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Hi! Kiah here. I’ve had a busy weekend. I moved to a new apartment on Thursday and have been reassembling my rooms in a new space, plus all the strange little errands that come with it (including Facebook Marketplace shopping!).

I also missed the 2026 World Cup Final on Sunday because *brag* I went with a group of friends to see The Odyssey in 70mm IMAX! Nashville has one of the 25 movie theaters nationally with a 70mm IMAX (in a part of town literally no one is excited to go to). Hilariously, the friend who coordinated this movie date did not know it was three hours long and how in-demand these tickets are now!

I also did karaoke with the same group of friends on Saturday and had many thoughts about song choices, including a very minor interaction about someone else’s song choice (how loud IS my voice? Do not answer that.) I did two songs, and am wondering what everyone’s go-to karaoke song is, and what criteria you use to select a song.

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About Those Crypto Trust Banks…

We are living in an era of financial services not seen for the last 15 years: a relative explosion of new bank charters. Federal and state bank agency heads working in the era of the second presidency of Donald Trump have signaled their openness to financial innovation and all sorts of business models, and industry players have responded with applications for new banks.

One popular application has been to establish a national crypto trust bank, a historically sleepy and slightly archaic charter type. Most — but not all — of these firms are subsidiaries of nondepository institutions, including a proposal from Sony to establish a foreign-owned bank that would have no oversight from the Federal Reserve.

Since last December, the Office of the Comptroller of the Currency has conditionally approved a number of national trust bank charters focused on the digital asset or cryptocurrency space (including that Sony application!). It remains to be seen how many of these companies will apply for Federal Reserve master accounts, which are accounts at Federal Reserve Banks that provide settlement and clearing/payment services. According to the Federal Reserve’s database, Tier 3 applicants in 2025 included Anchorage Digital Bank, BCUS, Standard Custody & Trust, Wisdomtree Digital Asset Co., Commercium Financial and Wise National Trust; in 2026, Custodia and N3XT both applied. As my friend and industry colleague Jason Mikula recently reported, Kraken's provisional master account at the Federal Reserve Bank of Kansas City isn’t live yet.

These companies are using an old charter for a new type of money, and right now bank regulators seem into it. The OCC is approving these charters. The Fed is crafting a new payment account that chartered institutions can apply for. But let’s pause for a second. What… do trust companies do? What do these specific trust companies do? Why aren’t they banks? What does it mean that they’re not banks, practically? Why would a company want to get a trust charter instead of a bank charter?

(Also my author’s note from 2025 is still valid: I know there’s no charter actually called a “national trust charter,” but rather a national bank that has limited trust powers and then a separate national banking charter. For ease, we are going to refer to the former as a national trust bank.)

The Three Forms of Money

Critics of these charters allege these companies are practicing a type of regulatory arbitrage. They say the national crypto trust banks are engaging in some of the key functions of a traditional bank, without being subject to the same oversight and capital requirements as their full bank counterparts.

The Bank Policy Institute argued that these companies plan to engage in activities such as “managing stablecoin reserves, facilitating payments and taking deposits" in an October 2025 statement.

“These activities closely mirror core banking functions, yet the applicants would avoid obtaining deposit insurance, nor would they be subject to consolidated supervision and consumer protections and other safeguards required of full-service national banks and their parent companies.”

But trust companies aren’t insured depository institutions — what you and I commonly think of as banks or credit. There are differences that aren’t always obvious to a consumer; to learn more about these differences, I spoke to Todd Phillips, a director at Klaros Group.

Todd said there are three ways a company can take customer money. The best way to conceptualize these differences is to imagine you have a shoebox full of dollars that are authentic and obtained through legal means that you want to store in a safe place.

Source: Random person on the internet via Google image search

You take these dollar bills from under your mattress, put them in your nicest shoebox and walk to a street where there are three businesses: a commercial bank, a custody shop (doesn’t exactly exist but stay with me) and a trust company. Of course, the bank is the way most of us are used to keeping our money safe, Todd said. The bank borrows money from a person or company, turning the person’s money into a deposit when it’s at the bank. The individual owns this deposit, and the bank becomes a debtor to the depositor.

A bank deposit? Boooo! If you liked banks, this money would already be in a bank. If you deposit this money in a bank, they will ask annoying questions about where it came from and maybe lecture you about deposit insurance. Banks are so boring! So you keep walking to the custody shop. A custody arrangement is a “special deposit,” Todd said. Here, the custody shop would agree to keep your money in a safe place, but they’re not going to do anything with it, so they’re not borrowing it from you.

This isn’t the same as a deposit — it’s closer to safe deposit boxes. “A safe deposit box is not a deposit account,” according to the Federal Deposit Insurance Corp. “It is storage space provided by the bank, so the contents, including cash, checks or other valuables, are not insured by FDIC deposit insurance if damaged or stolen.”

(Author’s note: Writing this week’s newsletter has really underlined the limitations of financial services language — first with “crypto trust bank” and then “traditional commercial bank” and now “bank deposit” that is insured and “safe deposit box” that is not insured. Can we please come up with a few more vocabulary words to tamp down on conflation and confusion?)

Keeping a box of cash safe but doing nothing is also boring! You might as well give the custody shop your mattress while you’re there. So you try door No. 3: the trust company. The associates tell you that they’d love to handle your cash and they’re trustworthy because they’re fiduciaries. A fiduciary is legally obligated to act in the best interest of the customer; the custodians next door have a contractual duty to keep your assets safe but don't have a duty to act in your best interest.

So if you want the fiduciary to just keep your shoebox safe, they can. But they can also do other things that you direct them to: invest the money, send it somewhere, buy stuff with it.

“What does a trust business do? The short answer: They do whatever you want them to do,” Justin Steffen, a partner at Barack Ferrazzano, told me in an episode of Bank Nerd Corner. “They are a professional agent, a professional fiduciary. They hold your assets. They execute on your instructions. That's why people think of it as a rich-person thing.”

So those are the three types of money: deposit, special deposit and trust. And of course, we’re not focusing on a shoebox full of cash, but cryptocurrency and stablecoins in digital wallets.

“Trust companies have changed in ways we today don't recognize, and it is messing with our understanding of public policy,” Todd said.

The different treatment of customer funds comes with different capital requirements for the institution that takes the funds, Todd pointed out. A deposit is a debt, so commercial banks have to hold capital against them. But if a trust bank takes customer funds in exchange for stablecoins and holds that in a reserve account under a custody arrangement, it’s treated as off the balance sheet (certainly not debt!) and doesn’t have to have capital against those. Further complicating things, the OCC has its own capital levels for nationally chartered trusts, which might be different than individual states issuing trust charters.

But to a customer, a bank deposit and a stablecoin might look pretty similar. Todd argued one reason why it’s hard to distinguish between the differences between the three types of money inside a financial institution is that the digital nature of money collapses these differences.

“We're telling companies: Take my digital cash and store it safely — no matter which framework it is,” he said. “These companies do the same business and same activity, but it’s treated differently by capital requirements.”

It’s not a stretch to say general consumers and enterprises do not know about the distinctions between a deposit, custodied funds and funds in trust. They might assume their funds become a deposit — especially if they move their funds in a way that sort of looks like making a deposit or if they can use the funds like a deposit most of the time. They might then assume they have the protections that come with a deposit. This works fine when everything is going well. It’s a disaster when it doesn’t.

What’s the Worst that Could Happen?

One of the primary risks that crypto national trust banks face is safeguarding the assets against potential hacks, given the specific risks related to crypto assets. That is a very real risk, and some trust companies have experienced it. But there is a downstream risk of that: insolvency and a bankruptcy process that leaves much to be desired.

Prime Trust

Prime Trust lost access to digital wallets that contained millions of dollars in customer assets in 2021 and then used customer funds in its omnibus customer account to buy additional cryptocurrency, according to a 2023 Bloomberg News article. When Nevada petitioned a federal court to appoint a receiver, the state’s petition stated that the company owed $85.67 million in fiat and $69.5 million in crypto to its clients but had about $3 million in fiat and $68.6 million in crypto on hand.

Fortress Trust

In August 2023, hackers stole $15 million of customer crypto from Fortress Trust, a Nevada-chartered and supervised trust company that was established by the same founder behind Prime Trust. Ripple, an investor in Fortress Trust, covered this customer fund shortfall. The trouble didn’t end there.

Fortress Trust received a cease and desist from the Nevada Dept. of Business and Industry in 2025. In the C&D, the department said Fortress Trust notified the division that it was on "the verge of insolvency, and that it would not be able to continue operations and meet customer withdrawals." Fortress owed $8.4 million in fiat currency and about $4 million in cryptocurrency and had only about $200,000 in cash and $1 million in crypto available.

There were other issues too. Prime Trust had been unable to provide the state with complete financial records that documented an adequate reconciliation of accounts and showed the company was not in deficit, as well as statements for the third quarter of 2025.

“I think [the multiple bailouts of Fortress Trust and another crypto firm the founder started] illustrate the elevated danger of custodying crypto assets and the urgent need for regulation and better industry standards in this area,” my colleague Alex Johnson wrote at the time. “Crypto custody presents unique risks because digital assets can be stolen or moved instantly, without recourse. Unlike traditional custodians that can reverse transactions or rely on intermediated settlement, crypto transfers are irreversible and hinge on the security of private keys, where one compromised credential can drain an entire account.”

Etana Custody

Etana Custody is a trust company chartered and supervised by the state of Colorado. In 2018, Payward, Kraken’s parent company, became a client and placed hundreds of millions of dollars into a reserve account. In April 2025, Kraken attempted to withdraw about $25 million of its reserve funds and ran into complications. In a lawsuit, Kraken alleged that Etana had commingled custodial assets with its own funds to cover operating expenses and make investments, and now lacked sufficient funds to fulfill the withdrawal.

I had Justin on Bank Nerd Corner to discuss the Kraken lawsuit against Etana. In that episode, he said Etana’s original capital requirement was “very low” — something like $300,000 in reserves — but the Colorado Division of Banking raised that tenfold to $3 million. In August 2025, the Colorado State Banking Board issued a cease-and-desist order for violating provisions of Colorado trust company law, including failing to provide adequate and complete supporting documentation for financial statements submitted to the Division. Etana entered Colorado court-supervised liquidation in November 2025 with $6.83 million in cash against more than $26 million in liabilities, most of which represents Kraken’s claim.

Caveat Emptor or Wild West?

It’s truly not obvious to me how a trust company can even lose customer funds like this and have its balances get so far out of reconciliation, but maybe I’m being unfair. After all, there have been four bank failures in 2026, and you don’t see me freaking out about them.

And that is because banks don’t go out of business the way other financial service companies do. The deposit is a debt, and some, if not all of it, is insured. The FDIC is really, really good at minimizing customer harm and disruption in bank failures. Uninsured depositors rarely take losses these days; when they do, the average haircut has been very small.

Nothing like this exists for crypto trust companies. So what is supposed to happen if a nascent crypto national trust banks or an uninsured state bank becomes insolvent? Todd has been thinking about this at Klaros. In a blog coauthored with Klaros Partner Doug Landy, he wrote that these chartered institutions would be placed into receivership by the OCC or the state banking regulator, who would then manage the resolution or hire a receiver. While that’s likely better than bankruptcy procedures, it may not be as smooth as the FDIC-run resolutions of failed banks.

“[T]hese regulators have not used their receivership muscles for some time and their skills are likely to have atrophied. And with State banking regulators, there may be 50 different processes for holders to consider before committing funds to any one [permitted payment stablecoin issuers],” he wrote.

It actually may be worse and more worrisome for customers impacted by a crypto trust bankruptcy. In the Etana bankruptcy, Etana is claiming that whatever funds of Kraken’s that are still in the institution are property of the bankruptcy estate. Justin said the legal argument boils down to “I'm so bad at my job that I made your money mine and I spent it.”

"'I couldn't tell you what's your money and what's my money because it's all in one big pool, and I took [funds] from that pool. Is that the estate's money or your money? Hard to tell. I can't even tell you whose is whose, so it's going to be mine by default,'" he said, paraphrasing the estate's argument.

Why should banks know about and care about nondepository crypto trusts? Should they be concerned, given what they know? Well, there’s the competitive threat and the argument around yield on stablecoins. There’s the different capital rules for activities that look pretty similar to each other, even if one is a debt and one is some off-balance sheet entry that’s uninsured but supposed to be fully reserved. There’s also the potential for the new special payment account at the Fed.

But I think it’s bigger and broader than that, and I don’t want the banking industry to miss the forest for the trees. State and national bank regulators are bringing more companies into the supervisory perimeter, but at the end of the day, there are still insured depository institutions, and there are companies that look like insured depository institutions but are not.

There is a problem when things that look like insured depository institutions but are not run into operational issues that impact customers. The problem isn’t that the public has a misconception about these institutions in their head when that happens; the problem is that the misconception was deliberately cultivated so that the public would not be able to identify the difference between the two. Synapse is one parallel that you could make, but you actually don’t need a parallel example. How has more than one trust company, acting as a fiduciary, run into issues and declared bankruptcy? How did those wind downs go, and did customers get their funds back? How many more times will this happen?

Technology and financial innovation have flattened the appearance between these insured depositories and nondepositories or uninsured depositories. And for all that innovation, they still haven’t found a way to clear up in consumers' and enterprises’ minds the important difference between the two. They also haven’t put in place rules or regulations to smooth out these differences when things go wrong.

So it’s the Wild West right now for companies like Kraken, which one would assume is a pretty sophisticated financial player. What is a consumer supposed to do? Is “Caveat emptor” acceptable?

Banks (and their trade groups) argue that the impact of stablecoins being able to offer yield will pull deposits from their institutions and compress lending in local communities. It’s fine to make that argument. But I think that’s sort of missing the point: noninsured depositories are going to offer something that looks, feels and acts a lot like a deposit account when everything is fine, and does not look like a deposit account when everything is not fine.

ONE EVENT I'D RECOMMEND

Your institution’s BSA/AML program assumes you can identify your customer.

That assumption breaks down the moment the "customer" is an AI agent transacting on bank rails, which is already happening via Visa, Stripe and Google's new protocols.

If your institution is waiting for regulatory guidance, you risk building your agent policy during an exam instead of before one.

My friend Alex is talking to Persona, Lithic and Glenbrook Partners about this very topic on July 29. It’s worth tuning in if you want to get ahead of it.

FROM THE VAULT

What’s on my mind and filling my time:

🐘 IMPORTANT BABY ELEPHANT NEWS: I got to see the baby elephant at the Smithsonian zoo when I was in town for Open Banker, and learned then that she had been rejected by her mother. So I was very interested in this Washington Post article about how the zoo built a care protocol for her, while making sure she’s integrated into her community.

💖 Happily Ever After: I'm a romance reader and ate up this Bloomberg profile of author Emily Henry. I’m fascinated by the economics of book publishing, and how romance book sales are subsidizing many other aspects of the industry while still being seen as silly or less serious. Things that mostly women like are not guilty pleasures!

🎙️ On Bank Nerd Corner: I was joined by Hebba Youssef, the chief people officer at Workweek (where I work) and the creator of I Hate It Here, a newsletter for human resource professionals. I tell Hebba a little bit about banking, and she tells me about developing talent and culture.

Thanks for reading and sticking with me for what I'm dubbing "Master Account Month!" Let me know your thoughts. - Kiah