Morgan Stanley-Backed Zerohash Denied Bid to Become a U.S. Trust Bank

Zerohash, the crypto infrastructure provider supporting major financial institutions such as Morgan Stanley’s E*Trade, plans to submit its application again after the Office of the Comptroller of the Currency returned its request for a U.S. national trust bank charter.

The Chicago-based company’s application was returned last month, preventing Zerohash from joining the growing group of firms that have recently received provisional trust-bank charters from the OCC, particularly those seeking to offer digital-asset services.

The regulator did not formally reject the application. Instead, the OCC returned the filing, a process used when an application is considered materially deficient. Zerohash said the return was administrative and coordinated with the regulator, allowing the company to submit a revised application this month.

“The return of the application is an administrative process that allows us to refile this month,” Zerohash said in a Wednesday statement. The company stressed that the development does not represent a decision on the merits of its proposal and has no impact on its existing operations, which continue under current regulatory approvals.

The company had recently posted job openings for positions including a national trust officer and chief operating officer at a proposed “Zerohash National Trust Bank.” The business had described the charter application as pending. Zerohash Co-President Stephen Gardner’s LinkedIn profile also identifies him as CEO of the proposed bank.

Zerohash indicated that its initial proposal may have covered too broad a range of activities. The application included plans for various digital-asset and fiduciary services, while the revised filing will take a more phased approach.

The company said it intends to begin with a narrower request for approval covering specific national trust activities that align with its planned rollout. Zerohash added that it expects the OCC to review the new submission quickly.

Zerohash Plans New Trust Bank Application

Zerohash initially filed its application in March amid a surge of companies seeking provisional trust-bank approvals from the OCC. Interest in federally regulated crypto banks has increased following the establishment of a legal framework for U.S. stablecoin issuers under the Guiding and Establishing National Innovation for U.S. Stablecoins Act.

OCC records show that Zerohash’s application was returned on July 17, although the documents do not specify why. Unlike a formal denial, a returned application generally does not include a detailed public explanation.

Zerohash did not publicly announce the development when the filing was returned and did not withdraw the application itself.

An OCC spokesperson did not immediately respond to questions about the filing, while Morgan Stanley representatives declined to comment.

The regulator had issued guidance the previous month explaining when it may return an application without making a formal decision. According to the OCC, filings can be returned when they lack important information about an applicant’s financial condition or senior executives.

The regulator also said an application may be considered materially deficient if the applicant fails to adequately provide information requested by the OCC after being given an opportunity to address missing details.

Rapid Expansion of Crypto Bank Applications

The Independent Community Bankers of America objected to Zerohash’s application in April, arguing that the rapid increase in crypto-related trust-bank applications was happening too quickly for regulators to develop policy in a deliberate and transparent manner.

The group pointed to applications and conditional approvals involving companies such as Circle, Ripple, Paxos, BitGo, Fidelity Digital Assets, Crypto.com, Payoneer and Zerohash.

Zerohash had also reportedly been seeking additional funding earlier this year at a potential valuation exceeding $1.5 billion. That fundraising effort took place while its federal trust-bank application was still under review.

The company has built crypto infrastructure for major businesses including BlackRock, Franklin Templeton, Stripe, Interactive Brokers and DraftKings. Zerohash already operates as a state-chartered trust bank, and a person familiar with its operations said its relationship with E*Trade does not depend on obtaining a federal charter.

Former Compliance Officer Raises Concerns

Separately, Zerohash is involved in a legal dispute with former Chief Compliance Officer Edgar Guerra, who alleged in a California lawsuit that he was dismissed after raising concerns about compliance problems within the company.

Guerra, who previously worked at the Federal Reserve, claimed that he and his team had identified more than 200 significant compliance issues, including weaknesses related to the company’s anti-money-laundering controls. He also alleged that some of the problems had been identified previously but were not adequately addressed.

It remains unclear whether OCC officials were aware of those allegations or whether they played any role in the regulator’s decision to return Zerohash’s charter application. The legal dispute is ongoing, and the company’s efforts to move the case into arbitration have so far faced preliminary setbacks.

Zerohash declined to comment on the lawsuit, while Guerra’s attorney did not immediately respond to a request for comment.

In a 2022 interview, Guerra said Zerohash had been working to strengthen its compliance program with a team of roughly two dozen compliance professionals at a company employing around 150 people at the time. He also said the leadership team was committed to treating compliance as a competitive advantage.

About The Author