Most of the world’s top 100 banks are investing in some way in crypto and blockchain companies, according to research from Blockdata. Even reluctant, bemused CEOs like JPMorgan’s Jamie Dimon have given way to apparent market demand and begun to offer services related to crypto.
A financial institution doesn’t have to be mammoth to get into this business, but they have to like change. It’s a tremendously fluid area that grows as new issues, like stablecoins and even government-issued central bank digital currencies are developing.
“Crypto is here to stay. It’s not going away as an asset class,” says Kerim Derhalli, CEO of Invstr, a social investment app company that works with Vast Bank, which lets customers buy and sell crypto through their checking account.
“Two different things are happening,” says Derhalli. “First, crypto is almost guaranteed a place in the financial landscape. Second, because it’s going to be accepted by the establishment, it’s also going to be scrutinized more and in a more serious way than it has been up to now.”
The Financial Brand spoke with three financial institutions involved in the cryptocurrency business. Here are the details.
Unify Financial: Bringing Direct Bitcoin Trading to Credit Union Members
In October 2021 $3.6 billion-assets Unify Financial Credit Union became the first credit union to begin signing up members to buy, sell and hold Bitcoin. The program is enabled by the Q2 digital banking platform with trading handled through NYDIG. Members will be able to track their holdings through their credit union accounts.
Greg Glawson, Chief Information Officer, says that members of the nationwide credit union clearly had interest in cryptocurrencies. He says Unify could see transactions going to and coming from crypto exchanges operated by companies like Coinbase and Kraken.
“We came to the conclusion that this was something we needed to offer to our members,” Glawson explains. Bolstering this, the credit union conducted a broad survey of what financial technologies members were interested in and found that three out of five were interested or very interested in having Unify-sponsored crypto capabilities. Many members are middle-class professionals, and with publicity about crypto and blockchain being so widespread, he says many want to try it out.
At the outset Unify began offering the service among a pilot group of employees as well as selected members. The credit union meanwhile set up waitlist enrollment on its website, with the plan to fully implement the service by yearend 2021. While the program initially will just involve Bitcoin, Glawson anticipates that other digital coins will be included in the future.
Looking forward, Glawson says Unify will be looking at options like receiving dividends on traditional deposit accounts in crypto instead of dollars. Many ideas are on the table.
The crypto part of the new accounts will involve a combined flat fee and percentage based on the size of trades. Glawson says Unify has worked to offer members a lower fee structure than other providers active in the market.
Don’t Assume People Really Savvy Crypto:
Rolling out the product requires not only marketing, but education too. Unify wants to be sure members understand how cryptocurrencies and their markets work before they put their money into these assets.
In fact, there’s a lot of education for staff as well, to make sure employees with public contact understand clearly what can and can’t be said about crypto. He has found that many crypto account offerings are made with the assumption that the consumer knows a lot about the subject.
Also informing product design has been Glawson’s own experiences. He has tried investing in crypto himself and found the tools his provider offered “extremely clunky.” In his research he has found that some payment providers’ apps can trigger debit card fraud alerts. He wants members to have a better experience. Part of this will be smoothed by the account setup, in which purchases and sales proceeds will move seamlessly out of and into the member’s Unify checking account.
The adoption curve for crypto accounts will resemble that for mobile deposit capture — pioneers first, and then a rush.
BankProv: Becoming Crypto Firms’ Bridge to the Dollar Economy
Almost paradoxically, while crypto companies are all about alternative forms of money, investment and exchange, they still have to do business in a dollar-denominated world. They need financial bridges and $1.6 billion-assets Provident Bank set out to be one of them.
A few years back, the Amesbury, Mass., bank, which is branded as BankProv, set out to serve underserved business markets, in search of new customers. Management identified the cryptocurrency business — exchanges, institutional investors, brokers, miners and others — as a prospect. Dave Mansfield, CEO and a former bank examiner, saw strong potential in banking the crypto business in part because it is legal in all states and growing. He headed to San Francisco to attend a crypto industry conference to get a better feel for the players and their banking needs, and began making plans.
Since then the bank has built a deposit operation for crypto companies and began expanding into business loans for these firms. BankProv doesn’t operate in crypto itself, though down the road it may play a role in cryptocurrency custody. At this point, it’s most important to demonstrate that it understands the business and can help the approximately 200 crypto businesses it serves to a handle their own banking needs as well as those of their own clients.
Carie Kelly, SVP, Virtual Banking, has developed much of the deposit side of BankProv’s crypto effort and handles overall marketing.
“These crypto businesses still need to be able to pay their vendors and their employees, and we’re not quite at the point yet where they can pay in crypto. So we provide them with the U.S. dollar on- and off-ramps.”
— Carie Kelly, BankProv
BankProv also offers banking-as-a-service to crypto companies, which gives their customers a place to park funds in dollars when coming into or out of crypto ownership. All this has required tailoring the bank’s compliance and anti-fraud functions to enable smooth onboarding of these specialized businesses.
Kelly adds that if the bank decides to provide custody services for crypto, it would probably work with one of its own crypto clients, such as Anchorage Digital Bank, N.A., which handles over 70 different cryptocurrencies. In a sense BankProv would be seeking “cryptocurrency-custody-as-as-service.” Kelly says this would help BankProv serve customers that want to hold crypto, without having to hold it on its own books in any way.
The two big players that BankProv keeps its eyes on are Silvergate Bank, which specializes in crypto and fintech banking out of California, and New York’s Signature Bank, which has a growing crypto focus. In part to remain competitive with real-time payments networks offered by those institutions, BankProv introduced its own, ProvXchange, in 2021. The bank offers three specialized business checking accounts designed to work with the exchange.
BankProv has been balancing innovative expansion with caution as it ventures into new territory. “There are quite a few banks that are trying to enter into this space,” says Kelly. “Others may not be at the point we’re at, but they’re making an aggressive push into our world.”
At this point there is a good deal of demand waiting to be met, according to Paul Mansfield, VP, Specialty Lending. He says that larger crypto companies may find themselves splitting their banking business.
“We’d love to be the primary bank, but some of these firms are multibillion dollar companies,” says Mansfield. “However, they need a lot of support from banking and so it’s not a winner-take-all proposition on the loan side of things.”
One of the crypto industry’s key challenges is obtaining dollar liquidity for digital assets — holdings in cryptocurrencies. Such crypto lending entails applying traditional concepts to a new category of assets.
New Use for a Seasoned Approach:
Actually, banks have been making loans secured by stocks and other securities for decades.
Mansfield says that, in principle, loans secured by crypto are similar. “You lend at a discount and there’s a margin call process,” Mansfield explains. “There are ways to structure a deal to provide credit enhancements. Overall, while it’s a different form of collateral, we feel confident that we are structuring these loans so the bank is safe and secure.”
BankProv issued its first bitcoin-secured crypto business credit line in late 2020 and has been rolling out this and an Ethereum-secured credit line in 2021.
Customers Bank: Crypto Can Be About Cutting Costs, Not Raising Revenues
People ultimately wonder how banks and credit unions can make money from crypto. But one of the concepts that $19.6 billion-assets Customers Bank strives for is keeping the costs of deposits down. In the third quarter of 2021 the company raised over $1.5 billion in interest-free deposits from crypto companies by using a real-time payment system introduced in October 2021 to attract them. That figure represents 26% of deposits the bank raised in the quarter, according to Sam Sidhu, Vice Chairman, President and CEO.
It’s a matter of sourcing “raw materials” more cheaply. Cryptocurrency companies need deposit services, especially payments related features, and “we feel that if you offer payments for free, you can get deposits for free,” Sidhu states. In addition, with the possibility of rising rates in 2022, the CEO sees the investment in real-time payments as an inflation hedge.
Crypto firms are only the first use case out of multiple industries whose deposits the bank hopes real-time payments will draw. Sidhu explains that they were chosen as an early target because so many crypto companies have difficulty finding banking services in general, and because real-time payments makes a good match for the crypto field.
“24 by 7 by 365 payments is exponentially better than the one to two to three, even four-day settlements on ACH or wire on legacy rails.”
— Sam Sidhu, Customers Bank
At present both sides of a transaction must be Customers Bank clients. The system uses a proprietary token called CBIT to make real-time transfers in dollars using blockchain technology. (CBIT stands for Customers Bank Instant Token.)
Of course, the “raw materials” are meant for lending, and as the payments platform brings in new crypto firms, Sidhu hopes to widen the relationships to include lending.