The Rise of Digital-Asset Native Banking

Companies that deal in digital assets are pariahs of the banking world. Even today, most banks still won’t touch Bitcoin. We are the quintessential outsiders banging on the door of an industry that does not want us. Unfortunately, this problem is reinforced by narratives both internal and external to the industry. 

Internally: “Bitcoin companies shouldn’t associate with banks because everybody should self-custody all of the time.” And externally: “digital assets are sketchy and therefore companies that deal in them shouldn’t have access to traditional banking.” This dynamic hampers the growth of the digital asset ecosystem because companies that want to build struggle to access basic financial services. Like any well-developed industry, there should be a variety of banking services available to digital asset companies that serve a variety of needs and risk tolerances. 

How did we get here? The first wave of “crypto banks” developed to serve the most basic needs that arose from traditional banks' refusal to conduct business with digital asset firms and the asset class generally. In most cases, it was impossible to move US dollars between businesses, exchanges, and institutions. 

Recently, the Wyoming bank license framework (SPDI) added important legal protection for depositors compared to the digital asset institutions that came before them. This has led to historic banking charter approvals for Kraken, in September, and Avanti, just one week ago.

The Wyoming framework requires that these “banks” not obtain legal title to the assets that they hold on deposit for customers. This is essential for institutional clients that are required to hold those assets with a third-party custodian. But, ultimately, it is not particularly useful for businesses looking for a banking relationship that can provide growth capital (extend credit and loans). Wyoming chartered “banks” aren’t intended to provide these kinds of ancillary banking services. 

And yet, globally, legislators and regulators in Europe have provided more clarity than their American counterparts. For example, an amendment to the EU’s fourth anti-money laundering directive gives German financial institutions authority to not only custody but sell cryptocurrencies. Jurisdictions are now competing to create clarity for digital asset companies because once they do, the liquidity soon follows. Unfortunately, clarity from American regulators on a host of issues, including banks selling digital assets and exactly what assets are securities, is still forthcoming. 

Alternatively, the legal and regulatory framework for digital assets in Bermuda is truly world class. The Bermuda Monetary Authority (BMA) requires Bermudian banks to meet stringent liquidity requirements to ensure ongoing stability. Furthermore, Bermuda is a sovereign nation that operates under British commonwealth law, is a sophisticated financial jurisdiction, and longstanding global leader in the insurance/reinsurance industries. 

In 2018, Bermuda created regulatory clarity and a legal framework for both digital assets and banking legislatively through two pieces of landmark legislation: the Digital Assets Business Act 2018 and the Banks and Deposits Company Act 1999 (as amended by the Banks and Deposit Company Amendment Act 2018). Bermuda also benefits from an integrated regulator, the BMA, which has unified authority over financial services. 

With a fully functioning digital asset bank on the island, Bermuda will solidify its role as a leader in effectively regulating the space. It is an exciting opportunity for digital assets infrastructure, as the combination of banking, payments, identity, and adoption of digital assets requires robust anti-money laundering/anti-terrorism financing policies and compliance. And this is why I’m bullish on Bermuda.

In addition to protecting depositors, the regulatory structure in Bermuda allows banks to provide a full suite of services. Importantly, this will include traditional and crypto-collateralized lending. While largely used by traders/speculators currently, crypto lending services will eventually play a foundational role in helping digital asset startups and companies to finance their growth. 

According to Forbes, the size of the crypto lending market is already massive and growing, surpassing $10 billion in total loan originations this year. The flexibility to lend is essential for a profitable banking enterprise and beneficial for the growth of the entire ecosystem. 

Traditional banks will eventually come around to digital assets. Until they do, we need pioneering institutions to serve digital asset companies now. I am optimistic that Bermuda will be home to these trail-blazing companies that will help close the gap between the digital asset world and traditional banking.