Banks of the future: Crypto firms seek legitimacy through licenses

On March 18, Reuters reported that various crypto companies seek to become state or national banks, which they see as an avenue for expanding their businesses under the Trump administration. What can change for crypto companies once they become banks?

Indeed, multi-faceted crypto platforms and banks already have overlapping functionality. Many banks allow customers to store their savings via crypto, grow capital using yield mining or staking, or attain crypto loans. In regions with a high unbanked population with smartphones, crypto platforms already occupy a bank-like position. 

However, getting licensed as a state or national bank differs from becoming a de facto bank-like entity. Let’s examine the prospects for crypto platforms seeking to become full-fledged banks.

Why transform into a bank?

With the U.S. embracing crypto, these companies have a bigger chance of transforming into banks. Modern-day regulators don’t see crypto as something utterly inadmissible. Reuters cites lawyers admitting that there is rising interest from crypto companies that are cautiously seeking new opportunities.

SmartBiz, for example, acquired Centrust Bank, becoming the first fintech company to get a bank charter since 2021. This indicates a possible trend setting. 

Earlier this month, the Office of the Comptroller of the Currency reversed the banks’ anti-crypto stance, permitting banks to engage in cryptocurrency-related activity, including stablecoins operations, crypto custody, etc.

First, the companies hope to obtain bank status to boost their credibility. It may attract new individual and corporate clients, as banks seem more trustworthy and familiar to them than cryptocurrency ecosystems. It opens new opportunities and allows companies to scale up substantially. Bank charter is associated with additional scrutiny, but on the other hand, it gives companies a more legitimate image that is important for business expansion.

The second reason is that bank regulations pull crypto out of the grey zone, giving the companies a clearer legislative environment, thus providing a more predictable development trajectory and the opportunity to follow their strategies more confidently. 

Another benefit of getting a bank charter is direct access to clients’ deposits. Without it, crypto companies have to borrow funds and pay high fees. With clients’ deposits, companies may be less constrained in their actions and development.

The intersection of banks and crypto platforms

Although blockchain has been antagonistic towards banks from day one (remember the message attached to the genesis block of Bitcoin), banks and cryptocurrency businesses have managed to coexist and shape each other’s ways of operating.

It seems that crypto no longer poses an existential threat to banks. Banks adopted blockchain solutions, while crypto platforms adopted many banks’ services, like loans and more basic operations like remittance.

Traditional banks use blockchain solutions for various reasons. Distributed ledger and smart contracts infrastructure allow banks to automate some processes and reduce costs, elevate compliance and overall security of funds and data, and increase settlement speed, especially regarding cross-border transactions. It’s worth saying that not only does automation make the services cheaper, but it also eliminates human errors and prevents fraudulent activity. 

Companies like JPMorgan Chase and Goldman Sachs use blockchain to streamline the Know Your Customer verification process. An international consortium of banks, Fnality International (it includes Barclays plc, HSBC Holdings, and other major banks), uses blockchain for cross-border transactions.

Central bank digital currencies, or CBDCs, will reduce the intermediary engagement between citizens and central banks while not stopping commercial banks from providing services like crediting and others.

At the same time, cryptocurrency platforms were serving as banks in rural unbanked areas with high mobile Internet penetration. Such areas can be found in Sub-Saharan Africa and some Asian regions. The residents of these areas mostly use crypto for remittance and savings.

Neobanks enter the picture

Neobanks, digital-first online banks that offer traditional banking services, emerged in the early 2010s. Since then, they’ve proven to have advantages over traditional banks.

For example, they boast a customer-centric approach and use peer-to-peer solutions. Neobanks also typically charge lower fees, provide user-friendly apps, and usually have a more favorable approach to providing credits/loans to clients. 

Tens of millions of clients use digital banks, such as Chime or Revolut. According to Plaid, over 21% of people aged between 21 and 56 use neobanks as their primary checking account.

The adoption of cryptocurrencies was a logical next step. Revolut is a notable example of a neobank that supports cryptocurrency operations in addition to other features like stock trading, currency exchange, and virtual cards. 

We will likely see more crypto companies becoming banks, as both the U.S. regulators and businesses express interest in such a development. Soon, we will learn if other countries are taking notes.