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

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

On Wednesday, FV Bank, an international financial entity registered in the U.S. territory of Puerto Rico, became the first bank of 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 within a single account.

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

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

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

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

Investors have been on the edge about crypto exchanges recently after Binance Chief Executive Officer Changpeng “CZ” Zhao announced that his firm was moving to take over rival FTX.com. The latter suffered a liquidity crunch after Zhao said he was selling a $530 million holding of FTX’s native token.

While banks face tighter regulatory controls, digital-asset custody opens up a Pandora’s Box of compliance hassles, as well as money laundering and know-your-customer risks, Beattie said.

The bank has tried to minimize those threats by building its digital-custody platform from the ground up, with compliance embedded in the technology, said FV’s Chief Executive Officer Miles Paschini.

Still, FV won’t 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, it has been focusing on institutional clients, Paschini said. About 20% of which are from the U.S. mainland and 80% are non-U.S. entities. Crypto exchanges Kucoin, Bybit and MEXC are among FV’s clients.

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

“Those companies need a place to go so that they can build, say, the next super app – the next cash app that is better than what they have in Argentina or Brazil or someplace,” Paschini said. “They need infrastructure that’s regulated and compliant. And that’s really what this is about. We’re delivering that infrastructure to the marketplace.”

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

Natalia Zequeira, the island’s commissioner of financial institutions, says her office has only given 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 just hold, but exchange, digital assets.

“We are not opening the door to do business in Puerto Rico to just anyone anymore,” she said. “You must know that this is a U.S. territory and you must 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 missed capitalization requirements. That same month, Bancredito was shuttered amid allegations that its founder made campaign contributions to then-Gov. Wanda Vazquez in exchange for naming Zequeira’s predecessor.

Since assuming the post in 2021, Zequeira says she has doubled the size of the inspection staff and has denied applications from at least 20 banks.

“The policy of this office is to promote economic development and we do not want to hinder financial innovation,” she said. “But it has to be done in a way that is safe and does not put clients’ deposits at risk.”