Like many crypto companies trying to establish themselves in the US, Avanti has compliance challenges.
While applying to become a bank in Wyoming and a crypto custody service provider, Avanti has had to jump through regulatory hoops the past two years with no end in sight.
“So the rules have changed on Avanti twice since we applied initially last fall,” CEO Caitlyn Long told Lendit on Nov. 8.
“The Fed introduced its payment system access principles in May, and then the President’s Working Group paper came out last Monday. And so we have responded by both applying for Fed membership, which we did in August, and last week we announced we’re applying for FDIC insurance.”
Though approved to become a bank, she said Avanti now needs FDIC insurance and acceptance into the Federal Reserve payments system to function as a bank and offer stable coin services. This is all despite following current regulations and oversight that traditional banks have to follow.
Long said the lack of regulatory clarity was not just a problem facing crypto firms alone. She said that recent comments and moves by the Federal Reserve, OCC, SEC, and FDIC leaders could affect all fintechs that use bank fintech partnerships.
The Wyoming Framework
The journey to becoming a legally regulated crypto bank began after the previous bitcoin bull run in 2017.
Back then, Long said regulators cracked down on crypto firms’ banking providers. So Wyoming and crypto institutions in the state began looking for a solution, a regulatory process that would fix everything. Finally, after two years of building, the state created a special purpose digital asset charter.
The goal was twofold; Long said: offer a framework for crypto custody institutions and enable crypto firms to access US bank accounts to do things like pay employees. In 2019, the special Wyoming charter launched and serves as a guideline program for other states and federal implementation of crypto banking activity.
Based on those guidelines, Avanti, Kraken, and other crypto firms applied for and became approved banks under the charter in 2020.
Still, Long said the state-based framework was insufficient to function as a bank: regulatory oversight kept moving the goalpost.
Both Avanti and Kraken, a cryptocurrency exchange, applied for access to the Fed Payment System in October 2020, and there has been no word since.
“In order to be an operating bank, you have to have a way to clear your US dollar payments, which means that you either need a master account at the Federal Reserve, which is what both Kraken and Avanti applied for, or you need a correspondent who will clear payments for you.”
Working Group asking Stable Coin Laws
The Presidents Working Group of regulators from the OCC, FDIC, SEC and Federal Reserve came out with a stablecoin report that complicated matters.
First, they called for more controls for stablecoin issuers, like FDIC insurance, KYC, and anti-money laundering controls.
But, Long said, through partner banks and state regulations, Avanti and other crypto banks have these controls in place, and their application for FDIC insurance has gone unanswered.
The pathway toward FDIC insurance for crypto companies was not open before the report came out: and it still is not clear if the FDIC is processing new applications after the report, Long said.
“It’s important to note that the policy regarding stablecoins is already in effect,” Long said. “It’s because the three bank regulators have agreed that they’re going to enforce that, and they don’t need Congressional approval for that. They can enforce that already through the bank supervisory exam process.”
She also said, though industry experts lead her firm with decades of combined experience in banking and regulatory compliance, it seems like the government views crypto firms like Avanti as “a group of freewheeling 20-somethings.”
“So coming to the President’s Working Group, as I said publicly, I hope that the intent of the regulators was not to provide a structural advantage to big banks,” Long said. “But the reality is that there is not a single crypto native company that has FDIC insurance.”
“Crypto Sprint” and Regulatory Rumblings
While dealing with the stablecoin report, Avanti and other fintechs have also been eyeing upcoming guidance from regulators.
It is unclear what is coming, but both the Acting Head of the OCC, Michael Hsu and the FDIC head have made speeches about the need for clearer fintech and crypto regulations at a federal level.
Speaking at the American Fintech Council Fintech Summit event, Hsu called for a need to make fintech bank partnerships and “synthetic banks” come under organized regulatory control through a joint effort by the FDIC, OCC, and SEC.
Hsu described a new industry of synthetic banking and why fintechs are not becoming banks through the typical path.
He said first, “it is easier and cheaper not to;” second, because fintechs operate as tech platforms focused on userbase data; and third, because fintechs have had no clear regulatory guidelines to follow to become banks.
“High-quality earnings is the hallmark of a safe and sound bank,” Hsu said. “The fintech business model turns that on its head. Some of the most highly valued technology companies generate minimal earnings or even operate at significant losses for multiple years before becoming profitable.”
Find new models
Instead of the standard model, regulators will have to find new ways to reconcile these business models to ensure safe financial products.
“I believe that having a clear, shared approach to the bank regulatory perimeter and leveling up our understanding, policies, and staffing related to emerging technologies can help address this challenge,” Hsu said.
Concerning the report on stablecoins, Hsu also mentioned the effort to explore new regulations for the exploding cryptocurrency industry in a task called the “crypto sprint” that regulators began in the spring of 2021.
Despite inquiries into these upcoming rules, it is unclear how bank-fintech partnerships will come under new advisement. However, Long believes that crypto and stablecoin providers attempting to go under regulatory oversight are not the only ones that should be worried. The entire fintech ecosystem, which functions through bank-fintech partnerships, should be prepared for change.
“The critical thing to understand is if all three federal bank regulators, all of whom have jurisdiction over every bank, and indirectly over every fintech, because of their bank-as-a-service-relationships,” Long said.
“If they have decided to change policy, they have the ability to implement that unless Congress stops it. If Acting Commissioner Hsu’s speech is indicative of where the bank regulators are, then it’s about to get very interesting for fintech generally, not just crypto.”
