Morgan Stanley's infrastructure partner Zerohash rebuffed in pitch to be U.S. trust bank

Zerohash, a crypto infrastructure provider for high-profile firms such as Morgan Stanley’s E*Trade, failed to get approval in its initial application to join the ranks of new digital asset-focused U.S. trust banks.

The U.S. Office of the Comptroller of the Currency sent the company’s application back to it in a process that suggests the regulator determined it had “material deficiencies,” so that charter bid is over, but not formally denied. The company said it’s hoping to re-apply by the end of the month with a narrower scope that it expects will get a quick review.

Zerohash, a crypto platform that handles the backend operations of high-profile traditional financial firms including Morgan Stanley's E*Trade, fell short last month in joining the dozens of firms who've recently been granted U.S. trust bank charters by the Office of the Comptroller of the Currency.

The banking regulator quietly returned the Chicago-based company's application, leaving the business in a singular position, left out of the OCC's recent abundance of provisional charters to trust banks seeking to handle digital assets.

In two other recent cases, fintech firms were flat-out denied in their applications, but a "return" means the process was ended because the application was "materially deficient," according to OCC policy. "The return of the application is an administrative process that allows us to refile this month," the company said in a Wednesday statement to CoinDesk.

"This approach was taken in coordination with the OCC and is not a substantive decision on the merits of our application, and it does not affect zerohash's current operations, which continue under our existing regulatory approvals."

Still, the company had recently advertised jobs — including for a national trust officer and a chief operating officer — at a "Zerohash National Trust Bank" that it indicated had a "pending charter application" before the OCC. And Zerohash Co-president Stephen Gardner's LinkedIn page lists him as CEO of the "zerohash national trust bank (pending)."

For its part, Zerohash indicated that the initial OCC application may have been ambitious in the scope of the trust bank's planned operations, having covered "a wide range of digital asset and fiduciary services," the company said, adding that the next effort will take a more "sequenced" approach, starting with an application for "a more focused approval of national trust activities aligned with our intended rollout timeline."

The firm is looking forward "to swift review of the resubmission," it said. The original effort in March joined the rush of firms hoping to be among the trust-bank provisional approvals flooding the U.S. with new crypto-oriented banks, especially amplified in the wake of the Guiding and Establishing National Innovation for U.S. Stablecoins Act that formally established a legal structure for U.S. stablecoin issuers.

But Zerohash's application was sent back on July 17, according to OCC records, which don't reveal the specific cause. Unlike denials (as received by Wise and Bunq) a return doesn't come with a detailed explanation. The company didn't publicly disclose the development when it happened, as it had with the submission of its application.

And Zerohash hadn’t voluntarily withdrawn the filing, as was its option. A spokesperson for the OCC didn't immediately respond to questions about the application, and spokespeople for Morgan Stanley declined to comment.

Just a month before returning Zerohash's effort, the regulator issued an explanation for how it makes such decisions, including its new approach to returning applications without registering a decision. The OCC will return a filing, the agency said, if it doesn't contain necessary information on the company's finances or officers.

Or, it noted, "the OCC may return a filing as materially deficient if, after attempting to have the filer furnish all required information for the OCC to assess the statutory or regulatory criteria through an additional information request, the responses do not sufficiently respond to the requests."

When the Independent Community Bankers of America filed an objection to the application in April, the community-bank group's letter noted: "In less than twelve months the OCC has conditionally approved or received applications from Circle Internet Group, Ripple, Paxos Trust, BitGo, Fidelity Digital Assets, Crypto.com, Payoneer (PAYO), and now Zerohash.

This pace — eleven filings or approvals in under one hundred days in some windows — precludes deliberate, transparent policymaking." Zerohash had lately been pursuing further investment, sources told CoinDesk in May, at a potential valuation above $1.5 billion, though that was at a point in which its application to be a federally regulated trust bank was still active.

The company, which in recent months had also been in acquisition talks with Mastercard that fell through, has powered crypto infrastructure at such businesses as BlackRock, Franklin Templeton, Stripe, Interactive Brokers and DraftKings. It's already a state-chartered trust bank, and a person familiar with its operation said that its business with E*Trade doesn't depend on getting a federal charter.

But the company has also been quietly battling in court against its own former chief compliance officer, Edgar Guerra, who claimed in a California lawsuit that he'd been fired in an effort to mask compliance issues he'd uncovered.

Guerra, a former regulator at the Federal Reserve, indicated in the suit that he and his staff internally identified more than 200 significant compliance gaps, including in the firm's money-laundering controls. Some of the shortcomings had previously been noted and insufficiently remedied, he said.

It's unclear whether OCC officials were aware of or had concerns with the claims of compliance problems or any details of that ongoing legal dispute, for which the company's attempts to push it into arbitration were preliminarily rejected. Zerohash declined to comment on the case, and a lawyer for Guerra didn't immediately respond to a request for comment.

In 2022, when he was six months into the job that he'd be fired from, for which he'd file a wrongful-termination suit, Guerra told an interviewer that his company was "trying to comply" with a couple of dozen compliance professionals at a company of about 150 employees at the time.

He said he'd been fortunate to be brought on by a leadership that was "really committed to making sure that compliance is a competitive advantage." Disclosure & Polices: CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies.

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