For the majority of banks and credit unions, the world of blockchain and cryptocurrencies likely remains an abstraction. On the radar, yes, but probably not a priority. That may be changing.
Consider that 11 years after Bitcoin launched, the Federal Reserve is actively considering creating a Central Bank Digital Currency. And that the Office of the Comptroller of the Currency (OCC) has confirmed that national banks can provide custodial services for crypto assets.
In fact, Brian Brooks, Acting Comptroller of the Currency and former Chief Legal Officer at Coinbase, the digital currency exchange, said in a podcast that “Instantaneous settlement [with stablecoin] would be a game-changer.” (Stablecoins are a cryptocurrency pegged to a fiat currency or other reference, as opposed to Bitcoin, for example, which fluctuates in value.) Brooks also predicted that in three to five years banks will be connecting to blockchain the way they are connecting to the global SWIFT network, as Banking Dive reported.
JP Morgan Chase, Wells Fargo and several other giant financial institutions have launched their own stablecoins. But before they did, a bank that by comparison is pint-sized, New York City-based Signature Bank, got the jump on these giants. It did that because its management team believes that in the dog-eat-dog world that banking has become, skillful use of technology, including blockchain, is the key to relevance for financial institutions.
“If you’re not involved in blockchain, in five years you won’t be around as a bank,” Joseph DePaolo boldly predicted in a comment to Forbes. The Co-Founder and CEO of Signature Bank made the statement in December 2018, just before the launch of the bank’s real-time, blockchain-powered payments platform called Signet.
Granted, Signature Bank, at $53 billion in assets, is hardly the same as a community bank or credit union, but in its home market, it’s considered a small bank.
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Why Signature Bank Embraced Blockchain
Signature Bank grew from a startup in 2000 to $53 billion in 20 years, with the same management team. At one point it had an unbroken string of 25 consecutive quarters of record earnings.
A hallmark of good leadership, of course, is to know what to stick with and what to change. And the bank’s core business model has not changed: It relies on Private Client Banking Teams, in which each team operates as a single point of contact for the bank’s mainly middle-market clients. The bank has made a science of acquiring entire teams from its larger competitors, bringing their book of business with them, and then giving them more freedom to operate.
It was through this means that Signature acquired a team specializing in digital assets — i.e. bitcoin and other cryptocurrency exchanges, and related players. Signature is one of only a handful of institutions providing banking services for the crypto community and it has become a fast-growing niche.
Technology, however, was never Signature’s primary focus beyond what was necessary to run the bank. In fact, in 2016 DePaolo stated, “I don’t think we’re going to lead in technology.” Things change, however.
According to Frank Santora, SVP and Director of Digital Asset Solutions for the bank, management realized that while the bank’s business model overall was still working well, if they wanted to continue to be relevant in the future, they had to not only provide great service to their clients, but invest in new technology as well.
That led to the formation of the Digital Asset Solutions Group that Santora runs, which is tasked with both understanding the latest technologies and developing solutions for clients.
Not Just Real-Time, Blockchain-Based Real-Time
Santora tells The Financial Brand that the number one challenge clients brought up with the bank’s team leaders was payments. Wire transfers and other traditional payment methods were costly, complex and inflexible. This was particularly true for the bank’s digital asset customers.
“We really believe that real-time payments will definitely be a necessity if you want to be competitive in today’s marketplace.”
— Frank Santora, Signature Bank
“We really believe that real-time payments will definitely be a necessity if you want to be competitive in today’s marketplace,” Santora states. The Fed is developing a real-time platform called FedNow, but that is several years away. “Banks need to decide, are they going to build something, or are they going to wait for someone else to do it?” says Santora. “We decided we weren’t going to wait around and we built it and we’re giving our clients that ability to do real time payments now.”
Santora acknowledged that The Clearing House has a real-time payments platform operating now but says that Signature Bank wanted to have a system based on blockchain technology. (In very simple terms, blockchain is a distributed ledger technology operating in a decentralized peer-to-peer network in which information is contained in digital blocks linked in a chain.)
“We could have made a payments platform just using databases,” says Santora, ” but that would limit our growth in the future. We see this as a technology that will impact many areas in banking.” Building the Signet platform on the blockchain gives the bank the ability to use smart contract features (automated, self-executing contracts) that enables them to minimize human interaction.
As a result, Signature Bank’s Digital Solutions Group focused on a blockchain-powered real-time payments platform and, working with trueDigital Holdings (now called Tassat), they launched Signet in less than a year on Jan. 1, 2019.
Advantages of Using the Signet Platform
To describe Signet as a digital payments platform doesn’t quite capture its significance. It enables real-time transactions and real-time settlement between two Signature Bank clients 24 hours a day, 365 days a year without any intervention or involvement by the bank. And it’s free for approved users, although a minimum account balance of $250,000 is encouraged.
It operates by converting dollars into “Signets.” These are one-for-one digital representations of the U.S. dollar, explains Joseph Seibert, Managing Group Director and SVP of Digital Asset Banking at Signature Bank. They are not cryptocurrencies, he says, because the client never gives up ownership of their dollars.
This allows clients to move funds at 3 a.m. on a Saturday or on a bank holiday when the Fed is closed, Seibert explains. This works particularly well for the crypto exchanges that often do their larger trades overnight or on weekends, and operate in multiple time zones. While the whole process is automated, Seibert says he has support staff available 24/7 for credential resets or other similar issues.
Santora says there are three ways to access Signet: on the website, through a client’s treasury management system using an API, and through a third party such as the Fireblocks digital assets platform.
What’s In It for the Bank? Deposit Growth
At the beginning of the article it was mentioned how knowing what to change and what not to change is a key leadership trait. With Signature Bank, a core operating principle that hasn’t changed is its focus on deposits. As CEO Joe DePaolo told ABA Banking Journal several years ago, “Everyone thinks of banking as lending. I think of banking as bringing in deposits. ”
“What this does is allow us to pivot into a world where we see a lot of non-interest-bearing deposits.”
— Joseph Seibert, Signature Bank
Organic deposit growth is the first thing Seibert mentions as a benefit of Signet. “What this does is allow us to pivot into a world where we see a lot of non-interest-bearing deposits,” he states. Coindesk reports that of the nearly $8 billion in deposit growth Signature Bank saw in the second quarter of 2020, $1 billion was brought in by the firm’s digital assets team, according to the bank’s earnings report.
Seibert says that about 650 unique clients from within the digital-asset ecosystem bank with Signature.
There are no fees to use Signet, as stated earlier. “We don’t want to nickel and dime clients,” observes Seibert. “With wires and ACHs they often get dinged for every little transaction they do. We look at the overall relationship.”
“We’re able to recoup our cost by growing our client base and by expanding the banking services we supply to them,” Santora adds. In addition, he points out that the bank saves money by using Fed Wire less. “When we’re doing transactions through Signet, we’re saving the client time and money, and saving the bank time and money.”
Are There Retail Banking Use Cases for Blockchain?
Not all users of the Signet payment platform are from the crypto community, but that is the largest segment, Santora confirms. The bank does have other commercial users and Santora says they are starting to see more interaction from different segments. However, some of these companies need to add certain features to their systems before they can participate, he adds.
While Signature Bank does have retail customers, it is primarily a commercial bank. In regard to using Signet for retail transactions, Santora notes that there are already other options for consumers to send small-dollar payments. Larger payments, however, might be another matter.
“The capability for retail is there, the desire [at the bank] is not at the moment,” observes Seibert. He also points out that the approval the bank received from the New York Department of Financial Services was for institutional only to begin with.
Seibert can foresee mass adoption of cryptocurrency in the U.S., but probably not for another couple of years.
But even without that, Santora believes there’s great potential for banking in blockchain technology. “In banking, there’s always two sides to every transaction — an exchange of an asset and a payment. So long as you can link these two things together using programing, there’s lots of areas that are ripe for automation if you use your imagination. If you don’t have to have a human interaction in a transaction, why have it?”