Why Do Crypto Companies Keep Filing to ‘Become a Bank’

The market has seen a sudden spike in blockchain firms applying for crypto banking charters as of late. This trend has been brought on by several factors, ranging from a desire to provide more transparency, all the way to having to complete additional regulatory requirements to offer certain financial products.

A lot has changed since the first days of cryptocurrencies, when the majority of users saw the asset as a way to escape the current financial system. Today, crypto platforms seek to become part of the larger traditional economy as part of their goal to become mainstream assets.

So why are so many crypto platforms becoming banks, and what benefits does this maneuver bring to these groups? Here’s what you need to know about crypto companies’ recent push towards legislative clarity and how it could affect the market moving forward.

What Does It Mean When a Crypto Company Becomes a Bank?

When it’s said that a crypto company is becoming a bank, it can mean several different things. Primarily, it refers to the company applying for banking licenses. There are several types of these licenses available, and each provides different capabilities to the organization upon approval.

Regardless of the license, this maneuver means that the company will now have to stick to strict regulatory requirements based on its license. Integrating bank-like standards provides crypto companies with some advantages in terms of product offerings, consumer trust, and government protection. Here are some of the most common banking licensing options.

Traditional Commercial Bank Charter

A traditional bank charter provides a company with the ability to offer the full range of banking services and products. The charter supports crucial tasks ranging from offering savings, checking, lending, investment vehicles, and more.

This is the strictest type of banking license that is available. It includes vital aspects of the business operations, such as strict capital control guidelines and exacting compliance requirements. Notably, no crypto firms have secured traditional commercial bank charters yet, with most applying trust charter licenses.

Trust Charters vs. Traditional Bank Charters (Key Differences)

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Trust charter banking licenses offer crypto companies access to the essentials they need to operate effectively. This level of licensing doesn’t support all banking activities, such as lending. Its primary focus is on fiduciary responsibilities and custodial services.

Trust banks are not the same as your local branch. They usually are digital in nature, meaning there is no local branch you can visit. These banks can operate within their specific trust purposes. As such, they can offer additional products that may not be available to those organizations with traditional banking licenses, like cryptocurrencies.

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While national trust banks do not accept FDIC-insured deposits and generally cannot engage in commercial lending, they can provide fiduciary services—including custody and, if approved, investment management—within the scope of their charter. For crypto-focused trusts, this is exactly the point: offer regulated custody and fiduciary capabilities without full commercial banking powers.

On and Off-Ramp Services

In the past, it has been very difficult for crypto platforms to offer on and off-ramp services. This term refers to converting crypto and fiat currencies. Traditionally, exchanges would rely on other platforms that had the licensing to enable the conversion.

Recently, this perspective has shifted with crypto firms now seeking their own trust license. Here are some of the current trust licenses available and firms that have secured or are in the process of securing them.

Wyoming SPDI (Special Purpose Depository Institution) Charter

Wyoming emerged as one of the most pro-crypto states recently with the issuance of its SPDI  (Special Purpose Depository Institution) Charter. This licensing takes advantage of the state’s unique regulatory framework and was purpose-designed to support the growing blockchain economy.

The Wyoming SPDI enables companies to streamline crypto-to-fiat conversions and vice versa. These companies can provide custodial services to digital and fiat deposits. All companies that hold this license must follow a full reserve banking model, meaning that 100% of deposits have to remain backed by liquid assets. This requirement stems from a lack of access to FDIC insurance, which traditional banking licenses include.

The Wyoming SPDI stipulations were designed to provide more transparency and regulatory oversight to crypto firms, but not hinder their ability to offer blockchain products. As part of this licensing, the corporation agrees to several security, transparency, and business management regulations, including oversight by the Wyoming Division of Banking.

The license supports storing customer holdings in liquid assets and enables exchanges to offer limited banking services to clients. However, it doesn’t support any lending practices. The goal of this decision was to reduce insolvency concerns.

Banco Kraken

Kraken Financial was the first company to secure a Wyoming SPDI in 2020. This maneuver helped the company expand its market penetration and offerings. It helped to build consumer confidence as it ensured stringent regulatory oversight, strict security, and that the compañía would adhere to data protection and crypto storage standards.

Banco Custodia

In 2022, Custodia Bank applied for and secured a Wyoming SPDI. Custodia is a hybrid banking platform that supports crypto and fiat services to streamline their interoperability. The company secured its SPDI but was denied a Federal Reserve master account because its crypto products were said to be still too risky. Notably, the company has sought clarification and vowed to reapply.

OCC (Office of the Comptroller of the Currency) Trust Charter

Another popular banking license that crypto companies continue to seek out is a National Trust Bank Charter or an OCC (Office of the Comptroller of the Currency) Trust charter. This license enables firms to offer custodial and fiduciary services. However, it doesn’t support making loans or accessing other banking investment options.

Notably, organizations that seek to issue stablecoins will now have to meet new licensing requirements as legislation continues to push through surrounding the industry’s practices. OCC trust charters support stablecoin issuers.

An OCC trust charter improves regulatory standing for custody and fiduciary services, but does not automatically grant direct access to Fed payment systems; firms typically rely on correspondent banks or must obtain a Federal Reserve master account for direct access—approval that is discretionary and has proven difficult for some applicants. While a trust charter can streamline onboarding by clarifying a firm’s regulatory status, direct Fed access still requires a correspondent relationship or a master account. It was specifically designed to support the expanding digital economy while ensuring that the firms adhere to the strict guidelines of the National Bank Act.

anclaje digital

Anchorage Digital was the first crypto firm to secure an OCC Chartered Trust in 2021. This decision was praised by crypto advocates but has encountered some resistance in the form of a dissent published in 2022. The dissent questioned the decision, pointing out apparent AML compliance shortcomings.

Coinbase

Esta semana, Coinbase anunció that it would seek an OCC trust license. Executives speaking on the decision stated that they had no intention of ever becoming a bank but acknowledged that its licensing could “open up several things” for North America’s largest exchange.

Ripple

Ripple Labs announced that it will apply for an OCC license as part of its RLUSD stablecoin campaign. This self-issued stablecoin is for internal system use. It’s designed to reduce conversion and sending costs for RippleNet users. Keenly, Ripple hopes to get out in front of any legislation by securing their OCC trust charter before new legislation hits.

 Why Crypto Companies Want to Become Banks

It may seem counterproductive to apply for licensing for products that may not necessarily fall under the scope of current legislation. However, becoming a trust bank helps to solve several issues for crypto service and product providers, including expanding custody and payment solutions.

Access to Payment Infrastructure

One of the main reasons why crypto firms are turning toward these purpose-built licenses is to ensure that they can support their payment infrastructure. In the past, crypto companies have been denied traditional banking access due to concerns of regulatory backlash revolving around AML restrictions.

Consequently, traditional banks have been averse to offering services to digital asset-related companies. Securing a banking license directly is a smart way for crypto companies to streamline their operations and take more control over their business model, providing companies with direct access to Fedwire, ACH, and more.

On and Off Ramp Woes

Some would argue that large CEXs like Coinbase would never have achieved their level of success if they did not provide on and off-ramp services. In the past, these large centralized platforms were the only ones that could convert your crypto to fiat and vice versa reliably.

These companies didn’t achieve this capability on their own. Instead, they had to work with intermediaries who held a license to make the conversion. This extra step slowed the process, increased costs, and added complicated steps to the process.

Additionally, the use of intermediaries opens the market up to unnecessary censorship. For example, there have been many cases where an exchange could provide access because a third-party on-ramp licensed provider blocked the transfer.

Cuestiones de confianza y credibilidad

Another motivating factor for the sudden turn towards becoming a bank is that it provides more transparency to the industry. This maneuver, in turn, raises the credibility of these platforms. To achieve this licensing, these companies agree to adhere to stringent compliance guidelines, ensuring that they have vital aspects of their business in line, including conducting regular audits, monitoring capital flow, and more.

Introducing New Financial Products

Many exchanges have decided to apply for banking licenses as part of their strategy to offer new crypto-related products and services. For example, stablecoins are now more popular than ever. However, recent legislation like the draft bills STABLE Act and GENIUS Act could make it so that only licensed companies can provide these services.

Limits and Common Misconceptions of Trust Charters

Securing an OCC trust banking license doesn’t mean that the company can now offer everything a bank does. It simply means that they agree to adhere to certain guidelines and operational practices. As such, it’s vital to understand that there are many services that only traditional banking licenses will enable, such as fiat currency lending.

The main confusion revolves around a trust bank’s capabilities. These firms have access to deposit-like activities but can’t manage their clients’ funding like traditional banks. They can’t lend the funding out as well.

How Crypto Banking Will Change Traditional Finance

According to many analysts, the rise in trust banking could have a major effect on the traditional banking sector. For one, it’s predicted that the introduction of these banking platforms would reduce the amount of integration with traditional brick-and-mortar banks.

In terms of the crypto industry. Trust bank charters can be seen as a good thing. They signal further market maturity and acceptance into the mainstream economy. Also, these licensing requirements will help to improve the crypto industry by reducing risks.

These crypto banks will help to drive public awareness of the benefits of digital assets and stablecoins. They will also provide a simplistic way to convert fiat and crypto funding seamlessly. In the end, crypto trust banks should work hand in hand with traditional banking, creating a synergistic momentum that could drive market innovation and legitimization of blockchain assets moving forward.

A Crypto Bank in Every Pocket

The digital economy has shown no signs of slowing down, and this latest push by established crypto platforms to become licensed trust banks is another sign that the industry is still growing. These companies will now be able to support direct fiat conversions and more, reducing costs and time to enter the market. In turn, this maneuver should help to drive adoption forward.

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