Cryptocurrency Firms Explore Getting Bank Licenses
Coinbase and ivyKoin met with regulators to discuss their business, learn about bank charters
By Ryan Tracy May 18, 2018 5:30 a.m. ET
Coinbase, which operates the largest U.S. cryptocurrency exchange, met with officials at the U.S. Office of the Comptroller of the Currency in early 2018, according to a person familiar with the matter. Meanwhile, ivyKoin, a payments startup, in recent weeks sat down with officials at the Federal Deposit Insurance Corp., this person said. IvyKoin President Gary Fan confirmed the meeting.
The discussions included other topics, such as the firm’s business models, this person said. The companies might not seek a bank charter, which would significantly ramp up regulatory scrutiny. Whether they do so will depend on whether they decide the benefits of becoming a bank outweigh the costs.
A federal banking charter would let the firms swap a hodgepodge of state regulators for one primary federal one. The companies would also gain the option of directly offering customers federally insured bank accounts and other services, rather than partnering with existing banks.
A Coinbase spokeswoman declined to comment on the meeting. She said the firm is “committed to working closely with state and federal regulators to ensure we are properly licensed for the products and services we offer.” An OCC spokesman declined to comment.
IvyKoin pitches itself as a payments platform for government-issued currencies and cryptocurrencies that uses “know your customer” technology to detect money laundering. In the near term, ivyKoin is working with banks rather than trying to become one, but it asked regulators about a banking license to understand what might be necessary if it decided to apply, Mr. Fan said.
At the meeting, they “talked about our business model, what we hope to accomplish, next steps for us, key risks and how we can help banks manage that,” he said. “Our experience was really positive and [regulators] actually encouraged the discussion.”
An FDIC spokeswoman declined to comment on the meeting. “We encourage parties to have informational conversations on the application process,” she said. The FDIC grants deposit insurance to new banks.
Financial-technology firms operating lending or payments businesses are known to have considered applying for bank charters. The notion is relatively new in the cryptocurrency space, which has drawn scrutiny from U.S. officials for allowing rapid growth in transactions outside the regulated financial system.
“Cryptocurrencies are strikingly innovative but also pose challenges associated with speculative dynamics, investor and consumer protections, and money-laundering risks,” Federal Reserve governor Lael Brainard, who helps oversee U.S. banks as one of three members of the Fed’s governing board, said in a May 15 speech.
Millions of customers have already used Coinbase accounts to buy and sell bitcoin and other cryptocurrencies, and exchange them for dollars. Coinbase connects to the payments system through banks and operates under state money-transmission licenses in the U.S., meaning it deals with dozens of regulators.
In addition to streamlining how Coinbase is regulated, a federal license could help the company acquire deep-pocketed customers such as hedge funds. Coinbase this week announced new products to hold institutional investors’ money in custody, through a partnership with a brokerage regulated by the Securities and Exchange Commission.
Coinbase could offer custody services itself with a bank license, such as a limited-purpose charter from the OCC that allows banks to provide custody or payment services even if they don’t maintain insured deposits. The firm is also exploring becoming an SEC-regulated brokerage, The Wall Street Journal has reported.
On the other hand, banks face a raft of intrusive rules governing their funding sources and consumer-facing activities, enforced by both state and federal bank regulators. Compliance can mean hiring more lawyers and buying or revamping internal systems.
Banks offering taxpayer-insured deposits face an even greater degree of scrutiny, including requirements under the 1977 Community Reinvestment Act to serve Americans of all income levels.
“Most fintechs come to us because they have heard of this thing called a national banking charter that gives them pre-emption across state lines,” Comptroller of the Currency Joseph Otting told members of the American Bankers Association trade group in April, referring to the fact that federal banking rules override some state laws. “When they come and they speak to us, and they understand what it really takes to be a bank, they kind of glaze over and often leave skid marks leaving the building.”
