Bank's Crypto Activities and FBO Compliance

OFFICE MEMORANDUM

Federal Deposit Insurance Corporation

DATE: April 18, 2023

To:
Bank File (RADD)

From:
b8
Case Manager

Subject:
XXXXX FBO and FIL-16-2022 Update Discussion with XXXXX Management via MS Teams on April 11, 2023

Re:
XXXXX

Prior Events Timeline

  • 4/25/2022:

  • XXXXX President XXXXX emailed CM b8 to understand regulatory expectations for offering “XXXXX XXXXX” to XXXXX

  • 5/23/2022:

  • XXXXX President XXXXX emailed CM b8 about also potentially offering a FBO deposit account to XXXXX

  • 6/13/2022:

  • Acting ARD Justin Shaffer emailed draft XXXXX Crypto-Related Activity Memo to WO.

  • 6/21/2022:

  • CM b8 held call with XXXXX President XXXXX to ask clarifying questions as requested by RO.

  • 7/7/2022:

  • Acting ARD Shaffer emailed WO a Follow-up Memo and Draft Letter to send to XXXXX with the recommendation that the prospective banking relationship between XXXXX be considered as “crypto-related activities” under FIL-16-2022.

  • 7/7/2022:

  • Senior Examination Specialist Sumaya Muraywid replied to email the same day to communicate that Memo and Letter have moved onto RMS Senior Deputy Director Rae-Ann Miller for her concurrence.

  • 7/21/2022:

  • Acting ARD Shaffer requested the assignment of RO legal assistance on XXXXX pending crypto-related activity notification. Senior Regional Attorney Lorraine Sumulong was assigned the next day.
  • 8/1/2022:
  • SES Muraywid replied to RO stating that Senior Deputy Director Miller concurred with region’s position that the activity is in scope and replied with revised letter to the bank.
  • 8/17/2022:
  • Letter sent to XXXXX President XXXXX informing the bank that if it intends to pursue prospective banking relationship (FBO account) with XXXXX then the bank would need to provide the FDIC with a formal notification as requested by FIL-16-2022.
  • 9/8/2022: President XXXXX tried to send FIL notification documentation via email to Acting CM XXXXX but the file size was too large. Acting CM XXXXX then set up EFX-FDIC Connect session on 9/9/2022 to receive the bank’s documentation. The bank’s provided documentation has been copied to the Retail Emerging Technology Working Group/CryptoSupervisoryReviews SharePoint site. Finally, bank provided documentation was emailed to XXXXX@FDIC.gov on 4/17/2023 to be uploaded to the institution’s Correspondence folder in RADD.

4/11/2023 Meeting Attendance - XXXXX - President XXXXX - Chief Risk Officer XXXXX - Chief Operations XXXXX - Chief Compliance Officer XXXXX - BSA Officer/Deposit Compliance Officer XXXXX - Chief Business Development Officer XXXXX - FDIC - Case Manager XXXXX - Senior Examination Specialist XXXXX

4/11/2023 Meeting Notes (Management responses in bold) FDIC Questions: - Has XXXXX opened the FBO account for XXXXX? If so, when was the account opened? - Yes, COO XXXXX stated the account was opened in April 2022 but it was dormant (no funds or activity) until November 2022. - CCO XXXXX also stated that since initial funding in November 2022, the account has not operated as a true FBO account and instead has been XXXXX commercial deposit funds comingled with XXXXX customer funds. - CRO XXXXX stated that bank management has the goal of the account solely being an FBO account structure by May 1, 2023, but the institution is still in discussions with XXXXX regarding expectations, and processes as well as finalizing agreements between XXXXX and XXXXX. - What is the current balance of XXXXX FBO account? Does the total balance vary a material amount day-to-day?

  • CCO XXXXX stated that the current balance of the account is approx. $360,000 and that the typical balance over the past few months has been $1.8 million.
  • President XXXXX agreed that balance can vary widely day by day but stressed a few times that management feels that the overall risk to the institution is limited due to size of the activity with the average account balance being 0.2% of the institution’s total assets.
  • How many XXXXX customers make up this XXXXX FBO account?
  • CRO XXXXX stated that there are currently funds from 546 XXXXX customers within the account at XXXXX.
  • Has XXXXX encountered any hiccups or issues since opening the account?
  • CRO XXXXX stated that the biggest hurdle has been getting XXXXX to understand XXXXX expectation that the account truly be a FBO account which includes the corresponding recordkeeping and reporting requirements associated with such a structure.
  • Has the institution performed any additional due diligence or risk assessments of XXXXX beyond the documentation provided to the FDIC on September 9, 2022?
  • CRO XXXXX stated that the bank completed due diligence of XXXXX at the onset and likely provided that documentation in September 2022 but the institution has not yet instituted a formal ongoing and recurring risk assessment process of; XXXXX CRO; XXXXX anticipates that the bank would formulate a recurring annual risk assessment of XXXXX once the account is operating as solely a FBO account.
  • President XXXXX noted that the bank has likely obtained updated financials from XXXXX as well as an updated listing of products and service offerings since September 2022.
  • BSA Officer XXXXX said she is currently in the process of doing a new money services business (MSB) risk assessment for XXXXX but this process has been more intensive than normal because; XXXXX is the bank’s only MSB and given XXXXX digital asset focus.
  • Chief Business Development Officer XXXXX added that; XXXXX reviews and is contractually required to review all; XXXXX marketing or communications materials that mention; XXXXX.
  • Has management obtained a legal opinion in regards to the permissibility of this activity?
  • President XXXXX stated that the bank has engaged; XXXXX to review and approve all agreements the bank has with XXXXX and the bank has also contracted with; XXXXX to provide additional consulting within this space.
  • During an Offsite Review Program related discussion last week (4/7/2023) with CM XXXXX CEO; XXXXX mentioned that the bank has received a fair amount of interest from digital asset related companies looking for financial institutions. Can you please provide an update regarding these prospective customers?
  • President XXXXX stated that the; XXXXX Board of Directors approved the addition of up to three additional digital asset related entities at the prior monthly Board meeting.
  • President XXXXX noted that the bank does not intend on becoming a “crypto bank” but sees the commercial benefit of providing commercial banking services to businesses that can meet the institution’s risk management standards.
  • CM XXXXX asked the institution to inform him of any future decisions to onboard crypto-related customers even if the bank only intends to provide more traditional commercial banking services.

XXXXX Questions: - At this time does the FDIC have any supervisory feedback concerning our discussion today or the documents provided by XXXXX in September 2022? - CM XXXXX told bank management that he was unable to provide any supervisory feedback at this time but one of the main purposes for this call is to better inform the FDIC’s development of a forthcoming letter to the institution providing initial supervisory feedback and potentially some additional request items. - Can FDIC provide an estimated date on when the aforementioned letter will be provided to the institution? - CM XXXXX stated that he was unable to provide an estimated timeframe given the numerous parties involved in the development of the letter but that it is his intention to provide it to the institution as soon as possible.

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