Cryptoasset-Related Activities of Banks: An Overview of Trust Charters and the Use of M&A

In recent years, some states have started to approve limited purpose banking charters for firms offering cryptoasset services to customers. Well-known among these are the Wyoming Special Purpose Depository Institution (“SPDI”) charter and the New York limited purpose trust company charter. This article provides a brief overview of these developments, as well as the use of M&A by cryptoasset-focused firms to acquire a bank charter.

In September 2020, the Wyoming Division of Banking (“WDoB”) approved Kraken Bank to become the first SPDI. In October 2020, Avanti Bank & Trust (now called Custodia) also was approved for a SPDI charter by the WDoB to engage in cryptoasset activities, including providing a stablecoin-type product called Avit. As of June 2022, there were nine virtual currency businesses operating under a New York limited purpose trust company charter, including Coinbase, Fidelity, Gemini, and Bakkt.

At the federal level, under former Acting Comptroller of the Currency Brian Brooks, the Office of the Comptroller of the Currency (“OCC”) accepted two conversion applications and one de novo national trust bank charter from cryptoasset firms proposing to engage in cryptoasset activities. On January 13, 2021, the OCC granted its first conditional approval to Anchorage Trust Company, a South Dakota non‑depository public trust company, for conversion to a national trust bank operating under the title of Anchorage Digital Bank, National Association. On February 4, 2021, the OCC granted conditional approval for Protego Trust Company, a Washington state trust company, to convert to a national trust bank under the title Protego Trust Bank, National Association. And on April 23, 2021, the OCC granted preliminary conditional approval for the de novo charter of Paxos National Trust. These approvals came on the heels of an interpretation issued by the OCC’s Chief Counsel that the OCC has authority to expand the activities of national trust banks to include certain activities of state trust banks under the “bootstrap” provision of 12 U.S.C. § 92a and the “business of banking” under 12 U.S.C. § 24 (Seventh).

The national trust banks that received approvals proposed to engage in a range of cryptoasset custody and related activities, including providing fiduciary custody of digital assets, custody and management of stablecoin reserves, custody of client cash deposits, settlement of transactions, on-chain governance services, transaction validation, staking services, payment exchange, and other agent services. Moreover, some banks proposed to offer platform services, including running a client-to-client trading platform for assets under custody, operating a client-to-client lending platform, and managing a platform for the origination and issuance of new digital assets whereby asset owners can digitize existing and prospective assets. Finally, some banks also would provide certain “know your customer” services, such as customer identification, sanctions screening, enhanced due diligence, and customer risk rating.

These approvals may have come under greater scrutiny under current Acting Comptroller, Michael Hsu, who has stated that the agency would review the provisional approvals granted under former Acting Comptroller of the Currency Brooks’ leadership. For example, Anchorage Digital Bank was recently issued a consent order for failing to meet the Bank Secrecy Act/anti-money laundering (“BSA/AML”) requirements under its operating agreement with the OCC.

More generally, OCC Interpretive Letter 1179, issued under Hsu and clarifying earlier interpretive letters (including Interpretive Letter 1176), suggests that while the path to charter a national trust bank engaged in cryptoasset-related activities remains available, it is narrower than the path envisioned by former Acting Comptroller Brooks. Notably, to date, no new national trust bank charter for a crypto‑native company has been approved by the OCC under current leadership.

Other innovation-focused companies have taken the M&A route rather than applying for a de novo or charter conversion with the OCC. For example, in September 2020, Fintech startup Jiko acquired Mid-Central National Bank, and in February 2021, LendingClub completed its acquisition of digital bank Radius Bank. In January 2022, federal banking regulators also approved SoFi’s application to acquire Golden Pacific Bank. In granting the approval, however, the OCC stated that the acquired bank may not engage in any cryptoasset activities or services currently conducted by SoFi unless it has received prior written determination of no supervisory objection from the OCC. In addition, the Federal Reserve Bank of San Francisco stated that “SoFi is currently engaged in crypto-asset related activities that the [FRB] has not found to be permissible for a bank holding company or a financial holding company” and must divest or conform to the requirements of the Bank Holding Company Act within the available two-year conformance period (subject to any available extension). SoFi’s current investment offerings include a cryptoasset trading service that offers trading in Bitcoin, Ethereum, Dogecoin, Cardano, and 26 more coins. To date, the FRB has not issued any guidance on permissible cryptoasset activities of bank holding companies.

The introduction of special purpose banking charters from states and the OCC’s acceptance of conversion and de novo charters represent new options for companies offering cryptoasset services to operate within the regulatory perimeter. Recent bank M&A deals also evidence the diverse paths that companies are taking to offer such services, particularly as the regulators under the Biden administration have seemed less receptive to charter applications. It remains to be seen, however, which path(s) will emerge as a dominant or favored approach by regulators and the industry.