How Crypto-Friendly Banks Combine Fiat and Crypto Under One License

For crypto businesses, banking is a persistent bottleneck. All the while they may be growing their company and their product offerings, their bank account can be closed on them without warning. The banking model that works for crypto businesses is one that looks like a regular bank account but handles fiat-crypto integration under the same license.

This is the model of the crypto-friendly bank: one that holds the license and permission to manage both fiat and crypto transactions.

What "one license" actually covers

The crypto banking license that crypto-friendly banks hold is not one that allows both fiat and crypto services within the same statute in most jurisdictions. Instead, it is one legal entity that holds multiple licenses: one for fiat transactions and one for crypto services.

Fiat services under an EMI or PI license

A license for electronic money institutions (EMI) or payment institutions (PI) permits a company to issue e-money, to open payment accounts for customers, and to access various payment transaction rails (such as SWIFT or SEPA).

The license requires that any funds used to back the e-money are held in separate, safeguarding accounts in licensed banks (or equivalent safe assets). These regulations ensure that the e-money company's operations include diversification between safeguarding banks, minimum capital floors, and restrictions on utilising customer funds as collateral.

Crypto services under a VASP or CASP authorisation

A virtual asset service provider (VASP) license authorises a company to engage in crypto-related transactions such as exchanging fiat and crypto tokens, holding crypto tokens for customers, and completing the transfer of those virtual tokens on the blockchain.

In the European Union and the European Economic Area, this is a crypto-asset service provider (CASP) license under MiCA, the Markets in Crypto-Assets regulation.

Furthermore, any crypto token that is referenced to fiat tokens may fall under the regulation of e-money tokens, giving that crypto token a license to the company in the fiat licensing regime. This is one of the reasons for the combined licenses.

Where the two regimes meet inside one entity

The European Banking Authority published a no-action letter for European banks explaining how the regulation of crypto assets under MiCA and payment services under PSD2 would interact.

The EBA advised banks on how they should regulate the activities of companies that offer both payment and crypto-related services, with a particular focus on which activities would fall under PSD2 regulation and which would fall under MiCA. The goal is to avoid regulatory overlap for the banks.

Therefore, one license in the company's marketing and communication channels means that the entity holds the licenses and permits for both fiat and crypto transactions and is supervised by the same authority (or group of authorities) for both types of transactions.

Fiat-crypto integration works at three different levels in practice: the legal structure of the company, how the compliance departments operate under the combined license, and how the technology is exposed to customers. All three of these have the potential to impact the model in different ways.

Legal and organisational structure

The entity is one entity, but the funds are separated:

Unified compliance and AML/KYC framework

A single AML/CTF and KYC program oversees all of the company's activities and products. Whether the money moves as e-money, bank deposits, or stablecoins, there is a single compliance program for all of these entities.

With virtual assets, travel rules require the company to send information about the originator and the beneficiary of those virtual-asset transactions. These rules are built into the compliance software that oversees both card-based transactions and virtual asset transactions.

Single API and unified front end

The technology for the company is most simply one integration. Companies that offer fiat-crypto integration to customers have an API that enables customers to use those services under a single API and front-end. This ensures that the company's customers experience a single platform that offers all the features they require and ensures to the regulator that the company is a single entity with defined capabilities.

What this looks like for the user

The features offered to customers are relatively small in number. The following describes the features that are offered to fulfil customer requirements and reduce the complexity of the technology stack they must use to access these services.

Single wallet across fiat and crypto

The customer faces a single wallet that displays balances in fiat and crypto. The balances can be converted to each other entirely within the company's wallet through the company's CASP-authorised crypto exchange. The company also offers cards and other payment schemes to customers that have balances linked to either fiat or crypto balances for that customer.

Stablecoins as the internal settlement layer

Some crypto-friendly banks use stablecoins as the internal settlement layer between their own internal nodes or between those nodes and crypto partners. Customers still deposit and withdraw in fiat. The stablecoins are used internally to transfer funds between the firm and its partners in seconds. The customer still uses fiat currency.

Treasury and FX tools for crypto businesses

Crypto-friendly banks also offer treasury products for crypto businesses. These provide functionalities like multi-currency accounts, currency conversion for the client, and automatic reconciliation of fiat and crypto ledgers for the company. Thus, these crypto businesses can issue invoices in local currencies and have revenue moved across jurisdictions, choosing either fiat or crypto funds to cover expenses with partners in the crypto space.

Benefits and challenges of the single-umbrella model

Crypto founders considering the single-umbrella model need to see the benefits but also the challenges of this model. The challenges are present despite the benefits of this organisational model.

Why crypto founders move to this model

Stability of access to banking services is the first reason that crypto firms that work with traditional banks tend to move to the single-umbrella model. When working with traditional banks, the crypto firms often experience their bank accounts getting frozen and their payouts getting blocked if the bank discovers that their organisation has any crypto-related activities. By placing their crypto and fiat licenses into a single company, that crypto activity is accounted for from the beginning of their banking relationship with that firm.

The second reason to consolidate crypto and fiat licenses under a single provider is to eliminate the friction that is created by having to work with three different banks with three sets of contracts and banking relationships. By consolidating the license, a crypto founder can manage their fiat and crypto businesses under one provider, which greatly simplifies their operations.

Where it gets complicated

Securing both authorisations is heavy. An EMI license alone typically takes six months to two years and runs around 800,000 to one million euros in setup, on top of regulatory capital starting at 350,000 euros. A MiCA CASP authorisation adds another six to eight months and another 100,000 to 150,000 euros, plus a minimum capital of between 50,000 and 150,000 euros, depending on the permissions sought.

The applications cover business plans, capital and safeguarding arrangements, governance and internal control structures, AML/CTF policies, outsourcing, and detailed shareholder disclosures, and the supervisor expects all of it before the firm can begin operating.

Regulations are changing rapidly. MiCA created categories for specific crypto tokens like e-money tokens and asset-referenced tokens. The European Banking Authority is working to understand how regulations like PSD2 interact with MiCA for firms that offer both fiat and crypto services.

These firms that were licensed before MiCA under the VASP regulations had to upgrade to full CASP licenses for MiCA regulations. Some stablecoins were licensed under the EMI regulations when the e-money token regulations became effective. Additionally, a crypto banking license today may not include the permissions that are needed for a crypto firm to offer specific services in the future without amending its existing license.

Cross-border limits

The permissions that a firm secures for fiat-crypto integration can typically be held across the European Economic Area (EEA). However, each country has its own regulations for crypto activity. There is no single license that allows a crypto firm to operate across the entire European Economic Area.

As such, the majority of crypto-friendly banks that have branches outside of their home country hold separate licenses for those other countries or limit the services that they can provide to those other countries. A founder who is looking to expand beyond their initial home country should consider which licenses their prospective banking partner holds and which countries recognise those licenses.

What to look for in a crypto-friendly banking partner

The first thing to look for in a banking partner is whether they hold a license for fiat and crypto money within the same entity, or if they have a crypto banking license within separate group companies. The structure of these separate entities may make it difficult to manage the fiat and crypto balances of the firms that they work with. The firms may have separate failures for their fiat and crypto companies.

The second thing to look for is the methods of holding and safeguarding balances for fiat and crypto companies. The founder should ask the banking partner for information regarding which banks hold the safeguarding accounts for the crypto company, how diversified those banks are, how they manage their crypto money (within an omnibus account, in a segregated account, or by using a third-party crypto custodian), and what would happen to the crypto customers' balances if the firm were to experience difficulties itself.

The third thing to look for is the banking partner's track record in banking for crypto companies. This factor will help the founder to understand whether or not the bank can live up to the terms of the banking relationship. Banks that have a track record of successfully banking for other crypto companies in the same vertical as the founder will typically have a better understanding of how to handle the founder's requests and challenges, as they will have dealt with similar situations in the past.