Custodia Bank in Wyoming and Vantage Bank in Texas have reached an agreement with Participate, a network of 600 banks that digitizes loan participations, to use the two banks’ tokenized deposits in their loan transactions.
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Custodia CEO Caitlin Long broke the news Thursday at American Banker’s On-Chain Executive Summit.
“That is an obvious use case,” she said during a panel moderated by CNBC reporter Hugh Son. “It’s bank to bank for loan participations. Why? If you’re digitizing loan participations, why wait to have to go through a Fedwire settlement when you can literally transfer the asset and the payment at the same time, and that’s the most important aspect of this.”
Participate manages banks’ participation in commercial-and-industrial loans.
“When the banks take participations, the closing of that is kind of like a closing of a mortgage,” Long told American Banker. “It’s a disaster, and so they automate it. And they wanted a tokenized dollar so when the participation closes, the dollar goes at the same time.”
Vantage and Custodia
“We’ve since been building the scaled platform, where we go live testing with it next week,” Long said. Multiple banks have been set up as beta testers.
It took six years to get all the regulatory approvals needed, she said.
One of the proofs of concept for the tokenized dollar, called Avit, was a logistics company whose CEO wanted to pay truck drivers within one hour of reaching their destination because that would allow him to recruit the best drivers. “So that’s solving a real business problem,” Long said.
Another Vantage customer using the tokenized deposit is a large restaurant chain that does not use cash at the restaurants, but is required by U.S. law to pay tips in cash, Long said. The CEO asked for this technology to start paying in tokenized deposits.
Long believes tokenized dollars will obviate the need for the ACH network in the next five to 10 years.
“It’s just better technology, better, faster, cheaper, more transparent, and it’s just literally the barriers to entry of the high switching costs that are stopping it from being implemented more widely today,” she told American Banker.
Banks will face deposit flight risk as people invest in stablecoins and other digital assets, panelists noted during the Thursday event.
In response, banks “could do nothing, but that’s not a good option,” said Robin O’Connell, CEO of Uphold Enterprise, a provider of digital asset infrastructure. “Times are changing, and the way that people deal with money is fundamentally changing. It’s no longer banks competing with banks, it’s banks competing with Robinhood. And there’s expectations of how you can move your money, what assets you can interact with, and that’s the world that’s coming. And so I think doing nothing is not a good call.”
The advent of stablecoins may drive banks’ deposit interest rates up, according to William Peck, head of digital assets at WisdomTree, which on Monday launched 24/7 trading and instant settlement for its tokenized money market fund.
“If the ability [materializes] for money to move more freely and easily, and for people to move value from one place to another more quickly, I think an inevitability of that is that consumers are going to have more choice in where they put their deposits, and are going to be less likely to just want to park it someplace with no interest rate, especially with yields remain[ing] kind of elevated to where they are today. So I do think there’s more competition coming around the rates that banks need to pay.”
Long noted that bank regulators want to make sure stablecoins don’t disintermediate core deposits. “There’s a desire to get this out in tokenized deposit form within the banking system,” she said.