After years of criticizing, sidestepping, or avoiding regulation, the cryptocurrency industry is now racing to embrace it. In recent years, an increasing number of cryptocurrency businesses have filed applications with the Office of the Comptroller of the Currency (OCC) for national bank charters.
For example, payment processor BitPay and crypto exchange Paxos have filed applications with the OCC to become national trust banks. Custodian Anchorage, which is a part of Facebook, Inc.'s (FB) digital currency initiative, has filled out a similar application. Approval of these applications will enable the businesses to offer crypto services to clients.
The fact that crypto businesses are willing to become banks – institutions of mainstream finance they trashed earlier – might seem puzzling to industry observers. But it makes good business sense.
- Cryptocurrency firms have filed applications to become national trust banks.
- It is a business move aimed at providing custody services to institutional investors, who are growing increasingly interested in cryptocurrencies.
- Cryptocurrency custody is a growing market, according to consultancy firm KPMG, and the move could help crypto firms upsell other services to clients.
A Business Decision
Traditional retail banks make money off the difference in interest rates they charge for loans and managing customer funds. They must adhere to strict capital reserve requirements mandated by the Federal Deposit Insurance Corporation (FDIC). Custodian banks, however, make a majority of their revenue from fees for storing assets and making sure that they are safe from criminals. It is this latter type of bank that is attractive to crypto businesses.
Cryptocurrency custody is low-hanging fruit for the industry. In July, the OCC allowed nationally chartered banks in the United States to provide cryptocurrency custody services to customers. The letter states that "consumers and investment advisors may wish to use regulated custodians to ensure they don't lose their private keys, and therefore, access to their funds." Cryptocurrency exchanges, which also act as custodians for retail investors, do not generally provide private key access to customers. Investors on these exchanges must withdraw their cryptocurrency to a private wallet to have control of their own private keys.
Crypto firms have filed applications to operate national trust banks. Such banks do not have to hold reserve capital mandated by the FDIC.
New York-based Paxos' application with the OCC states that the planned bank would perform "only certain activities that are currently conducted by Paxos' New York state-chartered trust company and supervised by the [New York Department of Financial Services], including custody services." The company already has a state trust charter in New York, and a national charter will significantly expand its scope of operations.
BitPay is traveling down the same route, and its application has similar wording. "[The bank] will be acting in a fiduciary capacity for its merchant customers to ensure that they can provide crypto pricing quoted to their shoppers at the best available exchange rate, as well as cryptocurrency payouts to a business's recipients," it states.
Developments on the national stage are being replicated at the state level. Avanti Financial, a Wyoming-based crypto firm, was approved for a Special Purpose Depository Institution (SPDI) license by the state's banking board in October. It was the second SPDI approved by the board after Kraken Financial, a crypto exchange.
A Crowded and Growing Industry
The firms are entering an industry already populated by a diverse mix of players. These include established firms that claim to offer institutional-grade services, such as Fidelity Digital Assets, to new players, such as Bakkt, to crypto industry pioneers, such as Coinbase.
Industry demand is expected to grow in the future as more institutional investors wend their way into crypto investing. A report by consultancy firm KPMG earlier this year stated that the cryptocurrency custody industry had "tremendous growth potential" and identified rapid proliferation of crypto investing among institutional investors and crypto hacks as the main drivers of the move toward cryptocurrency investing.
"As cryptoassets proliferate, custodians have a tremendous opportunity to profit – both by earning management fees for delivering straightforward custodian services, and also by offering adjacent services only possible in the emerging crypto ecosystem," the report stated.
In their applications, crypto firms have left the door open for this eventuality. Paxos' application states that "other activities conducted by Paxos affiliates may be migrated to Paxos National Trust over time based on operational, financial, and legal considerations." But it might have to contend with more regulation when it makes that migration.