San Juan, Puerto Rico-based FV Bank International Inc. is on track to open a master account at the Federal Reserve Bank of New York to process payments for its digital asset customers, according to CEO Miles Paschini.
"We're in direct and constant communication with the Fed, and I believe that we'll be successful in the near future getting our Federal Reserve master account," Paschini said in an interview.
FV Bank is licensed by Puerto Rico's financial services regulator, the Office of the Commissioner of Financial Institutions, or OCIF, as an international financial entity, or IFE. It started operations in July 2020 as a depository institution, and in November, it launched a new business line to provide custody and settlement services for transactions involving digital assets.
FV Bank believes its eligibility for the Fed membership has been determined, and it has retained a routing transit number issued by the American Bankers Association, Paschini noted. It started the application process for the Fed master account over a year ago, he added.
The ABA only assigns transit numbers to chartered institutions eligible for a Fed master account, according to the ABA's website. But the assignment does not guarantee an approval from the Fed. Having received an ABA routing number in early 2022, Wyoming-chartered Custodia Bank Inc. is suing the Federal Reserve Board and the Federal Reserve Bank of Kansas City for allegedly delaying action on Custodia's application.
FV Bank's confidence in its application is grounded in the merits of its business and precedent cases, where other banks holding the same type of charter in Puerto Rico secured access to Fed master accounts, Paschini said. In comparison, Custodia Bank holds the novel charter as a special purpose depository institution, he added. The charter was created by the state of Wyoming in 2019 to address banking for digital assets.
Still, master account access is very complicated, and applications by IFEs engaging in virtual currency activities will be subject to enhanced scrutiny, according to Mark Chorazak, a partner at Shearman & Sterling advising financial institutions on regulatory matters.
While the New York Fed has opened banking accounts for Puerto Rican IFEs in the past, the Fed has at least once temporarily suspended approvals of pending applications by this group, most recently in 2019, Chorazak wrote in an email.
The Federal Reserve Bank of New York declined to comment.
FV Bank has about 300 customers, Paschini said. They can open checking and savings accounts for their fiat currency deposits and can have transactions between fiat currency and cryptocurrency settled within the bank.
Having a Fed master account will give FV Bank access to the Federal Reserve's payment rails so that it can better facilitate transactions on FVNet, its proprietary payment network, Paschini said. FVNet competes with other interbank settlement platforms, notably Signature Bank's Signet and Silvergate Capital Corp.'s Silvergate Exchange Network.
As it waits for a ruling on its application, FV Bank plans to raise $40 million in equity financing in 2023 to accelerate growth, Paschini said. It is interested in investors in traditional finance, potentially including regional and community banks that are curious about its digitally oriented operations leveraging blockchain, he said.
Because an IFE can structure its activities in a way that its owners do not need to register as a bank holding company, they may attract a broader pool of investors without the onerous restrictions tied to bank holding company status, Chorazak wrote.
In digital asset custody, regulated players include incumbent asset managers such as Fidelity Digital Assets Services LLC and The Bank of New York Mellon Corp., as well as three emerging companies chartered by the Office of the Comptroller of the Currency: Anchorage Digital Bank NA, Paxos National Trust and Protego Trust Bank NA. It is not a field that U.S.-chartered depository institutions can easily participate in, partially because banks are not allowed to hold digital assets on their balance sheets.
Regulated as an IFE
The cofounders of FV Bank were initially attracted to Puerto Rico in 2018 by an opportunity to acquire an IFE, Choice Bank Ltd., from the seller, a trustee appointed by the Central Bank of Belize, Paschini said. The acquisition did not go through, but the team got to work with the OCIF during the process and decided to apply for the charter itself.
FV Bank publishes its reserves monthly and call reports quarterly to its regulator, OCIF, Paschini said. The trust and banking divisions are operated separately, and assets under custody and clients' deposits are reported separately in regulatory filings, he added.
FV Bank believes its deposits are eligible for Federal Deposit Insurance Corp. coverage, but it does not plan to apply for FDIC insurance at this point, Paschini said. Although it has thousands of individual accounts, it mainly concentrates on commercial customers whose deposits are typically significantly higher than the $250,000 coverage maximum. In addition, FDIC insurance does not cover balances in digital assets.
Since the IFE charter is designed to protect local brick and mortar banks, FV Bank cannot open accounts for Puerto Rican citizens or businesses, Paschini explained. Non-U.S. entities account for 80% of its customer base.