It’s been a slow news day, so I thought I’d summarize some of the interesting news along the U.S. regulatory crypto-asset and banking perimeter that has been on my mind lately.
Recently several U.S. banks have received state charters to run what would seem to be narrow banking operations. A narrow bank is a financial institution that issues demandable liabilities and invests in assets that have little or no nominal interest rate and credit risk. The U.S. Fed has rejected attempts to establish narrow banks, or what it calls pass‑through investment entities (PTIEs), the most recent being in 2018 by TNB USA. TNB proposed to provide nonfinancial firms and consumers with safe liquid deposits that paid higher rates of interest than what were then currently available, by placing deposits into a NY Fed Master Account. The rejection was based on the risk that PTIEs, if they caught on in a big way, could balloon the Fed’s balance sheet and disintermediate the traditional banking sector.
Meanwhile, in February 2019 Wyoming’s Special Purpose Depository Institution (SPDI) Act was signed into law. SPDIs are required to maintain 100% of fiat demand deposits as liquid assets and they are prohibited from lending fiat deposits. In July 2020 the Wyoming Banking Board accepted crypto-centric Avanti Financial Group’s bank charter application, paving the way to a chartering decision in October. In September crypto exchange Kraken’s application for a SPDI charter was approved. It is not clear if the new banks will apply for NY Fed Master Accounts, but Kraken’s Chief Legal Officer implied that it might.
Along similar lines, the San Francisco Fed and the Office of the Comptroller of the Currency approved Jiko Group’s purchase of Mid-Central National Bank. Jiko will offer Federal Deposit Insurance Corporation backed accounts into which customer deposits are briefly held until being swept into Treasury Bills. Returns on Bills are passed through to depositors, and Bills are liquidated when depositors withdraw funds. It sounds very narrow bankish to me!
In a further blurring of regulatory lines, the U.S. Office of the Comptroller of the Currency (OCC) will allow national banks to provide crypto-asset custody services on behalf of customers. It also reaffirmed that nationalbanks may provide permissible banking services to any lawful business they choose, including crypto businesses, so long as they effectively manage the risks and comply with applicable laws. JP Morgan is one such national bank that already provides banking services to crypto companies.