SFRO Recommends Crypto Activity Notification

OFFICE MEMORANDUM

Federal Deposit Insurance Corporation

DATE: July 7, 2022

To:
Sandy Macias
Chief, RMAS, RMS

Sumaya Muraywid
Senior Examination Specialist, RMS

XXXXX
Compliance Technology Specialist, DCP

Through:
Justin Shaffer
Acting Assistant Regional Director, RMS

XXXXX
Senior Examination Specialist, RMS

XXXXX
Compliance Technology Specialist, DCP

XXXXX
Case Manager, RMS

XXXXX
Review Examiner, DCP

Subject:
Recommendation that XXXXX prospective banking relationship with crypto-currency exchange, XXXXX should be considered “crypto-related activities” within the scope of FIL-16-2022 and request a formal notification to the FDIC

Re:
XXXXX

Purpose

This memo is a recommendation by the San Francisco Regional Office (SFRO) to consider the prospective banking relationship between XXXXX as “crypto-related activities” under FIL-16-2022 and request that XXXXX submit a formal notification consistent with the FIL. This memo is also a follow-up to a June 15, 2022, Office Memorandum that provided background on the financial institution, including the most recent regulatory assessments, as well as the limited information known about prospective

crypto-related activity at XXXXX based on email communication received from bank management since April 2022.

Notes from Additional Discussion with Bank

On June 21, 2022, Case Manager (CM) XXXXX discussed the prospective activity with XXXXX to clarify proposed activities and determine the applicability of FIL-16-2022. The following contains information received during the discussion between XXXXX and CM XXXXX:

  • The purpose of the accounts are 1) a non-interest bearing XXXXX customer’s U.S. dollars within that customer’s XXXXX exchange account and 2) a separate XXXXX operating account.
  • The anticipated holding account title would be XXXXX as custodian of Customer X”. The FBO account would contain only customer funds with no co-mingling for operating purposes.
  • Bank management does not believe that XXXXX has issued a stablecoin yet and has not had any discussions with XXXXX regarding holding stablecoin reserves.
  • Source of funds that will be placed into account are anticipated to be:
  • Deposits from external bank accounts,
  • Proceeds from liquidation of digital asset products within XXXXX platform, and
  • Disbursement of loan proceeds from digital asset securitized loans originated by XXXXX (Note: Management originally responded with the first two sources, and did not acknowledge loan proceeds from XXXXX lending product until specifically asked by CM XXXXX).
  • Debit cards are not expected to be issued.
  • Management was unable to provide anticipated overall activity size (by volume and number) and/or estimates of daily activity, but indicated that XXXXX currently has XXXXX customers. Bank management has also obtained a copy (date unknown) of XXXXX financial statements. Reportedly, the statements illustrate equity of XXXXX XXXXX and total assets of XXXXX.
  • Management does not anticipate any sweep arrangements. However, President XXXXX described the FBO account as “XXXXX XXXXX XXXXX.” The region will need further details to understand the structure.
  • XXXXX intends to maintain an ACH reserve deposit account at the bank for ACH chargebacks.
  • Bank management would receive daily reporting from XXXXX as well as view-only access into XXXXX’s customer reporting system, including XXXXX know your customer information.
  • The extent of contracts and agreements are not fully known. Bank management indicated that no contracts or agreements have been drafted to date. Information has been exchanged via emails between the bank and XXXXX.
  • Bank management intends to have XXXXX based external counsel XXXXX review the terms of use agreement and XXXXX agreements with customers. The scope or statement of work was not obtained by the region.

  • Bank management would require a “XXXXXXXXXXXX” of XXXXX marketing documentation as well as “XXXXXXXXXXXX.”

  • The intended purpose for XXXXX customer ACH and wire transfers will be to allow XXXXX customers to deposit and withdrawal U.S. dollars from XXXXX accounts or “wallets” via ACH or wire transfer methods.

  • President XXXXX provided an example as: XXXXX customer banks with XXXXX XXXXX and submits a digital asset purchase order within XXXXX platform. The order would initiated an ACH debit from the XXXXX deposit account and into XXXXX operating account at XXXXX. In exchange, digital assets would be placed in customer’s XXXXX account.

  • Bank management is also considering offering merchant processing services, allowing XXXXX customers to fund their XXXXX account with funds from a debit card instead of ACH or wire using routing number information. No additional services were being contemplated.

  • CMI XXXXX questioned if the proceeds or payments of XXXXX loans collateralized by crypto-assets would be processed through either the prospective operating or FBO account(s). It was apparent management had not previously contemplated these transactions. Management acknowledged that loan disbursements and payments could be processed through either the operating account or the FBO account depending on how the XXXXX customer sets up payment and disbursement methods within the XXXXX platform. For example, if the customer selected that they wanted loan proceeds to be deposited as U.S. fiat currency in their individual XXXXX account or “wallet” then funds would be deposited into the FBO account and earmarked for that individual.

FIL-16-2022 Applicability Assessment and Recommendation

The SFRO recommends that the prospective banking relationship with XXXXX should be considered “crypto-related activity” under the FIL because management’s answers up to this point do not illustrate robust understanding of the size and complexity of activity or a sufficient understanding of the potential risks inherent in the activity and/or the necessary controls for proper mitigation. In addition, during the June 21, 2022 telephone discussion, bank management acknowledged an additional potential source of funds for the FBO account which they had not previously considered: digital asset secured loan disbursements. While XXXXX proposed activities with XXXXX do not meet the definition of “crypto-related activities” in the FIL’s footnote 2, the FIL provides flexibility for other activities that may fall within the scope of the FIL and states that, “…the FDIC is concerned that crypto assets and crypto-related activities are rapidly evolving, and risks of this area are not well understood given the limited experience with these new activities,” and the region is prudently applying the discretion to this case.

Following WO concurrence that the described activity qualifies as crypto-related activity and falls within the scope of the FIL, the SFRO will send the enclosed letter to XXXXX informing management of the notification request should management further pursue the relationship with XXXXX.

Enclosure: “DRAFT XXXXX Crypto Related Activity Letter.docx”