Why Are Crypto Businesses Interested to Become Banks?

By | November 8, 2021

After years of criticism, contempt, or avoidance of control, the cryptocurrency industry is now rushing to accept it. In recent years, an increasing number of cryptocurrency businesses have applied to the Office of the Currency Regulator (OCC) in national bank accounts.

For example, BitPay payment processing and crypto exchange Paxos have applied to the OCC to become national trust banks. Custodian Anchorage, part of the digital finance system of Facebook, Inc. (FB), complete the same application. Approval of these applications will enable businesses to provide crypto services to customers.

The fact that crypto businesses are willing to have banks – standard financial institutions to discard beforehand – may seem confusing to industry observers. But it makes a good business sense.

Business Decision

Traditional banking banks make money at the difference in interest rates that charge interest and manage customer finances. They must comply with the strict savings requirements approved by the Federal Deposit Insurance Corporation (FDIC). Storage banks, however, make up the bulk of their profits from storage fees and ensure they are safe from criminals. This is the last type of bank that is attractive to crypto businesses.

Cryptocurrency retention is a fruit hanging in the industry. In July, the OCC allowed nationally employed banks in the United States to provide cryptocurrency storage services to customers. The letter states that “buyers and investment advisers may wish to use regulated custodians to ensure that they do not lose their private keys and, therefore, access to their funds.” Cryptocurrency trading, which also acts as a guardian of trading investors, often does not provide access to a private key for customers. Investors in this exchange must withdraw their cryptocurrency from a private wallet in order to control their confidential keys.

Crypto firms have applied to use National Trust banks. Such banks do not have to hold the prescribed amount authorized by the FDIC.

The New York-based Oxos application with the OCC states that the organized bank will “perform only certain functions currently performed by Paxos’ New York State-chartered trust company and under the auspices of [New York’s Treasury Department], including maintenance services.” The company already has a government trust in New York, and the national charter will significantly increase its efficiency.

BitPay goes down the same route, and its usage has the same names. “[The bank] will be working honestly with its merchant customers to ensure that they can offer the quoted crypto prices to their customers at the best available exchange rate, as well as cryptocurrency payments to business recipients,” he said.

Development at the national level is repeated at the level of government. Avanti Financial, a crypto company based in Wyoming, was granted a Special Purpose Depository Institution (SPDI) license by a board of state banks in October. It was the second board-approved SPDI behind Kraken Financial, a crypto exchange.

Dense and Growing Industry

Firms are entering the industry which is already full of various players. This includes established firms that claim to provide institutional-level services, such as Fidelity Digital Assets, to new players, such as Bakkt, to pioneers in the crypto industry, such as Coinbase.

Demand for the industry is expected to grow in the future as more institutional investors turn to investing in crypto. A report by consulting company KPMG earlier this year said the cryptocurrency storage industry had “significant potential for growth” and identified a rapid increase in crypto investment among institutional investors and crypto fraud as a leading cryptocurrency investment.

“As cryptoassets proliferate, caregivers have a greater opportunity to benefit – both by managing administrative funding by providing direct custodian services, and by providing nearby services that are only possible in the crypto ecosystem,” the report said.

In their applications, crypto firms have left the door open for this conclusion. Paxos’ application states that “some of the services provided by Paxos-affiliated companies may be transferred to the Paxos National Trust over time based on operational, financial, and legal considerations.” But he may have to contend with additional regulations when making such a move.

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