Transcription:
Penny Crosman (00:04):
Welcome to the American Banker Podcast. I'm Penny Crosman. Nathan McCauley, founder and CEO of Anchorage Digital, the only U.S. crypto bank to have a national trust charter from the OCC, recently urged banks to get more involved with cryptocurrency, and he recently got his company out from under an OCC consent order. He's here with us today to talk about these and other developments. Welcome Nathan.
Nathan McCauley (00:28):
Thanks, Penny. Really excited to be here. Thanks for having me on.
Penny Crosman (00:30):
Thanks for coming. Let's talk about stablecoins. I think this is top of mind for a lot of people. The bankers in our audience worry that the growth of stablecoins could siphon trillions of core deposits out from under them. This is especially true for community banks and they feel this could undermine their ability to fund local lending. What do you think about these kinds of concerns?
Nathan McCauley (00:55):
Sure. I think the general trend with community banks is one where technology continues to have an impact on them. Many of the technology advancements have been accretive to the regional community banks. Some of them are. I think there there's warranted concern about deposit flight and these kinds of things. So I think the main story that's going to happen with stablecoins over the next couple of years is how will local and community banks be enabled to adopt stablecoins. The technology is relatively straightforward: ledgering, depositing these kinds of things, and so I expect that they will be enabled by some of this and that there'll actually be a net boon for many of the local and regional banks across the country as they're enabled by better technology solutions.
Penny Crosman (01:49):
If banks issue their own stablecoins, do they still have the backing to make loans? I mean, can they lend against those funds?
Nathan McCauley (02:03):
So I think there's a couple ways to look at this. The first way is that if the reserves backing a stable coin are able to be used for loans under the GENIUS Act, the preference is that they are not, and that most of the reserves are either direct bank deposits, which they would be able to do that, but the lion's share of the actual assets back in the stablecoin are supposed to be held in things like Treasuries. And so the bank deposit portion, they would be able to continue to make loans on those. But I think it's in some ways, not necessarily the right way to think about it because it's not just about the reserves that they can potentially do loans with. But the stablecoins themselves could be held in either wallet infrastructure or I imagine that over time banks will be allowed to have stablecoins themselves be deposits that then could be lent out as well. And so I don't know if it's necessarily true that just as if a bank creates a stablecoin that there won't be an opportunity for lending there on either side of the equation. And that's something that I think the market is going to help us figure out.
Penny Crosman (03:23):
You recently said at our Digital Banking conference that you feel like banks ought to really be moving ahead with various kinds of cryptocurrency involvement. Can you recap, what do you think are some of the mean opportunities for banks and how can they think about safely moving forward?
Nathan McCauley (03:47):
Yes, I think they've got really three broad areas that they can start to look at. The first one I'll call crypto as a service. So allowing your clients to buy and sell, some of the major cryptocurrencies like Bitcoin and Ethereum, there's a lot of demand for this. And so if you have any kind of wealth platform or trust platform enabling Bitcoin and Ethereum, there is a great opportunity. Second great opportunity is all things with stablecoins, whether that's stablecoin reserves, stablecoin settlement, taking deposits in stablecoins or integrating wallet infrastructure so that your client base is able to hold stablecoins, all of those are great opportunities and really going to be, I think a big growth area for the next couple of decades. Right now, Treasury Secretary Bessant is saying that he wants the stablecoin ecosystem to grow into the trillions.
(04:49):
I think he's looking at it as a $3 trillion industry at least. And so that's coming directly from the administration, directly from the White House essentially. So the stablecoin opportunity is going to be profound and basically any way the dollars move or get stored will have a stablecoin nexus that can be thought of. And then the third that's maybe a little further out is starting to think about tokenization when we're not just talking about decentralized crypto assets like Bitcoin, Ethereum, not just talking about taking the dollar and putting it on same stablecoins, but starting to think about what does it mean for stocks, bonds, ownership records to be put on chain. And for those to be held at banks. The leader here really leading the way is BlackRock with their tokenized money market funds. But I think over time there will be a whole host of, really the addressable market is the entire capital markets that could come on chain and that could provide another opportunity for banks as well.
Penny Crosman (05:47):
And so as a lot of what you just described about becoming more efficient, basically doing things in a more quick and cost effective way?
Nathan McCauley (05:59):
I think there's two ways to look at it. I think one is technological advancements, allowing more use cases for your customer base, whether that's being able to invest in assets, being able to move dollars around more efficiently or more flexibly. And so that's add new features, add new dimensions to the banking business. The other side of it is, you're exactly right, efficiency gains, ability to settle more quickly, to account more quickly. There's a lot of opportunities there where you've got 24/7 global markets that are attached to every crypto asset. And so looking at those as opportunities that could be there to increase efficiency, reduce risk, and overall make the bank more flexible is another dimension to it. So I think those are absolutely the two ways that banks ought to be thinking about it.
Penny Crosman (07:03):
So as I mentioned in my intro, the OCC recently lifted the consent order on Anchorage. Congratulations on that. And I believe that was focused on anti-money laundering and Bank Secrecy Act compliance, which is something that a lot of banks have also been hit with consent orders on over the past five years. I mean always, but quite a few have received these in the last five years or so. What changes did you make to correct these perceived shortcomings and do you have any advice for banks that are also trying to do a better job with AML-BSA for themselves and also for their fintech partners?
Nathan McCauley (07:53):
Yeah, I think the first thing that everyone should take away is it's a very encouraging development. The OCC lifted our consent order, which has effectively given us a clean bill of health on everything we're doing with digital assets, with crypto assets on decentralized networks. And the good news there for the industry is that we have not somehow constrained the problem to make it easier for ourselves. We still interact with dozens of crypto assets across different blockchains. We interact with self-hosted wallets, we participate in staking, we participate in on chain activities. And so we have not done this on easy mode. We have solved the BSA-AML problems on the most complex way that you could possibly look at it. So we haven't skipped any of the problems. And the fact that we have done that in a way where we have complied with all the federal regulations and have built the programs that are sustainable, have passed our internal audit muster at the OCC themselves proves that it's possible.
(09:00):
I think many people wondered if it was even possible to correctly and effectively integrate the banking system with the BSA-AML provisions that are held to at the national level. We've proved that's possible and across a whole host of use cases. And so if any bank is worried, well, hey, is it even possible to do this? Is the OCC open for this? There's no clearer message than the lifting of our consent order and the path is open now. Now that doesn't necessarily mean that it's easy, but it is possible. And I think that's the biggest takeaway from the lifting of our center order.
Penny Crosman (09:37):
I know you hired a lot of people, compliance people and attorneys and so forth. Did you also make some technology changes to beef up AML-BSA compliance?
Nathan McCauley (09:52):
We did. We needed to build a number of custom integrations for our entire stack. And so if you think about the typical stripes of BSA-AML program across transaction monitoring, behavioral monitoring, looking at integration with the travel rule provisions, there was a whole host of things that the tech wasn't mature enough from a provider level, and then the integration of it wasn't yet ready. And we built that whole system that from onboarding all the way to calculating customer risk rating, to monitoring the activity that our clients do across all the different blockchains, all that need to come together in a impressive system that can monitor the risk, detect activity, generate alerts, those alerts, you can go and look into them more deeply. So for us, it was about something in the neighborhood of 12 software engineers for a period of two to three years that built this whole system that came together.
(11:04):
We spent a lot of time building that, and I think it's a testament to the oversight that the OCC had on us that they very rigorously looked at that. So you had to do model validations on everything that we put together. But at the end of the day, now we have the system that works and other banks we think are going to be able to benefit from the fact that we've built that system. I think many banks across the country will actually think about using Anchorage as a correspondent bank where we will be their crypto correspondent and be able to have banks draft off the fact that we've done all that work and utilize our services in a way where they know they're able to be compliant at a federal level because they're built on infrastructure that is compliant at a federal level.
Penny Crosman (11:56):
Do you actually use AI to analyze transactions for signs of money laundering, or is it more of a rules-based program you're using?
Nathan McCauley (12:07):
Right now we are still rules-based. And that's basically because in order for transaction monitoring, behavioral analysis and all of these things to pass muster with the federal regulators, you have to be able to do model validations. And right now, model validations are quite hard for AI models that you don't develop yourself because they tend to be black boxes. And so rules-based systems, at least for now, are the state of the art. I do imagine that AI will take a bigger part of the behavioral monitoring over time, but we'll have to be able to do proper model validations before we can really roll out those systems.
Penny Crosman (12:52):
Okay. Interesting. So several other crypto companies, including Paxos, Ripple and Circle, have recently applied for national trust charters from the OCC, and there's been a lot of pushback from bank groups like the ABA and ICBA, which say that these companies would then be providing deposit-like services without adequate regulatory oversight and that they would be exposing the banking system to deposit drainage and increased fraud. I think you were in favor of companies applying for these charters. What do you think of these kinds of objections?
Nathan McCauley (13:40):
I see things from both sides. As I sit here with a crypto charter myself, and having gone through four or five years of a consent order, I understand that there's a lot of work that goes into properly running these systems, and banks would like to be able to benefit from the fact that they have built thoughtful, careful programs over time. And so there's a natural feeling that comes with, Hey, we don't necessarily want more competitors. I understand that point of view. While at the same time, I understand that the federal regulators have a standard that they hold everybody to. And if you're worried about this being some sort of a easy way to get in and not have to comply with federal regulations, I can tell you unequivocally, that's not what's going to happen at the OCC. What's actually going to happen at the OCC is anybody else applying for one of these charters is in for quite a bit of a wake up call if they think they're going to have an easy time. It is a very difficult process to build the systems that work for the regular review cycles that you have at the OCC, and they're not interested in any excuses about, hey, the technology is different. It doesn't work that way. They're interested in compliance with the laws.
(15:15):
So I don't think that we're at risk somehow of these banks not being run appropriately because of the strictness and careful thoughtfulness of the federal regulator.
Penny Crosman (15:30):
I heard you attended the GENIUS Act signing ceremony at the White House. What was that like?
Nathan McCauley (15:37):
It was by far the fanciest event I've ever been at, so I'll start with that. I mean, everyone dressed to the nines, obviously, because it's an event at the White House. And so very formal in that regard. Even as we went in, there was a string quartet playing in the hallway as we walked in. So when I say formal, I mean formal. And it was cool. I mean, it's obviously a historic event, President Trump signing the GENIUS Act, which has set the rules of the road for stablecoins in America. So a couple of things that occurred to probably all of us attending there was number one, the contrast between where the crypto industry was maybe a year ago to now. That was, I think, a big change that we all felt with the things that were going on in the previous administration around banking and other kinds of lawsuits against crypto companies, to now, hey, we've got a federal regulation that lays out the rules of the road in a very clear way.
(16:48):
And that dovetails with an administration that is looking to advance crypto as part of its key economic and foreign policy objectives that couldn't really encapsulate it better than having that event with the GENIUS Act signing. I think another thing that was actually interesting about it that I hadn't really appreciated was that it's actually relatively rare for the U.S. Congress to sign and to pass bills that are standalone bills like the GENIUS Act was. Typically, the approach now is you have these omnibus bills that factor in a lot of different use cases, a lot of different legislative agendas that all come together in one big omnibus structure. And so having a standalone bill like GENIUS, I think this was the first one that has happened in the banking industry since literally Dodd-Frank. And so that part of itself was also pretty interesting. Not even just for the crypto industry, but just banking at large. This was a pretty special moment.
Penny Crosman (18:03):
Kind of a historic moment. Well, I'm afraid we're out of time. Nathan McCauley, thank you so much for joining us today. To all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Adnan Khan. Special thanks this week to Nathan McCauley at Anchorage Digital. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.