A full-reserve custody bank for cryptocurrencies is underway. Caitlin Long, who drafted Wyoming’s blockchain and crypto-friendly legislation to support entrepreneurs in the space, has introduced Avanti, a new US bank serving the digital asset industry through a suite of products and services not currently available in US dollar markets.
The Wyoming-based bank is a collaboration with Blockstream, a global leader in Bitcoin and blockchain technology.
The crypto bank project has reportedly raised $1 million in seed funding to target the emerging digital asset class dominated by Bitcoin. According to Long, the company is currently preparing the long process of a charter application. It plans to open its doors in early 2021 to address demand and provide critical solutions for the market.
The market at large is currently valued at $278 billion, at time of writing, with Bitcoin dominance at 63%, followed by Ethereum at 9.88%. XRP rounds out the top three cryptocurrencies with a 4.47% market share, according to data compiled by CoinMarketCap.
Long says the roughly $300-billion market is just too big to ignore, but it lacks the infrastructure to onboard big money clients.
The Wall Street veteran adds,
“I’ve founded Avanti with key support from top people in crypto and important innovators from traditional finance. Seed funding round recently closed. Avanti will serve institutional customers that need services around Bitcoin and cryptoassets.
A critical piece of US market infrastructure is missing – a regulated bank that can act as bridge to Fed for payments and custody crypto for big institutional money (pensions/ endowments/ foundations/ corporations/ sovereign wealth) who need this before entering crypto in a big way. Regulation had blocked it.
Thanks to the wise Wyoming legislature and Governor Gordon, Wyoming paved the way for such banks to exist via its special-purpose depository institution (SPDI) law, which is the optimal regulatory-compliant structure in the US for providing financial services around crypto.
For various regulatory reasons, existing US banks and trust companies can’t provide optimal services to crypto. Avanti plans to break that logjam and thereby help keep the US from falling behind other countries whose regulated banks are already serving institutions in this market.
SPDIs have very high reg requirements, including that all fiat deposits must be 100% reserved, assets can’t be rehypothecated and by far strictest, fairest consumer protections in the industry. Many crypto industry people advised and commented on early drafts of Wyoming‘s SPDI law and its rules.”
As decentralized assets that can power peer-to-peer transactions without banks or financial institutions, Bitcoin and its crypto cousins enable people to “be their own bank” by safekeeping their own private keys and controlling their own crypto funds. The message is a powerful dictate for sparking a whole new global financial system where people are not reliant on corporate institutions and banks to manage, control, hold or withhold their wealth.
But managing one’s private keys to maintain access to a digital wallet that contains Bitcoin has proved to be a sore spot for crypto newbies. The stakes are high when a piece of paper or other instrument containing secret phrases and passwords is misplaced, stolen or lost forever – with one’s “own bank” getting completely wiped out.
Long believes there’s a way to offer solutions that empower the crypto movement’s zen for decentralization and lack of authorities, while also helping people manage and protect their private keys. Essentially, the new crypto bank aims to solve huge pain points in the industry and is designed to offer the best of both worlds to incentivize a massive push into crypto without any regulatory or custodial related reservations.
Says Long,
“But wait, what about #NotYourKeysNotYourCoins? Avanti respects this ethos and plans to offer various levels of institutional custody services accordingly (including multisig signing-as-a-service, new Blockstream features and more).”
Long says Avanti’s approach is considerably different than a traditional bank. The key to the crypto bank is in reimagining how banks should fundamentally operate – by restricting their ability to use and abuse a customer’s funds.
Adds Long,
“Remember, Wyoming law is uniquely consumer friendly because it enables custody via bailment (same legal treatment as valet parking or coat check – you give possession of your property to a service provider, but not legal title, and the service provider can’t use it for its own benefit).
In a bailment, the concept is your asset remains legally yours even if you give temporary possession of it to a service provider for safekeeping (so if your service provider goes bust while holding your asset in its custody you get it back without waiting thru messy bankruptcy).
That stuff matters to big institutional investors, who are fiduciaries. Ironically trading securities markets don’t offer it though (to use valet parking analogy, securities custodian can rent out your car to Uber driver after you parked it, share only a fraction of the earnings with you and tell you that you’re lucky to get back your same make and model. Plus if the garage goes bust while in possession of your car, you’re stuck as a creditor in messy bankruptcy). From experience, you can’t know for sure if your custodian actually has your securities. It’s wrong!
Wyoming took a different approach based on property rights – i.e. crypto custodian should be mere service provider, not counterparty forcing you into a debtor/creditor relationship. That’s especially important for cryptocurrency since there’s no lender-of-last-resort. Wyoming=best legal regime for consumers!”
Despite the novel approach, disrupting the status quo isn’t easy.
“Hundreds inquired about starting an SPDI. I expected a flurry when applications opened 10/1 but until February no one applied. Wait wut? High capital requirement tripped up most (banks face much higher capital requirement than trust companies); others couldn’t find people here willing to work for them; (e.g., one Wyomingite fielded >100 recruiting inquiries before agreeing to work for Avanti). Net-net, it’s really darn hard to start a bank. Other SPDI applicants are on the way to Wyoming – they plan to serve different markets, though, and I’m cheering them on!
But I saw none of them planned to fill the institutional void. There’s real customer demand in these markets–real needs are not being met. I’ve seen this up close and personal (e.g., universities have alums wanting to donate crypto but face huge practical hurdles to accepting it, foundations recognize they can’t ignore a ~$300 billion asset class anymore but realize a custodian doesn’t exist yet that can meet their high fiduciary standards). So, when a group approached me in December to do it, I started thinking seriously about it.”
Long says Blockstream is the ideal partner for serving big institutional investors that require regulated banks to deliver them services around Bitcoin in USD markets.
Adds Long,
“Warning to those easily triggered: Avanti will bring together strange bedfellows because it’ll attract the best from the crypto and traditional worlds. I’m comfortable and have deep relationships in both worlds and am equally comfy in NYC’s concrete canyons as in the wilds of Wyoming.
So, don’t be shocked to see people you wouldn’t expect coming together in Avanti–not only top people from both the traditional and crypto worlds, but also from rival protocols within crypto. Avanti will be protocol neutral.
First and foremost Avanti will respond to needs of institutional customers. If they want Avanti to service cryptoassets other than Bitcoin? Yep, Avanti will service ‘em if institutions want ‘em, if our engineers can securely do it and if we can handle legal and other risks.
Avanti will comply with all US federal know-your-customer, anti-money laundering, counter terrorist financing and related laws. These are the law of the land so Avanti will strictly comply, period. I’ve long written about why these laws are unconstitutional in their overreach but they’re the law, so compliance isn’t optional. Don’t even thing about trying to use Avanti for illegal/nefarious purposes! Since Avanti will be critical crypto infrastructure, we will vigorously defend Avanti’s license and reputation.”
Avanti is looking for qualified professionals to join its headquarters in Cheyenne, Wyoming, from compliance experts to bank operations specialists. According to long, the engineering team will be decentralized and not based at the Cheyenne headquarters.
Featured Image: Shutterstock/Anton Violin