Compliance is Key Factor in Enterprise Choice of Crytpo-Capable Custodians Says FV Bank CEO
Blockchain Journal editor-in-chief David Berlind interviews Miles Paschini, CEO of FV Bank, at Consensus 2023, a blockchain and cryptocurrency conference in Austin, Texas. FV Bank aims to provide an enterprise-grade custody solution to organizations and institutions seeking a reliable, regulation-compliant, and structured way to operate in the digital asset space.
For those new to the terminology of the blockchain industry, a custodian is the entity that controls the private keys to digital assets. But simply holding those keys is not enough. Also of import are the legal and regulatory frameworks under which custodians of any assets — digital and non-digital — must operate (although FV Bank specializes in the custodianship of digital assets).
In the interview, David asks how FV Bank can promise compliance in an environment where there's a dearth of laws regarding crypto and subsequently, a great deal of regulatory uncertainty. Paschini disagrees, saying that both banking and custodianship are very well-understood from a regulatory point of view. For example, know your customer (KYC) and anti-money laundering (AML) regulations are well-defined, and the real issue is that some subsections of the blockchain industry have decided to ignore many of those existing laws. That said, Paschini concedes that FV Bank would like regulators to clarify certain aspects of the market, such as what is a security or commodity in the context of digital assets, and to define more market-friendly tax regulations around crypto.
By David BerlindPublished:May 5, 2023
David Berlind: Today is April 27th, 2023. I'm David Berlind, the host of the Blockchain Journal podcast, and today we are in Austin, Texas where Consensus 2023, one of the largest blockchain and cryptocurrency conferences in the US is taking place. We are surrounded by all kinds of exhibits and all kinds of attendees. Everything to do about blockchain, everything to do about cryptocurrency, and I'm in the FV Bank booth and I'm standing with Miles Paschini, who is the CEO of FV Bank. Miles, thanks for joining us on the show.
Miles Paschini: Thank you for having me.
Berlind: Yeah, it's great to have you. You've been having a good show so far?
Paschini: We've been extremely busy. It's been very good. And this event's usually a very good event for [the] US market.
Berlind: Yeah, I mean this area where you're located is extremely busy, so probably getting a lot of foot traffic.
I'm looking for enterprise stories. Blockchain Journal is all about the enterprise. And walked by your booth that says enterprise banking. I don't know what that is. So let's talk about what FV Bank is doing in the way of enterprise banking.
Paschini: So our goal is to provide an infrastructure for people who are looking to be operating in this space — different than what's happened in the past. So FV stands for FinTech Ventures, and really, the mission statement of the company was to build a company that had a regulatory and compliance foundation that would allow people who are entering this space, especially people with a fiduciary responsibility to operate in a reliable, regulated, [and] structured way.
Berlind: When you say people, we're talking about enterprises though, right? It's not the everyday average person, but more like companies that would be super concerned with issues surrounding compliance regulation.
Paschini: Yeah. We work with exchanges, OTC desks, so institutional traders, funds, family offices, [the] people who are managing large values of assets in the digital space. And really, the trading of a digital asset doesn't happen without the movement of Fiat money. They're very, very much interrelated. And so as a bank and a qualified custodian, we're able to provide a lot of consolidated services for those types of customers.
Berlind: Let's talk about custody, because I feel like it's one of those topics that [is] not terribly sexy, but actually among enterprises and institutions, it's critically important. They can't go into any kind of space like this without talking about custody. What does custody mean?
Paschini: Well, that's a great question, by the way. There's been a lot of definitions of custody over the last couple of years where people say, "Well, I'm custodying my assets with this company," but that company's not a qualified custodian. So at the very basic part, it is in the crypto space, it's the entity who controls the private keys to the digital assets. But what really matters is what is the framework? What is the legal and regulatory framework that that custodian is operating under? And so for us, custodianship means safeguarding customer's assets based on a legal framework.
Berlind: To put this in terms that other people understand, a bank's a custodian, it's just not a custodian of cryptocurrency?
Paschini: Yeah. A bank is a custodian of a lot of things. They might hold stock certificates, they hold your cash for you. They might hold things in a safety deposit box. So there's a custodian relationship with almost every bank. We just happen to specialize in the custodianship of digital assets.
Berlind: Now you mentioned how this is done in a way that's compliant with regulations or it makes organizations themselves compliant because they're using you and you provide that compliance framework. But as far as I understand, there are no regulations right now. It's for the wild, wild west. There's a lot of regulatory uncertainty when it comes to blockchain and cryptocurrency, especially in the United States. Maybe some of the laws are getting worked out in other countries, Germany, Europe, [and] Singapore. So how can somebody be using your service and then claim compliance if there's nothing to comply with?
Paschini: Well, I'll have to kind of disagree with your statement. I mean, banking is very well understood regulation. Being a custodian is [a] very well-defined regulation as to what that means. Things like KYC and AML regulations are very well-defined. It's just that some subsection[s] of the industry have decided to ignore the fact that existing laws are there. With that said, we would really like the regulator to come out and clarify certain aspects. For example, what is a security in the context of a digital asset? What is a commodity? What is something new that's not defined yet? And so there are areas of the market that would be great. The security commodity type question is good. We'd like to see maybe more market-friendly tax regulation around crypto, which currently if you sell your crypto, it's a capital gain.
And so, there are areas of the market, especially where we work in, which are very clear what the regulations are. And so when a company comes to work with us, they get the benefit of that framework. I think of it as guardrails for them. We're going to make sure that the KYC and the anti-money laundering monitoring is done on all the transactions. We're going to make sure that their assets are held segregated from ours, and we're going to make sure that they have functionality that helps them to run their business.
Berlind: What about businesses where you're not going to use a consumer-grade cryptocurrency wallet, like a MetaMask or something like that? You need something that is enterprise in nature, [that] allows organizations to set up permissions for who has access to the funds, what they can do with the funds, administrators, operators. Do you help organizations with that aspect of it as well?
Paschini: Yeah, so if you have an account with us, one thing we offer is a[n] integrated solution. So when you log into your account, you can see your banking activity as well as your digital asset custody activity. And that also includes user permission. So you can have what we call makers and approvers in your account, which is very normal in a corporate environment. So maybe somebody who authorizes or creates a transaction, somebody else has to authorize it. We use things like two-factor authentication to make sure those users are the right users of the account. And then at our level where we're actually running the custodial division, we use MPC technology and we have various, what we call vaulting strategies.
Berlind: MPC. So for our audience, members that don't know what that means?
Paschini: Yeah, it's a multi-part computation. And basically in layman's terms is that in order to do something, you need multiple parties. And essentially what those multiple parties are doing is reassembling the private key, if you will. And so in our business, if we want to move money from one vault to another vault inside of our vaulting system, it requires a multitude of people to actually do it in conjunction.
Berlind: There are other companies that are entering into the custodial space. What differentiates FV Bank from those other companies that are out there [that are] also going after enterprises and institutions?
Paschini: Yeah, I think one is there's a lot of good technical solutions out there. So we're not claiming one technical solution is better than the other. One is that we actually operate our technical solution inside of a legal framework, which is very well-defined in the United States. And so we have, let's call it administrative layer, and we also ensure the assets that we have under custody. And so it's not just a technical solution or a regulatory solution, it's a number of things that you need to do in order to safeguard customer's assets.
Berlind: All right. Well, Miles Paschini, CEO of FV Bank, thank you very much for joining us on the Blockchain Journal podcast.
Paschini: Thank you for having me. Have a good show.
Berlind: Yeah, thank you very much. You too.