Reality check: Will crypto firms score a banking charter?

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The news that at least two cryptocurrency companies, Coinbase and ivyKoin, have talked to federal regulators about obtaining a bank charter has prompted widespread interest — but it remains unclear if much will come of any discussions.

Over the past year, several companies from other sectors, including heavyweights like Amazon and PayPal, have approached banking regulators, only for nothing to happen.
Some predict a similar outcome here.

“The same issues are always going to affect banking regulators deciding whether or not to give a bank license: how do they confirm the identity of everybody who holds a wallet?” said Christine Duhaime, attorney at Duhaime Law.

In the case of cryptocurrency firms, the hurdles to acquiring a charter are daunting, including following know-your-customer rules and anti-money-laundering rules that require financial institutions to know exactly with whom they are dealing.

“You can try to identify everyone on your exchange, but at the end of the day you really don’t know 100% of the time to whom they are transferring money or digital currency and from where that digital currency is coming to the exchange,” Duhaime said. “To get a banking license, to start to take deposits, is a whole different ballgame when it comes to anti-money-laundering and Bank Secrecy Act compliance. It will be an uphill battle.”

But the firms themselves do not agree. Adam White, vice president and general manager of Coinbase, would not comment on an article by The Wall Street Journal that said the firm had met with the Office of the Comptroller of the Currency to discuss a banking charter.

But he did insist that the firm already complies with a rigorous KYC/AML program, signaling that it could handle the rigors of becoming a bank as well.

“We’re registered with Fincen" — the Financial Crimes Enforcement Network — "under the Bank Secrecy Act and we operate as a regulated financial institution,” he said.

Coinbase has been registered as a money service business since 2013, with 41 licenses in 39 states, according to a spokesperson.

But being a MSB is not the same as becoming a bank. MSBs can face less supervision than banking institutions, and do not face the same capital, liquidity and consumer protection requirements. Moreover, regulators have proven wary of crypto firms, with Federal Reserve officials saying they are watching the market carefully for signs it is a bubble. (As of now, officials have said it isn’t a big enough market to threaten the financial system.)

"They’re crazy if they think they can get a bank charter," said Ed Mills, managing director at Raymond James. "The Trump regulators are different, but not that different. They’re much more industry-friendly, but Trump regulators are old-world economy regulators. Ten years from now, twenty years, could you see this happen? Sure. But there are so many regulatory issues with cryptocurrencies that have to be settled out before they could get a bank charter. That is really putting the cart before the horse."

Still, Lex Sokolin, global director of fintech strategy at Autonomous Next, argued that Coinbase has the resources and incentives to get through the compliance process of obtaining a bank charter.

By combining banking and crypto products, Coinbase could give people mobile solutions that work for both types of economies, like payments, custody, and savings, “all wrapped up in a product that people know and think is cool.”

IvyKoin, meanwhile, is more open about its banking plans. Gary Fan, president of ivyKoin, confirmed executives had spoken to the Federal Deposit Insurance Corp. about a possible charter and said one is on the longer-term road map. But he acknowledged it may be challenging to obtain.

“Getting a charter from the FDIC and the application process is a large undertaking. There are time commitments, resource allocations and costs associated with that,” he said.
If the time and opportunity seem right, the company will go for it.

“Just having FDIC insurance for U.S. dollars deposited at a bank adds security for someone’s money," Fan said. "If someone wants to buy a house and the seller of the house doesn’t accept cryptocurrency, how does that person make that down payment? Or if someone’s looking to start a small business and they don’t have access to lending opportunities through the cryptocurrency world,” a bank could help with that.

The general intention of ivyKoin, according to Fan, is to build a bridge between the cryptocurrency world and the fiat world — first on banks’ behalf, then maybe on its own if it acquires a banking charter.

“We want to try to help legitimize and de-risk some of the cryptocurrency activity happening in the world today and allow for more visibility and data and transparency between transactions between customer data, to show there are a lot of legitimate, good businesses and people using blockchain and cryptocurrency for certain financial transactions.”

IvyKoin is working with bank partners to provide them with the data to do proper AML/KYC checks on cryptocurrency-holding consumers and businesses. For one thing, its blockchain technology would let potential customers attach documents such as invoices.

IvyKoin is also working on blockchain technology that would help banks deal with AML and BSA rules for cross-border payments, not necessarily involving cryptocurrency.

But mostly the company is striving to supply the data banks would need to know their cryptocurrency customers well enough to satisfy KYC and AML regulations and to make sure the customer falls under the bank’s risk tolerance threshold and is safe to bank.

The specific data points will vary institution to institution, Fan said.

“Every bank has their own high level KYC information they’re looking for,” he said, and their own definition of what constitutes a high-risk client.

Duhaime agreed the opportunity for crypto firms is huge.

“It’s a multibillion-dollar business opportunity for whoever can open a bank and get that bank to provide financial services to digital currency exchanges and blockchain companies, because they’re all being de-risked the second they open a bank account," she said. “If anyone can crack that nut and provide a way to provide financial services to all the blockchain and digital currency ecosystem, they would be a billionaire overnight.”

The reason no one is doing this now, she said, is because the cryptocurrency exchanges “all went down the path of saying to hell with anti-money-laundering and counterterrorism laws, those laws don’t apply to us because we’re decentralized, we don’t need you, banks, regulators, government. Actually, they do, though.”

And despite crypto firms’ claims to the contrary, she said exchanges can’t perform proper AML compliance at the moment because their volumes are too high to keep up with the workload.

If crypto firms ever do get banking charters, however, watch out.

“If we have real banks, whether traditional or new, that deliver banking products that combine with cryptocurrencies and tokens in a regulated environment with meaningful oversight and clients are able to access all these products, that’s a huge benefit for consumer choice and a meaningful competitive pressure to incumbents that don’t know how to do this technology,” Sokolin said.

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