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Banking Can Work With Crypto, But Crypto-Banking Does Not Work
Gene A. Grant II
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I think about banking with 30+ years experience helping it change
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Feb 10, 2023,05:13pm EST
The banking regulators are not saying no to cryptocurrencies.
The banking regulators are not saying no to cryptocurrencies – but they do want to see firms that ... [+]GETTY IMAGES
The securities and banking regulators are enforcing existing rules and clarifying the permissible interactions between the financial services industry and cryptocurrency. This is a positive development for the evolution of the digital asset-class, but the regulatory actions are making some market participants very nervous.

There are firms wanting to start “crypto-banks”, and are seeking to merge cryptocurrency into the banking system. In the face of regulatory pushback one argument used in support of their ideas is that if change does not happen quickly the U.S. will fall behind other countries in embracing the benefits of crypto-innovation. Cryptocurrency proponents decry the caution expressed by the guardians of the U.S. banking system, and want to see far greater interaction between banks and the new crypto-first companies. There are some participants, like Binance, that operate globally and without a primary regulator, who seek to change banking in the U.S. and abroad.

Banks Are Held To High Standards
Permitting any special interest group, especially one with large and powerful foreign participants, to directly or indirectly influence U.S. regulatory policy is a recipe for disaster. The financial system in the U.S. is a world leader because of the overlapping regulatory authorities and the multiple mandates to protect both the consumers, investors, and the industry.

It is not easy for anyone to obtain regulatory approval to own or operate a bank chartered in the U.S. The high hurdle exists to protect individual bank customers, and the stability of the entire banking system. The approvals required include a banking regulator either at the state level or the federal level through the Office of the Comptroller of the Currency (OCC), plus the Federal Deposit Insurance Corporation (FDIC). In addition, for bank holding companies, the Board of Governors of the Federal Reserve. All of the regulatory agencies have a duty to ensure that the banking system is safeguarded, and that participants in the banking industry have the appropriate skills and experience.

Poor Track Records Hurt The Industry
In the few cases where approval to operate a bank was granted, the track record of cryptocurrency-focused institutions has hurt the industry and resulted in a loss of credibility for everyone associated with the space. For example, the OCC granted conditional approval for the establishment of Anchorage Digital Bank, National Association in January 2021, and less than 15 months later, Anchorage received a Cease and Desist Consent order for failing to meet the conditions of their operating agreement.

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The experience of non-banks offering banking-like products in the cryptocurrency space has also not ended well. In addition to FTX, the firms CelsiusCEL -5.4% Network, Voyager Digital, and BlockFi all declared bankruptcy in 2022, and customers were left with substantial losses. When the banking regulators look at these firms the lesson they take away is that the banking system must be protected from firms not managed in a safe and sound manner.

The other lesson that investors should take away from the failures of those crypto firms is that simply providing banking products and services does not make a company a bank. There is a huge difference between the safety and security of a U.S. chartered bank and any other institution.

The exact causes of the failures of those three institutions differ somewhat, and in some cases may involve malfeasance, but there is some commonality. All suffered from insufficient capital and concentration risks. Banks simply are not permitted to take outsized risks, and these firms made very large bets on a small number of customer who had extremely risky business models.

Interestingly enough, the two most cited cryptocurrency risks – liquidity and sensitivity to market risk – were not the direct reason for the failures. They failed because they made loans to customers who could not repay the money.

Safety And Soundness First
At the beginning of last month, on January 3, the OCC, FDIC, and Fed issued a joint statement on crypto-asset risks to banking organizations. They listed a number of key risks, and cautioned that “risks that cannot be mitigated or controlled do not migrate to the banking system.”

In what may be the most important part of the release was that statement that “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.” That announcement was effectively a prohibition against banks issuing a stablecoin or holding cryptocurrencies on the balance sheet.

The bank regulators are simply reacting to threats to the safety and stability of the U.S. banking system. Given the tone of all headlines in the media one can understand their response as the desire to make absolutely certain that the nation is protected.

There are also reports that it is difficult for cryptocurrency industry firms to obtain banking services. It is definitely hard for firms in the digital asset space to find banks to accept accounts, and that should not be the case. Any company that is providing a lawful product should have access to the banking system.

There is no prohibition for banks to serve firms in the cryptocurrency space. On the other hand, banks are in the business of risk mitigation and cryptocurrency firms have elevated compliance risk and can pose liquidity risks (see my article on Silvergate). Once again, one can understand the high risk categorization given all the failures, media coverage of bad actors, and required regulatory actions.

Credibility is something hard earned and easily lost. As a group, the cryptocurrency industry has low credibility with the regulatory community, and the good participants are suffering from being grouped with the others. This period will pass, and well managed firms will find and maintain banking relationships – but it may not be easy.

One strength of the U.S. banking industry is that it is stable, and by definition, slow to change. A cautious approach to the association of cryptocurrencies and the banking industry does seem warranted by the recent events. The good news is that the banking regulators are not saying no to cryptocurrencies – but they do want to see firms that interact with the asset class to have the experience and systems necessary to ensure that risks are well managed. These requirements would suggest that providing the innovative banking services in the cryptocurrency asset class must come with the rigorous risk controls found inside the banking industry.

Special thanks to my colleague Steven Patrick for contributing to this article.

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Gene A. Grant II
Gene A. Grant II
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I am the CEO and co-founder of LevelField Financial: a traditional financial organization with a focus on digital assets. I have more than three decades of experience including co-founding and serving as CEO of two FinTech startups, CEO of an established financial services software vendor, investment bank managing director, and a futures exchange floor trader. As an entrepreneur, I started my first business at the age of 14, received a patent at 21, and listed my first financial services startup as an early-stage company on the AIM division of the London Stock Exchange at 29. I have held licenses in the securities and commodities industries. Within my professional career, I have lived in six cities, spanning three continents, and have led sizable globally disbursed teams. I hold a BSc from the University of Manitoba. Read Less

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BUSINESS
DAILY COVER
Meet The Unknown Immigrant Billionaire Betting Her Fortune To Take On Musk In Space
Eren Ozmen TIM PANNELL/FORBES
Lauren Debter
Forbes Staff
Forbes Digital Covers
Contributor Group
Jul 12, 2018,06:00am EDT
Even in the bloated-budget world of aerospace, $650 million is a lot of money. It's approximately the price of six of Boeing's workhorse 737s or, for the more militarily inclined, about the cost of seven F-35 stealth fighter jets. It's also the amount of money NASA and the Sierra Nevada Corp. spent developing the Dream Chaser, a reusable spacecraft designed to take astronauts into orbit. Sierra Nevada, which is based in Sparks, Nevada, and 100% owned by Eren Ozmen and her husband, Fatih, put in $300 million; NASA ponied up the other $350 million. The Dream Chaser's first free flight was in October 2013 when it was dropped 12,500 feet from a helicopter. The landing gear malfunctioned, and the vehicle skidded off the runway upon landing. A year later, NASA passed on Sierra Nevada's space plane and awarded the multibillion-dollar contracts to Boeing and SpaceX.

The original Dream Chaser, which looks like a mini space shuttle with upturned wings, now serves as an extremely expensive lobby decoration for Sierra Nevada's outpost in Louisville, Colorado. But the nine-figure failure barely put a dent in the Ozmens' dream of joining the space race. Within months of the snub, the company bid on another NASA contract, to carry cargo, including food, water and science experiments, to and from the International Space Station. This time it won. Sierra Nevada and its competitors Orbital ATK and SpaceX will split a contract worth up to $14 billion. (The exact amount will depend on a number of factors, including successful missions.) The new unmanned cargo ship, which has yet to be built, will also be called Dream Chaser.

The Ozmens, who are worth $1.3 billion each, are part of a growing wave of the uber-rich who are racing into space, filling the void left by NASA when it abandoned the space shuttle in the wake of the 2003 Columbia disaster. Elon Musk's SpaceX and Richard Branson's Virgin Galactic are the best-known ventures, but everyone from Larry Page (Planetary Resources) and Mark Cuban (Relativity Space) to Jeff Bezos (Blue Origin) and Paul Allen (Stratolaunch) is in the game. Most are passion projects, but the money is potentially good, too. Through 2017, NASA awarded $17.8 billion toward private space transport: $8.5 billion for crew and $9.3 billion for cargo.

"We're doing it because we have the drive and innovation, and we see an opportunity--and need--for the U.S. to continue its leadership role in this important frontier," says Eren Ozmen, 59, who ranks 19th on our annual list of America's richest self-made women.

Until now, few had heard of the Ozmens or Sierra Nevada. Often confused with the California beer company with the same name, the firm even printed coasters that say #notthebeercompany. The Ozmens are Turkish immigrants who came to America for graduate school in the early 1980s and acquired Sierra Nevada, the small defense company where they both worked, for less than $5 million in 1994, using their house as collateral. Eren got a 51% stake and Fatih 49%. Starting in 1998, they went on an acquisition binge financed with the cash flow from their military contracts, buying up 19 aerospace and defense firms. Today Sierra Nevada is the biggest female-owned government contractor in the country, with $1.6 billion in 2017 sales and nearly 4,000 employees across 33 locations. Eighty percent of its revenue comes from the U.S. government (mostly the Air Force), to which it sells its military planes, drones, anti-IED devices and navigation technology.

Space is a big departure for Sierra Nevada--and a big risk. The company has never sent an aircraft into space, and it is largely known for upgrading existing planes. But it is spending lavishly on the Dream Chaser and working hard to overcome its underdog reputation.

"Space is more than a business for us," says Fatih, 60. "When we were children, on the other side of the world, we watched the moon landing on a black-and-white TV. It gave us goose bumps. It was so inspirational." Eren, in her heavy Turkish accent, adds: "Look at the United States and what women can do here, compared to the rest of the world. That is why we feel we have a legacy to leave behind."

T

here are plenty of reasons that NASA gave Sierra Nevada the nod. Sure, it had never built a functioning spacecraft, but few companies have, and Sierra Nevada has already sent lots of components--like batteries, hinges and slip rings--into space on more than 450 missions. Then there's Dream Chaser's design. A quarter of the length of the space shuttle, it promises to be the only spacecraft able to land on commercial runways and then fly again (up to 15 times in total) to the space station. And its ability to glide gently down to Earth ensures that precious scientific cargo, like protein crystals, plants and mice, won't get tossed around and compromised on reentry. That's an advantage Sierra Nevada has over most other companies, whose capsules return to Earth by slamming into the ocean. Today, the only way the U.S. can bring cargo back from space is via Musk's SpaceX Dragon. "Quite frankly, that is why NASA has us in this program, because we can transport the science and nobody else can," says John Roth, a vice president in the company's space division.

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Space utility vehicle: Sierra Nevada’s unmanned Dream Chaser is designed to haul 6 tons of cargo to and from the International Space Station.COURTESY COMPANY
Sierra Nevada has acquired its way into space. In December 2008, in the throes of the financial crisis, Sierra Nevada plunked down $38 million for a space upstart out of San Diego called SpaceDev. The company had recently lost a huge NASA contract, its stock was trading for pennies and its founder, Jim Benson, a tech entrepreneur who became one of commercial spaceflight's earliest prophets, had just died of a brain tumor.

Sierra Nevada had its eyes on a vehicle from SpaceDev called the Dream Chaser. It had a long, storied past: In 1982, an Australian P-3 spy plane snapped photos of the Russians fishing a spacecraft out of the middle of the Indian Ocean. The Australians passed the images on to American intelligence. It turned out to be a BOR-4, a Soviet space plane in which the lift is created by the body rather than the wings, making it suitable for space travel. NASA created a copycat, the HL-20, and spent ten years testing it before pulling the plug.

Eleven months after the Columbia exploded, President George W. Bush announced that the space shuttle program would be shut down once the International Space Station was completed in 2010 (in fact, it took another year). In preparation NASA invited companies to help supply the station. By this point NASA's HL-20 was mostly forgotten and gathering dust in a warehouse in Langley, Virginia. SpaceDev nabbed the rights to it in 2006, hoping to finally get it into space.

Eren Ozmen puts their acquisition strategy in rather unusual terms. "Our guys go hunting, and they bring me this giant bear, which is not fully dead, and say, 'Now you do the skinning and clean it up.' "

But it was an expensive job, and later that year NASA declined to fund it. Enter Sierra Nevada Corp., which was always hunting for promising companies to buy. "The company had been very successful in defense but wanted to get into space and had a lot of cash," says Scott Tibbitts, who sold his space-hardware company, Starsys Research, to SpaceDev in 2006.

Soon the Ozmens were devoting an outsize amount of time and money to the Dream Chaser. "It was very clear the space side was like a favorite son," says one former employee.

E

ren Ozmen grew up in Diyarbakir, Turkey, a bustling city on the banks of the Tigris River, where she was a voracious reader and serious student. Her parents, both nurses, valued education and encouraged their four girls to focus on schoolwork. As a student at Ankara University, she worked full time at a bank while studying journalism and public relations and spent her little free time studying English.

In 1980, as she was finishing her degree, she met Fatih Ozmen. A national cycling champion, he had just graduated from Ankara University with a degree in electrical engineering and planned to pursue his master's degree at the University of Nevada at Reno. In 1981, Eren also headed to America, enrolling in an English-language program at UC Berkeley. She reconnected with Fatih and, at his suggestion, applied to the M.B.A. program at UNR. After she arrived on campus, the two young Turks became best friends.

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The husband-and-wife co-owners of Sierra Nevada Corp., Eren and Fatih Ozmen, and their long-haired dachshund Peanut, at their home in Reno.TIM PANNELL FOR FORBES
The pair soon struck a deal: Eren, a talented cook, would make Fatih homemade meals in exchange for some much-needed help in her statistics class. They shook hands and became roommates. They both insist they never even considered dating each other. "It was just like survival," says Eren.

More like survival of the fittest. Eren knew she had to get top grades if she wanted a job in America. She was also broke and holding down several part-time jobs on campus, selling homemade baklava at a bakery and working as a night janitor cleaning the building of a local company called Sierra Nevada Corp.

After graduating in 1985 with her M.B.A., Eren got a job as a financial reporting manager at a midsize sprinkler company in Carson City, Nevada, just south of Reno. She arrived to find that financial reports took weeks to generate by hand. She had used personal computers in school and knew that automating the process would cut the turnaround time down to a matter of hours. She asked her boss if they could buy a PC, but the expensive purchase was vetoed. So Eren took her first paycheck and bought an HP computer and brought it to work. She started producing financial reports in hours, as she had predicted, and was promoted on the spot.

In 1988, the sprinkler company was sold, and Eren was laid off. Fatih, who was now her husband, had been working at Sierra Nevada since 1981, first as an intern and later as an engineer, and told her they were still doing financial reports by hand. She brought in her PC and automated its systems.

Soon after starting, Ozmen was sitting at her desk late one night and discovered that Sierra Nevada was on the verge of going out of business. The little defense company, which primarily made systems to help planes land on aircraft carriers, had assumed that its general and administrative expenses were 10% of revenues, but she calculated that they were 30%. At that rate, the business couldn't keep operating for more than a few months. She marched to her boss' office to deliver the bad news. He didn't want to hear it, so she went straight to the owners. They were stymied. The bank wouldn't lend them any more money. At Eren's suggestion, the company stopped payroll for three months until the next contract kicked in. Employees had to borrow money to pay bills. "It was like the Titanic moment. We are waiting for this contract, but we didn't know if we were going to make it or not," says Eren.

Since arriving in America in 1981, Eren Ozmen has gone from janitor to billionaire co-owner of Sierra Nevada Corp. "Look at the U.S. and what women can do here, compared to the rest of the world."

That contract eventually came through, but Sierra Nevada was still living contract to contract two years later, when Eren, who was eight and a half months pregnant with her first child, got a call. The government audit agency had looked at the company's books and declared the company bankrupt and therefore unfit for its latest contract. Eren got on the phone with the auditor (she remembers his name to this day) and told him he had made a math error. He soon responded that she was right and that he needed to brush up on his accounting skills but that the report was already out of his hands. At that point Eren went into labor. Less than a week later, she was back in the office with her newborn.

The company limped along until 1994, when the Ozmens borrowed against their home to buy Sierra Nevada. Eren was sick of working for an engineer-led company that was lurching from financial crisis to financial crisis and figured she and her husband could do a better job running the place.

It took five years for the company to stabilize, with Eren keeping a tight handle on costs. "I can tell you, it wasn't a free-spending, freewheeling company. Everything was looked at," recalls Tom Galligani, who worked at the company in the 1990s. Eren worked for a time as the company's CFO and today is its chairwoman and president. Fatih became CEO and focused on creating relationships with government agencies and developing new products. He also began looking for companies to acquire.

A

s the sun sinks over the Rockies, Eren sits by the window at Via Toscana, a white-tablecloth Italian restaurant outside Denver, sipping a glass of Merlot and explaining in rather unusual terms the couple's approach to buying companies. "Our guys go hunting, and they bring me this giant bear, which is not fully dead, and say, 'Now you do the skinning and clean it up,' " she says. Fatih, sitting beside her, joins in: "There's a lot of screaming. And blood.

Fatih and his team search for companies that have some sort of promising high-tech product. Then they go in for the kill. "Of the 19 [companies we've acquired], we've never bought a company that was for sale," he says.

"The first thing you do with the bear is to establish a trusting relationship," Eren says, while reminding it of the benefits. "Every company we bought is ten times bigger now." Over the years, Sierra Nevada has bought companies that do everything from unmanned-aerial-system technology to high-durability communications systems.

Its first acquisition was Advanced Countermeasure Systems, in 1998, which made equipment that helped protect soldiers from improvised explosive devices (IEDs). Revenues have since zoomed from $3 million a year to $60 million, Eren says. A company is especially attractive to Sierra Nevada if, like Advanced Countermeasure, it has so-called "sole-source" contracts with the military, meaning it is awarded contracts without a competitive bidding process, under the rationale that only that specific company's product can meet the government's requirements. Last year the majority of Sierra Nevada's $1.3 billion in government contracts were sole-source.

Sierra Nevada's biggest source of revenue is from aviation integration, which means folding new technologies into existing planes primarily at its dozen or so hangars in Centennial, Colorado. Often that entails stripping down commercial planes and turning them into jacked-up military ones, cutting holes to install weaponry, cameras, sensors, navigation gear and communications systems. "What we do is take someone else's airplane and make it better," says Taco Gilbert, one of the many retired generals on Sierra Nevada's payroll. For instance, it took the popular civilian PC-12 jet ("That a lot of doctors and lawyers fly around on," Gilbert says) and modified it so that Afghan special-ops-forces could pivot from surveilling the Taliban to conducting a medical evacuation in a matter of minutes. It sold the U.S. Customs & Border Protection a fleet of super-quiet planes that can track the movement of drug traffickers without detection. When wildfires were raging in California in 2017, Sierra Nevada aircraft, modified with heat sensors, thermal imaging and night vision, provided support.

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Sierra Nevada Corp. President Eren Ozmen stands next to Vice President Mike Pence during the 2018 Space Symposium in Colorado.© 2018 BLOOMBERG FINANCE LP
But it's not just Sierra Nevada's responsiveness that sets it apart; it's also its prices. In their own version of the "80/20" rule, the company strives to provide 80% of the solution at 20% of the cost and time. In other words, "good enough" is better than perfect, especially if "good enough" is cheap and fast. To deliver, Sierra Nevada spends 20% of its revenue on internal R&D, coming up with creative ways to upgrade the military's aging aircraft for less.

"This allows them to punch above their weight class and leapfrog the large guys," says Peter Arment, an aerospace analyst at R.W. Baird.

"You can go to Boeing or Lockheed and take five or ten years and spend a lot of money," Eren says. "Or we can provide you with something right now."

O

n top of the $300 million it spent on the original Dream Chaser, Sierra Nevada has spent an additional $200 million so far on the cargo version and expects to invest $500 million more by the time it's ready for takeoff. To recoup its costs, Sierra Nevada is counting on things going smoothly. The company has already earned $500 million in milestone payments from NASA as it successfully completed design reviews as well as safety and test flights using the crewed Dream Chaser (which shares 80% of the same design and features) before it was retired. Much like when Eren was counting on that key government contract to cover payroll in 1989, Sierra Nevada is now waiting for the big payoff that will come when it sends the vehicle into space. Its launch date is set for September 2020, 11 months after rival Orbital ATK's Cygnus takes off in October 2019 and a month later than SpaceX's Dragon 2. If the Dream Chaser completes its six missions to the space station by 2024, Sierra Nevada will pocket an estimated $1.8 billion.

Eren isn't blind to the risk that things could go wrong. But brimming with an immigrant's sense of patriotism, she talks of the glory of helping the U.S. reestablish its leadership in space. She thinks Sierra Nevada and other private companies can help the government catch up on the cheap. "Looking at what are the things we can do to make space available," Eren says, "it's the commercial companies who are going to come up with those creative ideas and help the country catch up."

Reach Lauren Gensler at [email protected]. Cover image by Tim Pannell for Forbes.

Lauren Debter
Lauren Debter
I am a staff writer at Forbes covering retail. I have been at Forbes since 2013, first on the markets and investing team and then on the billionaires team. In the course of my... Read More

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