Coinbase Seeks Bank Charter to Attract More Institutional Customers

Cryptocurrency is going mainstream, or rather, banks and cryptocurrency exchanges are growing more enmeshed. Jamie Dimon and Warren Buffett may still think bitcoin is a Ponzi scheme, but in the meantime, Goldman Sachs has reportedly opened a crypto trading operation , apparently a first for the banking industry, and Coinbase , the market-leading wallet and exchange, is increasingly looking like, well, like a bank. Last week the San Francisco-based exchange announced the release of a suite of "institutional products," including Coinbase Custody, a secure storage facility; enhanced features for its trading platform, Coinbase Markets; and Coinbase Prime, "a new platform designed specifically to provide a suite of tools and services that institutional investors rely on when trading cryptocurrency." Shortly after this announcement from Coinbase, the Wall Street Journal reported Friday that Coinbase was in discussions with the Office of Comptroller of the Currency (OCC) to obtain a banking charter. It is not known if this is the famous "fintech charter" floated by the OCC. As of December, this charter had apparently received no applicants . The OCC respectfully declined to answer several questions put to them regarding charters and cryptocurrency companies. Ivy Koin, a crypto payments startups, is reportedly also in talks with the Federal Deposit Insurance Corporation (FDIC) about a charter of its own. It is well known that cryptocurrency companies can have problems even being bank customers, so the news that licenses could be extended to nonbanks was the talk of the crypto world, at least for a while. Circle, a Coinbase rival, was reported to be considering the OCC charter option in 2016. Circle was a likely candidate to successfully obtain one, having been the first of the very few firms to obtain a "BitLicense" from New York State. It seems "charter chatter" is once again sweeping the crypto world, and Coinbase is committed to following the regulated path. (It already has thousands of complaints in the CFPB Complaints database , and at the height of the crypto craze in 2017, it received more than 100,000 customer calls a week. A recent Washington Post profile called it the "anti-startup," noting its culture was to move slowly and fix things: Coinbase’s secret sauce isn’t a fancy algorithm or a data-driven advertising business. It’s a calculated bet that as the rest of the financial system begins to catch on to cryptocurrency, investors and regulators alike will want a fully licensed partner that undergoes routine audits and complies with all the policies that a typical brokerage does. Its brand, carefully cultivated, is one of trust and legitimacy, in contrast to what it says are “fly-by-night” exchanges that freely operate in a legal gray zone in other parts of the world. These licenses, if granted, would make the exchanges less reliant on bank partnerships, as they would be regulated holders of funds themselves. But also, and perhaps more relevant to Coinbase given its new product suite, is that a regulated status would be a draw for the institutional investors it looks to in order to grow its business. As CoinGeek noted, "Most of these institutions feel much more comfortable working with custody partners that have conventional banking systems—understandable in the rather risky environment that surrounds cryptocurrencies." Coinbase likely has enough cash at this point to obtain a charter through acquisition of an existing institution, as Green Dot did back in 2011. When the regulation is more firmly entrenched, will more banks follow Goldman's lead? Will a bank then seek to buy a wallet/exchange service that is less expensive than Coinbase? Joseph Otting, the comptroller of the currency, noted that even fintech companies interested in the charter tend to underestimate the work involved in "becoming a bank": "Most fintechs come to us because they have heard of this thing called a national banking charter that gives them pre-emption across state lines. When they come and they speak to us, and they understand what it really takes to be a bank, they kind of glaze over and often leave skid marks leaving the building."

Coinbase Seeks Bank Charter to Attract More Institutional Customers

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Coinbase Seeks Bank Charter to Attract More Institutional Customers

2018 Innovators to Watch: 34-44 [Page 4]

3 Money Management Startups to Watch

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