Anchorage: Institutions Still Dividing Up the Cryptocurrency Cake

Despite the downturn in the summer market, there have been a series of institution-related activities in the past few weeks, ranging from applications for spot Bitcoin ETFs to extensive discussions on custody and upcoming US congressional legislation. Debates on fundamental topics are still fiercely ongoing.

Anchorage Digital co-founder and president Diogo Mónica was interviewed by The Block. The company is a federally chartered crypto bank in the US, and the interview covers topics such as regulation, legislation, and the broader global market.

Institutional Actions and Attitudes

The Block: Let's take a macro perspective on the current situation as we are already in the second half of the year. In the past few weeks, there have been many interesting headlines regarding institutions, including all the ETF applications. We have also seen news from Prime Trust and the continuous regulatory uncertainty in the US. What are your thoughts on all of this?

Diogo Mónica: I think the best way to describe the current institutional involvement is that they are trying to stay and their interest and demand are growing. Interestingly, we see this from the inside, while the outside world does not. As you know, we at Anchorage focus on institutional business.

But these companies (referring to BlackRock, Fidelity, etc.) have actually started to get involved in the ecosystem in the past two years and launched projects that take 18 to 24 months, especially for things like cryptocurrencies that require careful consideration before launching. So now, these ETFs from BlackRock and all these things are coming out. Therefore, what you see is actually the continued momentum for cryptocurrencies, and institutions are not avoiding it.

The narrative has shifted somewhat to RWA, and it makes sense because institutions discussing it is a specific use case that is very friendly to regulatory agencies and the public. We have discussed this back and forth, whenever the market is in a bull phase, all institutions talk about cryptocurrencies. And whenever the market is not in a bull phase, they talk about tokenization of blockchain or global assets. It's not different this time.

What's different this time is that there are many legitimate and well-funded institutions in this space. They won't leave. So Anchorage saw a massive influx of secure funds earlier this year.

Prime Trust is another reason why this trend continues. In the first quarter, we actually saw asset growth on the platform of over 80%. We should be in a bear market, but within one quarter, our assets almost doubled, which shows the allure of the narrative.

Yes, the overall market size is shrinking, but the institutional market is expanding.

Pledges and Legislation

The Block: You are a federally chartered digital bank. In terms of the products you currently offer, which product do you think has the greatest growth potential? Is it just custody, or are there other projects on the platform that may pique customer interest?

Diogo Mónica: First of all, I want to emphasize that we are not a "Federal Chartered Bank," but the "Only Federal Chartered Bank," which makes the question completely different, right?

One very exciting thing is the ETH staking after the Shapella upgrade of Ethereum. At the beginning of this year, our ETH deposits reached billions of dollars, with less than 10% being staked, which is a very small percentage. But now, we are actually rapidly approaching 50%. I bet it will actually reach 70% to 80%.

They don't want to take the risk of smart contracts. They want to use a bank that explicitly provides staking services in their charter, and our charter does provide that, which is very unique because it gives confidence to all regulatory agencies that they are using a vendor who can offer these services.

With all the regulations introduced by the SEC, as a bank, we can actually custodian securities.

The Block: What is your stance on the ongoing debate about regulatory clarity in the crypto industry in the United States? Do we need new laws? More laws? Or are the existing laws enough?

Diogo Mónica: Actually, in the crypto field, there is not a lot of clarity in many places, and there is still a lack of clarity now, but crypto is not a singular thing, right? Crypto covers a range of assets ranging from stablecoins, NFTs, commodities like Bitcoin, and potential securities. Therefore, the level of clarity varies in different places.

However, we have always said, "Hey, if there is no clarity, let's establish a regulatory framework that allows us to operate effectively under any outcome." And that's what we've done.

So, other people in this field are actually saying that they don't have clarity because they don't want to face the highest level of scrutiny. We have done the harder things, so we can operate in regulatory uncertainty which still exists.

By the way, our position has always been the more clarity, the better. Whether it is excellent regulation for crypto or any other form of regulation, at least it gives us a standard, something to follow and refer to. And currently, there is very limited operability in the field of crypto and digital asset securities. That's the reality.

Differences between State and Federal Regulation

The Block: We see a lot of discussions about federal-level regulation versus state-level regulation. You are under federal regulation. Do you think there should be a primary regulatory body? Or can this industry work with state regulatory bodies, similar to certain parts of the banking industry? Where should the center of cryptocurrency regulation be?

Diogo Mónica: I do think that in order for this asset class to have the impact we want, regulation should be done at the federal level. There is a reason why every major bank is regulated at the federal level. It makes sense because it is the highest level of scrutiny.

In terms of regulation, it is completely different to be regulated at the state level compared to the federal level, especially when you talk about states like Nevada or Wyoming. Being regulated by an agency that doesn't have enough resources, manpower, historical perspective, and court cases like us is completely different. We have 200 years of federal cases that accurately describe what happens in bankruptcy... And, different states mean different risks. In that state, a court can make arbitrary decisions on the outcome of specific cases, as we have seen in the Celsius and BlockFi cases. So this is unfavorable for cryptocurrencies. This is unfavorable for the clarity people seek from regulatory agencies. So if people want consistency, we want clarity, and we want to have the highest level of scrutiny domestically, we need to stand with federal regulators. So I think that's what we need.

We should start by doing the harder things first rather than having a completely decentralized and independent expectation of what we actually need to do.

The Block: Shifting gears slightly, I know Anchorage has international operations. What is your view on the current international market? Are there any jurisdictions that excite you? Is there a risk of losing market share for the US? Do you see evidence of it?

Diogo Mónica: Yes, we see evidence of that. We see evidence of companies not wanting to do business in the US. In fact, we have licenses in Singapore where people can have regulated entities and participate in cryptocurrencies outside of the US.

First, I have to say that there are many compounding factors. Tax impact is one of the biggest factors. From a regulatory perspective and a tax perspective, many companies actually want to be outside of the US.

I've had discussions with many people who really want to leave the US and seek hedge.

Europe and Singapore leading the way

The Block: Which jurisdictions are getting it right?

Diogo Mónica: Europe is doing really well with Mica. I think the law has some aspects that actually shoot themselves in the foot, especially with stablecoins, like the $200 million limit, which is artificial and doesn't really help anyone.

But the law does provide more clarity and is an order of magnitude clearer than what we have in the US, so I think that's actually great.

But Singapore has definitely done some things right, they have a very strict and comprehensive regime.

Lastly, we have Hong Kong, which is a bit of a mixed bag. They are hot and cold. Right now, they are very keen on supporting and they seem to understand that if they lose cryptocurrencies, they lose this financial hub.

In Hong Kong, the regulators are actually putting pressure on banks to onboard cryptocurrency companies, which is very different from the US, Singapore, and other countries.

Why do you want cryptocurrency to be outside the scope of banking regulation? No, you want a bank that engages in cryptocurrency business so that regulatory agencies effectively have supervisory power. You shouldn't push it overseas, and you shouldn't push it outside the scope of regulation. Therefore, you should issue licenses instead of denying them to applicants.

So these are the three most important ones, Singapore, Hong Kong, Europe, and obviously the United States is still a bigger market.

The Block: Coming back to the United States, what do you hope legislators and regulatory agencies will focus on? What should they consider or pay attention to?

Diogo Mónica: The basics. Regulate stablecoins. Tell us what qualifies as a stablecoin. Don't push it outside the scope of US regulation.

Secondly, tell us which regulatory agency oversees digital assets. Are they something new? Are they securities? Are they commodities? Whose decision is it?

Currently, the state of the US is regulated through enforcement. Every day, there's a new data point for us to integrate into our framework, telling us if something is safe, and that's detrimental to everyone.

The US is just stalling innovation; what we want is clear regulation. So they must tell us who makes the decisions and force them to make quick decisions.

There are also many different issues regarding what is sufficiently decentralized, how to handle NFTs, and so on, but these are secondary and all depend on the first two questions.