Puerto Rico’s first crypto bank puts the island in an exclusive club

The race to build a fully integrated, US-regulated crypto bank is getting some Caribbean competition.

On Wednesday, FV Bank, an international financial entity registered in the US territory of Puerto Rico, became the first bank in the commonwealth to roll out a digital asset custody service. With a few mouse clicks, clients will be able to store, transfer and settle Bitcoin and fiat currency in a single account.

FV, which stands for FinTech Ventures, will include Ether, USDC and USDT in its roster in the coming weeks, and plans to add other cryptocurrencies in the future.

Although there are several crypto exchanges that offer customers the ability to exchange hard cash for digital money, few US-regulated banks have that option. Bank of New York Mellon – the oldest US bank that traces its roots to Alexander Hamilton – recently launched a platform that will allow some of its customers to hold and transfer Bitcoin and Ether. State Street has also announced similar plans.

That puts FV in a rarefied field in the fast-growing banking-meets-crypto sector, said Steven Beattie, financial crime consultant and crypto risk leader at EY.

“First-movers are incredibly valuable,” he said, as they stake out virgin territory in what is likely to be a packed arena. “As a first mover, you have a chance to change your competitive position across the industry. But being first creates a certain risk.”

Investors have been on edge about crypto exchanges recently after Binance CEO Changpeng “CZ” Zhao announced his firm’s move to acquire rival FTX.com. The latter suffered a liquidity crisis after Zhao said he sold a $530 million holding of FTX’s original token.

As banks face tighter regulatory controls, custody of digital assets opens up a Pandora’s box of compliance issues, as well as money laundering and know-your-customer risks, Beattie said.

The bank has sought to minimize these threats by building its digital custody platform from the ground up, with compliance built into the technology, said FV CEO Miles Paschini.

Still, FV will not be able to tap into the growing number of crypto investors moving to the Caribbean island of 3.2 million people for its lucrative tax breaks. Puerto Rico’s IFEs and IBEs — short for International Financial Entities and International Banking Entities — are barred from doing business with institutions or individuals based in the commonwealth.

While FV is open to individual customers, there has been a focus on institutional customers, Paschini said. About 20% of these are from the US mainland and 80% are non-US entities. Crypto exchanges Kucoin, Bybit and MEXC are among FV’s customers.

Ultimately, Paschini sees fintech and blockchain companies as some of its primary clientele in the digital asset custody space.

“These companies need a place to go so they can build, say, the next super app — the next cash app that’s better than what they have in Argentina or Brazil or somewhere else,” Paschini said. “They need infrastructure that is regulated and compliant. And that’s really what this is all about. We deliver that infrastructure to the market.”

Puerto Rico’s regulators are quick to dispel notions that they are creating a Wild West.

Natalia Zequeira, the island’s commissioner of financial institutions, says her office has given only a handful of banks preliminary approval to become custodians of digital assets. But only FV has built out a compliance department, and has jumped through all the capitalization and regulatory hoops required to win final approval, she said.

FV also went through an additional licensing process that allows it to not only hold, but exchange digital assets.

“We’re not opening the door to doing business in Puerto Rico to just anyone anymore,” she said. “You have to know that this is a US territory and you have to comply with federal laws and regulations.”

Puerto Rico’s international banking sector often makes news for the wrong reasons. In August, Peter Schiff’s Euro Pacific Bank International Inc. was liquidated after regulators said it did not meet capitalization requirements. In the same month, Bancredito was closed due to allegations that the founder made campaign contributions to the then government. Wanda Vazquez in exchange to name Zequeira’s predecessor.

Since taking the position in 2021, Zequeira says she has doubled the size of the inspection staff and has turned down applications from at least 20 banks.

“The policy of this office is to promote economic development, and we don’t want to hinder financial innovation,” she said. “But it must be done in a way that is safe and does not put the customer’s deposit at risk.”