Published: January 30th, 2021
Regulators in Europe and the US have begun licensing crypto firms as fully-fledged banks, giving them approval to engage in lending and custody services on behalf of their clients.
Last week, the US Office of the Comptroller of the Currency (OCC) gave the all-clear for Visa-backed digital asset platform Anchorage to become the first American crypto bank to receive a federal charter — setting the stage for greater integration of crypto assets into mainstream finance.
The OCC’s seal of approval is the latest leap forward in crypto’s rapid rise to legitimacy, while putting more pressure on traditional banks to find their own way into the trillion-dollar crypto market.
Having a federal charter means Anchorage can operate under one national regulator, rather than abide by different state-by-state rules for cryptocurrencies. That means they can jump ahead of big traditional banks in offering crypto-related services to clients.
Before the OCC's ruling, US cryptocurrency exchange and brokerage Kraken took a different route, and incorporated as a bank the US state of Wyoming. If it launches its banking arm ahead of Anchorage, it will become the first US-based crypto bank.
Wyoming has taken a more liberal approach to crypto regulation that other US jurisdictions, and offered Kraken a Special Purpose Depository Institution (SPDI) license, which frees it to operate payments systems, take deposits, and provide custody services.
“At its heart, Kraken is still a technology company, and we think our architecture and API will have a profound impact on the crypto banking customer experience,” said David Kinitsky, Kraken’s CEO, in a statement.
Having a banking license lets Kraken off the regulatory leash to offer crypto-based products and services in traditional areas like retirement savings and investment accounts.
However, it won’t be able to operate on a fractional reserve basis, which is how retail banks extend credit. Under Wyoming’s SPDI-type state license, it will need to maintain all of its customers' reserves continually. That makes it more like a custodial bank than a high street bank with the freedom to loan out its customer deposits.
Crypto custodian Xapo, which offers custody services to wealthy clients in emerging markets, has been awarded a full banking license in Gibraltar. Launch plans are currently on hold thanks to coronavirus restrictions, but the bank says it will be ready to move forward once lockdowns cease.
Meanwhile, in Switzerland, Zug-based Seba and Zurich-based Sygnum received Swiss provisional banking and securities licenses in 2019. Getting the nod from regulators has enabled them to blend cryptocurrency into a wide range of services — lending, investing, deposits, and withdrawals. Bitcoin Suisse, a regulated financial intermediary since 2014, has also applied for a banking licence.
Major banks in Europe and America have dipped their toes into cryptocurrencies, their interest piqued by the arrival of stablecoins and high-profile initiatives like Facebook’s Libra. They’ve seen adoption steadily grow and are now taking tentative steps to address demand.
Last Autumn, two of the biggest banks in the US launched digital currencies. Spanish bank Santander has partnered with US bank PNC to make Ripple their crypto solution for cross-border payments.
Another treasury-backed proposal, however, has the crypto industry on tenterhooks. It would require all money services businesses, including crypto exchanges and banks, to gather and report cryptocurrency transactions to private wallets if they meet a certain dollar threshold. If adopted, it could stifle the broader adoption of self-hosted wallets, a vital consideration for privacy-aware crypto users.
The new, approved crypto landscape is still coming into focus, but so far it looks like hybrid financial services will dominate, with traditional banks acquiring or partnering with crypto startups, while trailblazers like Anchorage and Kraken offer a full menu of services on their own — including brokerage, exchange and retail banking.
More launches are on the horizon. Thailand’s Siam Commercial Bank is already looking at a move into Decentralized Finance (DeFi), with a suite of products in the pipeline that it hopes will bridge the gap with traditional banking. It’s opted to partner with DeFi startup Alpha Finance Lab.
Within the EU, a recent amendment to the anti-money laundering directive gives FinTech companies the freedom to sell cryptocurrencies, as well as offer custody services. More than 50 aspiring crypto banks have applied for a license in Germany alone.
Meanwhile, the big-name banks are rapidly moving into crypto custody. A report from Big Four consultancy KPMG in January said that the cryptocurrency custody industry had ‘huge potential’ for growth.
As recently as December, the UK’s Standard Chartered, Spanish bank BBVA, and Singapore’s DBS all launched their own suite of crypto services, while Wall Street stalwart Goldman Sachs’ reportedly has plans to offer crypto custody services in the first half of 2021.
In Italy, private bank Banca Generali recently took a EUR 13 million stake in Conio, a crypto-to-crypto wallet provider.
There are still big questions to be answered about the regulatory environment facing custody services and the use of stablecoins. A piece of financial legislation called the STABLE would tighten legal expectations for entities offering stablecoins, effectively making a banking licence a requirement to operate.
Despite the uncertainties, twelve years after Bitcoin’s arrival, it’s clear that banks and institutions can’t dismiss cryptocurrencies any more.