Why crypto firms want to become banks
- Cryptocurrency firms are reportedly pursuing banking licenses
- While crypto firms that acquire licenses could challenge traditional institutions, the challenge for them is to meet stringent requirements under banking laws and regulations
Banks are increasingly paying attention to crypto — recent examples include Goldman recently hiring a crypto trader and launching a cryptocurrency trading desk and Japanese banking giant MUFG reportedly testing its own cryptocurrency next year.
But there are also moves in the other direction: As cryptocurrency companies become more a part of the traditional financial services sphere, becoming a bank may be the logical next step.
Cryptocurrency exchange Coinbase and payments firm Ivy Koin reportedly met with FDIC officials in “recent weeks” about possibilities to obtain banking licenses. Since cryptocurrency business models are already modeled on crypto-fiat exchange, remittance, merchant payment processing, personal and business value storage, ATMs, and even escrow and lending, there’s a good business case for bringing all these services together under one umbrella, said Robert Musiala, counsel with law firm BakerHostetler.
A banking license would give crypto firms FDIC insurance for funds invested and offer a platform to sell other products to customers. Cryptocurrency firms that become banks also need to meet customer and anti-money-laundering requirements that would enable firms to accept large crypto payments. Here are three implications of crypto firms’ pursuit of banking licenses.
Crypto firms hold a large volume of assets — Coinbase alone reportedly holds $20 billion, but customers shoulder a risk if the institution holding the currency fails. FDIC insurance protects against the against the loss of insured deposits if the institution fails, protected by the “full faith and credit of the United States government.” FDIC insurance could offer new legitimacy to crypto trading and investing.
“FDIC insurance is the biggest reason [for crypto firms to seek banking licenses],” said Woodrow Levin, CEO of San Francisco-based crypto asset fund 3.0 Capital. “Having access to FDIC insurance means being able to secure balances for customers; it’s a huge event from a marketing and customer-comfort standpoint.”
Adding legitimacy to crypto as an integral part of financial services
Crypto firms becoming banks would add new legitimacy for crypto as a foundational part of financial services, allaying customer fears that they’re dealing with unknown entities that aren’t safe or secure.
“There’s a significant interest in crypto — these types of actions and activities will make institutions safer so that to [customers] on the fence right now, who may say, ‘I don’t want to give my funds to some company I don’t know,’ it gets them over the line,” said David Sica, a principal at Nyca Partners. “This is good for the ecosystem and user growth in the crypto world.”
While crypto firms now work with partner banks, becoming a bank would also let them take the lead on product design and how they want to interact with customers.
“You can innovate on the product the way you want without having to adhere to the rules of a partner,” said Sica.
A platform to offer new types of services to customers
Crypto firms that become banks would have more flexibility to offer products to customers based on their crypto holdings — mirroring the services offered by traditional institutions, including direct deposit accounts and card products. Customers would also be eligible for loans based on their crypto holdings.
“For a retail investor investing on Coinbase, this could change a lot of things — for example, they could securitize mortgages based on crypto assets. … It’s [currently] difficult to get a loan based on bitcoin or ethereum, but if Coinbase is holding them on deposit, why not offer lines of credit or loans based off them?” Levin said.
Becoming a bank would also let customers who hold crypto more seamlessly trade and transact between cryptocurrencies and fiat currencies, which is the biggest threat to incumbents, according to Levin.
“Fiat has some advantages over crypto, and cryptocurrencies have some advantages over fiat, and by having one institution, you get the best of both,” he said. “If they open the door to everything — if [Coinbase] can offer you everything in one place, why do I need E-Trade, Fidelity or Chase?”
Banking license processes are time-consuming and expensive; navigating opposition to the moves from incumbents in the industry is also a risk factor. Companies also need to ensure they can meet anti-money-laundering requirements, which may be difficult, said Ben Jessel, fintech adviser at Capco.
“Bitcoin is a bearer asset, and Coinbase custodies the keys,” he said. “In a bank, a bank account is merely a number, and a balance is electronic and virtual. If Coinbase loses keys, they lose clients’ money — it’s unclear how that will integrate within banking laws or whether the scope of banking laws would apply to bitcoin.”