Crypto banks look set to redefine the banking sector in 2025
The Federal Reserve is the latest U.S. regulator to clear the path for crypto banking to enter the mainstream, so let’s take a look at where the market stands and how it might evolve.
One of the implications of the pro-crypto policies pursued by the Trump administration is that the banking sector is positioned to undergo a transformation via both the expansion of crypto friendly banks as well as the launching of multiple crypto-native banks. As of this writing the only federally chartered crypto operating in the U.S. is Anchorage Digital Bank NA, with other efforts such as those launched previously by Paxos National Trust and Protego National Trust having faced obstacles at the federal level. One other institution of note is FV Bank, which operates as a U.S. licensed digital bank, providing a platform where clients can manage both traditional USD accounts and cryptocurrencies. FV Bank services encompass digital asset custody, traditional banking services like payments, and support for various stablecoins.
Even in face of state-based efforts such as in Wyoming the regulatory outlook has remained challenging since cryptoassets first became a mainstream financial markets topic; these icy market conditions seem set to finally begin thawing. To understand the importance of such developments in the U.S. banking industry crypto investors and advocates would be well served to reflect on how crypto banking hopefuls were treated in the past. One notable example is the ongoing legal battle between Custodia and the Federal Reserve, following multiple denials for inclusion in the Federal Reserve system despite substantial efforts by the firm to satisfy previously stated requirements. Despite these setbacks, in March 24 the firm partnered with Vantage Bank to tokenize U.S. dollar demand deposits on Ethereum via ERC-20; the appetite and interest in tokenized payments continues to accelerate.
In short the U.S. banking landscape has proven to be difficult, if not outright hostile, to crypto-native institutions, but this has not stopped innovation and the creativity in the space. As this outlook continues to pivot to a more hospitable one, let’s take a look at what this means for crypto investors going forward.
More Yield Generating Crypto Instruments
One of the missing pieces of the cryptoasset ecosystem has been the lack of ability for investors to generate yield from investments and/or holdings. Notable collapses and potentially fraudulent activity that have occurred at various DeFi and stablecoin protocols in the past have not helped in the effort to develop legitimate options for investors. Most recently, Resolv Labs closed a $10 million seed round to not only expand a crypto-native yield platform utilizing the USR stablecoin, which amplifies the influence of the $450 DeFi protocol of the same name.
Other crypto leaders such as Circle, via its announced plans to go public, have ignited conversations about the possibility of distributions from stablecoin issers to future investors. Especially for banking institutions looking to offset some of the price and regulatory volatility that comes with the space, the ability to generate yield is an essential part of this plan. Interest generating cryptoassets also have the potential to entice institutional investors to support crypto-native banks, whose more patient capital will not be as volatile as retail investors can be during periods of uncertainty.
Having an additional income stream will also elevate another subset of the cryptoasset sector to even higher prominence than had already been achieved; stablecoins.
Stablecoins Will Lead Crypto Banking
One of the few areas that comprehensive legislation has moved forward to any extent, least of all to the significant manner the STABLE and GENIUS acts have, is legislation pertaining to stablecoins. This makes sense for a number of reasons. First, stablecoins are intrinsically a straight-forward on-ramp for TradFi institutions, retail investors to gain exposure to the crypto space, highlighted by the reduced volatility that many such instruments provide. Second, recent efforts by Circle indicating its intent to go public and expand partnerships with U.S. banks build on similar efforts in the European Union. Notably, Societe Generale-Forge is planning to update its EUR Convertible stablecoin to comply with MiCA regulations as ING reportedly works on a stablecoin project as well.
Stablecoins provide an almost tailor-made method for financial institutions to enter the crypto sector, have regulations that have passed (in the European Union) or are making significant progress (in the U.S.) and also provide the institutions a vehicle to duplicate the interest bearing accounts that have become more enticing given the higher rates of the post-COVID era. In addition, for audit and bank examination purposes, stablecoins promise transparency and fungibility that have proven difficult to duplicate with other existing crypto instruments.
The evolution of the cryptoasset ecosystem continues to accelerate in new, and somewhat unexpected directions, as consolidation and greater integration with the TradFi space look set to dominate the market in 2025 and beyond. Stablecoins, providing stability, traceability, auditability, and yield (income) potential for institutional players and customers alike, look well positioned to play a leading role in crypto banking growth moving forward.
