Challenger bank in Puerto Rico combines checking, crypto in one account

A digital bank in Puerto Rico is putting a new twist on cryptocurrency custody and offering products that aren't widely available in the mainland United States.

FV Bank was founded in 2018 by two payments veterans and provides digital bank accounts for individuals and businesses around the world. The next phase, to be launched at the end of 2021 or in the first quarter of 2022, is an account that can hold digital assets alongside fiat currencies and convert cryptocurrencies to U.S. dollars or other traditional currencies.

“We are licensed as a bank and a digital-asset custodian,” said Miles Paschini, FV Bank's chief executive. “We’re combining those two worlds inside a bank.”

Last week, Visa gave FV Bank the OK to issue Visa cards as well; it plans to make debit cards available to customers by the end of 2021 and introduce credit cards early 2022. The credit cards will allow users to borrow against cryptocurrency assets and access the credit lines on a Visa card.

FV’s style of account that combines fiat and digital currencies is unusual, even as traditional banks and financial services companies explore crypto custody.

“Usually you see institutions offering one or the other but not both,” said Sam Wyner, head of KPMG’s crypto practice in the Americas.

U.S. Bancorp announced a number of crypto custody initiatives in April. Mastercard’s new partnership with the digital asset marketplace Bakkt means customers of financial institutions connected to the Mastercard network can manage digital assets via Bakkt and spend cryptocurrency rewards at Mastercard merchants. Visa is working with central banks on central bank digital currency policy.

Quontic Bank already offers cards and a checking account that provide rewards in the form of bitcoin. Meanwhile, the banking software vendor Finastra and Bakkt have teamed up to help credit unions and community banks extend crypto services. The cryptocurrency services company NYDIG is working with Fiserv and FIS to help some small banks build capabilities to buy, sell and hold bitcoin. Several states have set up their own special-purpose bank charters and regulations to accommodate digital currencies. Vast Bank in Tulsa, Oklahoma, lets customers buy and sell cryptocurrency from their mobile banking app. Several other community banks are building the ability to let customers do the same with bitcoin.

There is demand among consumers for all of this. According to a survey Raddon Research conducted of 1,221 U.S. banking customers that was published last week, 29% would like to receive debit and credit cards with cryptocurrency rewards from their banks, and 28% would like to be able to buy and spend digital currency from their financial institution.

FV’s multi-asset account will solve a number of potential risks for the family offices, funds, exchanges, trading desks and liquidity providers the company is targeting, Paschini said. For example, if a family office wants to sell a large amount of bitcoin, it would have to remove the assets from custody, transmit them to an exchange to convert the amount to dollars, and transmit the proceeds to a bank. But a family office banking with FV can keep those assets in a bank account, exchange them in the same place and receive the proceeds of the transaction directly into the account.

“There is no more moving around those assets physically or the operational risk with multiple third parties,” said Paschini.

Crypto custody has unique risks and challenges, such as the need to deal with clients that make transactions in very high dollar amounts and to understand and identify businesses around the world.

To address these issues, FV is working with partners who use Chainalysis and other providers of tools that detect crypto assets that may be tied to criminal activity. The bank is building knowledge within its teams to understand how traditional banking and crypto intersect, and using multiparty computation to secure private keys.

The in-account conversion will be done like a traditional foreign exchange swap, Paschini said.

Another unusual choice FV made was to obtain a charter in Puerto Rico. The company considered a number of countries but settled on the U.S. territory because the the Office of the Commissioner of Financial Institutions of Puerto Rico is open to merging blockchain and banking. Basing itself in Puerto Rico meant a lower corporate tax rate while having access to the Federal Reserve System to apply for a master account and use the FedWire and ACH systems.

FV must adhere to the same Bank Secrecy Act and anti-money-laundering standards as any other U.S. bank, but is considered to be part of the Latin American and Caribbean network for Visa and other payment networks. That means it can issue credit and debit cards to both U.S. and non-U.S. customers, rather than only American customers if it was based in the U.S. It took about two years to get banking and digital asset licenses from Puerto Rico regulators. The founders estimate this would have taken up to five years in the U.S. The charter does not allow FV to do business in Puerto Rico and compete with local banks.

FV’s approach could be a model for how other banks partake in crypto custody.

John DelPonti, a managing director at the consulting firm Berkeley Research Group, says that crypto has seen a tremendous amount of growth.

“For the banks to become players in the markets of the future, they have to participate,” he said. “They won’t be as aggressive as forefront innovators like FV Bank, but they will learn from them and either purchase them or leverage their technology.”