Recently, American cryptocurrency organizations have been able to create their own banks. Who is taking the chance and why crypto companies should create their own banks – in our material
In the fall of 2020, the United States Office of the Comptroller of the Treasury (OCC) allowed U.S. banks to hold funds to collateralize stablecoins, pegged to one of the fiat currencies, at a 1:1 ratio. Months later, regulators went a step further and allowed credit institutions to use blockchain and open stablecoins for payments.
The OCC clarified that the solution would allow American banks and savings and loan associations to conduct transactions in digital assets using an independent node verification network (INVN) and stablecoins.
The regulator notes that the use of INVN will complement the current user payment order processing scheme. The only difference is that this work will not be done by a centralized system, but by the nodes of the blockchain network. “The bank itself can later act as a node in INVN to facilitate payment transactions. Likewise, banks can use stablecoins to facilitate payment transactions for INVN customers, including by issuing stablecoins and exchanging them for fiat currency,” the OCC said in a statement (.pdf).
In general, the new scheme will work as follows: the bank’s client converts dollars into stablecoins and transfers them to the beneficiary via INVN, after which the beneficiary converts it back into dollars. At the same time, the payments themselves can be both domestic and cross-border. “The use of INVN and stablecoins can provide a cheaper, faster and more efficient means of money transfer,” the regulator said.
OCC solutions have paved the way for stablecoin companies in the US banking market. By contacting the regulator, they can obtain a full license from the national bank – that’s how the United States calls commercial financial organizations that operate across the country.
Since the OCC decision spoke about banks working with digital assets, a new name was created for them – “National digital currency bank” (NDCB, National Digital Currency Bank). Bloomchain studied how popular new proposals from American regulators were, and which companies had taken advantage of them.
The first is California-based startup Anchorage – in January 2021, it announced the formation of the first national digital bank in the United States. “This is an important milestone not only for us as an organization, but for financial markets as a whole. The cryptocurrency industry should have its own bank, and we are very proud that we will be one of those who will set the standard for them,” said the company blog.
Anchorage was created in California in 2017. Initially, he was involved in cryptocurrency storage services, but then he began to develop other products: trading, lending and working with DeFi instruments. Since its inception, Anchorage has focused on working with institutional investors.
During its existence, the company has closed four investment rounds, having successfully raised $137 million. The number of investors includes not only large venture capital firms, such as Andreessen Horowitz and Blockchain Capital, but also payment system Visa.
It was Visa that became one of the participants in the first cryptocurrency transaction in the history of Anchorage. In March 2021, the account was opened with a digital bank accepting payments from the service Crypto.com, with which Visa worked on a cryptocurrency project. It finishes on the Ethereum network, and USDC becomes the unit of account.
Crypto.com called the transaction an “industry milestone that will bring crypto and fiat networks closer together.” However, for this process to become a reality, it may take time – six months after the information about obtaining a banking license, Anchorage announced the launch of only two partnership projects.
The former is co-hosted with California-based Silvergate Bank, which serves the accounts of a large number of cryptocurrency companies, including major exchanges. Another commercial bank, BankProv, has become a partner in the second project. In both cases, Anchorage offers its clients to use cryptocurrency assets to issue loans in fiat at partner banks. In the first case, Bitcoin is used as collateral, in the second – ETH.
Also Read: Silvergate Bank Stops Serving Binance Dollar Deposits
Judging from the description on the company’s website, cryptocurrency loans and deposits will be the main products of its digital bank. There is no information on how much demand they are now and which companies can become new partners for Anchorage.
BitPay, Paxos and Protego
In line with Anchorage, several other cryptocurrency projects applied for licenses to the OCC. BitPay, the payment service, did it before anything else – company executives wanted to register a new bank in the state of Georgia. However, the problem does not go further than the initiative – after almost a year nothing is known about the fate of the project.
The other two companies were more consistent. Blockchain startup Paxos, which produces its own stablecoin Pax Dollar, received its OSS license in April. By this time, the project already had a banking license from the state of New York – now its effects have extended throughout the United States. Moments earlier, another blockchain project Protego, registered in Seattle, received an OSS license.
In all of these cases, including the Anchorage story, an important caveat must be made – all banking permits issued by OSS are preliminary. This is followed by the camera work stage, during which regulatory representatives will study all internal company documents – final clearance will only be received upon completion of this process, which can last up to 12 months (.pdf ). If there is a claim from OCC, the license can be revoked.
In August, one of the most important players in the cryptocurrency market, Boston-based company Circle, announced its intention to create a national digital bank. In 2018, together with exchange Coinbase, it released USDC, a stablecoin pegged to the US dollar. Currently, the token is in the top 10 of the largest cryptocurrencies with a capitalization of over $38 billion.
USDC cap growth, data from CoinMarketCap
“In just three years, USDC has become a critical part of the infrastructure of the new financial system, in which digital currencies are embedded. Circle now intends to become a national commercial bank with full reserves,” the company said in a statement.
Circle said the new bank would meet the requirements of all national regulators – the OCC, the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). However, it is not yet clear whether the company will apply for the permit directly. The prospectus for the Securities and Exchange Commission (SEC), published before the public listing, said the company was also considering buying banks with valid licenses.
How exactly Circle intends to use this license is not stated in the prospectus. The only clarification on the matter sounded like this: “the license will allow us to gain direct access to the Federal Reserve System, reducing costs and time to settlement.”
In a statement, the company separately noted it had met Basel III liquidity requirements. This document was developed by the international committee for banking supervision, which includes regulators from 28 countries.
In the summer of 2021, this committee came up with an initiative that should reduce the risks that banks face when working in the cryptocurrency market. He proposed classifying stablecoins as a group of assets with a lower level of risk – assuming that if they were backed by a traditional pool of assets in a 1:1 ratio, then banks would not need additional coverage.
See also: problems with asterisks – how Basel tightened the rules for working with cryptocurrencies for banks
Circle notes that USDC guarantees always meet this requirement. Coinbase COO Emily Choi also confirmed this. According to him, stablecoins are always backed by assets, the value of which is equal to or more than $1 – this approach gives USDC owners the opportunity to exchange assets for US dollars at any time.
Additionally, in August, developer Circle announced their decision to keep only US dollars and US securities in the USDC collateral basket – previously their share was less than 75%. This announcement was made against the backdrop of IPO preparations and is not directly related to plans to launch its own digital bank, however, as expected, it will give investors additional confidence in USDC’s future.
Is USDC a threat to the digital dollar?
The launch of America’s first national digital bank comes amid claims by American regulators that the United States is far behind in the development of a central bank digital currency (CBDC).
While the United States is only planning to launch a pilot program to test the digital dollar, China is already preparing to start using its digital currency during the Winter Olympics in February 2022. Similar projects are being developed in several dozen other countries.
Countries develop their own CBDCs. axio data
This is what is causing concern among American regulators – analysts have publicly said that CBDCs in the future may become a more effective financial instrument than traditional cash. In this situation, Circle’s intention to become a regulated company and scale could raise concerns among US regulators that its stablecoins may be more in demand than digital dollars.
Read also: Fed chief tells why the United States is not in a hurry to launch a digital dollar
How the American authorities react to such an initiative is well known in the example of the Libra project, which was presented in the summer of 2019 by the social network Facebook. Its creators were about to launch a dollar-pegged stablecoin, but due to endless bureaucratic processes, the project was actually frozen for some time.
Of great importance in this situation is the opinion of the SEC, whose position in relation to cryptocurrencies remains extremely difficult. The commission’s new chairman, Gary Gensler, said he was not a fan of stablecoins, comparing them to the chips used by casino players.
While the development of the digital dollar continues to stall, stablecoins are becoming an increasingly popular means of payment. According to McKenzie, in the first half of 2021, the volume of transactions in it amounted to about $3 million. Thus, the growing popularity of USDC can be an additional annoying factor for American authorities, who are losing competition on the trade front. digital currency not only for foreign competitors, but also for domestic private companies.
Is USDC the New Digital Dollar?
On the other hand, the active development of stablecoins can be one of the possible solutions to the “digital dollar” problem. A recent article by analysts at the Federal Reserve and Yale University suggested using it as a digital partner for national currencies.
See also: declare “crypt” – an oxymoron or the future of paper money?
Experts suggest that the U.S. government abandon its own CBDC development, and instead include stablecoin-issued companies within the limits of banking oversight, and issue them appropriate licenses.
In this case, the companies will be the issuers of digital money. The authorities only need to communicate their requirements to them to ensure liquidity, deposit insurance and independent audits. Analysts from the Fed and Yale University believe that one of these stablecoins may be USDC, which is mentioned in the material as one of the most “transparent” projects on the market.
Given the extremely tough stance of American regulators on everything cryptocurrency-related, it is difficult to predict what position they will take in relation to stablecoins. However, by the time Circle’s banking licensing issue is resolved, there should have been significant progress on the digital dollar issue.