Banks, fintechs navigate market's appetite for crypto amid pending regulatory guidance
The global cryptocurrency market cap surpassed $2.9 trillion in November following a rally from digital coins Bitcoin and Ethereum, according to data from CoinMarketCap.com.
The volatile asset class has attracted the attention of consumers and investors worldwide. Traditional institutions, which have historically taken a cautious approach to crypto, are deciding how they want to participate in the space amid a growing consensus that the popularity of digital assets isn't going away any time soon.
And neobanks, whose mission, in most cases, is to differentiate themselves from the incumbents, see the space as a new frontier where they can offer their customers a safe avenue to access crypto and educate themselves on the booming market.
From allowing customers the opportunity to earn Bitcoin rewards to offering custody services for digital assets, banks and fintechs are carving out strategies and services tied to crypto as regulators seek to catch up with guidance.
The pandemic's impact
"It's hard to imagine a more perfect set of circumstances to bootstrap and bring this type of technology into the mainstream," said Diogo Mónica, president and co-founder of Anchorage Digital, the first crypto firm to receive a national trust bank charter. "The pandemic did multiple things. It forced everybody to work remotely. And these crypto projects are primarily decentralized projects. And so they already supported fully remote from day one."
The stimulus and the elimination of travel and most workers' daily commute afforded many with the time to explore alternative asset classes such as crypto, said Mónica, who co-founded Anchorage in 2017.
"The amount of stimulus and the money printing by the Federal Reserve just speaks directly into the narrative that we have a highly inflationary system and highly inflationary monetary policy. Bitcoin, as a store of value, is highly deflationary," he said. "All of this, tied together, both from a macro perspective and from an individual perspective, led everybody to either have time to learn or participate or dedicate themselves full time into researching and building protocols."
For financial institutions, the interest in crypto has been growing over the past several years, starting with the 2017 run-up, Mónica said, referencing the year that Bitcoin climbed from $1,000 to nearly $20,000.
"Institutions were extremely interested in the space, and it takes some time. It took them a couple of years to become comfortable to really run through all the compliance requirements," Mónica said. "We really saw [in 2020], during the pandemic, the fruits of those types of investments, which were obviously 18 months to 24 months in the making. It's fascinating, because the 2017 run-up was really the thing to catalyze institutions to come in a meaningful manner."
Banks' growing interest in crypto is a boon to Anchorage's business. The bank, which gained its trust charter from the Office of the Comptroller of the Currency (OCC) in January 2021, uses a digital asset management system that stores customers' passcodes online through a combination of multiparty, multifactor authentication, advanced fraud detection and specialized hardware.
The San Francisco-based crypto custody firm recently announced a partnership with banking core Finxact, which essentially adds crypto capabilities to Finxact's core systems.
The partnership allows the banks and financial services companies that use Finxact's core banking platform to offer their own customers access to crypto products and services, Mónica said.
"It's just such an exciting time for us," Mónica said. "We're seeing just a lot of business and a lot of different things coming to our plate and we're trying to help as many institutions as possible build products coming into the space."
The letter, issued by former Acting Comptroller Brian Brooks, essentially gave nationally chartered banks the green light to provide cryptocurrency custody services and hold unique cryptographic "keys" associated with cryptocurrency on behalf of customers.
The letter was the starting gun Vast Bank was waiting for, encouraging the firm to roll out a service it knew its customers were already interested in.
"We met with the board and our shareholders, and we made the decision to re-prioritize things, to put the customer first and be able to offer things that customers around the country were asking for, which was a national bank that is safe and sound and that they can trust to be able to participate in this digital asset cryptocurrency world," Vast Bank CEO Brad Scrivner told Banking Dive in October.
Since launching at the end of August, Scrivner said the bank's new offering has allowed the firm to significantly grow its retail customer base.
"We're probably at about 50% of what it took us 40 years to build, in terms of our retail customer population, in just those eight weeks," he said.
The service has garnered interest from both high-net-worth crypto players and new entrants, or the "crypto-curious," Scrivner said.
"They're wanting to make sure that when they do come into the environment, they feel that it is safe and secure and they trust that the institution is not going to be gone. That has been a really good growth factor for us," he said.
Other traditional institutions are finding ways to fold crypto offerings into their existing products and services to satisfy the growing appetite and interest for digital assets.
Blue Ridge Bank, a Charlottesville, Virginia-based institution that provides banking-as-as-service (BaaS) for a large portfolio of fintechs and neobanks, offers its consumers access to Bitcoin at 19 branch and off-site ATMs.
The bank, which launched the service in February 2021, is partnering with ATM operator BluePoint ATM Solutions and Bitcoin ATM software provider LibertyX to facilitate access to the cryptocurrency.
Quontic Bank, a digital-first community bank headquartered in New York City, launched a checking account in 2020 that rewards consumers in Bitcoin. The product, still in beta, appears to be the first Bitcoin rewards program offered by a U.S. bank.
For every purchase made through its debit card, Quontic pays the consumer 1.5% back in Bitcoin.
"It was something of a heavy lift for us," Quontic CEO Steven Schnall told Banking Dive in April, "but we believe that there's a place for Bitcoin in people's portfolios. We did a lot of surveys and found that there was a huge percentage of the population that was interested in Bitcoin, but didn't necessarily want to take the risk to acquire it themselves, or thought it was too volatile or didn't know how to go about getting it."
Other financial institutions are seeing the business-to-business potential the space offers by banking the cryptocurrency firms themselves.
Customers Bank announced in November it had partnered with around 20 cryptocurrency clients, joining trailblazers Signature Bank and Silvergate Bank in offering banking services to digital asset institutions.
Customers Bank, whose cryptocurrency clients include Genesis, Blockfills, GSR and San Francisco Open Exchange, said it has collected $1.5 billion of zero-cost deposits from crypto businesses since the beginning of October.
"This should allow us to add potentially billions of dollars in deposits to our franchise, which is really defining for a $20 billion bank," said Customers Bank CEO Sam Sidhu.
The Wyomissing, Pennsylvania-based bank is just one of a few institutions willing to bank cryptocurrency clients, but there is room for many more, Sidhu said.
"We think that this industry today is $65 billion to $75 billion, at a minimum, in deposits, so we can't even take them all," he said. "I think there's a broad enough industry that a lot of players can enter."
Consumers are curious
Several consumer-focused neobanks are addressing the knowledge gap that exists around crypto, hoping the ability to offer newcomers the service, paired with education and guidance, will help provide those interested in the asset class with the security they're seeking.
Paybby, a challenger bank serving Black and Brown communities, plans to add cryptocurrency investing to its platform by January 2022.
CEO and founder Hassan Miah emphasized the platform will have a focus on education when it offers its users the service.
"We want to do it in a safe and profitable way for our community," he said. "It's a great new investment class, and the people of our community should have access to this investment class just like anybody else. And we intend to ensure that that happens."
Digital bank MoneyLion, which went public via a SPAC in 2021, launched its own cryptocurrency capabilities in September, enabling its customers to buy and sell digital currencies within its app. The company said eligible customers will initially be able to buy and sell Bitcoin and Ethereum, and round up their debit-card purchases in Bitcoin.
"We're giving them lots of bite-sized ways to get in," MoneyLion CEO Dee Choubey told Banking Dive at October's Money20/20 conference in Las Vegas. "It's an asset class, and potentially a technology framework for the future, that a lot of people want to learn about. … The mission has always been to create financial access, and we believe that crypto should not be limited to those in the know, the usual people that come to this conference."
Stuart Sopp, CEO of challenger bank Current, which also plans to provide crypto services to its nearly 3 million customers, said there is a "need and a demand for a company like Current to explain and shepherd people into this new world."
"There's a bunch of things and a bunch of value happening in cryptocurrencies that is not easily explained," Sopp told Banking Dive in April, following the close of the company's $220 million Series D fund-raise led by Andreessen Horowitz.
Like Anchorage's Mónica, Current's chief technology officer, Trevor Marshall, said he believes the pandemic created an environment where more consumers became curious and ready to engage with digital assets.
"The COVID/Bitcoin bull run of 2020 really changed people's perspective. When it became available for trading and in Cash App, in Robinhood and other very accessible places, people started to put skin in the game and started doing research," he told Banking Dive during the Money20/20 conference. "It demystified a ton of what we were encountering previously, when we talked to our customers, which was, 'Isn't that that bad thing?' … Now it's associated with generally positive things, or at least it's more well understood."
The new 'shadow bank'?
But not everyone shares the same optimistic curiosity toward cryptocurrency as some fintechs and their customers.
Regulators and some members of Congress have raised the alarm regarding the rise of cryptocurrency, and have indicated digital assets need more supervision.
"Crypto is the new shadow bank," Sen. Elizabeth Warren, D-MA, told The New York Times in September. "It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system. ... It's like spinning straw into gold."
In a report that addressed stablecoins, a class of cryptocurrency that is pegged to a fiat currency such as the U.S. dollar, regulators said they want to see more oversight of the digital asset, and have asked Congress to pass legislation that would require that issuers of stablecoins be insured depository institutions subject to the same regulations as traditional banks.
In a statement accompanying the report, Treasury Secretary Janet Yellen said stablecoins have the potential to support beneficial payments options, "but the absence of appropriate oversight presents risks to users and the broader system."
Two weeks after the report was released, however, Federal Reserve Governor Christopher Waller, in a speech, challenged some of the report's policy recommendations, saying limiting stablecoin issuance to banks would stifle innovation and competition in payments.
"While regulations are necessary, they also limit free entry into at least some of the markets in which banks operate," Waller said. "As a result, regulatory oversight can insulate banks from some forms of direct competition."
Meanwhile, a "short statement" regarding an interagency "crypto sprint" involving the OCC, Federal Deposit Insurance Corp. (FDIC) and the Fed, is expected to be released soon, Acting Comptroller Michael Hsu said.
The OCC will also provide clarity on its recently concluded review of crypto-related interpretive letters, Hsu said.
Hsu, who has displayed a more cautious approach toward crypto than his predecessor, said in June he would revisit Brooks' actions regarding crypto.
The message from both the interagency statement and the OCC's clarification of the interpretive letters is that "the agencies are approaching crypto activities very carefully and with a high degree of caution," Hsu said.
"We expect banks to do the same. To the extent the OCC's prior communications have been interpreted as tacit encouragement to engage in crypto activities, the forthcoming releases will clarify that safety and soundness is paramount," he said.
The releases "should not be interpreted as a green light or a solid red light, but rather as reflective of a disciplined, deliberative and diligent approach to a novel and risky area," Hsu said.
"We will proceed carefully and cautiously and will hold banks to the same," he said.
As regulators continue to observe and craft guidance for the crypto space, Sidhu said he believes regulators and crypto companies are searching for the same thing: clarity.
"The regulators, generally, at the top level, are supportive of banks working with crypto companies. And crypto companies, similarly, are looking for clarity because there's so much they're doing that no one's ever thought of before," he said. "There's no parallel to it, so they also want lines drawn."