Is it true that stablecoin issuers will become crypto banks? Spread Circle, BitGo, etc. to apply for a banking license!

According to the Wall Street Journal, several cryptocurrency companies, including stablecoin issuers Circle and BitGo, plan to apply for U.S. banking licenses and permits. Is there a chance for stablecoin issuers to become crypto banks? Is this contrary to Satoshi Nakamoto's philosophy?

Crypto companies such as Circle and BitGo want to apply for a banking license

According to the Wall Street Journal, citing people familiar with the matter, a number of cryptocurrency companies, including Circle and BitGo, plan to apply for a Bank Charter/license. There is also news that cryptocurrency exchange Coinbase and stablecoin issuer Paxos are considering similar measures.

At present, the Trump administration is moving to integrate cryptocurrencies into mainstream finance, and Congress has introduced two bills aimed at establishing a regulatory framework for stablecoins that will make it easy for people to trade more volatile cryptocurrencies. The bill would require stablecoin issuers to obtain a charter or license from the regulator.

Some cryptocurrency companies are interested in a national trust or banking license, which would allow them to operate like traditional banks, such as taking deposits and issuing loans. Others seek a relatively narrow license that allows them to issue stablecoins.

Any crypto company that obtains a banking license will be subject to stricter regulation, including Know Your Customer (KYC) and anti-money laundering programs, capital, information security, and more.

 The Fed Masteraccount is out of reach

Another obstacle for crypto firms is the Fed's master account, which has long struggled to access traditional financial infrastructure. After years of hard work, Custodia Bank was still denied access to the Fed Masteraccount, a special type of account provided by the Federal Reserve System (Fed) to financial institutions that allows holders to transact directly with the Fed without going through an intermediary bank.

In August 2022, the Federal Reserve released guidelines for applying for master accounts, which were interpreted as wanting to further open access to master accounts, which sparked hopes among crypto companies such as Circle and Kraken, but so far no crypto companies have approved the application.

 Stablecoin Issuer = Crypto Bank?

Bloomberg Views columnist Matt Levine argues that stablecoin issuers are similar to a form of crypto banking: you deposit dollars into a stablecoin issuer, and it gives you back tokens, giving you the right to get your dollars back, while it can do whatever it wants with those dollars. In the early days when cryptocurrencies were unregulated, "do whatever you want" could indeed be quite exciting, but now stablecoins are big business and it has become the norm to keep deposits in very safe, short-term dollar-denominated assets, ideally Treasury bills or reverse repo or BlackRock money market funds. If you launch a new stablecoin today and say "we're going to take your dollars and use them to lend to emerging crypto entrepreneurs," you're going to have a hard time competing with the big incumbent stablecoins that say, "we're going to take your dollars and use them to buy Treasury bills," especially if most stablecoins don't pay any interest.

While a traditional banking license encompasses the business of taking deposits and lending from customers, Levine asks a number of questions:

• If you are a crypto company that wants to get a banking license, do you have to take out a loan?

• If you are a stablecoin issuer whose entire business is (1) taking deposits and (2) depositing those deposits in Treasury bills, would the banking regulator be willing to grant you a license? Isn't a banking license issued for banks engaged in financial intermediation?

• Will stablecoin issuers be under pressure to become real banks, taking deposits and using them to make loans?

• Does a crypto company that wants to become a bank have to be a regular bank and not a narrow bank?

And the irony is because crypto is somehow a rejection of traditional banking. Satoshi Nakamoto invented Bitcoin in part because of his aversion to the 2008 financial crisis. Cryptocurrencies differ from the U.S. dollar in that the U.S. dollar is fundamentally a bank debt, while Bitcoin is fundamentally not; Cryptocurrency is a non-debt currency that is a way to have funds, payments, and bank accounts without the need for traditional banking.

Will cryptocurrencies be able to fully rebuild normal banking in the future, including banking regulation? And is this exactly the opposite of Satoshi Nakamoto's philosophy?