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Why Litecoin's Creator Is Buying Into A Bank (And How It Could Go Wrong)

One of the most unusual and potentially transformative deals in the cryptocurrency space started as an argument on social media.

Back in April, Charlie Lee, the creator of litecoin, was exchanging barbs on Twitter with Derek Capo, the CEO of payment processor TokenPay. But their fight quickly turned into a friendly exchange of direct messages, in which the two crypto enthusiasts realized they shared a common problem: In a word, banking.

Both the Litecoin Foundation, the non-profit that promotes the sixth-largest cryptocurrency and where Lee is a managing director, and Capo’s Virgin Islands-based startup had encountered difficulty securing bank accounts – a longstanding problem for the industry.

“We had lots of trouble” on that front, Lee told CoinDesk.

Capo elaborated: “Some banks, they close down bank accounts if they get a whiff of anything to do with crypto. We saw a lot of competitors with similar offerings get cut off because they didn’t own the bank and they didn’t have control.”

But Capo was working on a solution for TokenPay by trying to buy a bank. And he realized this plan, if successful, could address another problem for Lee.

“Why don’t we talk about having a litecoin debit card so that you’ll have a real solution?” Capo recalled telling him. “Because, you know, they had been trying very hard to have a litecoin debit card… I said, why don’t we talk?”

That is how the Singapore-based Litecoin Foundation ended up owning 9.9 percent of WEG Bank AG, an until-now obscure German financial institution, in a surprise transaction revealed this week.

But the foundation didn’t put money in; TokenPay previously acquired the stake and traded it to the non-profit in exchange for future technical support. TokenPay also acquired another 9.9 percent (the maximum allowed in Germany without prior regulatory approval) of WEG and is seeking the green light to buy up to 80 percent. (The price was not disclosed.)

If all goes according to plan, not only will TokenPay and the Litecoin Foundation have a reliable banking partner, they would also transform WEG into an on-ramp for consumers worldwide who want to trade fiat for cryptocurrency or pay for goods and services with crypto.

But owning a bank, by itself, won’t necessarily solve crypto’s banking problem, according to compliance experts who’ve worked in both fields. Even if the regulators bless the pending takeover, Capo and Lee may face new challenges operating in a heavily regulated industry where “coin” is frequently treated as a four-letter word.

The roadmap

Undaunted by regulatory hurdles, Capo and Lee have ambitious plans to usher in a new wave of crypto banking services.

Stepping back, while transacting in cryptocurrency may be frictionless, converting from dollars or euros to crypto and back is anything but. Buying crypto through an online exchange can mean registering a credit card with an exchange platform, then waiting days, sometimes longer, to complete the transaction.

Meanwhile, most of the merchants that accept crypto are wary of the price volatility and generally rely on a payment processor like BitPay to convert it to fiat. All these options incur processing fees along the way.

That’s why Capo wants to offer crypto debit cards and the ability to convert litecoin to euros directly through a traditional bank account, to make it a smoother experience for crypto users transacting in a fiat-dominated economy. He hopes to offer such services within nine months of receiving regulatory approval for the acquisition.

“Connecting cryptocurrency to fiat rails is very useful,” said Lee, who told CoinDesk he aims to join the WEG board as the Litecoin Foundation’s representative (a move that would make him possibly the first person to simultaneously hold the titles of “cryptocurrency founder” and “bank director”).

“We will have a say in influencing the bank to work on crypto projects,” he said.

Eventually, after tackling debit cards and payment processing, Capo and Lee plan to integrate banking services directly with TokenPay’s decentralized exchange (DEX) platform, eFin, which offers peer-to-peer trading between cryptocurrencies.

If traders pass all the know-your-customer (KYC) and anti-money-laundering (AML) demands for a crypto bank account, they will be able to seamlessly cash out TokenPay’s own token, known as tpay, from the exchange as fiat, plus buy or sell cryptos like litecoin without delay.

“eFin will have LTC. We will help them with it technically,” Lee said. “And they will also airdrop [tpay] tokens to litecoin users.”

In addition to the promise of technical expertise and litecoin’s relatively stable popularity among cryptocurrency fans, Capo said he gave the nonprofit equity in the bank based on Lee’s massive online following, a marketing boon, and professional connections.

“Litecoin has a very influential leader, someone who’s been around for a very long time,” Capo said in describing Lee, an alumnus of the popular cryptocurrency exchange Coinbase.

Challenges ahead

Yet even if they obtain a banking license, Capo and Lee are not guaranteed unlimited liquidity.

Located in the town of Ottobrunn (population: 21,378), WEG was previously a property management bank that offered loans to housing associations. After TokenPay acquires a majority stake, the plan calls for the bank’s CEO, Matthias von Hauff, to stay involved as WEG transitions to a retail bank with more consumer-facing products and services.

But such a tiny institution likely would likely rely on outside organizations – larger global banks, the German central bank, or SWIFT – to be able to move large amounts of fiat around the world, according to Simon Taylor, a former Barclays banker and co-founder and director of the U.K. fintech advisory firm 11:FS. If those partners became squeamish about crypto in general, they could cut off WEG’s access to fiat, Taylor cautioned.

“The really, really big banks tend to be the ones that connect you through the global corridor to the U.S. dollar, they’re the ones that get the big KYC fines,” Taylor said, adding, with regard to the WEG acquisition plan:

“I don’t think it’s going to achieve what they want it to achieve. I get the temptation to buy a bank. But buying a bank doesn’t give you what you think it gives you.”

Joe Ciccolo, president of the compliance service provider BitAML Inc., said regulators would probably expect extra diligence on WEG’s part if it were to become a crypto-focused bank.

“On its own, running a bank and implementing AML anti-money laundering] across a broad range of products and services is difficult to begin with,” Ciccolo said. “This is going to be a much higher barrier to entry than one would associate with traditional AML.”

The idea of integrating a decentralized exchange into a bank gave Ciccolo the most pause. He described DEXs as “nails on a chalkboard for regulators,” who have taken years to wrap their heads around bitcoin. If Capo and Lee plan to pull this off, Ciccolo said, it will require significant investment in educating regulators on an ongoing basis and constant communication with larger banks.

Acknowledging the challenges, Capo said the first and most costly step of converting WEG into a crypto-savvy bank will be restructuring all of its KYC and AML processes to create a new crypto-centric model.

“We’re being conservative because we want to build this bank so it will be around for a long time,” he told CoinDesk, concluding:

“The infrastructure is there, we just might have to potentially modify it for crypto-based services.”

Litecoin image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Metropolitan Bank Is Handling Millions for Crypto Clients (And It Wants More)

To most banks in the U.S., cryptocurrency businesses are pariahs. To Metropolitan Commercial Bank, they’re “pioneers.”

At least, that’s how the New York financial institution’s chief technology officer, Nick Rosenberg, describes them.

“We’re certainly very interested in growing this vertical,” Rosenberg told CoinDesk of the bank’s crypto clientele. “We’ve learned that it’s a serious industry. There are some very smart people involved. There are some very interesting ideas coming out that could really change the way people do business.”

While most banks cling to the adage “blockchain not bitcoin,” Metropolitan stands out simply by being one of the very few to enthusiastically court deposit business from crypto firms.

These clients include a few exchanges, as well as hedge funds and other crypto investors that bank at Metropolitan because it’s easier to quickly move their money to those exchanges. (To be clear: the bank only handles fiat for customers and does not touch crypto itself.)

So far, it’s proven a lucrative niche for Metropolitan. In the first quarter, cash management and foreign exchange conversion fees from cryptocurrency clients totaled $3.4 million, the bank disclosed in an investor presentation. This helped drive a more than 300 percent increase from a year earlier in Metropolitan’s total non-interest income, to $5.4 million, according to a Securities and Exchange Commission filing.

If that doesn’t sound like a lot of money, keep in mind that Metropolitan is a community bank. With just $1.9 billion in total assets, it’s less than one-1,000th the size of JPMorgan.

What’s more, that triple-digit rate of growth is astronomical for the U.S. banking industry, where non-interest income for all institutions climbed a measly 7.9 percent during the same period, according to data from the Federal Deposit Insurance Corp.

Yet despite the lucrative demand from crypto companies for banks to provide fiat liquidity and other traditional services, bitcoin-friendly banks like Metropolitan are still as rare as they were three years ago.

“It’s extremely challenging,” said Joe Ciccolo, president of the compliance service provider BitAML Inc. Referring to another sector that banks have famously shunned, he added:

“The legalized cannabis industry are having a much easier time than our cryptocurrency clients.”

‘High-touch relationship’

One reason Metropolitan Bank is an outlier in embracing the crypto industry is that most banks can’t stomach the risks. Chief among them is the regulatory risk.

Anti-money-laundering regulations require banks to identify their customers and even their customers’ customers, plus track the flow of funds. While public blockchains can help banks and law enforcement trace the movement of money, the pseudonymous nature of crypto addresses makes it hard to determine who is ultimately sending and receiving funds.

Bitcoin’s historical association with underground drug markets certainly doesn’t help.

“It’s very difficult for a bank to maintain a pro-bitcoin stance,” said Ciccolo, citing the high turnover among compliance officers. “If you have a new officer come into a financial institution, they may take the opportunity to put a different stance on high-risk customers such as crypto companies.”

As bullish as they may be, Metropolitan’s bankers still recognize the risks of working with crypto clients. “It’s a high-touch relationship,” Rosenberg said, meaning one requiring extra diligence.

With regard to risk management, Rosenberg said there are two crucial keys to serving crypto clients.

The first is being extremely selective about client acquisition, only working with companies that take compliance as seriously as the bank does. The second is maintaining an open dialogue with regulators.

“Law enforcement departments, in general, are understanding that cryptocurrency is not all about illicit payments, it has a value and it has a legitimate purpose,” Rosenberg said. “It’s just a matter of spending time explaining it, understanding what their concerns are, making them feel comfortable that we are mitigating those concerns, and that we have the right controls in place.”

Other risks

Compliance aside, Metropolitan also has to insulate itself from the volatility its cryptocurrency customers live with every day. As noted above, the bank only works with fiat currency like dollars, never touching cryptocurrency directly.

But more subtly, it’s minimized the risk to its own balance sheet in the event crypto depositors’ balances suddenly shrink. To illustrate why this would be a concern, the settlement accounts it maintains for exchanges totaled $281.2 million on March 31, representing 17.4 percent of the bank’s total deposits, according to the SEC filing.

Such a high concentration might normally be worrisome.

However, Metropolitan isn’t using these accounts to fund long-term assets like mortgages, just cash and equivalents. So, even if they were drained at once, it’s far from a run on the bank.

“They do not utilize a lot of these deposits in their everyday operations, just because they do know there is significant volatility there,” said Collyn Gilbert, an analyst and managing director at the investment banking firm Keefe, Bruyette & Woods.

To be sure, Metropolitan held another $100.8 million in corporate accounts for cryptocurrency firms, making up 6.2 percent of total deposits as of March 31. And these accounts do fund assets on the balance sheet.

But corporate accounts, which clients use for normal business activities like payroll, are less volatile than settlement accounts, which hold money only temporarily until a transaction is completed, Gilbert said.

Yet there’s one more risk Metropolitan has encountered in the crypto space: what finance types call “headline risk.”

In January, the bank sent its customers a reminder of what it said was a longstanding policy of not accepting crypto-related wire transfers from entities outside the U.S. Word leaked out to the press, which reported this was a new policy prompted by fraud. Metropolitan had to issue a public denial of that claim to quell backlash.

Reaping rewards

Setting aside the fee income and interest-free funding on deposits, there’s a more intangible benefit Metropolitan gains from banking cryptocurrency firms, one that arguably compensates for all the risks.

Namely, it gets a front-row seat to the revolution and is learning about how cryptocurrencies perform in the wild.

“I think Metropolitan was intrigued by the structure, more than just bitcoin, but the structure of that currency market in general,” Gilbert said. “The technology behind it is what has really been intriguing to this management team.”

Ciccolo agreed that serving this sector has given Metropolitan a competitive advantage.

“There’s a dual benefit for those banks that are willing to step out there,” he said. “Not only does it present a new book of business their competitors don’t have, so they can grow their customer base and reach, at the same time, it also gives them a sneak peek at some of the technology that might be impacting their world in traditional finance.”

Indeed, the bank’s director of new products, Kyle Hingher, said Metropolitan hopes to someday be one of the leading banks serving the emerging token economy, once the opaque regulatory landscape clears up.

“We’re looking at this market as a new asset class,” Hingher said. “We’d like to do more for the new asset class.”

For now, of course, even companies with cypherpunk ideals benefit from working with traditional banks to tap into audiences and services that utilize fiat currencies. Liquidity lends any crypto startup greater usability.

“If something is really going to succeed, it’s going to require a banking partnership,” Hingher said.

Looking ahead, the Metropolitan banker is keeping close tabs on the emergence of security tokens and blockchain-based settlement systems.

“The opportunity is to merge technologies and that potential for something brand new that could be earth-shattering and change everything. The potential for that, I think, outweighs all the crash-and-burn scenarios,” Hingher told CoinDesk, concluding:

“We call ourselves the entrepreneurial bank. We want to work with this new space rather than butting heads.”

Image via Metropolitan Commercial Bank

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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2017 Review: What Bankers Think of Bitcoin

Is bitcoin in a bubble? Or will its price continue to increase through 2018 as some investors have predicted?

Notable bankers, economists, and rich investors have all weighed in over the past year. But views vary: some believe investors should hold their funds; but many big-name financiers have also sounded the alarm on the world’s largest cryptocurrency by market cap while others looking down at other cryptocurrencies.


The Bearish

One of those who predicted the 2008 housing crisis, Peter Schiff, President and CEO of Euro Pacific Capital, is a gold bull but not for bitcoin. And while some people can benefit from bitcoin, the investment advisor does not expect most people to sell in time to do so. He told CoinDesk on Aug. 17 when bitcoin was trading at $4,000:

“There’s certainly a lot of bullishness about bitcoin and cryptocurrency, and that’s the case with bubbles in general. The psychology of bubbles fuels it. You just become more convinced that it’s going to work. And the higher the price goes, the more convinced you become that you’re right. But it’s not going up because it’s going to work. It’s going up because of speculation.”

On Sept. 12, Jamie Dimon, CEO of JPMorgan Chase was speaking at a Barclays event when he doubled down on his criticism of bitcoin. At the time, bitcoin was worth still around $4,000. Since then, he took aim at bitcoin in a few more occasions, which sparked a wave of comments from Wall Street figures. And the CEO said he’s now done talking about bitcoin.

“It’s a fraud … It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” – Dimon on Sept. 12

“Right now these crypto things are kind of a novelty. People think they’re kind of neat. But the bigger they get, the more governments are going to close them down.” – Dimon on Sept. 22.

“If you’re stupid enough to buy it, you’ll pay the price for it one day.” – Dimon on Oct. 13.

Ray Dalio, founder of the hedge fund firm Bridgewater Associates said in an interview on Sept. 19 that the speculation around bitcoin coupled with its lack of broad adoption are preventing it from becoming a true currency. Bitcoin stayed at around $4,000 at the time.

“It’s not an effective storehold of wealth because it has volatility to it, unlike gold. Bitcoin is a highly speculative market. Bitcoin is a bubble.”

Two days later on Sept. 21, John Hathaway, a gold investor with Tocqueville Asset Management referred to cryptocurrencies as “garbage” during an interview, saying they were not taking attention or investments away from gold.

“Sure you can make money in bubbles any time but you have to get out. Let’s not forget that the total market value of these cryptocurrencies is $180 billion or so, maybe a little less now – that’s tiny compared to gold.”

Yet, the former principal at Fortress Investment Group Mike Novogratz took a more opportunistic approach. While agreeing on the bitcoin bubble, the billionaire investor announced on Sept. 26 to be launching a $500 million hedge fund focusing on cryptocurrencies and blockchain technology. Bitcoin climbed back to $3,000s that day after the tumble amidst China’s crack down on ICO.

“This is going to be the largest bubble of our lifetimes. Prices are going to get way ahead of where they should be. You can make a whole lot of money on the way up, and we plan on it.”

Jordan Belfort, the “Wolf of Wall Street” backed up Jamie Dimonon on Sept. 27 after the latter’s infamous “fraud” comments. Bitcoin hovered around the $3,910 mark throughout the day.

“I’m not saying you should or shouldn’t buy bitcoin, but [what] I’m saying is I personally, myself, would be very, very careful about investing a lot of money in something that could vanish very quickly.”

Warren Buffett, the billionaire investor and perhaps the most notable figure of them all, called bitcoin on Oct. 26 “a real bubble” during a question-and-answer session he hosts every year. At the time, bitcoin stayed close to the $5,700 mark.

“People get excited from big price movements, and Wall Street accommodates … You can’t value bitcoin because it’s not a value-producing asset.”

In the following week on Nov 2, CEO of Credit Suisse Tidjane Thiam, weighed in on the topic at a press conference, where he noted that bitcoin’s ability to facilitate anonymous transactions made it a challenge. At the time, the cryptocurrency was floating around the $7,000 mark.

“From what we can identify, the only reason today to buy or sell bitcoin is to make money, which is the very definition of speculation and the very definition of a bubble.”

Another billionaire investor Carl Icahn, also the founder of Icahn Enterprises said in an interview on Dec. 1 that bitcoin looked like a bubble to him, comparing it to the Mississippi land bubble just prior to its collapse. Bitcoin jumped around the historical $10,000 mark at the time.

“I got to tell you honestly, I don’t understand it … I just don’t get it. I just stay out of something if I don’t understand it.”

The Bullish

Yet the legendary hedge fund investor Bill Miller stood by a different view. He doubled down on his belief in cryptocurrencies as his MVP1 fund had increased its weight on bitcoin and bitcoin cash to nearly 50 percent. In mid December, he said in a podcast that his fund bought in around 2013 and 2014 when the bitcoin price was at $350 in average. At that time, the bitcoin investment only accounted for 5 percent of the pool.

Miller also took aim at those who have criticized the cryptocurrency, including Warren Buffet and Jamie Dimon above. According to Miller, neither of them had fully thought the topic through.

“I’m highly confident to say that not one of them had actually studied it carefully,” he said during the podcast. “That is to say, they have strong opinions about something they haven’t really looked at.”

The Academia

While experts from the academic world didn’t go as far as the financiers who cast doubts on the legitimacy of cryptocurrencies, they nonetheless raised questions on the bubble as well as whether cryptocurrencies can truly be evaluated in a rational model.

More known as the Wall Street’s “Dean of Valuation”, Aswath Damodaran, a Finance Professor at New York University’s Stern School of Business wrote on Oct. 25 in a blog post that that he does not think cryptocurrencies would ever be an asset class. Nor could it be a commodity.

“Bitcoin is not an asset, but a currency, and as such, you cannot value it or invest in it. You can only price it and trade it.”

Nouriel Roubini, Economics Professor at New York University’s Stern School of Business, referred to bitcoin as a “gigantic speculative bubble” on Nov. 8 during an interview with Business Insider Poland. Bitcoin reached nearly $8,000 at the time.

“What’s more – it is also used by criminals, for their shady business. I think that more and more countries will start to make cryptocurrency exchanges illegal like China did. New regulations will be adopted. So, this will find its end.”

Joseph Stigliz, former chief economist at the World Bank and now a professor at the Columbia University said on Nov. 29 he believes digital currencies should be controlled by the government, calling bitcoin’s price increases unsustainable. At the time, bitcoin was jumping around the $9,900 mark.

“Bitcoin is successful only because of its potential for circumvention, lack of oversight … So it seems to me it ought to be outlawed. It doesn’t serve any socially useful function.”

Robert Shiller, Nobel prize-winning economist somehow echoed with a similar view on Dec. 19. He said in an interview that investors in the cryptocurrency are not making rational decisions when it comes to bitcoin investment since there’s not way to evaluate the cryptocurrency. Bitcoin’s price skyrocketed to almost $20,000 over the prior weekend.

“I think the value of bitcoin is exceptionally ambiguous,” he said. “You might think people who are educated will transform the decision problem into something precise … But it doesn’t seem like the brain is doing that.”

Wall Street image via CoinDesk’s archive

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