A digital asset firm is trying to do something that has eluded others in recent years: create a regulated bridge between crypto and the traditional financial system.
Telcoin Inc., a company that issues its own cryptocurrency, provides digital wallets and handles international remittances, is seeking a bank charter under
If chartered, Telcoin Bank Digital Asset Bank would seek to issue its
Telcoin CEO Paul Neuner, in an interview with American Banker, said his firm aspires to advance the digitization of money by linking banks more directly to telecommunications systems to enable consumers to transact with bank-issued currencies through their mobile devices.
“In the traditional banking system, everyone’s got their own internal ledgers and it’s about using SWIFT and Fedline to tie those all together,” Neuner said. “What we’re talking about is, the telecoms around the world run the internet, right? Why shouldn’t they also process blocks in, effectively, the settlement layer of digital cash floating around the internet of money?”
Telcoin is not the first group to attempt to bring crypto into the banking system.
Custodia has been bogged down in a
Neuner believes Telcoin can avoid the pitfalls of Custodia because of differences between Nebraska’s DADI regime and Wyoming’s SPDI, as well as his firm’s distinct business model and approach.
“The Wyoming one was more about how nonbanks disrupt the space and do institutional crypto,” Neuner said. “The Nebraska law was from the perspective of, ‘How would a bank get into this and how is this going to really transform banking and payments?'”
Banks in Nebraska have been wary of the DADI framework since it was first proposed, noting that it would provide banking privileges to entities that are not held to the same standards as traditional banks. While the legislation was modified to address bankers’ concerns, they remain skeptical about certain elements of the chartering regime.
The Nebraska Bankers Association submitted a letter to the state’s Department of Banking and Finance on Thursday regarding Telcoin’s application. The group asked that the company be referred to only as Telcoin Digital Asset Bank and never Telcoin Bank, to avoid the impression that it is a traditional bank. It also urged regulators to monitor the firm’s unencumbered liquid assets and to work with federal agencies to keep close tabs on the firm.
“As your team navigates this nascent regulatory environment, constant assessment is necessary,” the letter reads. “It is imperative that the Department continually evaluate and assess the applicant’s liquidity, business model and internal controls as well as ensuring a highly competent and knowledgeable applicant and regulatory staff to operate in a safe and sound manner.”
Like Custodia’s founder and CEO Caitlin Long, who helped craft the Wyoming SPDI legislation, Neuner also played an active role in developing Nebraska’s policy. He worked alongside then state Sen. Mike Flood — now a U.S. congressman — in drafting the legislation that ultimately passed into law in 2021. Neuner and Flood were college roommates at the University of Notre Dame.
Neuner added that the structure of the law in Nebraska would allow Telcoin Bank to operate in the state without a Fed master account, something that he said would have been challenging under the Wyoming statute.
Telcoin still plans to seek a master account — and feels it will have success, based on conversations with government officials — but has a temporary fix in mind for the meantime. Neuner said he has acquired a 24.9% stake in Battle Creek State Bank, a federally insured Fed member bank, with the goal of eventually bringing it under the same bank holding company as Telcoin’s digital asset bank.
“That approach, right now, is just getting a plain old bank, going through the current, existing safety and soundness check with the Fed in parallel to getting the digital asset depository approved,” he said. “That way we don’t have to force the hand of the Fed to give us membership. They can take their time, because I know that’ll take time. … We’re trying to thread the needle that way.”
A change in beneficial ownership for Battle Creek State Bank, which occurs once an entity owns at least 25% of a bank, would have to be approved by the Federal Reserve Board in Washington. Master accounts are administered by regional reserve banks — in this case, the Kansas City Fed, which denied Custodia’s application in January 2023.
Telcoin has the potential advantage of a more favorable policy environment toward digital assets at the federal level thanks to the election of Donald Trump and Republican majorities in both the House and Senate. While not a strictly partisan issue, Republicans have tended to highlight the economic growth potential of crypto rather than its financial stability risks. Their unified control in Washington is expected to pave the way for legislation on stablecoins in the next Congress.
But Telcoin’s banking ambitions have been years in the making, and the firm’s leadership expected to gain both a banking charter and access to the Fed’s payments rails regardless of who prevailed in last month’s elections.
Patrick Gerhart, Telcoin’s president of banking operations, said the top-line sentiment toward digital assets will not change the underlying risks that need to be addressed and or the expectations from bank regulators and supervisors.
“Just because this upcoming administration is more digital asset-friendly does not mean that any of the regulatory bodies are going to ease up on what they need for the regulations to be administered by them. They’re just going to be more open to us applying and utilizing them as a regulator. I don’t see any changes in regards to making things easier for us,” Gerhart said. “We want to be regulated like a bank. We want to be on that playing field because we want the benefits of being a regulated entity in the United States of America.”
If approved, Telcoin Bank would be headquartered in Norfolk, Nebraska, where it currently has offices. Telcoin Inc. operates internationally, with subsidiaries in Australia, Canada, Hong Kong, Japan, Lithuania, Malaysia, Singapore and the U.K.
Neuner said in addition to the eUSD stablecoin — a digital asset with a value pegged to a certain underlying currency, in this case, the U.S. dollar — it also plans to issue stablecoins pegged to other sovereign currencies as well, including the Canadian dollar and Mexican peso.
Because the eUSD will be issued by a bank and therefore tied directly to an asset, Neuner said it would not be classified as a security. He added that he sees the global digital banking space gravitating toward two competing models: bank-issued stablecoins and state-run central bank digital currencies.
“We’re doing the free world model, which maintains that a bank is an intermediary between the citizens and the government, and I think that’s very important. I think that’s the model that’ll win out in the majority of countries,” he said. “But, yeah, this is definitely a philosophical competition that’s emerging, so we’re trying to be the first to present that model in the U.S.”
A decision on Telcoin’s DADI application is expected early next year.