Crypto-Native Trust Bank
Another crypto player has taken steps to go mainstream, but a lot of work still remains ahead.
Bitcoin (BTC) payments giant BitPay aims to form a national trust bank, based on its recent filing with the United States Office of the Comptroller of the Currency.
“We confirm BitPay has filed an application with the United States Office of the Comptroller of the Currency (OCC) to establish BitPay National Trust Bank,” BitPay general counsel and chief compliance officer, Eden Doniger, told Cointelegraph. “A national trust bank is a limited purpose national bank that engages in trust activities.”
A representative for the OCC told Cointelegraph that the office received BitPay’s application on Dec. 7. With its limited operations, a national trust bank does not, for example, need to purchase FDIC insurance required of most banks.
Under the leadershipof former Coinbase executive Brian Brooks, the OCC approved digital asset custody by federally-chartered banks this past summer. Following the new rulemaking, digital asset exchange Kraken received approval to set up a crypto-native bank in September.
The crypto clarity from the OCC came after more than 10 years of generally murky waters, including a number of high-profile cases in which banks cut off crypto firms from services. Consequently, Brooks has been hailed as a blessing for the industry.
However, Brooks never received Senate confirmation for his position and only recently got a nomination from President Trump. Given the impending change of administration and little reason to believe that Biden as president would re-nominate Brooks, the crypto industry is waiting with bated breath to see if the Senate schedules his confirmation hearings in the coming weeks.
The OCC usually sets a timeline of 120 days to respond to applications like BitPay”s, in which time the office could be operating under completely different leadership.
“The OCC is at the forefront of government regulation of the cryptocurrency industry,” Doniger said, adding:
“Our operations as a national trust bank will be subject to strict safety and soundness requirements which will provide our customers with assurances that our services remain best in class and allow us to be subject to a uniform regulatory framework.”
Paxos Seeks Approval To Become Fully-Regulated Crypto Bank
The stablecoin issuer and PayPal partner wants to increase its range and scope of services by becoming the first crypto services provider to be regulated at both state and federal levels.
Stablecoin creator and crypto services provider Paxos filed an application to open a national bank on Wednesday. If approved, the pioneering Paxos General Trust will be headquartered in New York, licensed to hold cryptocurrencies and execute the duties of a regular trust bank.
According to a blog post on the Paxos website, being granted a national trust bank charter from the U.S. government would broaden both the range of services offered by the company and the geographic area to which it can offer services:
“Our mission is to modernize financial market infrastructure and enable the movement of any asset, any time, in a trustworthy way. A national Trust Bank charter would help us realize our goal by enabling us to serve customers across the country in the most efficient way.”
If approved, the application would mark the first time that a steward of digital assets was regulated at both the state and federal levels within the U.S. One of the first companies to receive New York State’s coveted BitLicense, Paxos is already regulated by the state’s Department of Financial Services (NYDFS).
In 2015, the company — then known as ItBit — became the first “virtual currency” services provider to receive a charter from NYDFS.
In October, Paxos partnered with PayPal to provide trading and custodial services related to cryptocurrencies supported by the payments giant. “PayPal’s selection of Paxos is a reflection of New York’s status as the gold standard for cryptocurrency regulation,” said Paxos CEO Charles Cascarilla in a press release about the partnership announcement.
In addition to providing services for PayPal, Paxos continues to operate the ItBit exchange, offer crypto brokerage services, and maintain stablecoins PAX, BUSD and PAXG. The company was founded in 2012, has offices in New York, London and Singapore, and employs around 150 people.
Digital asset custodian Anchorage also applied for a federal charter last month.
DBS Bank’s Digital Exchange To Begin Trading Crypto ‘Next Week’
DBS Bank of Singapore has officially announced the arrival of its digital assets exchange, with trading to start next week.
The DBS Digital Exchange is 10% owned by Singapore’s SGX stock exchange. It will also provide tokenization of securities and other assets, as well as bank-grade custody for digital assets.
The new exchange will facilitate spot exchanges from fiat currencies to cryptocurrencies and vice versa, said Piyush Gupta, DBS Group CEO on a media call, Thursday.
Four fiat currencies (SGD, USD, HKD, JPY) will be tradable against four of the most established cryptocurrencies covering 70%-80% of the market, namely bitcoin, ether, bitcoin cash and XRP, Gupta added.
“We are ready to begin crypto trading as early as next week,” said Gupta. “Security token offerings may take a month or two to get started – but in summary we are ready to go.”
The security token offering part of the digital exchange will comprise a regulated platform for the issuance and trading of digital tokens backed by financial assets, such as shares in unlisted companies, bonds and private equity funds.
“You can tokenize anything, you can tokenize a painting. But for now, we will be concentrating on financial assets.” Gupta said.
The third part is custody, which is said to be bank and institutional grade. This will be air-gapped cold storage that leverages all the existing cyber security tech at the bank, according to the CEO.
Interestingly, Swiss digital exchange SDX said this week it would also be building a crypto exchange in Singapore with Japan’s SBI Holdings, slated for launch in 2022.
The DBS exchange will only be open to institutional clients and accredited investors, Gupta said.
“We are excited to apply our strengths in market infrastructure and risk management to this venture,” said Loh Boon Chye, CEO of SGX in a statement. “There are significant opportunities to bring trust and efficiency in price discovery to the global digital assets space. We look forward to working closely with DBS to advance Singapore’s standing as a multi-asset international financial center.”
The planned setup is in partnership with Singapore Exchange Ltd., which will hold 10% in the new bourse, the Singapore-based lender said Thursday in an exchange filing. The new services include asset tokenization, secondary trading of digital assets including Bitcoin, and custody services, DBS said.
The Monetary Authority of Singapore, the central bank, gave an in-principle approval to the new bourse to trade assets from shares, bonds and private-equity funds, the bank said. Such regulatory blessing allows DBS to be among a handful of major banks to dabble in the crypto industry. While crypto is gaining institutional acceptance, the asset class still sees occasional cyber hacks and is still seen by many as associated with illicit fund flows.
“The time has come, the time is right for this industry to increasingly find partnership and sponsorship from the formal banking sector,” DBS Chief Executive Officer Piyush Gupta told a media briefing following the announcement. Trading will start as early as next week, he said.
The bank has “robust governance and controls” to monitor and prevent financial crime, he said.
Digital currencies have gained popularity this year as prices soar. Central banks from China to Europe to the U.S. are studying whether to create their own versions of digital currencies. Bitcoin is up about 150% and Ether has more than tripled since the start of the year. Meantime, institutions and investors are rapidly jumping into the space.
After Microstrategy Downgrade, Analysts Recommend Smallcap Crypto-Centric Bank
Motley Fool analysts think this smallcap bank stock might be the next to benefit from Bitcoin’s surge.
Following a Citi report downgrading business intelligence firm Microstrategy’s stock to a “sell” rating, analysts for popular trading website the Motley Fool have recommended a lesser-known bank stock that also has an emphasis on cryptocurrencies.
Last Tuesday, Citi analyst Tyler Radke downgraded Microstrategy (NASDAQ:MSTR) shortly after the firm announced a debt purchase that would bring its Bitcoin holdings up to a nearly $1 billion mark.
The report chided the company, which at points has seen share prices more than triple from $92 yearly lows, for its “disproportionate” focus on bolstering its BTC holdings, and said that the current run is “overextended.”
However, in a recap article today analysts for the Motley Fool suggested the little-known, crypto-focused smallcap Silvergate Capital (NYSE: SI) might be worth a look for traders aiming to capitalize on the next crypto play.
Silvergate — the La Jolla, California-based bank with over $2 billion in assets under management — boasts an impressive list of cryptocurrency firms as clients, including Coinbase, Paxos, Circle, Gemini, and Polychain Capital.
Motley Fool contributors Matt Frankel and Justin Moser noted the banks 21-year streak of profitability, $50 million in BTC on the books, and a lending book featuring primarily commercial mortgages. Both analysts also recommended the bank as a superior investment to spot BTC.
A previous Motley Fool article earlier in the week also called attention to the crypto exchange infrastructure Silvergate has built for its clients, the Silvergate Exchange Network (SEN). SEN operates as a 24-hour intermediary between exchanges and their institutional clients buying and selling cryptocurrencies, as opposed to normal banks which would be limited by normal working hours. SEN has reportedly cleared over $100 billion in volume since inception.
SI currently sits at a 36.69 price-to-earnings ratio, offers a 10.36% dividend, and is up nearly 100% on the year.
Silvergate and Microstrategy aren’t the only publicly-traded blockchain stocks enjoying a surge in investor interest. Mining giant Riot Blockchain is also on a tear after appointing new members to its board.
New York’s Quontic Becomes First US Bank To Offer A Bitcoin Rewards Debit Card
New York-based Quontic Bank has become the first FDIC-insured financial institution to launch a bitcoin rewards checking program.
Announced Tuesday, the program includes a bitcoin rewards debit card (1.5% back), mobile app, access to ATMs, and mobile payments options like Google Pay and Apple Pay.
The bank had to receive approval from the U.S. Office of the Comptroller of the Currency (OCC). In July, the OCC issued a letter enabling nationally chartered banks in the U.S. to provide custody services for cryptocurrencies. Acting Comptroller Brian Brooks has hinted at more “good” actions on crypto by the end of Trump’s term.
At Quontic, customers’ bitcoin will be custodied by crypto asset manager NYDIG, which just scooped Quontic’s former chief innovation officer to serve as its head of bank solutions. Major banking software and payments technology provider FIS will build a mobile app with Quontic to track bitcoin rewards in the second quarter of 2021.
“This is the first time any bank or any core [banking system] has done anything with bitcoin that is consumer facing,” Quontic CEO Steve Schnall said in an interview.
Customers will be able to hold their bitcoin with NYDIG or redeem it in cash, Schnall said. At the moment, customers are not permitted to transfer the bitcoin to another wallet address.
Quontic is a tiny bank with only $1.4 billion in assets, about 0.044% the size of JPMorgan. In 2019, it banked a couple crypto firms. Since then, the bank has pivoted from offering bank accounts to crypto firms to trying to bring bitcoin to the masses.
“Right now we’re not banking crypto companies,” Schnall said. “For the foreseeable future, we’re just going to focus on the consumer.”
The bitcoin rewards program is initially available to residents of Alabama, Arkansas, California, Maryland, Massachusetts, Missouri, Montana, New York, Pennsylvania, Utah, Wisconsin and Wyoming. Quontic does business in all 50 states, but these are the states that NYDIG currently operates in.
The Big Banks Positioned To Ride Bitcoin’s Bull Ride
Traditional banks are now taking the plunge and coming out with crypto-related services. The shift coincides with bitcoin’s price hitting all-time highs in December.
Banks may have been looking closely at digital assets for some time now, but have been skittish about saying anything in public. Now they appear to be joining a general shift towards crypto in the latter half of 2020 that has included payments giant PayPal (PYPL) and hedge fund mavens including Paul Tudor Jones and Stanley Druckenmiller.
Starting with technologically advanced Switzerland and Singapore, where some of the first big moves are happening, the industry is seeing a growing list of lenders leaning towards crypto.
DBS Bank of Singapore recently announced its crypto trading and custody platform (which is 10%-owned by the national stock exchange SGX) was ready to go live, making it a frontrunner.
The same week DBS made its announcement, Swiss digital exchange SDX said it was partnering with Japanese bank SBI Holdings, to build a digital asset exchange in Singapore, although that won’t be ready until early 2022, the firms said.
An important milestone in October was Gazprombank, a subsidiary of the Russian energy conglomerate, going live with crypto custody in Switzerland. The bank used institution-focused custody tech from Swiss firm METACO, which is working closely with core banking software vendor Avaloq.
It later emerged Spanish bank BBVA will also be basing crypto operations out of Switzerland, and using METACO’s custody tech. BBVA declined to comment on the plans, which sources said would be ready in January 2021.
Another leading bank to emerge from the bushes is London-headquartered Standard Chartered, which announced a crypto custody partnership with U.S.-based Northern Trust.
CoinDesk also learned that Standard Chartered is working with five or six of the largest trading desks and exchanges in crypto, including LMAX and ErisX, for a post-trade and settlement system which is also slated to go live early next year.
“What you could say is that we’re enabling an element of institutional trading by having an institutional infrastructure,” Alex Manson, head of the bank’s venture arm, told CoinDesk in an interview. “Accordingly, any exchange interested in institutional space is a potential client.
In terms of whom the bank is working with, Manson said, “It’s hard to be specific about names and exchanges. I would just confirm that we have been in touch with a number of the players and exchanges. Ultimately, all will come together and – assuming the right degree of safety, compliance and regulatory requirements – will become parts of an ecosystem and value chain.”
Pump The Brakes
Providing a sanity check, LMAX CEO David Mercer said the headlines are great for adoption but pointed out that actual banking of crypto is still some way off; a couple of years down the road, he reckoned.
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“Mostly the banks are extending existing custodian services. What they’re doing is leveraging their technology prowess,” Mercer said in an interview, adding:
“Entering the crypto space means taking delivery of and owning a crypto asset. Cryptoland is jumping on these technology services and saying, ‘Wow, a huge bank is launching crypto.’ They’re not. They’re just extending their services and future-proofing their business.”
U.S. Regulatory Clarity?
Earlier this year, there was a push from the U.S. Office of the Comptroller of the Currency (OCC) for banks to embrace a more crypto-friendly atmosphere. In July, the agency published a letter telling nationally regulated banks they could offer crypto custody. Earlier this month, Acting Comptroller Brian Brooks hinted at the idea he’d provide clarity around banks plugging “directly into blockchains as payments networks.”
There’s also evidence that additional guidance from the OCC would help more banks enter the crypto custody space. In August, just under a dozen banks, including U.S. Bank and PNC, indicated they might be interested in providing crypto custody services in response to the OCC’s Advance Notice of Proposed Rulemaking (ANPR) in June, which asked the general public to weigh in on how crypto and other fintech tools might be used in the financial sector.
Cryptocurrency firms also have more banking options in 2020.
Historically, there have been a handful of firms willing to bank the crypto sector, with Silvergate Bank, Signature Bank and Metropolitan Commercial Bank leading the charge. Bankers have long been wary of not being able to trace the source of funds that cryptocurrency firms work with and having to do extra know-your-customer and anti-money laundering checks to onboard crypto businesses.
However, each of these crypto-friendly banks hold just a fraction of the $2.87 trillion in assets controlled by JPMorgan, the largest bank in the U.S. and one of the 10 largest banks in the world.
In May of this year, it was revealed that JPMorgan was banking crypto exchanges Coinbase and Gemini, in part because both firms are regulated by multiple regulators.
When U.S. regulators get involved, large U.S. banks feel more comfortable offering services to an industry. Digital securities firm TokenSoft has been banked by JPMorgan since 2017, in part because of its regulatory sophistication, said TokenSoft CEO Mason Borda.
“I was able to walk across the street into the branch, accurately and effectively describe our business and additionally recommend that the banker personally invest in bitcoin,” Borda said. The banker “politely brushed off” Borda’s bitcoin advice but gave TokenSoft a bank account, he said.
Custody and checking accounts are still financial services with tight margins and the crypto industry is a new asset niche on which banks still have to figure out how to make risk-adjusted returns.
While banks aren’t driving bitcoin’s current bull run, their increasing familiarity with the sector has been seen by many as an endorsement of a legitimate asset class.
Crypto Banks Are The Sector’s Game-Changers
Crypto banks offer an integrated solution that is connected to the traditional financial world — which, most importantly, is compliant with regulations.
The crypto space has come a long way since its inception in 2008. Many areas have improved over the last 12 years, such as custody and exchange solutions. If you ask the early adopters of crypto, they can tell you stories about how hard it was to set up a wallet or how cumbersome it was to go to a meetup and exchange Bitcoin (BTC) without being scammed.
Since then, things have changed for the better when it comes to user experience and user interface. Nowadays, creating a cryptocurrency wallet is as easy as setting up an email address. The same goes with purchasing crypto — hundreds of reliable exchanges have emerged in recent years, enabling the simple and secure purchase and sale of cryptocurrencies.
While I could mention many more examples in the crypto space that have improved over the last decade, there is still a major problem with most products and services in the crypto space: they are not in a fully integrated setup. This is where crypto banks come in and will be game-changers for the crypto space.
When I use the word integrated, I refer to two areas: the first is in regards to the crypto ecosystem, which offers a great number of interesting and promising applications and services that are distributed over several platforms and service providers; the second area is in the context of the financial services industry, where crypto banks offer an integrated solution due to being a gateway between the crypto space and the traditional finance space.
I will cover both areas, as they are equally important to understand the revolutionary aspect of crypto banks.
Crypto banks allow you to have your crypto assets and your traditional assets — such as fiat currencies, securities and more — in one account. Most people who are into crypto must deal with multiple third parties. You probably have some crypto assets on multiple exchanges, hardware wallets, on services providing non-bank lenders, and maybe you’ve already interacted with popular decentralized financial applications.
Of course, we should also not forget about your fiat bank account, which you need in order to send funds to another party to purchase crypto assets and send your revenues back when selling crypto.
Ultimately, you have your data and assets all over the place, thus dealing with multiple counterparty risks.
Crypto banks provide that you have all your various crypto holdings, fiat currencies and services in one convenient bank account and are dealing with one service provider. While distributed ledgers are good, distributed control is bad. Crypto banks allow you to have centralized control over your decentralized assets.
This eliminates the current risks many crypto investors have when dealing with a large number of different providers in different jurisdictions. With a crypto bank, you have one specialized gateway to multiple services and products.
A Bridge To The Old World
Even though the benefits of crypto assets are obvious, the number of traditional players such as pension funds, traditional hedge funds or family offices that go into crypto is surprisingly small.
While recent announcements such as PayPal’s new crypto offering also show a trend of institutions entering the space, the large majority is not yet doing so. The reason for this is the lack of regulations and trusted partners to work with.
Crypto banks are the perfect partner to help institutional players enter the crypto space, make investments into the world of digital assets, and securely store assets with a full, banking-grade service offering.
Often, institutions want to invest in crypto, but their investors or board of directors are afraid of the risk involved in dealing with crypto assets. However, if a fund can partner up with a regulated bank that specializes in crypto, this can change the opinion of important stakeholders.
This could increase the adoption of crypto immensely, as the mass market often follows the big players. Getting more and more institutional players into crypto will benefit the whole space.
Crypto banks work as the bridge between the crypto world and the traditional financial services world. By having a banking license, a crypto bank fulfills the requirements and standards of the traditional financial services world while offering services and products in the crypto space.
Creating a seamless connection between these two worlds will be game-changing.
Being regulated is the key for the future
Beforehand, the crypto space used to be mostly unregulated. Similar to custody and exchange solutions, this has changed greatly, benefiting investors in particular.
Most jurisdictions have created laws and regulations around crypto assets and are further designing new laws to integrate them into the regulated financial services world such as in Switzerland.
A crypto bank is, by design, compliant with regulations. In order to receive a banking license, a project needs to fulfill all regulatory requirements stated and examined by the regulator. This gives crypto investors the security that there will be no crackdowns on such service providers.
If we look at the current situations of several exchanges dealing with regulators for not being compliant, one can understand the benefit of working with a regulated partner.
Globally, the trend is heading toward more regulation. I believe that in the future, offering crypto services without some sort of license will be forbidden. Crypto banks are perfectly positioned, as they have been compliant from the start. This is a major issue for players in the crypto space that have been around since before increased regulations emerged for crypto.
Irony Of Fate
Although Satoshi Nakomoto’s original idea was to get rid of centralized intermediaries and one of the old mantras of Bitcoin was to “be your own bank,” crypto banks will ironically be the game-changer for crypto assets by offering all services and products in a compliant, one-stop-shop solution.
Currently, Switzerland and the United States are leading when it comes to granting banking licenses for crypto projects, but it can be expected that the number of specialized banks will increase globally over the next few years as their value proposition becomes evident.
Indian Crypto Bank Opens Physical Location, Eyes 100 Branches By 2022
India is now home to the world’s first physical crypto bank branch despite regulatory uncertainty surrounding digital currencies in the country.
Unicas, a joint venture between Indian online crypto banking platform Cashaa and United Multistate Credit Co-op Society, has launched a physical crypto bank branch in Jaipur, India.
Back in October, Multistate announced plans to offer both online and physical crypto banking services across its 34 locations in northern India.
Users will be able to access both fiat and crypto-asset services at the bank. Unicas will also provide instant digital loans with cryptocurrencies as collateral.
According to a Cashaa blog post on Dec. 28, the physical crypto bank branch in Jaipur is part of an initial rollout in 14 locations across three states before the end of January 2021. The Unicas JV is also working toward establishing a total of 100 branches by 2022.
For Unicas CEO Dinesh Kukreja, the establishment of physical crypto bank branches will allow the company to offer customized crypto investment products to the local Indian market. With a Unicas savings account, customers can transact in both digital currencies and Indian rupees.
Commenting on the news, Cashaa CEO Kumar Gaurav described the move as a necessary development in the march toward establishing a “digital India.” Gaurav also revealed that Unicas will showcase the convenience and security associated with blockchain adoption.
Highlighting The Rationale Behind Establishing Physical Crypto Bank Branches, The Cashaa CEO Told Cointelegraph:
“India is a very social and family-based country where the financial decision is made by the head of the family, which mainly lies in the age group of 40–65 years. This age group needs to see things physically before they believe in anything and that is why we decided to open a minimum of 100 branches which will establish trust about crypto but also educate and [create] awareness about crypto.”
Despite regulatory uncertainty, crypto adoption in India is on the rise, especially in the peer-to-peer trading arena. Meanwhile, the government is reportedly looking at imposing taxes on Bitcoin transactions.
Anchorage Granted US’s First National Crypto Bank Charter
With Acting Comptroller Brooks on his way out the door, the OCC has given its first digital bank charter.
Custody pioneer Anchorage is the first crypto firm to see a charter from the U.S. national bank regulator.
Per a Wednesday announcement from the Office of the Comptroller of the Currency, Anchorage will have conditional authorization to operate as a trust institution nationally. The charter is the first of its kind, part of an idea of a “fintech charter” stretching back to the Obama years, but which has been accelerated under the leadership of Acting Comptroller Brian Brooks, formerly of Coinbase’s legal team.
Per the announcement, Anchorage’s continued charter will hinge upon unique requirements:
“As an enforceable condition of approval, the company entered into an operating agreement which sets forth, among other things, capital and liquidity requirements and the OCC’s risk management expectations.”
The actual agreement between Anchorage and the OCC specifies a point that has been central to the debate around the fintech charter; namely, that the new species of banks will not hold deposits: “The Bank shall not engage in activities that would cause it to be a “bank” as defined in section 2(c) of the Bank Holding Company Act.”
It’s a controversial point. What is a bank? With the advent of online banking and especially with the technological security that crypto provides, Brooks believes that the future belongs to more bespoke financial services. Narrower uses more tailored to individual needs, but still requiring national authorization, as he described his vision earlier today.
In the same interview, Elliptic CEO Simone Naimi asked Brooks when to expect the first such national charter for a crypto bank. Brooks checked his watch, in what at the time seemed to be jest.
Hitherto, such registration has been done state-by-state, but only recently for crypto. This past summer, Wyoming authorized Kraken as the first crypto-native bank in the U.S.
Nonetheless, state regulators have expressed concern that the OCC’s push to charter non-depository institutions represents a threat to their authority.
An OCC representative declined to comment as to whether to expect more crypto bank charters in Brooks’ final days as Acting Comptroller.
Anchorage Set For Growth Following $80M Fundraise
With additional millions in funding, Anchorage looks toward scaling.
Last month, digital asset entity Anchorage received a bank charter from the United States Office of the Comptroller of the Currency, or OCC. This month, the outfit has added $80 million in funds.
“Today, we are pleased to announce that Anchorage has raised an $80 million Series C, led by GIC, Singapore’s sovereign wealth fund, with participation from a16z, Blockchain Capital, Lux, and Indico,” a Thursday blog post announcement from Anchorage says, adding:
“This new capital will allow us to rapidly scale to meet the rising demand for participation in the digital asset space, particularly among corporations and traditional financial institutions.”
In January, the OCC dished out a banking charter to Anchorage — a first by the governing body for a blockchain company. The ruling came with a number of guidelines, including specific restrictions preventing Anchorage from acting as a bank in the traditional sense.
Anchorage started as a digital asset custody solution, later expanding into other crypto finance endeavors. Its recent blog post details:
“This new round of funding will help us help institutions participate in new ways — by bringing crypto to their users, by diversifying their corporate treasuries, and by enabling a wide range of emerging use cases.”
Upcoming developments include easing the processes around the lending of digital assets and partnerships with multiple bank types, the post added.
In July 2020, the OCC gave U.S. national banks the go-ahead to offer crypto custody services.
Signature Bank Crosses $10B In Deposits From Crypto Customers
Signature’s $10 billion in deposits from crypto businesses is now double that of rival Silvergate.
Deposits from digital currency customers now make up nearly 16% of total deposits at New York’s Signature Bank.
In an earnings call Thursday, Signature revealed that deposits from customers in the crypto industry now total $10 billion – twice that of California rival Silvergate Bank.
“We’ve clearly become the preeminent player in that space,” said Eric Howell, the company’s executive vice president of corporate and business development. “It’s obvious that digital assets and cryptocurrencies are not going away.”
Signature Bank CEO Joseph DePaolo added that the bank’s blockchain-based payments platform Signet is the main driver of deposit growth in digital asset banking, and that institutional adoption is causing the vertical to “grow by leaps and bounds.” Prominent customers include Voyager Digital Holdings, Polychain Capital and bitFlyer USA.
Signature banks the “top five crypto exchanges,” DePaolo said, and is now offering retail banking services through them. (Silvergate is known to serve Coinbase, Kraken and Bitstamp. Exchanges often have more than one banking partner in order to more quickly onboard new customers.)
Signature added $2.5 billion in non-interest-bearing deposits in the fourth quarter of 2020, which fell half a billion shy of Silvergate’s $2.9 billion in new deposits from digital currency customers in Q4.
Crypto firms are often a rich source of low-cost deposits for the few banks that openly serve the sector. As such, analysts have paid close attention to non-interest-bearing deposit growth at Signature, especially since the bank doesn’t break out deposits from crypto customers in its financial statements.
Signature sees itself as a bank for high-net-worth individuals and institutions; its crypto banking business has a low profile.
These deposits are not equal to the deposits from crypto firms at the bank, since Signature has many other lines of business. In total, non-interest-bearing deposits represent nearly 30% of total deposits at the bank.
Total deposits increased at the bank quarter-over-quarter by $8.98 billion, with money-market deposits representing the lion’s share.
Signature’s average cost of deposits and average cost of funds for the fourth quarter of 2020 decreased by 66 and 69 basis points to 0.42% and 0.57%, respectively.
Crypto Startup Metal Pay Files For National Bank Charter
Metal Pay’s “First Blockchain Bank and Trust” would be FDIC-insured, says CEO Marshall Hayner.
Peer-to-peer crypto payments platform Metal Pay has filed to become a national bank in the U.S.
The startup filed a charter application for “First Blockchain Bank and Trust, N.A.” with the Office of the Comptroller of the Currency (OCC) on Feb. 3, CEO Marshall Hayner told CoinDesk. Its trust company would be incorporated in Rapid City, S.D.
Metal Pay will shortly file applications with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank of San Francisco, Hayner said.
Favorable crypto banking guidance has sparked an inflow of industry charter applications in the past two months, with Paxos, BitPay and now Metal Pay all seeking OCC approval. Last month, Anchorage became the first crypto firm to obtain conditional approval for a national trust charter.
But Hayner said Metal Pay is the first to pursue “full” banking licensure. It wants to accept cash deposits alongside the crypto, and it wants those cash deposits to be insured by the FDIC.
“This would be the first FDIC-insured crypto bank,” Hayner said, adding depository insurance would give First Blockchain a leg up in banking institutional clients. That insurance would only apply to cash deposits, however.
The application will now enter a 30-day public comment period before it can proceed for consideration. Hayner expects OCC to render a decision within four months.
It is possible that a new OCC chief will be installed by then. Former Acting Comptroller Brian Brooks, a former Coinbase lawyer, left the regulator toward the end of the Trump Administration. President Biden is said to be interested in nominating a similarly pro-crypto Comptroller in Michael Barr.
Blue Ridge Bank Shares Halted By NYSE After Bitcoin ATM Announcement
The stock jumped by more than 13% after news that Blue Ridge would let customers buy bitcoin through its ATMs.
The New York Stock Exchange (NYSE) halted trading of Virginia-based Blue Ridge Bank’s stock (BRSB) after a spike in trading activity Wednesday, the company told CoinDesk in an email.
The company announced late Tuesday that it had opened up bitcoin redemptions and purchases at 19 of its ATMs. The stock started the day trading just under $20 and jumped to $22.61 before settling to $21.22 as of press time.
“NYSE told us the company’s stock reacted to the news and due to the volatility, a Limit Up/Limit Down (LULD) trading halt was triggered,” said Blue Ridge external spokesperson Jon Amar. “The LULD is a 5-minute trading pause. Currently, the stock is trading up approximately 5% on 75K shares vs. its 30 Day ADV of 10K shares.”
The NYSE did not respond to a request for comment by press time.
Anchor Begins Countdown To Launch Of Bank-Beating DeFi Savings Account
Anchor was originally slated for an October launch, but the team pushed that back to late November. With the countdown showing on its website, this could really be it.
Anchor, the much-anticipated cryptocurrency savings account from the team at Terraform Labs, appears to be finally nearing a go-live date, based on a countdown clock on its website.
Under the plan announced last summer, Anchor would allow users to hold Terraform’s UST stablecoin, pegged to the U.S. dollar, and earn returns that consistently outpace the annual percentage yield (APY) of savings accounts at U.S. banks.
Anchor represents a significant new decentralized finance application independent of Ethereum (where most of the DeFi action takes place): a basic savings account that should be more than competitive with traditional banks.
Based on its own implementation of the Tendermint consensus mechanism, UST has a market cap of just under $1 billion, making it the fifth-largest stablecoin, according to CoinGecko. The token has spread from its native blockchain to Ethereum and Solana.
Anchor was originally slated for an October launch, but the team pushed that to late November. With the countdown showing on the site now, this could really be it.
Crypto Investment Bank Seeks To Hire A Dozen For Flurry Of Deals
Imperii, an investment bank that focuses on the cryptocurrency industry, is looking to hire at least a dozen people this year to handle a flurry of deal activity that it’s expecting.
“Anyone that’s interested in fintech and understands that crypto is the revolution, and if you want to be a part of that, and you’re sitting in a firm that’s clearly not addressing that — ours is,” Chief Executive Officer Tony Scuderi, who worked at investment bank KBW for 14 years before starting Imperii, said in an interview. “There are tons of deals happening.”
Scuderi and his co-founder Alex Pack are plotting an expansion of Imperii after about 20 months of operation, and are looking for talent across the gamut of Wall Street. He’s already posted a job for a managing director with more than a decade of experience and is on a “partner track,” who would be based in San Francisco but work remotely for the “foreseeable future,” according to the listing. He’s also looking for junior talent and economists.
The expansion comes amid a flurry of transactions that involve crypto-friendly firms. Day-trading platform eToro, an early adopter in the industry, this week agreed to go public in a more-than $10 billion deal with a blank-check firm. Crypto exchange Coinbase Global is also planning to go public within weeks.
Imperii has advised on deals including Blue Fire Capital’s sale to Mike Novogratz’s Galaxy Digital and was also involved in the $10.9 million of investments raised by blockchain company O(1) Labs.
“We need the entire stack” in terms of talent, Scuderi said. “At this stage, we’re talent and fit first, so somebody who’s a very capable and talented investment banker who also has a background in crypto is a home run.” He added that Imperii would also talk to those who have an interest in the industry more broadly.
Avanti Financial Raises $37 Million To Launch Institutional Crypto Bank
The digital asset bank will be aimed at institutional investors only, and there is no exchange planned.
The Avanti Financial Group has announced that it has raised $37 million in a Series A round, bringing the company closer to launch as a digital asset bank.
In a March 25 announcement, Avanti stated that it will use the proceeds to fund the required regulatory capital needed for launch, in addition to funding development and other operating expenses. The round brings the total amount raised to $44 million.
Participants in the round are a who’s who of institutional investors including Coinbase Ventures, Binance.US, Morgan Creek Digital, Madison Paige Ventures, AP Capital, and Susquehanna Private Equity Investments, in addition to individuals including Trace Mayer and some of Avanti’s executives and directors. The University of Wyoming Foundation also contributed to the funding round.
Avanti was founded in 2020 as a Wyoming bank engineered to serve as a regulatory compliant bridge between U.S. dollar payments systems and digital assets. The firm first gained bank charter status from the state of Wyoming in October 2020 and was the second crypto company to become a bank after Kraken Financial which received the bank charter in September of the same year.
Founder and CEO of Avanti Financial, Caitlin Long, stated that the firm has received more than 2,500 inbound customer inquiries since announcing its bank charter approval and looks forward to starting to serve clients later this year. She did not reveal any details about a launch date but mentioned that a fully regulated dollar-pegged stablecoin was in the pipeline.
“Our roadmap includes offering API-based U.S. dollar payment services for wires, ACH and SWIFT; issuance of our tokenized, programmable U.S. dollar called Avit; and custody and on-/off-ramp services for bitcoin and other digital assets.”
In an interview with Cointelegraph in September 2020, Caitlin Long confirmed that Avanti has no intentions of becoming an exchange and will be for institutional investors only.
Early Bitcoin adopter and entrepreneur Trace Mayer, who formed the consortium that led Avanti’s Series A, stated that Avanti is extremely well-positioned to address the need for legally compliant operators in the digital asset industry as markets mature.
Anchorage To Custody Digital Securities For Prometheum’s Retail Trading Platform
The custodian’s bank charter allows it to hold digital assets for broker-dealers and their clients, said Anchorage CEO Nathan McCauley.
A subsidiary of blockchain company Prometheum has tapped digital asset bank Anchorage to be the custodian for an alternative trading system (ATS) for digital securities that the company expects to be open to the public later this year.
According to Prometheum CEO Aaron Kaplan, the ATS application is still pending at the Financial Industry Regulatory Authority (FINRA), but the company has built a system that allows brokerage firms and clearing firms to speak to each other easily in an effort to entice Wall Street companies to use a platform with which they’re familiar.
“It’s a Nasdaq on the blockchain,” Kaplan told CoinDesk in an interview.
Adding more ATS platforms for the digital security market will give issuers more liquidity for their tokens, said Anchorage CEO Nathan McCauley. Last month, security token platform Tokensoft announced it would allow its issuers to trade their digital securities on tZERO, which uses Prime Trust as its custodian.
Other ATS providers for digital securities include OpenFinance and the Public Private Execution Network. Security token firm Securitize applied for both a broker-dealer license and an ATS in October.
“The big advantage of securities tokens is public ledgers,” McCauley said. “The transparency is unprecedented in traditional securities markets.”
During its charting process, Anchorage got specific approval from the Office of the Comptroller of the Currency (OCC) to custody security tokens on behalf of broker-dealers, McCauley added. Anchorage plans to offer cash loans with security tokens acting as collateral through an affiliate.
Signature Bank Goes Head-to-Head With Silvergate In Bitcoin-Backed Lending
Signature’s CEO said on an earnings call Wednesday the bank wants it to be a “no-loss business.”
New York-based Signature Bank will soon start offering its crypto clients bitcoin-backed cash loans, executives revealed on an earnings call Wednesday.
The bank joins its rival Silvergate, which has been offering bitcoin-backed loans since June of last year, and crypto lending startups including Genesis, BlockFi and Unchained Capital. (Genesis, like CoinDesk, is owned by Digital Currency Group.)
The move shows an appetite for crypto-collateralized loans from banks that have more stable funding sources (FDIC-insured deposits) and tougher underwriting standards than the startups.
“We want it to be a zero-loss business,” said Signature CEO Joseph DePaolo. “And so we’re only going to have it for the very, very best clients. We’re going to underwrite it to death, have deep discounts and quality custodians. It will contribute in 2021, but not necessarily in the second quarter to a great extent.”
Signature says it’s still in the process of doing due diligence on the custodians it wants to use for the bitcoin-backed loans. Silvergate works with Fidelity, Coinbase, Anchorage and Bitstamp for its lending product.
“We also want to have the ability to liquidate quickly, and we won’t negotiate on margin or liquidation provisions,” Signature’s DePaolo said.
The bank CEO noted that Signature was open to more cryptocurrencies than just bitcoin (BTC, -2.74%) as collateral but wouldn’t say what the interest rate yields would be on the loans except that they’d be more “than our traditional CNI” or cash net income.
Signature also reported that it raked in $4.4 billion in deposits from crypto customers in Q1 of this year.
Last quarter, the bank said its deposits from crypto customers totaled $10 billion. If that number held steady, then the bank now has $14.4 billion from the digital currency space.
The bank added 110 crypto customers for a total of 740 customers from the industry. This falls well below Silvergate Bank’s 1,104 customers in the space, but Signature’s deposit growth from these customers more than doubled Silvergate’s $1.8 billion growth in crypto customer deposits in Q1.
Deposit growth from digital currency customers at Signature is also driven by the bank’s blockchain-based payments platform Signet, which offers real-time fiat payments for crypto customers 24/7. DePaolo would not break out figures on Signet’s transaction volumes.
Unlike Silvergate, Signature banks dollar reserves for stablecoin issuers. Signature also serves over-the-counter trading desks, crypto exchanges, blockchain companies and bitcoin miners.
On the company’s earnings call, DePaolo was pressed on whether or not deposits from these customers would stick around.
“Well, 30% of those deposits are in [demand deposit accounts] because we’re getting the operating accounts,” DePaolo said. “We’ve been asked, ‘What about the big banks? The Chases and the Citis, if they get into digital in a big way?’ Well, we’ve been competing with them for 20 years so we’re not worried about the big players.”
Similar to Silvergate’s Q1 earnings call, DePaolo was also pushed on how the bank was deploying deposits from crypto firms into securities that would offer higher yields.
“We do keep a decent amount of liquidity against these deposits because it’s still early on,” DePaolo said. “Although we have a team that’s been around for eight years in the business, it’s still early on for the crypto world.”
SBI Doubled Crypto Business Profits In Past Fiscal Year
SBI’s total pre-tax profit from its crypto business surged above $174 million in the past fiscal year.
Japanese financial giant SBI Group more than doubled the total profit of its cryptocurrency business during the fiscal year that ended in March.
On Wednesday, SBI released a report on the company’s financial results, disclosing that its pre-tax crypto-powered profits during the past fiscal year amounted to 18.9 billion yen ($174 million). The amount is 10 billion yen ($92 million) higher than the total pre-tax total profit recorded over the previous fiscal year, SBI said.
SBI’s crypto division features several companies, including crypto trading platform SBI VC Trade, mining arm SBI Crypto, and newly acquired crypto trading platforms like TaoTao and B2C2. SBI purchased a 90% stake in B2C2, making it a subsidiary in December 2020, shortly after acquiring the TaoTao crypto exchange in October.
In the report, SBI notes its continued support of XRP dividends as part of the company’s XRP shareholder benefits program.
The firm also reiterated its commitment to establishing a Singapore-based digital asset exchange in collaboration with Switzerland-based SIX Digital Exchange. “We aim to further expand the liquidity of digital assets and services for institutional investors through collaboration with the SIX Group, which has a high level of expertise in dealing with institutional investors,” the firm stated.
SBI also mentioned its plans to set up a digital stock exchange in collaboration with Sumitomo Mitsui Financial Group. Dubbed Osaka Digital Exchange, the platform is expected to start trading digital securities in 2023.
SBI previously highlighted the positive impact of crypto on its business, reporting that SBI Securities’ trading revenue surge in 2019 came thanks to its crypto investment wing.
Wells Fargo Investment Institute To Onboard Crypto Clients By Next Month
The investment bank is ready to give crypto a chance, after declaring that it had matured and evolved of late.
Wells Fargo Investment Institute announced that it will soon open an investment product for its wealthy clients, with president Darren Cronk declaring the firm’s stance that the cryptocurrency space has finally come of age.
The research division of Wells Fargo Wealth & Investment Management, which oversees close to $2 trillion in assets, is in the process of evaluating and onboarding its cryptocurrency investment platform for qualified investors. The platform is expected to be launched by around mid-June, after the final stages of the due diligence process.
“We think the cryptocurrency space has just kind of hit an evolution and maturation of its development that allows it now to be a viable investable asset,” said Cronk in an interview with Business Insider.
As recently as December 2020, Wells Fargo Investment Institute was hesitant to state any interest in the cryptocurrency space, with its head of real asset strategy, John LaForge, telling a media conference that the institute had little interest in crypto.
Cronk said there was still risk involved, referencing a $2 trillion global market cap — which has since shrunk to $1.3 trillion at the time of writing as Bitcoin (BTC) and the cryptocurrency space experience one of the worst bloodbaths in recent memory.
Customer protections and regulations were on Cronk’s mind when he looked ahead to the product launch, noting the still-evolving landscape ahead.
“There’s a whole element of consumer protections and regulations that have to still evolve with the changing landscape. So we’re not without risk, it’s just that we think there can be a viable investable option for those clients who show an interest,” said Cronk.
Why US Government Yanked BitGo’s Contract And Gave It To Anchorage
A tale of crypto rivalry, multimillion-dollar contracts, and bureaucratic definitions of “small business.”
BitGo’s hard-won deal to be the custodian of cryptocurrency seized by the U.S. government was a victim of the company’s own success.
The $4.5 million, six-year contract with the U.S. Marshals Service, which CoinDesk revealed in April, fell through late last week. Instead, Anchorage, a smaller competitor, secured an even larger USMS contract – $6.6 million – that expires after five years.
BitGo got disqualified on a technicality. USMS spokeswoman Lynzey Donahue told CoinDesk the firm was simply too big to win a small business contract, and so the Small Business Administration (SBA) nixed the original deal.
The turnabout is the latest development in a contract saga that stretches back to 2018, when the USMS first hinted it needed help storing criminal coins. A division of the U.S. Department of Justice, USMS is responsible for disposing of millions of dollars in crypto that its sister agencies have seized.
Fifteen companies pitched USMS beginning in June 2020, public records show. Some were excluded from consideration – the government says being too big for a small business contract is the most common reason – but BitGo and Anchorage both survived the cull. BitGo signed the contract on April 21. CoinDesk broke the news the next day, and BitGo trumpeted the victory the day after that.
That win began to teeter within five days when at least one of the contract’s 14 losers cried foul to the SBA.
“BitGo was their first choice and it was protested by competitors,” BitGo CEO Mike Belshe told CoinDesk.
Who that protester was remains a mystery, but it kicked off a bureaucratic review that caused BitGo to lose the contract and runner-up Anchorage to win it.
“We are unable to comment on BitGo, but Anchorage participated in more than a yearlong process, and in the end, we were chosen,” Anchorage said in a statement. It declined to comment on what happened behind the scenes.
Lucre And Glory
The competitive world of federal contracting is awash in cash, private sector suitors and more than a hint of prestige. Especially in crypto, an industry with a robust criminal underworld, getting to boast of a law enforcement partner that perhaps counteracts the shadow is itself a prize.
Some crypto firms avoid that megaphone. For example, Chainalysis, the largest crypto tracing company, does not trumpet every million-dollar deal it receives from a government agency. It has secured more than 100 federal contracts from agencies such as the Drug Enforcement Administration, Immigration and Custom Enforcement, Internal Revenue Service and the FBI since 2015.
BitGo and Anchorage have each had only one record in the public databases – the same USMS custody deal. Both quickly marketed their contract wins.
“We see this as a validation” of BitGo’s service, one company exec crowed in the April press release. Three months later, Anchorage declared more or less the same.
Losing the contract will likely make little difference, financially speaking, for BitGo, which two weeks after declaring pre-emptive victory in April agreed to a $1.2 billion acquisition by financier Mike Novogratz’s crypto conglomerate, Galaxy Digital.
Galaxy’s certainly no small business, and few in the crypto world would consider pre-buyout BitGo or Anchorage, which holds a BitLicense from New York state that allows it to conduct digital asset business in the state, to be mom-and-pop shops either. But the SBA sets the line for small businesses in the “commodity contracts dealing” industry at those with less than $41.5 million in annual revenue.
SBA press officer Clements Tiffani told CoinDesk the agency checked a “snapshot” of BitGo’s financial records from May and June 2020 and found the firm’s revenue was too high for an SBA contract.
“BitGo has the option of appealing our determination, so far they haven’t,” she said in an email.
If BitGo had appealed, then a trove of documents detailing its size, salaries and revenue could be made public, according to Shane McCall, a partner at the law firm Koprince McCall Pottroff, which specializes in challenging SBA rulings.
Belshe, who will become Galaxy’s deputy CEO and a board member once the merger closes, said he’s decided to just walk away from this.
“We’re busy with the business,” he said. “The last thing I need to do is continue” this fight.
USDC Builder Circle Says It Wants To Become A National Crypto Bank
The plans would take Circle well beyond the OCC banking charter already conditionally issued to several firms.
Fresh on the heels of announced plans to go public, Circle said Monday it intends to become “a full-reserve national commercial bank.”
If approved, the proposed digital currency bank would operate under the supervision of the Federal Reserve, U.S. Treasury, Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).
To be clear, this would be an industry first, with a scope far beyond the OCC banking charter already conditionally issued to Anchorage, Paxos and other crypto-native financial services firms.
“We are embarking on this journey alongside the efforts of the top U.S. financial regulators, who through the President’s Working Group on Financial Markets are seeking to better manage the risks and opportunities posed by large-scale private-sector dollar digital currencies,” Circle said in a blog post.
A Circle spokesperson was not able to immediately answer if any corresponding paperwork has been filed with the federal authorities listed in the announcement. The OCC has not received a charter application from Circle, agency spokesperson Stephanie Collins told CoinDesk via email.
There are currently $27.5 billion USDC in circulation. The dollar-backed stablecoin administered by Circle is the market’s second-largest stablecoin behind Tether’s USDT.
Circle announced last month it had partnered with a special purpose acquisition company (SPAC) to go public later this year. The deal valued Circle at $4.5 billion.
The firm hinted at its banking aspirations in an S-4 form filed late Friday:
“As part of our strategy to reduce our dependence on third parties, we may in the future consider pursuing a U.S. national bank charter or evaluate the acquisition of a national bank. This would allow us to access the Federal Reserve System directly, reducing the costs and time for settling transactions.”
Wyoming’s Crypto-Friendly Bill Could Be A Sandbox In Action, Sen. Lummis Says
The new bill would allow crypto banks to get faster approvals for conducting business in Wyoming.
As the United States continues to weigh out the best ways to include crypto businesses through an infrastructure bill, the state of Wyoming has taken proactive measures to attract Bitcoin (BTC) miners and other crypto businesses to its local jurisdiction.
Wyoming’s crypto-friendly notion comes into light as the state has passed more than 24 bills related to blockchain technology. A recent CNBC report shows that the state has now approved a bill that will allow for “quick approval for new crypto banks.”
Wall Street veteran Caitlin Long, CEO of digital asset bank Avanti, stated that Wyoming’s latest bill creates a welcoming legal environment. She added:
“[Wyoming’s bill] just clarified that this industry is lawful and does exist in a recognized manner.”
However, Long shared her concerns about the gray areas of crypto regulation in other U.S. states. Comparatively, Wyoming has not imposed taxation on personal crypto incomes in addition to providing cheap energy resources and a fast internet connection, which is ideal for mining Bitcoin and other cryptocurrencies.
Wyoming’s Cynthia Lummis was among the U.S. senators who proposed crypto amendments to the infrastructure bill. CNBC quoted Senator Lummis saying:
“The state [of Wyoming] is bringing in more revenue and tech jobs thanks to crypto. It could be a sandbox in action for [Washington] DC.”
Citing long delays related to crypto reforms, Lummis also highlighted the risk of crypto businesses “burning through the capital” to get a nod for starting operations. Following suit, other U.S. states, including Texas, Nebraska, North Dakota and Illinois, are now passing their own crypto-friendly bills.
The report also stated that leadership of crypto companies, such as Kraken and Avanti, believe that the developments led by Wyoming will further pressure other states and the federal government to innovate along similar lines.
Currently, Texas and Wyoming are leading the race to attract crypto banks and Bitcoin miners that have been recently banned from operating in China.
While the infrastructure bill, HR 3684, proposed a framework for crypto businesses to operate within the U.S., senators opposed imposing regulations around crypto taxes. If amended, the bill could allow many crypto-related businesses to bypass extensive reporting requirements.
On Aug. 6, U.S. Treasury Secretary Janet Yellen objected to the infrastructure bill amendment proposal. Parallelly, the White House announced accepting the amendments suggested by senators Rob Portman, Mark Warner and Kyrsten Sinema, excluding only proof-of-mining and sellers of hardware and software wallets from tax reporting.
PNC Bank Planning Crypto Offering With Coinbase
A source said PNC, the fifth-largest bank in the U.S., plans to offer crypto investment services to clients.
Crypto exchange Coinbase said Tuesday it’s working with PNC Bank, the fifth-largest commercial bank in the U.S. by assets, on a crypto project.
“In recent months, we have formed partnerships with industry leaders including [Tesla CEO] Elon Musk, PNC Bank, SpaceX, Tesla, Third Point LLC and WisdomTree Investments,” a letter from PNC to its shareholders read. When asked about the partnership by CoinDesk, Coinbase declined to elaborate.
A source had previously told CoinDesk that PNC Bank is expected to unveil a crypto coin in the coming quarters.
The service would give the Pittsburgh-based national bank more seamless access to cryptocurrency investments for its customers, the source said. It’s just one facet of PNC’s broader digital assets and blockchain strategy.
PNC is the latest mainstream megabank to dip its toe into digital assets, and perhaps the largest to do so with Coinbase. PNC is already plotting a more crypto-centric future and months ago began hunting for someone to lead its innovation push.
That gig – a crypto product manager – will consider how PNC might leverage blockchain technology as it explores crypto’s “innovation cycle,” the source said, cautioning the role was about more than just investments.
A Since-Removed Job Description For The Philadelphia-Based Position Was More Explicit:
“The role will work on scaling operations for our cryptocurrency investment capability as well as managing all operational aspects pertaining to new cryptocurrency initiatives.”
PNC Bank didn’t return requests for comment.
Crypto Firms Want Fed Payment Systems Access—and Banks Are Resisting
Efforts by the new breed of financial entities, if successful, could create more competition for traditional banks.
Cryptocurrency companies want to tap into the Federal Reserve payments systems that traditional banks use to move money around quickly. The banks are pushing back.
The companies include Avanti Bank, which aims to provide custody services for institutional investors in cryptocurrencies, and Kraken, a cryptocurrency exchange platform.
They say direct access to the Fed’s payment systems would allow them to more quickly and cheaply process orders from customers buying and selling digital assets. Currently they must partner with traditional banks that have accounts with the Fed.
Traditional banks say the newer financial firms are supervised relatively lightly and lack the internal controls needed to ensure against money laundering and other illicit activities—concerns that regulators have expressed about the crypto industry more broadly. And they say the firms are riskier because they aren’t insured by the Federal Deposit Insurance Corp.
“It is reasonable to expect that such applicants will pose heightened risks regarding matters of anti-money-laundering, cybersecurity and consumer protection, as well as safety and soundness,” the Bank Policy Institute, which represents large banks, and the Independent Community Bankers of America wrote in a letter to the Fed last month.
Avanti and Kraken, which both have “special purpose” bank charters in Wyoming, say they have all the same compliance, controls and supervisory requirements of traditional banks. The only U.S. bank regulator that has a supervisory exam manual for crypto is in Wyoming, they say.
If they have their way on access to the Fed’s payment systems, that could encourage more firms to follow their example, introducing more competition for banks.
“It has the potential to reduce banks’ traditional role as gatekeepers and toll collectors for payment flows that are likely to grow over time,” said Jonah Crane, a partner at Klaros Group, an advisory and investment firm.
Last year, the central bank processed about $900 trillion in payments on its systems. These ranged from small bank-to-bank payments such as direct deposits or automatic bill payments to large wire transfers between financial institutions.
The struggle over access to the Fed’s payment systems also reflects incumbent banks’ concerns about the potential for competition from larger tech companies, such as Facebook Inc. and Google parent Alphabet Inc., which don’t face the same level of federal bank regulation.
“They have some reason to be paranoid,” said Eugene Ludwig, a former comptroller of the currency, who was responsible for the regulation of large national banks.
For example, Diem Association, which is backed by Facebook and 25 other members, has said it is developing a blockchain-based payment network that will be faster and cheaper than existing systems while protecting consumers and providing safeguards against financial crime.
Diem is partnering with a Fed-regulated bank on the project. But if other tech companies got direct access to the Fed’s payment systems, they may not need to take the additional step of partnering with established banks, according to banking lawyers and former regulators.
Regulators are also concerned that some types of crypto activities could pose risks to financial stability if they grow big enough. For example, some officials worry that so-called stablecoins—a form of digital currency pegged to the value of the dollar and other traditional currencies—could be susceptible to the kinds of runs that affect banks and mutual funds in a crisis.
Fed regulators are seeking feedback from the industry on a set of proposed principles for regional Fed banks to consider when evaluating applications for access to the payment systems from nontraditional banks.
Among them: whether strains at the institution may be transmitted to other segments of the financial system in times of stress.
The Fed suggested that federally insured banks already are likely in compliance with the guidelines. Firms that aren’t “may require more extensive due diligence,” the Fed said.
In recent years, startup financial firms have benefited from the issuance of new types of charters at the state level, and approval to operate as trust banks at the federal level. While full-service banks typically engage in three core activities—deposit taking, lending and payments—these nontraditional institutions offer only some of these services.
They generally aren’t allowed to lend to customers, but some are authorized to accept deposits while others collect fees for maintaining custody of the private digital keys for crypto customers or operate crypto exchanges.
Caitlin Long, chief executive officer of Avanti, said granting direct access to the Fed’s payment systems to banks that cater to the digital asset sector should be welcomed because doing so would bring them under the watchful eyes of regulators.
“The absence of action to open a direct path has pushed much of the U.S. dollar banking of the digital asset industry into the ‘shadow’ banking system, which means risks cannot be readily monitored,” she wrote in a July comment letter.
Still, after about a year of waiting for Fed approval, Ms. Long said in an interview that her firm this month applied to be directly regulated by the central bank, a move she said should bolster its case for access to the central bank’s payment systems.
If approved, her bank would also be directly subject to Fed regulation and examination.
Kraken also sought direct access to the Fed’s payment system last year and is still awaiting an answer.
The cryptocurrency exchange operator describes itself as just as safe as an FDIC-insured bank because it doesn’t lend out its depositors’ money and holds 100% of their cash at a correspondent bank or at the Fed, via its correspondent institution. It is also supervised by the Wyoming Division of Banking.
“I agree these banks need to have a bank-grade supervisory and oversight program,” said David Kinitsky, chief executive of Kraken Bank, a wholly owned subsidiary of Kraken. “We do.”
BTC Markets Taps Licensed Neobank Volt For Integrated Banking Features
Fintech companies see an opportunity in the negligence and reluctance of traditional banks toward the cryptocurrency ecosystem.
The banking capabilities of fintech have met cryptocurrencies in a new partnership between Australian crypto exchange BTC Markets and local neobank Volt.
With a license to operate in Australia as an authorized deposit-taking institution since 2019, Volt will provide corporate cash management accounts for BTC Markets users to manage their Australian dollar funds. Those accounts allow real-time payments on the New Payments Platform, Australia’s national infrastructure for fast payments.
“This means near-instant trading opportunities for our crypto clients, as they can rapidly fund AUD into their BTC Markets account,” BTC Markets CEO Caroline Bowler told Cointelegraph, adding that in the future, the partnership would also allow BTC Markets users to open Volt bank accounts without leaving the exchange:
“It gives stability to our clients and builds out a key piece of market infrastructure, which is vital to our industry development. […] It also goes to show that innovation is alive and well within Australian financial services.”
Speaking on the regulatory approach in Australia, Bowler reiterated the need for proportionate regulation that protects the investor without stifling innovation. “I think our partnership with a regulated entity here in Australia goes to show it is possible,” she added.
Highlighting the displeasure of crypto users regarding “the games being played by banks,” Volt co-founder Steve Weston explained, “The total of all deposits in Volt accounts are covered by the protection of up to a maximum of $250,000 AUD ($185,900) per account holder under the Financial Claims Scheme.”
Despite the increasing adoption of crypto, where 17% of Australians own crypto according to a recent survey, regulators’ warnings on crypto exchanges have lead to a reluctant approach by traditional banks.
Crypto.com And Silvergate Enable Institutions To Buy And Sell Crypto With USD
Silvergate is a major crypto bank known for assisting the launch of El Salvador’s crypto wallet Chivo.
Major cryptocurrency exchange Crypto.com continues expanding its crypto on-ram and off-ramp solutions with a new partnership with the California state-chartered bank Silvergate.
Crypto.com announced on Tuesday that it is working with Silvergate to allow institutional clients to deposit and withdraw from the exchange using the U.S. dollar (USD).
According to the announcement, bank transfers to and from the Crypto.com exchange are now available for institutional investors. With the help of Silvergate, institutional clients can transfer USD between their bank accounts and Crypto.com with no fees.
The new feature is enabled through the Silvergate Exchange Network, a payments platform enabling users to instantly send U.S. dollars at any time of the day. The feature will be available to institutional clients in all exchange available markets, the announcement notes.
Crypto.com co-founder and CEO Kris Marszalek said that the new feature is “highly requested” and supports the company’s vision of accelerating the world’s transition to cryptocurrency. “We are excited to work with Silvergate to provide an additional fiat on/off ramp solution to our institutional clients,” he added.
As previously reported, Crypto.com has been working with the USD Coin (USDC) stablecoin issuer Circle to provide USD deposits and withdrawals on its platform.
Crypto.com launched withdrawals through USD bank transfers for institutional clients across more than 60 countries via Circle API in August. The exchange previously partnered with Circle to enable USD deposits and USDC transfers for users in more than 30 countries.
Silvergate is a crypto-focused bank known as the issuer of Facebook’s not-yet-launched digital currency Diem USD and the manager of its reserve. The bank also assisted the launch of El Salvador’s government-backed Bitcoin (BTC) wallet Chivo, acting as a responsible entity for facilitating Chivo’s U.S. dollar transactions.
US Fed Opens Pathway For Crypto Banks To Tap Central Banking System
The central bank will create a three-tiered system for evaluating whether a financial institution should have access.
The U.S. Federal Reserve said Monday it is publishing its final guidance for novel financial institutions to access its “master accounts,” something these firms need to participate in the global payment system.
Monday’s announcement would seemingly move the U.S. central bank one step closer to possibly allowing Wyoming special purpose depository institutions (SPDI), like Custodia (formerly Avanti) and Kraken Bank, access to these accounts so they would not need intermediary banks.
The Fed first proposed guidance last year, opening up a request-for-comment process. Nearly 300 respondents filed comments, leading to a second public feedback process earlier this year.
In a statement, Fed Vice Chair Lael Brainard said, “The new guidelines provide a consistent and transparent process to evaluate requests for Federal Reserve accounts and access to payment services in order to support a safe, inclusive, and innovative payment system.”
The guidance is largely similar to what was first proposed in 2021, and will create a multi-tiered system allowing the Fed to adapt its evaluation process for granting access depending on what kind of financial institution is applying. Each tier corresponds to a respectively more stringent review process.
Under the guidance, Tier 1 banks would be federally insured. Tier 2 banks would not be federally insured but are still “subject to prudential supervision by a federal banking agency.”
The third tier consists of firms that are “not federally insured and not subject to prudential supervision by a federal banking agency,” which would most likely apply to the Wyoming crypto banks.
According to a statement published with the guidance and press release, the Fed received comments after publishing both its initial proposed guidance in 2021 and its updated guidance earlier this year. Many of these commenters filed a form letter but the Fed appears to have received a hair under 70 unique responses.
“Many commenters, on the other hand, recommended that the Proposed Guidelines should provide a more challenging path for institutions with novel charters to gain access to accounts and services. Many of these commenters argued that the Proposed Guidelines should subject non-federally insured institutions to the same types of requirements as apply to federally insured depository institutions, regardless of the institution’s business model,” the document said.
Custodia and Kraken both applied for master account access in 2021, shortly before the Fed published its initial proposal.
David Kinitsky, the CEO of Kraken Bank, told CoinDesk at the time that the proposal was a positive step for his company.
“There’s nothing novel in terms of the factors that they’re including here. It’s exactly the type of things that the Federal Reserve is looking at, in terms of risk to the reserve itself, risk to the payment system [and] risk to the economy,” he said.
Still, Custodia sued the Fed in June on allegations of violating a mandatory one-year deadline in deciding whether to grant the Wyoming firm access or not.
Federal Reserve Finalizes Guidelines for Access To Its Payment Systems
Institutions engaged in novel activities would undergo more extensive review.
The Federal Reserve said Monday it would adopt a tiered approach toward determining whether to grant financial institutions access to its payment systems and signaled that cryptocurrency companies would be subject to a higher level of review.
The Fed’s board in Washington issued final guidelines Monday for its 12 regional branches to use when evaluating applications for so-called master accounts with the central bank.
Such accounts allow financial institutions—primarily banks—to move trillions of dollars a day on the Fed’s payment systems.
In recent years, financial-service firms that cater to cryptocurrency investors have sought master accounts from the Fed, saying access to the central bank’s payment systems would allow them to process orders from customers more efficiently.
That has followed efforts by banking regulators in some states, such as Wyoming, to make it easier for such firms to obtain bank charters.
Under the tiered approach the Fed decided to adopt, applications from financial firms with state charters would face more scrutiny than applications from institutions insured by the Federal Deposit Insurance Corp. or subject to federal supervision.
“Institutions that engage in novel activities and for which authorities are still developing appropriate supervisory and regulatory frameworks would undergo a more extensive review,” the Fed said in a press release.
The guidelines reflect the skeptical view that officials inside the Fed and other regulatory agencies have taken toward the cryptocurrency market, which is largely unsupervised.
Fed Chairman Jerome Powell warned earlier this year that it was “easy to see the risks” in products such as cryptocurrencies.
He said the asset class should be subject to the same rules as other financial products, calling regulation “necessary to level the playing, keep trust of users, [and] protect consumers.”
After proposing a clearer set of guidelines for granting access to its payment systems last year, the Fed received dozens of comment letters from cryptocurrency firms, bank lobbyists and consumer-protection groups.
Crypto companies such as Kraken, a trading platform that applied for a Fed master account in 2020 through its Wyoming-chartered affiliate, said uncertainty and prolonged delays in approving such applications could hinder financial innovation.
Crypto Banks Are One Step Closer to Reality Under New Fed Guidance
The Federal Reserve’s guidance for approving master account access is a major milestone for crypto banks, but it still leaves much to be desired.
The U.S. Federal Reserve published guidance detailing how crypto banks can secure master account access, something several of these banks have wanted for over a year.
While the guidance stops short of true transparency, potential applicants now have a roadmap of sorts they can follow, while the Fed has indicated that it is indeed open to letting crypto companies (and other novel entities) access global payments rails.
Big Baby Step
After over a year, the Federal Reserve published final guidance detailing how it will assess reserve account applications from banks, ranging from federally supervised entities with deposit insurance to novel financial institutions with state charters.
That’s right, folks, we’re talking about Wyoming’s Special Purpose Depository Institutions (SPDI).
Why It Matters
A handful of crypto companies have sought bank charters for the past few years. The reasons for doing so vary. In some cases, a federal bank or trust charter opens up the potential client list for various services.
For others, being a bank means no longer needing a bank intermediary to access the global financial system. Regardless of the reasons, last week’s release provided a shot of adrenaline to these efforts, although it is just a first step.
Breaking It Down
The Fed said last Monday that it was publishing its finalized guidance for novel financial institutions and other banks seeking access to its “master accounts” (otherwise known as Reserve accounts and not at all to be confused with FedAccounts).
Under the published guidance, the Fed will look at how applicants meet six criteria and judge them based on what sort of institution they are.
Each applicant will have to 1) be legally allowed to apply for a Reserve Bank account, 2) verify they would not create a risk to the Federal Reserve Bank that grants them an account, 3) verify they will not create a risk to the overall payment system 4) verify they will not create a risk to the U.S. financial system 5) prove they won’t allow illicit activity and 6) show they won’t “adversely affect” the Fed’s ability to draft and apply monetary policy.
The amount of scrutiny a Fed Reserve Bank branch will apply to an applicant depends on what kind of applicant it is. Tier 1 institutions include federally insured banks and will face the lightest amount of scrutiny.
Tier 2 institutions are not federally insured but are at least overseen by a federal bank regulator. Tier 3 institutions are not federally insured or overseen by a federal regulator and will face the toughest scrutiny.
Crypto companies, like Wyoming SPDIs or New York trust entities, will mostly fall into Tier 3 (though some, like Paxos, could be classified as Tier 2).
What the Fed did not do is describe just what this scrutiny will actually look like, or how long it may take to evaluate an application.
Julie Hill, a professor at the University of Alabama’s School of Law, noted that the final guidance is “more or less the same” as the proposed guidance first published in April 2021.
The Fed solicited public feedback at the time, ultimately receiving more than 40 unique comments and over 280 form letters.
According to the Fed, many of the comments provided specific feedback to the different tenets laid out in the proposed guidance.
Other commenters pushed back against the idea that some companies without federal charters or companies with novel charters could gain access. Despite this, the Fed explicitly denied these commenters’ feedback.
“Some of the commenters to the guidelines said crypto companies or [companies] without deposit insurance should not be eligible and the guidelines don’t say that,” Hill said.
Gary De Waal, special counsel with the Katten Muchin Rosenman law firm, agreed.
“There was a lot of pushback in the comments. This is a classic case of the traditional versus the nontraditional, and I think the Fed has stood up well to the traditional and they said, ‘We’re not going to just say no,’” he said.
“You can see that in the responses to the comments. To me that’s very significant, people should not underestimate that.”
In a document published by the Fed detailing the comment letter, the central bank explicitly said the guidance was meant for any eligible company to use.
“The Board does not believe that it is appropriate to categorically exclude all novel charters from access to accounts and services. The Account Access Guidelines as adopted are intended to be applied by Reserve Banks to access requests from eligible institutions with both novel and more traditional charters. The Board believes that the final Account Access Guidelines will provide a robust framework for analyzing and mitigating risk,” the Fed’s guidance said.
This is good news for the crypto applicants, De Waal said. De Waal, alongside two of his Katten colleagues (former CFTC General Counsel Daniel Davis and special counsel Christina Grigorian), wrote an article for the National Law Review analyzing the guidance.
Ok, But What’s The Bad News?
There is more the Fed needs to explain.
While the Fed detailed its six principles, it did not explain how a company can satisfy those principles. It also has not shared what its timeline for approvals might look like.
In other words, while we know that Tier 3 applicants will face the greatest amount of scrutiny, we have no idea what that means.
A Federal Reserve spokesperson declined to comment about this on the record.
The Fed has a long list of risk factors, but it hasn’t shared what they are, Hill said.
The central bank may publish additional guidance that can answer these questions.
“I think this is clearly a first step, but it’s an important first step,” De Waal said. “… My hunch is the further guidelines that are published by the Reserve Bank will seem more ‘meat on the bones.’”
In the meantime, companies that have already applied for reserve account access may have to continue waiting. Of the two companies that have applied (that we know of), one has already lost patience.
Custodia Bank filed suit against the Fed earlier this year, alleging it violated a statutory deadline to make a decision on its application.
The Fed responded last week, after the guidance was published.
The Federal Reserve Bank of Kansas and the Board of Governors of the Federal Reserve System, which were each named as a defendant, filed their own motions to dismiss with supporting documents.
The Board’s defense boils down to stating it is under no legal obligation to direct the Kansas branch of the Fed to approve a master account, as De Waal pointed out.
“The Board, a federal agency … would not be an appropriate defendant even if plaintiff had any cognizable claims (and it does not),” the filing said.
The Kansas bank’s defense further says that it does not believe it has “taken an unreasonable amount of time to consider Custodia’s request,” given the circumstances (namely: That Custodia is a non-FDIC-insured state-chartered SPDI that would be the first crypto company to secure master account access if approved).
It also says it is under no obligation to grant Custodia a master account, and it lays out the various concerns and risks that a crypto bank might pose.
Plus, it’s still crypto.
It’s this last argument that I suspect we’ll see more often. Concerns about the financial stability risks of cryptocurrencies – particularly stablecoins – are appearing more and more.
The Fed (national group, not a reserve bank) even included this in the minutes of its latest Federal Open Markets Committee (FOMC) meeting.
“[The Fed staff] noted that these assets, including stablecoins, were subject to vulnerabilities – such as runs, fire sales, and excessive leverage – similar to those associated with more traditional assets,” the minutes said.
“While the recent turmoil in digital asset markets had not spread to other asset classes, these participants saw digital assets’ rising importance and growing interconnectedness with other segments of the financial system as underscoring the need to establish a robust supervisory and regulatory framework for this industry that would appropriately limit potential systemic risks.
A few participants mentioned the need to strengthen the oversight and regulation of certain types of nonbank financial institutions.”
These concerns are probably not going away, so what remains to be seen is how the Fed branch banks address them as they evaluate the crypto banks’ applications.
Bitcoin And The Banking System: Slammed Doors And Legacy Flaws
It’s no secret the banking system doesn’t like Bitcoin — but does that stance challenge Bitcoin-first companies? Cointelegraph investigates.
Despite Bitcoin’s (BTC) promise of a peer-to-peer world, building a Bitcoin-first business in 2022 still requires third-party intermediaries.
Whether it’s startup capital, using fiat money or simply exploiting fiat payment rails, Bitcoin business means interaction with the legacy financial system.
For the vast majority of Bitcoin-based businesses, this means that they probably need a bank.
Cointelegraph spoke to Bitcoin-only businesses about their experiences working with banks, given that ultimately, Bitcoin gets a lot of bad press in mainstream media.
Plus, some of the banking industry’s biggest supporters love to bash Bitcoin. Ben Price, founder of the Bitcoin Company, recently shared that the company had lost “dozens of dozens of banking partnership opportunities simply because we’re a Bitcoin company.”
We’ve lost dozens of banking partnership opportunities simply because we’re a Bitcoin company.
We’ve lost even more for simply following the law and fighting to minimize required user data and re-normalize financial privacy.
Most companies simply sell users out for simplicity.
— abitcoinperson (@abitcoinperson) June 8, 2022
Price was a product manager at Visa for years before founding the Bitcoin Company. He told Cointelegraph that the Bitcoin Company’s “goal is to bring Bitcoin to the whole world” because it’s “a real catalyst for improvement in our civilization.”
Price grew frustrated while working at Visa — not because he was a “hardcore Bitcoin maxi” but due to slow progress.
According to him, projects relating to payments, central bank digital currencies (CBDCs), noncustodial wallets and more were regularly shuttered or mothballed. Plus, the legacy finance system’s inner workings came into question. Carman told Cointelegraph:
“And, at the end of the day, Visa kind of serves the banks. They don’t serve consumers.”
The Bitcoin Company is part of a new range of Bitcoin “neobanks” — banks that treat Bitcoin as native currency alongside fiat. From The Bitcoin Company in the United States to Xapo in Gibraltar an CoinCorner in the United Kingdom, Bitcoin neobanks are flexing their financial muscles.
In short, they’re allowing people to live on a Bitcoin standard and easily interact with the legacy financial system.
Carman explains that Bitcoin neobanks derive from a desire to “hyperbitcoinize” — i.e., spur Bitcoin mass adoption — while conceding that only a smaller group of people will adopt Bitcoin as the cypherpunks originally intended.
He splits Bitcoin users into two pools: the cypherpunks who prioritize privacy, bury their seed phrases in the yard, mix their coins and run Bitcoin nodes; and the other 95% of people — such as his mom and sister, he explains — who will likely need access to a Bitcoin neobank. According to Carma
“To bring Bitcoin to most people around the world will probably require a gradual transition away from fiat legacy systems onto a Bitcoin standard. And to do that, you need to provide both pools.”
However, why can’t banks integrate Bitcoin and capitalize on the new technology and profit from Bitcoin’s success? Christian Ander, founder of the Swedish Bitcoin exchange BTCX, told Cointelegraph, “Many banks have a policy not to engage with or onboard Bitcoin and crypto companies. It doesn’t matter if the company complies with regulations or not.”
Danny Brewster, CEO of Bitcoin trading platform FastBitcoins, told Cointelegraph that banking Bitcoin-only companies, such as FastBitcoins, have persisted since 2013.
However, banks initially didn’t want to do Bitcoin business due to “a lack of understanding,” Brewster told Cointelegraph.
Fast forward to 2022, and “Despite regulatory clarification and increased scrutiny, the wider crypto market is a mess with the likes of LUNA, 3AC, etc.” Brewster explained that due to the Terra implosion and the subsequent crypto contagion, banks are even more risk averse. He said:
“The banks just see this, combined with payment fraud issues as a massive red flag and headache they want to avoid. […] I used to naively think it was because they were scared of being replaced by Bitcoin, and time has proven this thesis wrong.”
Brewster stated that crypto scams, wash trading and the darker side of crypto tarnish Bitcoin’s reputation: “In one case at a bank, 90%+ of all payment fraud cases touched ‘crypto’ at some point in the flow, it is obvious why as the resulting transaction gives the criminal irreversible funds at the end of the transaction.”
The constant recurrence is likely to color one’s opinion of Bitcoin, he explaine, as Bitcoin and crypto are considered one and the same:
“When your days are spent dealing with this, it will impact your views on everything to do with the space, and these people also have input on who the bank chooses to do business with.”
Anders explained that there are many reasons behind banks’ reticence to onboard Bitcoin businesses, from “incompetent Anti-Money Laundering staff and routines regarding Bitcoin and crypto assets” to the “old money vs. new [money]” debate.
However, he suggested that it’s wrong to think that Bitcoin is a threat to banking’s core business model. “In fact, it’s not, but central bank digital currency is.”
Brewster argued that “CBDCs will go the way of every shitcoin partnership that gets announced,” suggesting their eventual demise. But if CBDCs are successful, then commercial banks may face some competition from an unlikely source.
Finally, Hal Finney, the first person to mine Bitcoin after Satoshi Nakamoto, predicted the existence of Bitcoin-backed banks in 2010.
Finney highlighted scalability issues as the reason for such banks, although the Lightning Network has evolved to allow Bitcoin to process infinitely more transactions. In the meantime, although workarounds exist, Bitcoin-first businesses may be forced to continue “partnering” with banks.
Plus, Carman conceded that while partnering with banks is a headache, “A lot of merchant partners refuse to work with us (i.e., let us sell their gift cards) because we allow users to buy with Bitcoin. […] So it’s not all on the banking side.”
Indeed, while there are some hopeful signs of Bitcoin merchant payment adoption, fiat is king while FUD reigns almighty.
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