Deposit flight to Coinbase and other cryptocurrency exchanges has helped persuade community bankers who were once skeptical of crypto to embrace it.

Two small California banks, First Foundation Bank in Irvine and Suncrest Bank in Visalia, are with the help of technology partners quietly building the capability for customers to buy, sell and hold bitcoin. Account holders would be able to manage and monitor their crypto holdings alongside their checking, savings and other traditional bank products.

Ciaran McMullan, president and CEO of Suncrest Bank in Visalia, Calif. (left), regularly gets inquiries from customers asking about cryptocurrency. At First Foundation Bank in Irvine, Calif., Lindsay Lawrence, chief operating officer, and Kevin Thompson, chief financial officer, saw millions of dollars of deposits going out the door to Coinbase.

They’re among dozens of small banks that are realizing how popular bitcoin has become and working with partners to let customers buy it. In December, Quontic Bank in New York launched a bitcoin rewards debit card. Blue Ridge Bank in Charlottesville, Virginia, in February began letting cardholders purchase and redeem bitcoin at 19 ATMs.

Those efforts coincide with initiatives by much larger banks: JPMorgan Chase is preparing to offer an actively managed bitcoin fund, CoinDesk reported last month. Morgan Stanley has said it is launching access to three funds that will enable ownership of bitcoin. Goldman Sachs has created a cryptocurrency desk that trades bitcoin-linked derivatives, according to an internal memo reported by CNBC on Friday. And U.S. Bank is developing the ability to offer digital asset custody to institutional investors.

Many others are in the consideration and development phase, according to industry observers. All are working to stay relevant and keep customers from leaving for a nonbank financial services provider that can meet their cravings for crypto.

From skeptics to believers

Three years ago, executives at the $7.1 billion-asset First Foundation were bitcoin skeptics, just like much of the industry.

“We were kind of unsure when everyone started talking about it,” Chief Operating Officer Lindsay Lawrence said. “In the beginning, a lot of us looked at it more as a currency and not really as an alternative asset class.”

But the bank’s chief executive began reading about bitcoin and hearing people say, “if you’re not already getting into this, you might already be too late,” Lawrence said.

A new chief financial officer who joined the bank last June, Kevin Thompson, turned out to be a so-called crypto hodler. Bitcoin enthusiasts’ misspelling of the word “hold” dates back to 2013, when a bitcoin investor posted an entry titled “I AM HODLING” in a bitcoin forum.

Then Lawrence analyzed how much of the bank’s deposit base had left to go to Coinbase. It was in the millions of dollars.

“Whether we wanted to admit it or not, it was happening,” Lawrence said.

After the bank announced an investment in the New York cryptocurrency software company NYDIG in April, wealth management clients started telling their financial advisers they were glad to hear it because they have bitcoin worth millions of dollars in their portfolios.

“From what we’ve read and seen, a lot of people would feel more comfortable participating and purchasing bitcoin if it went through their bank because they trust the banks,” Lawrence said.

Thompson noted that many large, public companies, including Tesla, Square, PayPal and MassMutual, have been investing in bitcoin.

“We’ve reached this adoption cycle where this disruptive asset, which was really a store of value, has become mainstream,” he said. About 20% to 30% of the U.S. population is invested in bitcoin, he said.

At Suncrest Bank, president and CEO Ciaran McMullan regularly gets inquiries from customers asking about cryptocurrency.

“It always felt like that could be a business opportunity for us,” he said.

The pandemic caused the $1.3 billion-asset bank to accelerate a range of fintech initiatives it had been considering, including something in the digital asset space.

“We reached out to FIS, our core technology partner, and were excited to hear they were working on a cryptocurrency custodial platform with NYDIG,” McMullan said. “That immediately felt like a good entry point into the cryptocurrency sector for a bank of our size.”

The idea was an easy sell internally.

“Bitcoin is becoming more mainstream and less volatile with a lot more held in corporate treasuries these days,” McMullan said. He personally made a bitcoin investment through NYDIG to understand its platform and was impressed. The bank may start with a custodial service through which it would buy, sell and hold bitcoin for existing customers.

“For Suncrest, we see this as a way to be innovative and responsive to changing customer needs and the changing demographics in our customer base,” McMullan said. “In the long term, we see it as a good potential noninterest-income business line.”

McMullan says consumers will be well served by banking organizations’ bringing a level of trust to the sector and “helping customers to avoid the myriad fake or fraudulent crypto schemes that are out there.”

What’s involved

A newish crop of service providers offer to take care of bitcoin for banks: They’ll buy it, store it and sell it. The group includes includes NYDIG, Avanti Bank and Kraken Bank in Wyoming and Coinbase, which is incorporated in Delaware.

Some are working with banks’ major core banking software providers to integrate with their software, so that banks’ customers can buy and sell bitcoin straight from their mobile banking apps and online banking sites, though the banks still won’t touch the bitcoin themselves.

Even though the Office of the Comptroller of the Currency gave national banks the power to offer custody of digital assets, questions linger about what that means, he said.

“There’s not enough regulatory clarity for many banks to act as a custodian, definitely not at a state level,” said Patrick Sells, head of bank solutions for NYDIG. “Obviously the OCC has ruled, but for many states it is not so clear.”

With FIS, NYDIG is launching a bitcoin trading platform that lets people buy and sell bitcoin the way they might in PayPal or Square’s Cash App. Banks that opt to use the trading platform will set and keep the fees customers are charged and will pay a monthly software-as-a-service subscription to NYDIG.

Banks will be able to set controls on their customers’ use of the platform, Sells said. A bank might not allow customers to invest 100% of their money in bitcoin, for instance. It might set daily or monthly limits.

Sells compares NYDIG’s crypto services to Zelle, a payment app banks offer within their own apps but that’s provided by a third party.

“It makes it easy for banks, and it helps greatly reduce some of the risks,” Sells said.

Banks do still have to consider third-party vendor management risk and reputation risk. They need to convince their bank regulators that this is a good idea. And they have to make some technology changes to accommodate the work with cryptocurrency partners.

First Foundation uses a Fiserv core system called Precision that is being integrated with NYDIG’s software.

The fact that NYDIG is going to store and secure customers’ bitcoin gives the bank and its regulators comfort. First Foundation hopes to go live with this by the end of the year.

“We don’t want to rush it because we want to make sure we do it right, and we want to be thoughtful,” Lawrence said.

At Suncrest, McMullan expects the bitcoin service to require minimal technology work on the bank’s part because of the partnership between NYDIG and Suncrest’s core provider, FIS.

Getting regulators comfortable

Working through regulatory compliance challenges has been critical for Suncrest, McMullan said.

“We plan to work closely with our regulators and keep them informed and involved every step of the way,” he said. “This is new for all of us, banks and regulators, and we want to do it carefully and thoroughly. That said, we have found our regulators to be very open to working with us on this to make sure we all get it right.”

First Foundation executives have met with their regulators multiple times about bitcoin, and they will continue to do so.

“There will be lots of dialogue because we’re all educating one another throughout this process,” Lawrence said. “On top of that, we do have to look at NYDIG from a vendor due diligence perspective, just like we would with any other third party. If we were just plugging in credit cards, that’d be easy because the world is comfortable with credit cards. But this is scary — it’s different. And whenever there’s something new, that’s where the partners you select are important.”

Partly due to the regulators’ concerns, “our motto here right now is crawl, walk, run,” Lawrence said. “As much as I want to sprint and do everything, we’ve got to ease into it to get everybody that comfort level.”

The regulators are asking some deep and thoughtful questions, Thompson said.

“They also understand that this is technology that is being widely adopted, but they want to ensure that it’s implemented correctly,” he said. “I believe long term it makes sense to have cryptocurrency under the umbrella of the regulatory system, because we in the banking system are really good at the [know-your-customer, anti-money-laundering] processes and want to bring that discipline to this new technology.”

In addition to handling bitcoin custody and the integration work with core bank software providers, NYDIG has been writing model compliance documents banks could use as a guideline, Sells said.

Another risk banks face in offering bitcoin is the chance that the price could plummet and their customers could lose money.

First Foundation will warn customers of this.

“We need to make sure the customers understand that this is an investment, that you can lose your money if you’re not careful,” Lawrence said. “It’s going to be important for us to set expectations because it’s not FDIC-insured. It is different. It’s the same conversation we have to have with our clients when they do go to the investment side of the house.”


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