Circle Internet Financial Ltd., one of the world’s most valuable cryptocurrency platforms, is looking to make a big leap into the highly regulated realm of U.S. banks and brokerages.
The venture, partly backed by Goldman Sachs Group Inc., plans to seek a federal banking license to provide more services to customers. It also intends to pursue registration as a brokerage and trading venue with the Securities and Exchange Commission, so it can help investors buy and sell tokens deemed to be securities.
Circle leaders including Chief Executive Officer Jeremy Allaire laid out those aspirations in an interview. It’s uncharted territory: No venture that began in the largely unchecked world of digital currencies has obtained such status with U.S. regulators. While getting a banking license would subject it to tough scrutiny, the move would winnow the field of regulators Circle must appease because federal laws would pre-empt a patchwork of state rules covering crypto.
“You’re able to have a single conversation,” said Robert Bench, Circle’s chief compliance officer. “It’s hard to have 50 conversations.”
Circle officials say they’ve had preliminary conversations with the Office of the Comptroller of the Currency to explore banking functions, as well as with staff at the SEC and officials from the Financial Industry Regulatory Authority, which oversees brokerages. The firm is likely to pursue SEC regulation before the banking license. The OCC and Finra declined to comment. SEC spokesmen didn’t respond to requests for comment.
A bank charter would make Circle less dependent on traditional lenders, potentially letting it hold customer assets in the form of digital coins or government-issued currencies such as U.S. dollars. It could also plug into other components of the financial system.
“To hold reserves with the Federal Reserve, to natively access the central-banking system without intermediaries, to directly settle with other banks in other markets around the world through those networks — that can improve the efficiency of what we deliver, it can reduce the costs,” Allaire said.
After thriving for years outside government oversight, crypto firms are building relationships with U.S. regulators, potentially exerting more influence over the drafting of rules for the young industry.
Coinbase, one of the nation’s largest cryptocurrency trading platforms, has also broached the topic of a potential banking license with regulators, according to two people with knowledge of the matter. In January, company officials met with the OCC’s chief innovation officer, Beth Knickerbocker, according to calendar entries obtained under the Freedom of Information Act. A charter was among topics raised, a person with knowledge of the gathering said. Elliott Suthers, a spokesman for Coinbase, declined to comment.
Other banking overseers, including the Federal Deposit Insurance Corp. and Fed, also have heard from crypto firms. Ivy Koin, a business payment system, met with regulators this year after reaching out to the FDIC for guidance on complying with rules, according to Gary Fan, the firm’s president. The company doesn’t expect to apply for a bank charter in the near term, he said in an interview.
A key part of Circle’s pitch to OCC staff is that it would use its expertise to help develop standards for one of the biggest challenges facing traditional financial firms interested in handling cryptocurrencies: how to act as a custodian of those assets.
On Wall Street, firms like State Street Corp. provide custody services such as holding securities for investment advisers. Banks and brokerages in that realm must be so-called qualified custodians under SEC rules. But the industry has so far struggled to adopt an acceptable way to hold cryptocurrencies. The technology is relatively new, presenting challenges for verifying and guarding holdings — especially in a world where hackers have proven adept at cracking security and siphoning off large hoards.
Virtual-coin enthusiasts argue that solving the issue around custody will pave the way for more widespread investment in the asset class. With State Street and others so far on the sidelines, crypto-focused firms have tried to fill the gap with custody offerings of their own, but have realized they probably need federal licenses to get big investors on board.
“The regulators need to figure this out because eventually other banks that they regulate are going to want to hold crypto,” Circle CEO Allaire said. “They’re going to need to have rules for this. We can be a great guinea pig.”
U.S. bank regulators have long maintained an arm’s-length relationship with cryptocurrencies, watching developments as the markets surged in just a few years from concept into assets with values in the hundreds of billions of dollars. Meanwhile, officials at market regulators like the SEC and the Commodity Futures Trading Commission frequently quip in public appearances about the amount of time they dedicate to policy questions about virtual coins.
SEC Chairman Jay Clayton has said most coins sold by ventures in initial offerings are really unregistered securities. That means venues handling those tokens need to register as exchanges, become alternative trading systems or broker dealers. While it’s not a public bourse like the New York Stock Exchange, an ATS can provide many of the same functions of matching buyers with sellers.
“The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not,” the agency said in March, inviting companies behind trading venues to contact authorities. If the regulator believes a firm is in violation it can bring an enforcement action seeking penalties.
Circle officials said the company is interested in becoming an ATS, either by applying or by purchasing a platform that’s already got that status. Earlier this year, Circle bought Poloniex Inc., one of the larger digital-token platforms, which offers dozens of coins and margin trading. Allaire says Poloniex already delisted numerous tokens to conform with SEC guidance issued last year. With Circle at the helm, it may cut more soon amid an analysis.
“We’re making our own legal determinations because you can’t call up the SEC and say, ‘Is this a security or not?’” he said. “You can expect to see us delist further things and that’s the prudent thing to do.