The author is Maxim Bederov. 

The once strict lines separating traditional finance and crypto finance are melting away. And it could lead to once-unthinkble cryptoasset prices much sooner than any of us believed possible. 

When San Francisco cryptoexchange Kraken crossed the Rubicon to win a US bank charter in September 2020, it sparked off an international conversation about the repercussions of the decision. Kraken was joined by Caitlin Long’s Avanti Financial just a month later. In truth the most consequential move of all came on 13 January 2021, when the Office of the Comptroller of the Currency granted cryptoasset custody specialist Anchorage conditional approval for a federal banking licence. 

Both Kraken and Avanti won Special Purpose Depositary Institution (SPDI) status under Wyoming law. And while they, like Anchorage, have to put in place certain requirements like raising additional capital, there is a marked difference between state-level banking charters and those conceived at a federal level, as Anchorage now has in its grasp.

There are similarities, of course, between Wyoming’s SDPI and a federal banking charter. 

Wyoming requires its SPDIs to maintain 100% of its fiat demand deposits as liquid assets, including cash and US Treasury bonds — this means depositor money won’t be lent out without their permission. This does mean that SDPIs can’t take advantage of the fractional reserve system and generate income by lending out what they receive in deposits. The Wyoming Division of Banking also expects applicants to have initial capital of at least 1.25% to 1.75% of its assets under custody or $10m, whichever is greater. 

The OCC’s capital requirements for Anchorage include that it must hold $7m in Tier 1 capital: this is the primary source of funding for banks and consists of shareholder’s equity and retained earnings.  At least 50% of that must be made up of what are called “Eligible Liquid Assets”. At all times, Anchorage must maintain $3m of liquidity or 180 days-worth of operating expenses. Regulators will also be allowed to poke around inside the structure of the business and review its capital and liquidity on a quarterly basis.  

But the effects of being an SPDI have not yet been widely tested by the market, or by regulators, as this is a relatively new vehicle that the State of Wyoming created in 2019. 

And while Kraken says one of its main abilities as an SPDI is to call itself a “qualified custodian” of digital assets, the SEC is still working out what “qualified custodian” means for crypto, which injects a little more regulatory flex into proceedings than Kraken would probably like. 

Also: what SDPI status does not do, is entitle it to operate in any other state without applying for and getting approval from that state’s banking regulator. 

A federal charter, by contrast, makes it very clear that big banks can all use Anchorage to hold cryptoassets on behalf of their clients. And thinking in a wider sense, the OCC conditional approval puts Anchorage the same sure regulatory footing as every other national banking institution in the United States. 

In the wake of the decision, its CEO Nathan McCauley was naturally bullish, predicting that this kind of regulatory certainty will lead hundreds of banks to partner with Anchorage, further fuelling the long-term growth of the cryptoasset market. “It will let all sorts of people come to the table who until now have been hesitant to come in. It marks a big shift in the availability of cryptoassets,” McCauley told Fortune. 

Custody the key

When BNY Mellon, the largest custodian bank in the world, announced its own move into custodying cryptoassets, it was this point that it lasered in on.

“The lack of certainty regarding national regulators’ treatment of digital assets is often cited as the main reason for the cautious approach of asset managers towards digital assets.” it said. “However, the reality is that, apart from the uncertainty surrounding the regulatory framework, it seems that the lack of safe, qualified custody is also a significant barrier preventing institutional investors from joining the crypto market in greater numbers. What’s really at stake is ensuring the safekeeping of private keys and crypto-addresses while allowing third-party access to pertinent information stored on the wallet to provide relevant services, such as, asset servicing, delivery versus payment, audit, fund administration, etc.” 

There is that openness, as we mention above, allowing regulators and others to come in and poke around in the workings of the bank in a transparent manner. 

Anchorage, of course, is a digital asset custodian native: it was a custodian before it was a bank, and promises end-to-end insurance that beats anything else available on the market. 

It has taken considerable time and effort for crypto-friendly banks to come to the aid of institutional investors. Two names that long-time readers will recognise are Silvergate and Signature. As crypto custody pioneers, these two helped to serve institutions who were scorned by the traditional mainstreamers: like America’s fourth-largest bank Wells Fargo. 

The anecdotal anti-crypto stories about Wells Fargo are myriad but include denying business accounts to those who mention the word ‘Bitcoin’, backed by a December 2020 investment strategy report that says cryptoassets may be worth investing in “one day”. Such notions will be little succour to the clients clamouring for cryptoasset exposure. And it’s not just possible but likely that Wells and its ilk will miss out on billions in client cash if they can not remove their blinkers.  

The inability or unwillingness for mainstream banks to invest  in crypto compliance created a market vacuum quickly filled by smaller fintech and private banks: over in Switzerland and Germany it was the likes of SEBA and Sygnum hoovering up client capital at the expense of larger banks. 

Back in the US, we can see the effects of crypto compliance: since its debut on the New York Stock Exchange in November 2019, Silvergate’s holding company Silvergate Capital Corp (NYSE:SI) has experienced explosive growth. Priced at $12 a share at its IPO, the bank has seen its shares rise by over 940% inside two years. 

The outgoing OCC Comptroller, Brian Brooks, laid out the future in pretty stark terms after approving Anchorage’s case. “Fiat [currency] will ultimately be a legacy thing of the past,” he said at a public webinar event hosted by Elliptic, arguing instead that banks will transition to being broadly blockchain-based service providers. Certainly his Interpretive Letters allowing federally-regulated  banks to custody crypto and to use stablecoins for settling payments would speak to that future. 

Brooks’ departure from the OCC does raise the spectre of a markedly less crypto-friendly head coming in to lead the organisation, as part of the shift away from former President Trump and into the Biden administration. Anchorage and their ilk aren’t necessarily worried by this, saying that because the OCC’s decisions were based on existing laws, and not entirely new ones, they are less likely to be reversed. 

How might crypto prices respond to digital asset banking? 

We have already seen the seismic effects of banks and other supersized financial institutions entering the crypto asset class. At time of writing, Bitcoin is valued at over $55,000 per coin, and price predictions of $146,000 by JP Morgan or $318,000 by Citibank (by December 2021, no less) no longer look quite so outlandish. 

Ethereum, which largely powers the DeFi subsector by itself, spiked to an all time high above $2,000 on 20 February 2021, gaining over 840% across the last 12 months. The institutional floodgates are now open: new technologies are coming online all the time allowing banks to borrow and stake digital assets in the same manner as forward-thinking retail investors

Swiss fintech group Taurus, for example, just launched access for banks and exchanges to stake cryptoassets using DeFi platform Aave.

The truly remarkable thing about this whole situation lies with the systemically disruptive element of cryptoassets. 

Institutional adoption of cryptoassets through banks that are subject to federal regulation and oversight promises profound changes to financial markets. Not only are much greater levels of capital inflow likely — as we’ve seen with the likes of Tesla, Microstrategy and Square at the crest of the wave of determining appropriate levels of cryptoasset-denominated treasury — it makes the market more accessible to a much broader investor base than those happy few drove the last major Bitcoin bull run in 2017. 

It’s perhaps the reason why industry insiders like Kraken’s CEO Jesse Powell believe that the Bitcoin price — supported by the structural aid of digital asset banking — could reach $1m inside the next decade. 

If cryptocurrencies do in fact replace fiat currencies like the US dollar, as Brian Brooks so vehemently stated, such incredible price points could be just the start and not the end for crypto assets holders.