A community bank in Doylestown, Pennsylvania, has broken what it says is new ground, agreeing to sell commercial loan participations to a digital currency platform.
Under a deal announced late Friday, the $571 million-asset HV Bancorp, parent of Huntingdon Valley Bank, will syndicate portions of new commercial loan originations to MakerDAO, creator of the Dai digital currency. MakerDAO has committed to investing $100 million in HV loans.
Both MakerDAO and HV have called the pact the first commercial loan participation between a U.S. bank and a decentralized digital currency. Like many other cryptocurrencies, Dai is not governed by a central agency akin to a central bank. Decisions are arrived at instead by a decentralized network of participants.
MakerDAO's currency is backed by assets pledged by participants, who convert their property's collateral into Dai stablecoins — a type of cryptocurrency that attempts to peg its value to a real-world asset, in Dai's case the U.S. dollar. Since there is currently little effective regulation of the collateral that undergirds cryptocurrencies, injecting real-world assets like a bank's real-estate loans can provide a critical boost to a cryptocurrency's credibility, according to Hugh Ragsdale, general partner at Lupine Capital in New York.
"It signals an intent to integrate, as opposed to evade, regulation," while at the same time providing "an out-of-the-box real-world asset yield solution that generates crypto-uncorrelated, relatively stable yields," Ragsdale stated in an email.
For HV, whose loan portfolio totaled $388 million on June 30, the $100 million pledged by MakerDAO represents a substantial pool of new liquidity, though executives are pledging it won't lead to big changes in the way the bank conducts business. Prior to the arrangement with MakerDAO, HV syndicated loans in excess of its $8 million legal lending limit to other banks. HV can now take advantage of a pre-funded relationship with a single partner, significantly streamlining the lending process, according to Chief Lending Officer Hugh Connelly.
A longtime mutual institution that converted to stock ownership in January 2017, HV operates six Philadelphia-area branches.
"We think it's almost a watershed event," Connelly said of Friday's accord. "We're the first, but we won't be the last'' bank to align with a cryptocurrency.
Connelly said he expects other banks to follow quickly in HV's footsteps, seeking similar relationships with MakerDAO or other cryptocurrency platforms, since they offer lenders an opportunity to tap into a fresh stream of low-cost funding at a time when the Federal Reserve is shrinking its balance sheet and many lawmakers are expressing concern over the size of the federal budget deficit.
The Federal Deposit Insurance Corp. said its actions are "consistent with longstanding legal authorities to ensure that banks engaging in crypto-related activities are doing so in a safe and sound way that protects consumers."
On its own, MakerDAO wants to commit a total of $1 billion to acquiring bank assets, leaving plenty of room for deals with other institutions, Connelly added.
Initially, HV's partnership with MakerDAO will focus on commercial real estate loans, but can be expanded to include commercial-and-industrial and other types of commercial credit as MakerDAO's comfort level increases, said Travis Thompson, HV's chairman and chief executive.
According to the terms of its agreement with MakerDAO, HV will submit the loans it seeks to syndicate on a monthly basis. MakerDAO will make payments from a Delaware Trust Account funded with dollars it converted from stablecoins.
Ted Peters, chairman and CEO of the Community Financial Institutions Fund and former chairman and CEO of Bryn Mawr Bancorp voiced concerns that injecting such a large amount of additional funding could incentivize HV's lenders to make larger, riskier loans. For their part, Thompson and Connelly noted HV has no time limit to deploy the $100 million and will keep at least 50% of each loan on its books.
"We're not a flashy bank," Connelly said. "We're small and we're going to keep doing what we're doing."
On June 30, HV's nonperforming assets amounted to 0.46% of total assets. Net charge-offs amounted to 0.03% of outstanding loans.
HV has made it clear it is keeping its balance sheet free of any crypto on both the asset and deposit sides. The company "worked months" with regulators to ensure they were comfortable with the idea of a community bank partnering with a cryptocurrency platform, Connelly said.
"We started very early," Thompson said. "We wanted to be very transparent."
