Crypto’s growth in terms of market cap and institutional appeal has exploded in 2021. Indeed, the amount of growth that has taken place since the beginning of the year has been remarkable. However, crypto’s journey over the past 12 months has been even more explosive.
In a way, it seems almost as though the institutional ‘moment’ that Bitcoin believers were talking about in 2017 has finally arrived. Finance Magnates sat down with Diogo Monica, President and Co-Founder of Anchorage, to speak about how the industry got to this point. Diogo spoke about regulatory clarity, shifts in financial markets, and what has been happening behind the scenes for the past several years.
Anchorage’s Journey to Becoming a Federally-Chartered Crypto Bank: “Clients Wanted Clarity (from a Regulatory Perspective) around the Status of a Qualified Custodian.”
In early 2021, Anchorage became the United States’ first federally-chartered cryptocurrency bank. “We offer a platform that allows institutions to build products in crypto,” Diogo said.
“What that means is that institutions with Anchorage can have custody, brokerage, buy-and-sell; they can do lending, they can generate yield on their assets, they can do staking governance, all of these other elements, including integration with all of the blockchains that they want to integrate with.”
In other words, Anchorage is “a technology platform that is wrapped as a bank,” Diogo said.
How did Anchorage become the first crypto bank in the United States? Diogo explained that the initiative behind the shift was client desire. “Clients wanted clarity (from a regulatory perspective) around the status of a qualified custodian.”
In other words, as the crypto industry has attracted more institutional clients, those institutional clients want to make sure that their activities are within the limits of the law. “[They wanted clarity] in terms of whether an institution could actually serve them for digital asset custody, for trading, for stablecoins, for participating in blockchains, and so on,” Diogo said.
Therefore, becoming a federally chartered bank seems to have been the next logical step. “in January, we were approved as the first federally-chartered crypto bank. We have an OCC charter; it was actually a conversion of our South Dakota trust charter.”
“It was a recognition from the OCC that we had (and the space has) both the technology and the clarity that [the OCC] required,” Diogo continued. “The OCC has been really forward-looking and forward-facing, and they have been releasing guidance letters around the status and the clarity around how OCC-regulated banks could operate with digital custody and participation in blockchain.”
Banks Are Approaching Anchorage with “Very Concrete Questions: ‘Can You Provide This Specific Thing?’…That’s When You Know the Banks Are Serious.”
Diogo explained that since Anchorage has become federally chartered, there has been a clear trend with other entities in the industry.
“It allows other banks to know where we stand in terms of regulation because we have the same regulatory. We stand eye-to-eye with other banks,” he said, “which is pretty interesting because they’re all coming to Anchorage now.”
Indeed, “all of the neo-banks and challenger banks have seen Square and PayPal succeeding” with their endeavors in crypto. “All of the bulge bracket banks that have specific business that they want to do in crypto are all coming in.”
“Three years ago, or even last year, the banks came to us to ask what they should be doing in crypto,” Diogo said. “Now, they’re coming to us to ask very concrete questions: ‘can you provide this specific thing?’, or ‘show me your API for this particular platform. Show me that you can do A, B and C’.”
“It’s a pretty dramatic shift,” Diogo said. The fact that so many firms are interested in providing specific use cases is evidence of major growth in the infrastructure in the crypto-financial industry.
“We’re not just talking to the ‘innovation’ groups or the ‘blockchain’ groups. We’re actually talking to business leads: specific people from specific firms with an actual PNL to answer to,” he said. In other words, “people who want to generate money from this.”
“That’s when you know the banks are serious.”
Nowadays, “the Institutions That Are Coming in Are Not Just Focused on Bitcoin.”
Indeed, the fact that any cryptocurrency company was able to become a federally-chartered bank is nothing short of a seismic shift from the way that the cryptocurrency industry was perceived several years ago.
“Institutions began to show interest in crypto in 2017, but they couldn’t really come to the market,” Diogo explained. “There were no liquidity partners.” Now, there are many, including Anchorage. Additionally, “in 2017, the clarity around qualified custody (and being able to store with a qualified custodian) wasn’t there.”
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In the early days of institutional interest in crypto, the ways that Bitcoin and other cryptocurrencies could be used to generate cash were also very limited. “You didn’t really have the ability to generate yield from your Bitcoin,” Diogo explained. “Bitcoin wasn’t really a productive asset if you wanted it to be.”
As a matter of fact, there was “no real support” for any crypto assets in this way. Nowadays, “the institutions that are coming in are not just focused on Bitcoin, although a lot of them are, in particular, treasuries. Many treasuries are coming to Anchorage because they want to take a position like Tesla or Square did,” Diogo said. “They want to do capital preservation, so they want to do Bitcoin.”
Simultaneously, “many of them want to build projects,” Diogo said. “They want to issue stablecoins. They want to participate in the DeFi ecosystem. Some of them are coming for non-fungible tokens (NFTs), and asking us ‘how do we do custody for NFTs?’, which is something our platform absolutely supports.”
In other words, there is a lot going on behind the scenes. We asked Diogo what he is most excited by at the moment.
“Neo banks and challenger banks,” he replied. “They’re coming to the space in a meaningful manner. They want to provide their clients with cryptocurrency buy-and-sell services alongside equities, which is absolutely amazing. That’s something that they’re doing now that they weren’t doing last year, and that PayPal and Square’s [entrance in crypto] has helped quite a bit with.”
“There’s Going to Be a Major Impact in the United States When a Bitcoin ETF Comes to the US.”
The institutional side of the Bitcoin industry in Canada recently saw a boon with the launch of the Purpose Investment Bitcoin ETF. We asked what a possible launch of an ETF might mean for markets in the United States.
“I still think that there’s going to be a major impact in the United States when a Bitcoin ETF comes to the US,” Diogo said, adding that: “I do think that the regulatory clarity around qualified custodianship is going to be one of the major unlocking functions in having an ETF approved.”
“The other thing that we have to think about is that today’s market is very different from the market at the time that many proposed Bitcoin ETFs were being rejected,” Diogo said. In early 2019, a number of Bitcoin ETF proposals fell flat in the face of the Securities and Exchange Commission (SEC), including a proposal by Bitwise.
Diogo explained that at the time, there were a number of reasons why the ETFs were not viable. In early 2019, the crypto industry lacked the necessary institutional infrastructure, including “liquidity, regulatory clarity, and the number of platforms in place.”
Now, “the space is in a very different level of maturity,” Diogo explained. “That is one of the things that it seems like regulators were waiting for, and I think we’re there now. I wouldn’t be surprised if we get an ETF in the United States at some point soon.”
A United States Bitcoin ETF Is “a Little Bit behind the Curve. A Lot of the People That Wanted to Have Bitcoin Exposure Have Already Gotten Bitcoin Exposure.”
In addition, Diogo said that in spite of the fact that the buzz around Bitcoin ETFs may have quieted since the wave of the SEC rejections in early 2019, “the reasons why people are excited about them are still there.”
“The ease of integration of an ETF with all of these financial platforms that are out there is still unparalleled to all of these other existing funds and other vehicles for investing in Bitcoin and other cryptocurrencies,” he said.
“It is a little bit behind the curve. A lot of the people that wanted to have Bitcoin exposure have already gotten Bitcoin exposure,” Diogo explained.
Still, a Bitcoin ETF in the United States will be a major point of influence on Bitcoin and crypto markets as a whole. “It will create price competition. There are a lot of premiums on the current funds in the market that may come down whenever there’s an ETF. The ETF competition itself may also be better for the space.”
“I’m also excited about ETFs going beyond just Bitcoin,” Diogo continued. “Once they’re approved, I predict that there are going to be a lot of them, and a lot of them for other cryptocurrencies, not just Bitcoin.”
“Once you’ve created the first one, once you’ve ‘oiled the gears’, the gears start turning, and hopefully churning out very high-quality funds.”
Seismic Shifts in Crypto Markets
Moreover, we asked Diogo for his thoughts on Bitcoin’s massive price increase between Crypto’s ‘Black Thursday’ in March 2020 and today. Over the course of the 12-month period after March 2020, the price of Bitcoin increased approximately 10-fold.
What does the price increase signify for the way that people are engaging with Bitcoin and other cryptocurrencies? “The major difference is the type of capital,” Diogo said.
“The capital that we’re seeing is capital that is coming from the fact that investors believe in the space,” he continued. “These are not retail hodlers that are looking for a simple speculative increase. These are institutions that are looking for capital preservation and diversification.”
“These are smart investors that are looking to the space in terms of its long-term potential. They are not looking for short-term appreciation.”
“This will hopefully stabilize the price of Bitcoin going forward in a way that wasn’t possible in 2017.”