Since their early days, cryptocurrency companies have positioned themselves as disruptors poised to replace the traditional banking system. This year, they’re lining up to join it.
More than a half-dozen digital-asset firms have recently applied for national bank charters — licenses that would allow them to perform some banking functions and place them under federal regulatory authority. Only one crypto firm — Anchorage Digital — currently holds a federal bank charter.
Several key factors have helped create this wave of applications rolling in to the Office of the Comptroller of the Currency, the federal agency that grants bank licenses and supervises national banks. These include a crypto-friendly White House, a newly signed digital-asset law and crypto firms’ growing desire to further establish credibility and potentially expand their product offerings.
“Despite the rhetoric of the crypto industry as wanting to disrupt traditional finance, the goal has always been integration with the traditional financial system,” says Hilary Allen, a professor at American University’s Washington College of Law who specializes in banking law. “Having crypto banks is just a piece of that broader integration project.”
Among those seeking bank status are some of the larger names in the digital asset arena. Circle, which issues the world’s second-largest stablecoin, USDC, applied to become a national trust bank shortly after its successful initial public offering in June. Crypto firm Ripple followed days later. Paxos, the company that issues PayPal’s stablecoin, applied in August.
Most of the crypto firms are applying for national trust charters, which would not allow them to operate as full-service banks. They wouldn’t be licensed to accept deposits or provide loans. Instead, they would be able to perform some custody services, such as holding assets in reserve.
“These aren’t depository institutions where, for example, you would open up a savings account at one of these crypto banks,” says Michael Imerman, an assistant professor of teaching in the finance area at the Paul Merage School of Business at the University of California, Irvine. “We’re not there yet. That might come down the road. These are national trust banks that are basically custodians, where they will hold assets.”
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Reasons Why Crypto Firms Are Seeking Bank Licenses Now
A favorable political climate and the lure of potential competitive benefits have combined to encourage crypto firms to seek bank licenses.
A Crypto-Friendly Administration
Perhaps the biggest reason for the uptick in applications is that crypto companies see an opportunity under President Donald Trump, a vocal proponent of digital assets who in July signed a law to create a regulatory framework for stablecoins in the U.S. (A stablecoin is a type of cryptocurrency designed to hold a stable price, and it is usually backed by a reserve asset such as the U.S. dollar.)
Experts say some firms likely held off on applying for charters during President Joe Biden’s term, anticipating that approval was unlikely and determining that the cost and effort involved may not have been worth it.
“There’s a different view of crypto,” says Felix Shipkevich, a payments regulatory attorney and special professor of law at Hofstra University. “It’s a lot more accepted by the current White House administration in comparison to the last White House administration.”
Experts say Trump’s stablecoin law, the GENIUS Act, will almost certainly lead to more crypto companies seeking federal bank licenses. The law provides licensing and oversight requirements for all stablecoin firms in the U.S., and it requires those companies to maintain reserves of liquid assets such as the U.S. dollar or Treasury bills for every stablecoin it issues. Trump says he wants the U.S. to be the “crypto capital of the world.”
“Part of Trump’s platform when he ran was that he was going to support innovation in crypto assets and digital assets, and now signing this act into law just codifies that and lends to this credibility and legitimacy of the industry,” says Imerman.
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Legitimacy
Although digital assets have gradually gained acceptance from a swath of the American public, many consumers still consider them too risky, experts say. A bank charter, and the regulation and oversight that comes with it, could put more potential customers at ease and help crypto firms expand their reach.
“If you have a federal license and you can say you are a bank, it puts you in a different category,” says Shipkevich. “It just creates a different level of legitimacy.”
Enhanced credibility could be especially crucial now that some major traditional banks are planning to launch their own stablecoins. The cautious consumer looking to wade into the crypto waters may decide they’re more comfortable doing so with a bank, and experts say a bank license would help put crypto firms on more equal footing.
Simplified Compliance and Clear Regulations
Most crypto firms currently operate under a patchwork of state regulations that that can be onerous and time-consuming for their compliance teams to follow.
So while falling under the OCC’s supervision would likely open the door to more scrutiny, it would also provide a clearer understanding of regulations and standards that crypto firms must meet.
“There’s an argument to be made: Why would you want to be licensed by 40-plus regulators versus one federal regulator?” says Shipkevich.
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Potential Risks
If approved bank charters help usher in a wave of new crypto traders, experts say it could expose consumers and the overall financial market to certain risks.
As digital assets become more intertwined with the traditional banking system, experts say their volatile nature may pose a threat that expands beyond just the consumers who own those assets.
“With the exception of stablecoins, almost every crypto asset is essentially a Ponzi,” says Allen. “There’s nothing behind it, it trades entirely on sentiment and it can go to zero in a heartbeat.”
She warns that a severe downturn in crypto markets could lead to a panic that ripples throughout the financial markets. If the price of assets falls and people have borrowed to purchase them, consumers could be stuck with an outstanding loan, she says. That could lead them to sell off other assets, driving down the prices of those as well.
Shipkevich says he believes the federal government needs to further tighten regulations in some areas. For example, he says it’s not yet clear what would happen if a chartered crypto bank was hacked and money was stolen from consumers’ digital wallets.
“What would be the assurances that my money would be there tomorrow if my wallet is missing my crypto?” says Shipkevich. “I think that the regulatory framework is still quite light. We’re just in a very infant stage of this, and this overexcitement sometimes leads to also maybe putting the carriage before the horse in a lot of these instances.”
Imerman says one theme he’s noticed throughout his career researching new financial technologies is that often the biggest risk is something no one is currently anticipating.
“There’s always this possibility for unintended consequences,” says Imerman. “We think we’re developing a new technology that’s going to change the world — and in many cases it does — but it’s misused or abused in some way that we didn’t envision, and it gives rise to these risks that we didn’t consider.”
While there’s no set timeline for the OCC to rule on the pending applications, experts say they believe there’s a good chance many will be approved.
“I imagine under the current administration, they probably will be granted these licenses unlike under the previous administration,” says Shipkevich. “I’m actually surprised there are not more applying for charters.”
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Why Are Crypto Companies Applying for Bank Charters? originally appeared on usnews.com
