By Walt Williams
Community banks shouldn’t ignore stablecoins, which will create new business opportunities for the institutions but also pose a serious risk to their deposit base without proper regulation, three bankers said today during a panel discussion on the digital asset at the American Bankers Association’s Conference for Community Bankers in Orlando.
Congress last year passed the Genius Act, creating a regulatory framework for stablecoins. One argument that Vantage Bank’s Shawn Main often hears from community bankers is that their institutions are not cross-border banks, so stablecoins are not a fit for them. That’s a mistake, he said.
“There’s going to be a lot of domestic payment activity as well,” said Main, who is EVP and chief business architect officer at Vantage. “Anecdotally, I’ve talked to plenty of customers who are already doing this. They’re not talking to you as a bank because they’re either afraid to talk to you about that, or they don’t think that you have the expertise. So they’re going outside the system. They’re locking up stablecoins and they’re using that to make payments between their manufacturers and suppliers or their logistics companies, or they’re doing it internally because they have subsidiaries across state lines and need to operate outside of normal hours.”
Walk, don’t run
The Bank of Guam is among the community institutions currently exploring stablecoins. CEO Joaquin Cook said the geographic isolation of his clients — his bank has 15 branches spread over 6,600 miles, including overseas locations in the Marshall Islands, Federated States of Micronesia and Palau — makes the digital currency a particularly attractive option for transactions.
“We literally have to fly and ship cash to these islands because they are very cash-dependent,” Cook said. “So we see payment stablecoins as a way to reduce and maybe even totally give rid of the dependency on paper currency, because it is expensing shipping money, flying money, couriering money (and) paying insurance.”
Main said “there is a ton of noise out there” about what community banks should be doing with stablecoins. His advice is not to rush into offering products.
“You need to be looking into infrastructure,” he said. “You need to understand how it’s going to impact your operations, how you’re going to upskill your people. . . . You do not want to run into this — you will run into a wall.”
“We think the biggest use cases that most banks will go out the gate with, and should go out the gate with, is your own money flows,” Main said. “Use your loan participations, your correspondence settlements, try those things first. That is going to help you better understand the operational risks that are posed to your institution. That will help you understand what risk appetite you should be setting for yourself. And that will also help you build out your risk frameworks.”
Deposit flight
The primary threat the digital currency poses to community banks is a legal loophole that could allow crypto firms to bypass the Genius Act’s prohibition on paying interest or yield on payment stablecoins. ABA is advocating for Congress to use proposed cryptocurrency market structure legislation to close the loophole.
ABA Chair and First Independence Bank CEO Kenneth Kelly said in his home state of Michigan, roughly 70 chartered banks hold about $58 billion in deposits. The loophole could result in roughly $3 billion to $6 billion in deposit flight in his state alone.
“That’s less opportunity for us to lend to small business, less opportunity for us to have an impact on that individual who’s buying their first house or possibly buying their first car. So it’s a real issue,” Kelly said. “I say that to challenge all of us. We need to know those numbers for our respective states, so that when you’re talking to your lawmakers, in particular, your senators and your representatives, they understand where you’re coming from and what’s going to happen if those dollars are moved out of our banking system.”
