Custodia, Vantage release first bank-issued stablecoin on Ethereum

Custodia Bank, in partnership with Vantage Bank, has issued the first-ever tokenization of a bank's U.S. dollar deposits on a permissionless blockchain.

The banks together issued Avit tokens for a customer on the Ethereum mainnet using the ERC-20 standard, the technical standard established by the crypto community for creating fungible assets on the Ethereum blockchain, ensuring the coin functions within it. Vantage Bank worked on the fiat reserves and traditional banking services and Custodia provided the blockchain functions including issuance, custody and reconciliation with its Avid Management System. 

Together they conducted eight regulated test transactions including the mint, transfer and redemption of the Avit tokens with ensured compliance of U.S. banking regulations including BSA, AML and OFAC. In a statement, the banks said they both worked closely with their respective bank regulators on this project.

"We broke ground on the legal [and] regulatory front, proving that U.S. banks can collaborate to tokenize demand deposits on a permissionless blockchain in a regulatorily-compliant manner," said Caitlin Long, CEO of Custodia Bank. "Custodia looks forward to the reversal of U.S. regulatory obstacles that have stymied stablecoin innovation in recent years, so that American consumers can benefit from the substantial network effects and global reach of permissionless blockchain technologies."

Long also praised Jeff Sinnott, president and CEO of Vantage, in a statement to American Banker, noting he led the push. 

"This was his idea," Long said. "I'm grateful to the innovative banks that see where the proverbial puck is going, not where it is today. Multiple banks are interested in doing this. Many in traditional banking see where things are going and I salute them for being early. It's an exciting and dynamic time."

Sinnott called it "a pivotal moment in reshaping the financial landscape" and said the feat shows "how blockchain and stablecoins can revolutionize payments."

"By executing this transaction, we're empowering banks to lead responsibly in cross-border modernization, while also leveraging the strength of the U.S. dollar and demonstrating regulators' support for responsible innovation," Sinnott said. 

Long told American Banker that the accomplishment made stablecoins on par with "real dollars" as classified by the Federal Reserve. 

"A few weeks ago in his stablecoin speech, [Federal Reserve] Gov. [Christopher] Waller correctly distinguished between 'real dollars' that only banks can issue, and 'synthetic dollars' that non-banks can issue. He put stablecoins in the latter bucket," Long said. "But as of yesterday, that distinction no longer holds because a depository institution – one that even the Fed classifies as a depository institution – has now issued a stablecoin. When issued by a bank, a stablecoin is just a dollar issued under different technology, a permissionless blockchain, in this case. That has never existed before."

Long founded Custodia in her home state of Wyoming in 2020. The state-chartered bank has been back and forth with federal regulators for years in its effort to receive a master account and deal with cryptocurrencies. The Federal Reserve deemed Custodia a depository institution eligible for a Federal Reserve master account in 2022 but it was denied the following year by the Federal Reserve Bank of Kansas City.

The 2023 announcement came on the same day the Federal Reserve Board issued a statement "mak[ing it] clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities." Earlier that month, the Fed along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation released a joint statement on "key risks associated with crypto-assets."

These were part of a series of events known within crypto circles as Operation Choke Point 2.0, which they believe is a coordinated effort by regulators to discourage banks from working with cryptocurrencies. The FDIC in 2022 sent 24 pause letters to banks encouraging them to think twice before working with cryptocurrencies. Last month the FDIC released documents relating to the incident, following a FOIA request by Coinbase.

The election of President Donald Trump was welcomed by many in the industry. Trump declared at a bitcoin conference in Nashville over the summer he would make the United States the "crypto capital of the planet" and just two months into his second term, the president has already made strides towards that, including hiring many cryptocurrency oriented staffers.

Trump signed a crypto-focused executive order days after taking office establishing a digital asset working group led by White House Crypto Czar David Sacks tasked with crafting an outline for the development and use of cryptocurrencies in the U.S. The order also included a call to create a crypto strategic reserve which he officially formed earlier this month.