Cryptocurrency has emerged as a topic of great interest in the early days of President Donald Trump’s second administration.
On the legislative front, the U.S. Senate recently passed a bill that would create a regulatory framework for stablecoins, which is a type of cryptocurrency that’s pegged to another asset; the U.S. House of Representatives will now take it up. Federal bank regulators have issued guidance saying crypto-asset custody and execution services are permissible activities for regulated institutions. With such a rapid shift, it’s no surprise that banks are wondering whether, and how, they should interact with this space.
To learn more about the crypto choice facing banks, Banking & Fintech Editor Kiah Lau Haslett speaks to Benjamin Melnicki, chief compliance officer at Cross River Bank, which provides limited services to cryptocurrency firms and exchanges. Cross River is the $8.5 billion bank unit of Fort Lee, New Jersey-based CRB Group. In this webinar, she also talks to David Sewell, a partner at the law firm Freshfields who works with crypto clients.
The transcript below has been edited for brevity, clarity and flow.
BD: Ben, what type of crypto products does Cross River offer?
Melnicki: Our products and services right now are currently geared towards allowing crypto companies to move within the crypto asset space. If a crypto company needs to pay its law firm, it can move money.
The other [clients we serve are] cryptocurrency exchanges and trading platforms. We offer a unique product set, where the reconciliation and ledgering take place within our books. If you want to buy $10 of bitcoin or sell $10 of ethereum, we’re able to move and facilitate that to and from your bank account and the exchange. And then for the exchange, we help them meet their obligations. There are a lot of things that happen when you hit “send,” “buy” or sell” that go on behind the scenes.
BD: David, what are other banks offering in this space?
Sewell: There are two kinds of buckets. One is providing services to companies in the crypto or digital asset space, providing depository lending and payment services to those types of companies. In my experience, there’s a relatively small number of banks in the U.S. that are currently doing this, but it’s not zero.
Where there’s close to zero actual activity is the second category, which is true crypto activity. The Office of the Comptroller of the Currency has stated there are at least three activities that are permissible for depository institutions: providing custody for crypto or digital assets, providing stablecoin reserves and acting as independent node verifiers for payments-related networks. That’s a pretty limited universe, but even within that universe, most banks at this point have shied away from that direct activity.
That’s where I think — especially given the dramatic change between the end of the Biden administration and the beginning of the Trump administration in terms of what federal regulators are willing to permit and even encourage — we’ll see more of the direct activity relatively soon.
BD: Why should small financial institutions think about offering a cryptocurrency business line? Is this just a big bank play?
Sewell: From a legal perspective, there’s certainly no reason why this is only a big bank play. I think there are a lot of arguments to suggest that it’s naturally something for smaller and midmarket banks to engage in, in part because there are so many more of them, and that this is a niche market that is underserved.
Any new product involves a lot of upfront costs, and I think the upfront costs of standing up stablecoin are probably going to be significantly higher than most. The regulators are going to be looking at this very closely. What kinds of third-party vendors are you using to assist with the program? What kind of policies and procedures do you have? What’s your tech stack look like? Is your [Bank Secrecy Act and anti-money laundering] monitoring program up to handle this new product? Those are the kinds of things where I think a lot of upfront investments are going to be significant.
Melnicki: It’s not just a big bank play. Bitcoin and its supporting technology were meant to disintermediate the larger financial institutions. A lot of the products and services we see today, and that we’ve seen over the last 15 to 17 years, were built with speed to market. And I think one thing that big banks don’t do well is bringing products and services to market with speed and at scale.
The tech stack that banks need is really critical. Crypto companies are technology companies. And there are other risks too; it’s not just BSA/AML. You’re talking about moving money. There are disputes, too; consumers have certain rights and obligations. There’s a lot to think about, and how you market the product and service when you’re tied to a bank is complicated.
Sewell: I work with banks large and small, and I think the smaller and midsized banks are more nimble. Given the state of the development, this is a business that’s going to require some amount of nimbleness, being close to your customers and your markets and not trying to do too much — walk before you run. These are areas where small and midsize banks actually have an advantage over the bigger players.
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