What happens now that the government has released the crypto kraken?

The irony of the century is that digital asset and crypto businesses, which were conceived out of a deep disdain for governments and banks, now want to become banks regulated by the government. And the White House and federal regulators are welcoming them.  

The first digital national bank was approved in 2021, and five crypto firms received conditional approval to operate non-deposit-taking national trust charters in 2025. Since then, more than a dozen digital asset companies have filed applications to form some sort of national bank charter. And last month, the Federal Reserve awarded Kraken Financial, a Wyoming-chartered bank, a Federal Reserve master account, making it the first digital asset bank to receive the keys to the Fed’s payments kingdom. 

This may seem like the government keeping up with technology, but beneath the surface, policymakers face a much more complex set of challenges.

No one really knows whether the infiltration of digital assets and cryptocurrencies will facilitate or disrupt the stability of the financial system, the role of trusted intermediaries, and the flow of liquidity and capital throughout financial markets. But the other side of the issue is equally fascinating: Why would crypto companies want to be banks? 

The modern attraction of a bank charter goes back to the early 1980s, when a woefully underfunded Federal Savings and Loan Insurance Corporation reconfigured the entire financial landscape by inviting a new set of companies to acquire failed savings and loans. Using novel geographic, accounting and economic incentives, we cobbled together an interstate franchise composed of savings and loans in three different states and sold it to National Steel. That released a financial kraken, and every major company in America showed up on our doorstep to buy a savings and loan franchise to get into the banking business. 

There are tangible and intangible benefits to owning a bank. Access to low-cost consumer funding in the form of FDIC-insured checking and savings deposits is the most obvious.

Investment-grade companies cannot borrow in the market at the low rates that banks can borrow from customers who maintain insured accounts with them. In addition, new services can be provided — and operating costs reduced — by having an interest-bearing master account at a Federal Reserve Bank to move money through payments systems. Federally chartered banks can also preempt the application of state usury, branching and other laws that can directly affect operating costs, particularly when building a national franchise.

And finally, the aura of safety and legitimacy is priceless that comes from being able to flash an imprimatur from the U.S. government when soliciting other people’s money. 

Over the last five decades, some combination of these benefits has enticed a range of companies to file for bank charters. Their record of success has been spotty when measured by the number of them that still exist. Dimension Financial Corporation took advantage of a loophole in the Bank Holding Company Act and acquired the first non-bank bank in 1982. Around the same time, industrial loan companies established under the laws of a half-dozen states attracted non-bank acquirers, because while they too could look and act like banks, they were not considered to be banks under the Bank Holding Company Act of 1956. In 1987, Congress shrank that loophole. 

By the end of 2005, there were still 58 industrial loan companies with combined assets of $213 billion. Some were owned by some of the largest non-bank financial services companies in the U.S., including Merrill Lynch. A variety of insurance companies, mortgage banks and other commercial organizations also filed to establish national bank and trust company charters in the 1990s. As of March 31, 2025, there were only 23 industrial loan companies left with $247 billion in aggregate total assets in California, Utah, Nevada, Hawaii and Minnesota. Of the 64 national trust charters doing business today, only one is owned by an insurance company. 

The reality has been that the euphoria of acquiring a bank eventually gives way to the reality of being regulated as one. Buyer’s remorse usually sets in about the time that bank examiners take up residence in the new bank’s offices for several weeks to review every decision made. If that doesn’t do it, executives eventually chaff when regulators have their say about management, capital, liquidity, dividends, balance sheet risk, and proposed transactions. The great disappointment is not being able to use those low-cost FDIC-insured deposits to bankroll affiliates and side ventures.  

Digital asset companies either have a plan to beat these odds and avoid becoming the latest dogs to catch the car or believe that the regulatory system will bend to accommodate them so that they can take advantage of the benefits of being a bank while avoiding the pain. We should wish them good luck with that. 

Crypto firms must understand the fine print of the world they are entering — and be prepared to dislike it. Legislators and regulators should be extremely cautious about the unprecedented risks and potential instabilities being embedded into the financial system by assimilating companies that are accustomed to no regulation, have seen some of their highest-profile executives marched off to prison, and make their money relying on speculative, aspirational assets.  

Neither of these two worlds are ready for each other. History tells us that is a dangerous situation.

Thomas P. Vartanian is executive director of the Financial Technology and Cybersecurity Center.  He was a former general counsel of the Federal Home Loan Bank Board and FSLIC and special assistant to the chief counsel at the Office of the Comptroller of the Currency before chairing the financial services practices at two Wall Street firms. He is the author of “200 Years of American Financial Panics” and “The Unhackable Internet.”

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