As regulators continue to press, where is crypto banking going?

2023-03-09 11:17

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Historically, full reserve banking has never lasted long.

原文标题：《加密银行业务路在何方？》

Original article by Frances Coppola

Mary Liu, BitpushNews

Crypto banking is a mess, with a thunderstorm on the FTX trading platform causing a damaging run on two US-regulated banks. Among them, Silvergate Capital Corp. had to sell assets at a loss to repay depositors and lenders, and Silvergate Bank collapsed. Voyager Digital went bankrupt and urgently warned customers that its deposits would not be covered by the Federal Deposit Insurance Corporation. Protect.

监管机构持续施压，加密银行业务路在何方？

U.S. regulators are pressuring banks to stop providing banking services to encrypted platforms and trading platforms. In a decision that shocked the crypto industry, the U.S. Federal Reserve rejected membership at Custodia Bank, a full reserve Bank that provides payment and custody services to cryptocurrency companies.

What about cryptocurrency-related banking?

On January 3, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Bureau of Monetary Supervision (OCC) issued a joint statement to banking institutions on crypto asset risks, marking the official start of the regulatory crackdown on crypto banks. We wonder why it's only now, 14 years after Bitcoin and nine years after Tether first appeared, that they've decided to sever the link between the crypto ecosystem and the dollar system.

But the answer is in their statement: "The events of the past year have been characterized by intense volatility and vulnerability exposure in the crypto asset space, and these events have highlighted some of the key risks associated with crypto assets and crypto asset industry participants that banking institutions should be aware of."

They go on to describe the risks they see in the current crypto ecosystem: fraud and scams; Legal uncertainty; Inaccurate or misleading marketing (including claims of FDIC insurance) and "other potentially unfair, deceptive or abusive practices"; Cryptocurrency market volatility; Stablecoin reserves are at risk; The risk of contagion due to extreme interlinkages; Poor risk management and governance; Hacking and cyber attacks; Risks associated with open, public and/or decentralized networks are generally increased.

"It is important that risks associated with the crypto asset sector that cannot be mitigated or controlled are not transferred to the banking system," they warned.

The message is clear. U.S. regulators consider cryptocurrencies a serious threat to the traditional financial system. Not because it will take it over, but because it might bring it down.

For all the slogans about "unbanking yourself," cryptocurrency exchanges, lenders, and stablecoin issuers need access to banks. All dollar-denominated transactions, with the exception of physical notes and coins, pass through the U.S. banking system and ultimately through the books of the Federal Reserve Bank of New York. Fintech payment apps such as Venmo and Zelle create the illusion that dollar payments can be made without bank involvement. But a deeper look at the companies reveals that they rely on a network of banks - indeed, Zelle is owned by a consortium of banks, as is international dollar payments.

Contrary to popular belief, international payments are not sent via SWIFT: SWIFT is simply a messaging service. Instead, like onshore payments, international dollar payments are sent and received by banks and cleared through the New York Fed's books. Therefore, it is impossible for any cryptocurrency company, whether or not it has a U.S. presence, to accept or pay legal dollars unless it has a direct or indirect relationship with a U.S. bank.

Cryptocurrency companies also use banks to store the cash reserves that "back" customer deposits. But this is not absolutely necessary: they could use money market mutual funds, for example, or hold short-term US Treasury bills. It's also odd that crypto companies like to claim that, "unlike banks," they hold full reserves against customer deposits. However, if reserves are held in fractional reserve banks, this argument is not true.

It's hard not to conclude that the real reason many cryptocurrency companies hold cash in banks is so they can tell depositors they can get FDIC insurance. The FDIC has issued cease and desist orders to a number of firms, including trading platforms FTX and CEX, for falsely stating or implying that FDIC insurance applied to their customers' deposits.

But while payments and custody services are important banking functions, they are less important than traditional business models. The business model of traditional banks is to borrow at low interest rates, lend at high interest rates, and pocket the difference. Traditional banks are important creators and distributors of liquidity, not only in financial markets but also in the wider economy. As the US discovered after the collapse of Lehman Brothers in 2008, when banks stop lending, the economy grinds to a halt. The crypto industry initially shied away from borrowing, but soon found that without it, the ecosystem wasn't liquid enough. When there is more HODLing and less lending, liquidity is gold.

The dollar is illiquid in the crypto ecosystem, so crypto companies don't need the lending services of traditional banks. And because they may have to pay those scarce legal dollars at a moment's notice, they want any money they deposit with a traditional bank to be kept safe, rather than used as liquidity for the bank's other activities. So cryptocurrency companies want a kind of bank we don't currently have: a "full reserve" bank. In 2019 Wyoming enacted the charter of a full reserve bank. Its "special purpose depository institution" (SPDI) can take deposits and provide asset management, custody and related services, but cannot lend money (though it can buy some types of debt securities) and must keep at least 100% of its total deposits in uncommitted liquid assets. .

Custodia Bank was a SPDI in Wyoming. It does not lend money, but offers payment and custody services:

"Custodia has all the benefits of being a bank with expertise in digital assets -- plus, as a depository institution, we qualify to connect directly to the Fed payment system, eliminating the middlemen and layers of fees." In particular:

U.S. banks with direct access to the Fed through their main account can clear payments for their clients directly at the Fed, reducing the costs, delays, reconciliation difficulties, and counterparty risk involved with traditional intermediaries

A bank is defined as a "qualified custodian" under the Investment Advisers Act and the Securities and Exchange Commission custodian rules

Under the SEC's customer protection rules, banks are defined as "good control platforms."

A fully-funded non-lending bank that makes a profit solely from fees paid and custodial services sounds like a sensible solution to meet the needs of cryptocurrency banking. Indeed, many may think it has wider applications as well - after all, it's not just cryptocurrency companies that need safe places to park their savings. If it is 100% reserved, there is no risk of a bank run, and if it does not lend, it will not be insolvent with bad debts. Although the deposits at Custodia are not FDIC insured, they are perfectly safe. So why did the Fed refuse to accept Custodia as a member and to participate directly in dollar clearing?

The problem is not Custodia, it is the customers. Custodia specialises in banking and custodial services for crypto businesses. The Fed's view of these is more than mildly biased; it sees the entire crypto industry as a hotbed of financial crime. It would hardly give the green light to a bank whose main business, in its view, is to help risky and, at worst, actually criminal enterprises to store and move dollars.

还有第二个问题：Custodia 计划发行自己的Token。该 Token 将是 Custodia 的一种负债，可按面值兑换成美元——一种「 Token 化的美元」。它将被完全保留，Custodia 已申请 FDIC 保险。一家受监管的银行发行完全保留的、FDIC 保险的 Token 化美元，可以在多个区块链上使用，这似乎是个好主意。这将使美元在加密领域的流动性大大提高，并减少对 Tether 等公司的依赖。问题不在于 Token ，而在于网络。

Custodia 计划在 Blockstream 的 Liquid 网络上发行 Token ，也可能在以太坊上发行。这些是公共去中心化网络。Custodia 无法控制此类 Token 的所有权和分配。就好像它发行了自己的货币一样。上面引用的联合监管机构声明说，在此类网络上发行 Token 「很可能与安全可靠的银行业务不一致」。虽然监管机构将加密货币视为洗钱、恐怖主义融资和勒索软件的工具，并且头条新闻主要是与加密货币相关的欺诈、诈骗和站台，但受监管的银行将不会被允许在公共网络上发行稳定币。

If crypto companies stop fighting regulators and clean up their act, the Fed might look more favorably on the banks that serve them. But in any case, I don't believe Custodia's business model makes business sense. The reason we don't have full reserve banks is that they are inherently less profitable than their fractional reserve competitors. Historically, full reserve banking has never lasted long: banks have either found a way to use customer deposits, been bought by fractional reserve banks, or gone out of business.

The development of full reserve banking in the crypto industry was short-lived: crypto lending platforms, trading platforms, and stablecoin issuers that promised depositors "full reserve" turned out to be nothing, and in a financial world dominated by fractional reserve banks, I doubt that full reserve banks like Custodia can survive in the long term.