One of the most unusual and potentially transformative deals in the cryptocurrency space started out as a controversy on social media.
In April, Charlie Lee, the creator of Litecoin, exchanged barbs on Twitter with Derek Capo, CEO of the payment processor TokenPay. But their battle quickly evolved into a friendly direct messaging exchange in which the two crypto enthusiasts realized they shared a common problem: banking in short.
Both the Litecoin Foundation, the nonprofit that promotes the sixth largest cryptocurrency and of which Lee is managing director, and Capo’s startup in the Virgin Islands have struggled to secure bank accounts – a long-standing problem for the industry.
“We had a lot of trouble” on that front, Lee told CoinDesk.
Capo stated, “Some banks close bank accounts when dealing with crypto. We have seen how many competitors with similar offers were cut off because they did not own the bank and had no control. “
But Capo was working on a solution for TokenPay by trying to buy a bank. And he realized that this plan, if successful, could solve another problem for Lee.
“Why don’t we talk about a Litecoin debit card so you have a real solution?” Capo remembered telling him. “Because they went out of their way to have a Litecoin debit card … I said why don’t we talk?”
In a surprising transaction that became known this week, the Singapore-based Litecoin Foundation received 9.9 percent of WEG Bank AG, a previously unknown German financial institution.
But the foundation did not invest any money; TokenPay previously acquired the stake and traded it to the non-profit organization in exchange for future technical support. TokenPay has also acquired a further 9.9 percent (the maximum allowed in Germany without prior regulatory approval) from WEG and is aiming for the green light for the purchase of up to 80 percent. (The price was not disclosed.)
If everything goes according to plan, TokenPay and the Litecoin Foundation not only have a reliable banking partner, but the WEG would also become a point of contact for consumers worldwide who want to exchange fiat for cryptocurrency or pay for goods and services with crypto.
But owning a bank alone won’t necessarily solve the crypto banking problem, according to compliance experts who have worked in both areas. Even if regulators bless the pending acquisition, Capo and Lee could face new challenges operating in a highly regulated industry where “coin” is often treated as a four-letter word.
Unimpressed by regulatory hurdles, Capo and Lee have ambitious plans to usher in a new wave of crypto banking services.
Taking a step back, while cryptocurrency transactions can run smoothly, converting dollars or euros to crypto and back is anything but. Buying crypto through an online exchange can mean registering a credit card with an exchange platform and then waiting days, sometimes longer, to complete the transaction.
In the meantime, most of the merchants who accept crypto are wary of price volatility and generally rely on a payment processor like BitPay to convert them to fiat. Processing fees apply to all of these options.
This is why Capo wants to offer crypto debit cards and the ability to convert Litecoin to euros directly through a traditional bank account in order to provide a smoother experience for crypto users operating in a fiat-dominated economy. He hopes to offer such services within nine months of receiving regulatory approval for the acquisition.
“Linking cryptocurrency to fiat rails is very useful,” said Lee, who told CoinDesk that he would like to join the WEG board as a representative of the Litecoin Foundation (a move that might make him the first person to do so simultaneously bears the title of “cryptocurrency founder” and “bank director”).
“We will have a say in influencing the bank to work on crypto projects,” he said.
After grappling with debit cards and payment processing, Capo and Lee finally plan to integrate banking services directly into TokenPay’s decentralized exchange platform (DEX), eFin, which offers peer-to-peer trading between cryptocurrencies.
If merchants pass all of the Know-Your-Customer (KYC) and Anti-Money Laundering (AML) requirements for a crypto bank account, they can seamlessly withdraw TokenPay’s own tokens, known as tpay, from the exchange as fiat, plus cryptos like Litecoin Buy or sell without delay.
“EFin will have LTC. We’ll help them technically, ”said Lee. “And they will fall out of the air too [eFin] Token for Litecoin users. “
In addition to the promise of technical expertise and Litecoin’s relatively stable popularity with cryptocurrency fans, Capo said he gave the bank’s nonprofit equity based on Lee’s massive online following, a marketing boon, and professional connections.
“Litecoin has a very influential leader, someone who has been around for a long time,” said Capo when describing Lee, an alumnus of the popular cryptocurrency exchange Coinbase.
However, even if they get a banking license, Capo and Lee are not guaranteed unlimited liquidity.
WEG, based in Ottobrunn (21,378), was previously a property management bank that granted housing associations loans. After TokenPay has acquired a majority stake, the plan provides for the bank’s CEO, Matthias von Hauff, to remain involved in WEG’s transition to a retail bank with consumer-oriented products and services.
But such a tiny institute would likely rely on outside organizations – larger global banks, the German central bank, or SWIFT – to move large amounts of fiat around the world, according to Simon Taylor, a former Barclays banker and co-founder and director of the UK Fintech consulting firm 11: FS. If these partners get squeamish about crypto in general, they could cut WEG off access to fiat, Taylor warned.
“The really, really big banks tend to be the ones that link you to the US dollar across the global corridor, they’re the ones that get the heavy KYC fines,” Taylor said, adding on the WEG takeover plan add:
“I don’t think it will achieve what they want. I’m tempted to buy a bank. But buying a bank doesn’t give you what you think it gives you. “
Joe Ciccolo, president of compliance services company BitAML Inc., said regulators would likely expect additional diligence from the WEG if it turned into a crypto-focused bank.
“Running a bank on your own and implementing AML anti-money laundering across a wide range of products and services is difficult at first,” said Ciccolo. “This will be a much higher barrier to entry than would be associated with traditional AML.”
The idea of integrating a decentralized exchange into a bank was what caused Ciccolo to pause most of the time. He described DEXs as “the nails on a board for regulators” that took years to dig into Bitcoin. If Capo and Lee plan to do so, Ciccolo said, it will require significant investments in ongoing training of regulators and in constant communication with larger banks.
Capo recognized the challenges and said the first and most expensive step in converting WEG into a crypto-centric bank is to restructure all of their KYC and AML processes to create a new cryptocentric model.
“We are conservative because we want to build this bank so that it will exist for a long time,” he told CoinDesk and concluded:
“The infrastructure is there, we may only have to modify it for crypto-based services.”
Image via consensus 2018