Bitcoin's rise favors crypto custodians seeking bank charters

Cryptocurrency appears on the path to a mainstream financial service, and several crypto-focused companies that have sought bank charters in recent months could be well-positioned to take advantage.

Bitcoin's price has reached record highs during the first few weeks of 2021. Many large, well-known companies, such as Tesla Inc., Bank of New York Mellon Corp. and Visa Inc., announced moves into the digital asset space. Meanwhile, the Office of the Comptroller of the Currency has received several national bank charter applications from cryptocurrency custodian companies aiming to take a central role in the growing sector.

"All these things are happening simultaneously. There's no question that this is rapidly mainstreaming crypto at an impressively quick rate," David Yermack, a professor and chairman of the finance department at the NYU Stern School of Business, said in an interview.

Going mainstream

Following Tesla's announcement that it invested $1.5 billion in bitcoin and plans to accept bitcoin as payment in the near future, bitcoin's price soared to record highs. The cryptocurrency's value stands at more than $51,000 at Feb. 18, according to S&P Global Market Intelligence's Bitcoin Liquid Index.

Traditional financial service companies are also looking to enter the digital asset space. On Feb. 11, Bank of New York Mellon announced it is forming a digital asset unit to hold, transfer and issue cryptocurrencies for its asset manager clients. Charlottesville, Va.-based Blue Ridge Bankshares Inc.'s trading was halted for five minutes on Feb. 10 after it announced that consumers can now buy and redeem bitcoin at its ATMs.

Also in February, Visa Inc. announced plans for a suite of crypto application programming interfaces, or APIs, that will enable customers to buy, custody and trade digital assets held by Anchorage Trust Co. And Mastercard Inc. announced that it will begin supporting select cryptocurrencies on its network in 2021.

Following the Bank of New York Mellon announcement, Compass Point analyst Michael Del Grosso wrote in a Feb. 13 note that "2021 is looking like the year of the crypto." One of the biggest beneficiaries of the surge in popularity will be Silvergate Capital Corp., which focuses on banking for digital currencies and the companies behind them, he wrote.

"We believe that this move by Mastercard is a validation that digital currencies are part of the future and that incumbents will not stand still," Keefe Bruyette & Woods analyst Sanjay Sakhrani wrote in a Feb. 10 note. Announcements like the ones from Tesla and Visa are likely the first of many from companies that will enter the space in the years to come, Yermack said.

"A lot of this is irreversible and the narrative is likely to continue over the next decade as the technology from the crypto industry really becomes the foundation for much of the legacy finance industry to migrate into," Yermack said.

Crypto bank charters

As banks and other companies enter the digital asset ecosystem, cryptocurrency companies are seeking national bank charters to be seen as legitimate partners. During the final few months of 2020, a string of cryptocurrency-focused companies submitted applications for national bank charters with the OCC. In 2021, two companies have received conditional approval and two more have submitted applications.

"In the mainstream phase ... a lot of players come in, and they want to move fast and they recognize an advantage in relying on others who have built capabilities, and that's where we find ourselves right now. And that's a very exciting place to be for us and for our business," Charles Cascarilla, CEO and co-founder of Paxos Trust Co. LLC, said in an interview.

Paxos focused on securing various regulatory approvals throughout the U.S. over the past few years in anticipation of cryptocurrency becoming more popular, Cascarilla said. Having the required regulatory approvals allows Paxos to be seen as a credible and trustworthy partner as cryptocurrency gains traction and other companies look to enter the space, he said.

Banks have contacted Paxos to inquire about how to get into digital assets, he said. "They're all taking a very hard look. And they're doing it in a very serious way," he said. "Large institutions, asset managers and others are really starting to decide they want to be part of this ecosystem, and they're buying digital assets, and they're investing in them, and they're trying to figure out how they can offer services and have different relationships with our customers as a result of this technology. That's a very exciting thing."

Two more cryptocurrency companies have applied for national bank charters with the OCC in 2021. BitGo National Trust Co. applied to convert its state charter to a national bank charter on Jan. 15. First Blockchain Bank and Trust NA, which will be a wholly owned subsidiary of Metallicus Inc., applied for a national bank charter with the OCC on Feb. 3.

If granted the charter, the bank plans to offer trust and estate services, demand deposit accounts and cryptocurrency services, according to its application. The company expects to get conditional approval in about four months, Irina Berkon, CFO of Metallicus, said in an interview. The bank also plans to apply for deposit insurance with the Federal Deposit Insurance Corp.