Alan Lane is undaunted by the recent drops in cryptocurrency prices and the tanking of stablecoins like TerraUSD.
“We’re not surprised by the market volatility — we’ve experienced conditions like this before,” said Lane, who is CEO of Silvergate Capital, a bank in La Jolla, California, that provides an alternative payment rail institutional investors can use to buy and sell digital assets, even at night and on weekends when normal payment mechanisms like the automated clearing house and FedWire are off. It was designed with market fluctuations in mind, Lane said.
“Its ability to move money 24/7 becomes even more critical to clients’ business operations during periods of increased volatility,” he said.
The $15.8 billion-asset Silvergate also helps stablecoin issuers to mint their digital currency and it’s building its own stablecoin based on the Libra/Diem project started by Meta’s Facebook.
“We remain committed to issuing a Silvergate stablecoin — a tokenized dollar — in 2022,” Lane said.
He’s not alone in his commitment to supporting digital assets despite steep price declines amid what some call “crypto winter” in spite of the hot late-June temperatures.
In Tulsa, Oklahoma, Vast Bank CEO Brad Scrivner is also staying the course on the bank’s efforts to support customers who want to buy cryptocurrency. The bank, which has $828 million of assets, lets customers buy 13 different digital currencies through its website and mobile banking app. About 50,000 people now use this feature and customers are doing more buying than selling, Scrivner reports.
This skew toward buying, not selling, “is indicative to me of the type of customer that's going to operate in a bank environment,” Scrivner said. “They may have been very curious about crypto, and that may be the reason they got into it, but they did their research, they did their homework, and they're not going to do panic selling.”
For the bank itself, crypto winter doesn't change anything, Scrivner said.
“We believe that digital assets are something that customers want to use in the context of banking,” he said. “And by that, I mean protecting and storing assets, lending against assets and transferring those assets. Whether that be fiat currency, whether that be digital assets, we believe there's a space for doing it. We still think that, especially with some of the things that have happened with stablecoin, people that want to be in the space want to operate with banks, with institutions that are regulated, and give them the confidence that they're going to be around.”
And at Northern Trust, which last week launched a new digital assets and financial markets group and tapped Justin Chapman to lead it, the crypto winter is viewed as something that could give traditional financial firms an advantage as clients become more aware of the fragility of decentralized ecosystems that often lack proper risk controls.
“I think what will come out of this crypto winter is much more focus on risk management,” Chapman said. “And I think the firms that will be successful and the assets that will be successful will be better for going through some of the challenges we've seen over the last six months. This separates the wheat from the chaff in terms of quality risk management.”
Northern Trust is “absolutely committed to the digital asset area,” Chapman said. “We’ve started to deploy across digital asset frameworks, and we continue to invest heavily in that space. And we continue to look to further invest as the markets mature.”
To be sure, many banks are moving cautiously, not only because of the inherent risks of dealing with digital assets but also because regulators have been paying closer attention.
Defying crypto winter
The term crypto winter was coined during the cryptocurrency crash of 2018, when the TV series "Game of Thrones" popularized the phrase “Winter is coming,” meaning bad things were about to happen. “Crypto winter” came to represent any major drop in cryptocurrency prices.
The price of bitcoin has declined from more than $67,000 in November to $20,746 on Monday. Ether, the second-most popular cryptocurrency, was worth $4,427 in November; on Monday it was priced at $1,186.
But banks that have been working on launching and expanding crypto services for the past several years are carrying on.
Northern Trust has pursued digital-asset-related projects since 2017, when it launched a private equity asset servicing blockchain on the island of Guernsey. The legal agreements and related documents for the management of private equity funds were all stored on the blockchain. In 2019, Northern Trust sold its portion of this technology to Broadridge.
“It was difficult for us to get traction wider than our own client base,” Chapman recalled. Whoever hosted such an ecosystem needed to have some neutrality, he noted. “We partnered with Broadridge to deliver that code and that IP for them to create that environment and grow in delivery. They are servicing the wider market.”
Also in 2019, Northern Trust signed custody agreements with the World Bank Treasury to provide global custody and related services for its investment management business. The following year, Northern Trust and BondEvalue completed the first trade of a fractionalized blockchain-based bond. The Chicago-based bank has also partnered with Standard Chartered Bank to form a crypto custodian joint venture in London called Zodia that’s overseen by U.K. regulators.
Chapman’s new group is working on digital asset tokenization and custody, as well as development of a stablecoin.
“We're seeing lots of these opportunities across all different markets,” Chapman said. “This group is bringing those all together and leveraging the work we've done in one market with another market. We’re leveraging our relationships and counterparties to help move the agenda forward.”
Vast Bank began letting customers buy cryptocurrency through its digital banking channels in February 2021, with the help of partners Coinbase and SAP. The bank has not received any complaints from customers that have lost money due to the sliding value of these digital assets. It’s also not marketing or recommending the cryptocurrencies, Scrivner said.
“We're making a very clear distinction between the accounts that are FDIC insured and the crypto accounts,” he said.
Eventually, when regulators approve the idea, Vast will be able to lend against cryptocurrencies, Scrivner said. This would be similar to lending against commodities or any other type of asset that can have volatility.
“Banks have been lending against those types of assets for a long time,” Scrivner said. “So we're familiar with the volatility, we're familiar with margin calls, we're familiar with all the aspects that go along with that.”
Banks are also schooled in safe and sound lending, he noted.
“I would anticipate that we will be able to adopt similar practices and apply them to digital assets,” Scrivner said.
Many banks still thinking about it
In the industry at large, many bank executives are still waiting for specific guidance on cryptocurrency services from regulators like the Office of the Comptroller of the Currency and the FDIC, according to Richard Rosenthal, Deloitte's digital-assets banking regulatory practice lead and principal.
“What you see happening is folks continuing to do their assessments, continuing to engage in their new product development processes, continuing to figure out how they want to play,” Rosenthal said. “Everyone is still forming teams, looking at whether and how far they want to go on the risk appetite spectrum. I think most are engaging in a pretty cautious manner and seeking more [regulatory] clarity.” Then they will do the things they know are permissible.
Each bank is having its own discussions with local supervisory teams who then in some cases need to engage with Washington on the specific facts and circumstances of each bank’s plans for crypto, he said.
Beyond regulatory concerns, some of these crypto- curious bankers are concerned about the price drops in cryptocurrencies, Rosenthal said.
“You can't ignore some of the market activity that's going on,” he said. “I think for some it definitely would give them some pause. When you have big headline moments, it can be sobering for people to say, do we really want to do this?”
At the same time, winners are shaking out and bankers will see opportunity in this sector, he said.
“People are reflecting and looking at their proposals and their strategies and their ambitions and saying, how would this hold up to further volatility?” Rosenthal said. “How do I really want to do this? If customers are still asking for products and if there's demand coming, then we need to find a way to be there.”
My 96 Sats: It is interesting to see Northern Trust; this is a large and respectable boutique bank, primarily catering to UHNWI. If you are working class or below, this is not the best bank for you.
https://www.americanbanker.com/news/crypto-friendly-banks-stay-the-course-despite-bitcoin-volatility
