Avanti Bank, a blockchain bank formed by former Wall Street veteran Caitlin Long, has received a bank charter from the Wyoming State Banking Board.
It's one of several bank charters awarded recently to fintechs such as SoFi, Square, Jiko, Varo and Kraken. Kraken, like Avanti, got its charter from Wyoming, which has created a special-purpose depository institution charter for companies that want to offer services around digital currency and blockchains.
Along with the charter, Wyoming has approved Avanti’s business plan, which has some unique components.
For one thing, the bank plans to offer a tokenized U.S. dollar called Avit (the name rhymes with “have it”). The bank will offer custody of digital assets and the ability to trade with other customers.
Caitlin Long, founder and CEO of Avanti Financial Group, was formerly a managing director at Credit Suisse and Morgan Stanley as well as president of the blockchain technology company Symbiont. In an interview Thursday, she explained how she got into blockchain banking and what her new company, which hopes to open its doors in the first quarter of 2021, plans to do with its banking charter.
How did you get interested in starting a blockchain bank? Was there anything in your experience on Wall Street that pointed you in this direction?
CAITLIN LONG: Yes. I was in the weeds on how payments and public and private securities get settled during my years at Morgan Stanley running the pension business, where we were transferring billions of dollars in wire transfers and securities transfers.
Every one of those assets had to move between a pension fund and an insurance company and settle on the same day. That may not sound difficult for a wire transfer, but given the risk of what would have happened if those wire transfers had not settled on the same day — the entire annuity contract would have been deemed illegal — we had to figure out how to get same-day settlement to assets that normally settle in longer time frames.
In securities back then settlement took three days. And in private equity, it was sometimes weeks. It took months of planning and practice sessions to orchestrate among the operations professionals how that was going to get done.
I concluded when I was working on that, there has to be a better way. The system we have is just not designed to meet the customer's needs. And around about that time, blockchain was coming into the forefront, and it struck me immediately as a solution to the problems that I was living with on a day-to-day basis.
So that got you interested in the use of blockchain in securities settlement. What got you into the idea of starting your own blockchain bank?
A big part of that was the experience of the digital asset industry in being turned away by traditional banks. That is still a problem. Believe it or not, at Avanti we had trouble getting a bank account because of our involvement with digital assets. Most traditional banks will not do business with the digital asset industry. It's an industry that's been shunned and only a handful of banks, such as Silvergate and Signature, will do business with the industry. JPMorgan is now banking two of the larger players in the industry [Coinbase and Gemini], and so the ice is thawing.
But what I saw was that a lot of legitimate, lawful startups were having real trouble with the most basic aspect of being a business, which is getting a bank account so that they could remit their withholding to the IRS, which has to be done electronically from a bank account. In this country, if you do not have a bank account, you are not a business. And a lot of startups literally had to shut their doors in 2017 when they lost their bank accounts.
I also understood, having come from the pension world, that there needed to be a bank that could custody digital assets in order for mainstream institutional investors to enter this asset class. And indeed, that's what we're seeing.
So you're going to provide some basic banking to some of these companies in the digital asset industry. Is it riskier? Are you going to have to go through extra levels of know-your-customer and anti-money-laundering compliance? Or is it a myth that any company that's affiliated with digital assets is riskier to bank?
I think it is a myth, especially for us since we're servicing institutional customers. And even for companies that do service individuals in this industry, it's all the same rules that banks have to comply with: the Bank Secrecy Act, anti-money-laundering rules, Office of Foreign Assets Control sanctions. All of the same compliance processes apply to bitcoin as they do to dollars.
Who might be a typical client for Avanti?
Probably a hedge fund or a family office, at least in the beginning.
One thing that that you're going to do is issue tokenized U.S. dollars called Avits. Can you explain what Avits are?
They are bank notes issued by Avanti, which is, by the way, required by law to hold 100% reserves in high-quality, liquid, short-term assets. They’re just electronic bank notes analogous to any bank note or check that is an obligation of the bank. And the difference is it just happens to be in electronic form. The value of that is that it can be used in software applications. That's what doesn't exist right now in the banking industry.
Avits are analogous to stablecoins. There are existing stablecoins that are issued by New York-regulated trust companies. One is called Paxos standard, which is issued by Paxos, a trust company in New York. Another one is called USDC, which is issued by Circle, a trust company in New York. Gemini has issued something called a Gemini dollar. So regulated versions of these already exist. What's different about Avanti’s Avit is that it's going to be issued by a bank as a bank note, instead of issued by a trust company as a trust obligation.
Is an Avit a piece of code?
Yes.
With what distributed ledgers will it work?
It is issued by Avanti, so we'll work through our own ledger. It's not decentralized in that regard. We will be using either the bitcoin blockchain or the Ethereum blockchain as our database. So while a traditional bank might use an SQL database to keep track of their bank checking obligations, for example, Avanti will be using a public blockchain instead.
And what will having these Avits enable you to do at Avanti?
What the stablecoin market has shown us is that having a programmable payment system allows for two things. One is, customers can settle their U.S. dollar payment at precisely the moment they need it to settle. If that's 11:37 p.m. on a Saturday night, they can program their dollar payment to settle at precisely that point in time.
The value of that is there's no counterparty risk. You can design transactions where the settlement of the payment and the asset happens at the same time. The way U.S. dollar payments work, you cannot program them to settle at a particular point in time, which means that even in, for example, Fedwire, somebody is carrying an unsettled payment obligation. You can't settle both legs of the trade at the same time. It's not a surprise to me that payment innovation is happening in digital assets because digital assets settle in minutes.
Also, you get settlement finality. Once you send a digital asset, it's legally settled. You cannot get it back. One of the risk issues that is well known in the U.S. dollar payment world is that ACH payments can be clawed back. And so the reason the digital asset industry is so focused on innovation in this area is the intermediaries in digital assets, if they deliver, say, a bitcoin to a customer, and then the customer who originally paid them through ACH claws back the ACH payment, the intermediary is out both sides of that trade. It's a significant risk issue.
So necessity is the mother of invention. And stablecoins came about precisely because the intermediaries in the industry wanted to ensure that that risk was off the table by enabling simultaneous settlement of their bitcoin and U.S. dollar trades. When mainstream users need to have fast settlement of their payment obligation, they can use Avanti.
What if there's a bad actor or some kind of fraud and that payment has gone through? Is there any recourse?
Yes. As the issuer, we will have the ability to work with law enforcement to freeze the [customer's digital-asset] wallets. There hasn't been much reversal or freezing of transactions to date because everyone knows that they can be frozen. And so the bad actors stay away.
Say I'm a hedge fund customer. What kind of day-to-day needs am I going to come to Avanti Bank for?
We will allow customers who store assets at Avanti to trade those assets through other trading firms. So a hedge fund will come to us and want to trade with Avanti’s custody customers. Right now, over-the-counter trading volume in bitcoin and Ether is surprisingly large — it’s at about $112 billion. It's a bigger market than most folks realize.
So you'll be able to participate in that. Do you also see yourselves as a traditional bank? Will you be able to provide basic banking services to these clients?
Yes. We're offering ACH and Fedwire services through an [application programming interface], which will enable customers to build their own applications. Customers are demanding tech-forward banks in a way that they had not been previously.
