How VersaBank's battling stablecoin deposit drain

Key Insight: VersaBank is planning an alternative to stablecoins.

What's at stake: Banks are concerned cryptocurrency may negatively impact traditional deposits.

Forward look: Many banks will likely pursue both cryptocurrency and alternatives such as tokenized deposits. 

With banks under pressure to navigate an expected stablecoin boom, VersaBank is trying to build support for an alternative that it contends offers the same benefits with less risk. 

"What we have has all of the function of a stablecoin," David Taylor, founder and president of VersaBank, told American Banker. "You can do anything with ours that you can do with a stablecoin."

The London, Ontario-based VersaBank's U.S. subsidiary is testing USDVB, a U.S. dollar version of its digital deposit receipts, a form of tokenized deposits that are digital representations of deposits at the bank. 

VersaBank is joining a growing number of banks such as JPMorganChase that are considering or developing alternatives to stablecoins to attract clients that want the efficiency of blockchain-powered financial services with less security or economic risk. For the banks, it's also a way to mitigate the pressure stablecoins may place on traditional bank deposits and loans.   

How VersaBank's coin works

VersaBank's USDVBs will be issued at a rate of 1 USDVB for each U.S. dollar on deposit with VersaBank USA. The bank will manage issuance, redemption and management through its internal digital vault platform on the Algorand, ethereum and Stellar blockchains. Access to and control of USDVBs will be managed through VersaView's e-wallet platform. The pilot program will be completed by the end of 2025, with commercial launch coming shortly after. 

Read more about stablecoins. Stablecoin | American Banker

VersaBank structured its deposit token with open blockchains to foster interoperability, and plans to make the technology available to other banks. "We are ready to help, if anybody wants that," Taylor said, adding licensed banks, as the "trusted, regulated safekeepers of personal and business cash assets and other valuables," are naturally positioned to do the same for digital currencies.  

The $162 million-asset VersaBank USA is a digitally focused bank that is in the midst of building a U.S. network of lenders that use its technology. This includes real estate financing companies and community banks, Taylor said. These banks are under pressure to meet the demand of clients that want to use digital assets such as cryptocurrency and stablecoins, yet face the risk of losing deposits to digital asset accounts from fintechs or other providers. 

"There are assets flowing out of community banks into crypto assets, and some of that flow is going to stablecoins," Taylor said, adding tokenized deposits enable banks to rebuild their traditional deposit base. "Seeing that flow away from community banks is quite concerning. So the idea is that if bank customers want the function of the stablecoin, they can stay within the safety of the banking industry."

One of many options

It's likely that tokenized deposits will be an added option for banks to tap digital assets, rather than a substitute for stablecoins. 

Subject to bandwidth constraints, banks will take a mixture of approaches, Eric Grover, a principal at Intrepid Ventures, told American Banker. 

"We'll see tokenized FDIC-insured deposits earning interest and supporting credit and bank and nonbank issued stablecoins competing in the market," Grover said. "It's too early to know how it will play out."

Banks need strategies for stablecoins and tokenized deposits because they solve different issues, James Wester, director of crypto for Javelin Strategy & Research, told American Banker.  

Stablecoins give banks a way to operate in the open digital currency ecosystem as a portable "bearer instrument" designed to move across platforms and networks, Wester said. Tokenized deposits, on the other hand, modernize the liability side of the balance sheet, enabling instant settlement, liquidity, and programmability inside a bank's own system.

"Banks that only pursue one will leave a gap in their strategy," Wester said. "The differences between stablecoins and tokenized deposits, whether one represents something similar but safer, for instance, is going to be a big issue and discussion in the next year or so."

Most banks will look to adopt both tokenized deposits and stablecoins, assuming broadly used stablecoins will be the primary form of acceptable money in commerce, marketplaces and tokenized assets, Thomas Shuster, research director for capital markets, wealth and digital asset strategies, told American Banker.

"The conversations I am having now are dominated by an anticipated need for interoperability for both, where a unified programmable layer will make stakeholders 'money-type' agnostic, assuming, of course, everything complies with regs."

It's interesting that VersaBank chose public blockchains for tokenized deposits, in contrast to others that have chosen private/permissioned networks, Shuster said. "It suggests that banks want public-chain 'reach' with bank-grade controls. I do not believe that tokenizing deposits makes them unusable. If the money is to be used for lending, then those tokenized deposits could be exchanged for traditional dollars or a stablecoin as needed."