From Exchanges to Banks: The Crypto Industry's Fight for Legitimacy

Crypto companies are seeking to become state or national banks in a bid to expand their business under the Trump Administration. However, crypto firms still face institutional pushback as well cybersecurity challenges on their path to mainstream acceptance.

Historically, financial institutions have not accepted cryptocurrencies because they view them as high-risk assets. This is coupled with a regulatory system that has been slow to approve new bank charters. In fact, between 2010 and 2023, US regulators approved only five new bank charter applications per year, compared to 144 per year between 2000 and 2007.

Additionally, controversial figures such as Sam Bankman-Fried, who in March 2024 was convicted of misappropriating customer funds and defrauding investors, have given the crypto world a wild-west image, which has not endeared it to large financial institutions and regulatory bodies.

But this looks set to change radically following the election of Donald Trump, who has taken a pro-crypto stance, announcing that he would be a 'Crypto President' and would 'overhaul' US crypto policy. He even created a crypto strategic reserve, which will include a number of major currencies such as bitcoin, ether, XRP, solana and cardano.

This has created excitement in the crypto industry, which has expectations that Trump will usher in a deregulatory regime that could pave the way for more bank charters.

This would present clear benefits for crypto companies. Obtaining a bank charter would give them legitimacy, potentially encouraging further investment. It would also allow them to offer a wider range of products, such as crypto-backed loans.

However, there are a number of obstacles that crypto firms need to consider when applying for a bank charter, one of the most important being the implementation of robust cybersecurity measures.

Given that crypto firms operate almost exclusively online and cyber threats are developing rapidly, crypto companies will need to stay on top of the latest cybersecurity protocols to ensure they are protected and comply with guidelines.

Rotem Farkash, a cybersecurity expert, entrepreneur and investor, weighed in on the debate:

'Many people will have heard about the recent Bybit hack, where $1.5 billion of crypto assets were stolen. Understandably, this raised issues of cryptocurrency cybersecurity. It is true, crypto exchanges can be more vulnerable to cybersecurity breaches due to their structure and the lack of regulation.'

Farkash adds 'There are a huge number of cybersecurity considerations to take into account when applying for a banking license. New crypto banks will need to implement safeguards to protect consumer financial data, per the Gramm-Leach-Bliley Act and have incredibly tight protections against hackers.'

'If tighter cybersecurity measures are required for crypto companies to obtain bank charters, I see that as a positive step. The safer the industry becomes, the more people will be willing to adopt cryptocurrencies,' Farkash explained.

Crypto is gaining mainstream and institutional acceptance, especially as the Trump Administration implements pro-crypto measures. While bank charters are a significant step in crypto's journey, ensuring robust cybersecurity remains a crucial challenge.

With that said, the potential is immense. Crypto banks could offer all the traditional financial services - deposit accounts, lending, and custody - while being backed by digital assets. By bridging the gap between traditional finance and the digital economy, they have the power to unlock crypto's full potential and bring it to the masses.