U.S. banks give multibank blockchains another try

About five years ago, U.S. banks began talking to organizations like R3, Ripple and Digital Asset Holdings and the Enterprise Ethereum Alliance about developing shared digital ledgers that would make the banks more efficient and help them work with one another for cross-border payments and other purposes.

But then most U.S. banks quietly backed away from these projects. Some thought it was too hard to co-own a blockchain where everyone, no matter the bank’s size, has equal say. A second stumbling block was banks’ reluctance to let rivals see their customer, transaction and deal data. A third was that there wasn’t a stable digital asset that could function like a digital dollar in the transferring of funds from one bank to another. There were digital assets that fluctuated in value and would need to be converted to local currencies.

Joseph DePaolo, president and CEO of Signature Bank; Frank Santora, chief payments officer of Signature Bank

Signature Bank became interested in blockchain technology in 2018 as a way to support cryptocurrency businesses, said Joseph DePaolo, president and CEO, at left. Multi-bank blockchains will give help small and midsize banks compete, said Frank Santora, the bank’s chief payments officer.

But in recent weeks, several regional banks have signed up for new multibank blockchains. In November, New York Community Bancorp joined the Provenance blockchain developed by Figure Technologies. The $53 billion-asset Western Alliance Bancorp in Phoenix and the $19 billion-asset Customers Bancorp in West Reading, Pennsylvania, have started using a blockchain for banks run by Tassat. Other banks are working with Tassat but haven’t announced so publicly.

What’s changed over the last five years is that distributed ledger technology itself has adapted to the needs of banks. Stablecoins have come along to provide stable stores of value. And the organizers of multibank blockchains have figured out an approach in which each bank member gets value out of its own version of the ledger, then links it up with others for a multibank blockchain.

Building a bank-friendly blockchain

New York-based Signature Bank, which has $108 billion of assets, started with its own blockchain in early 2018 as a way of supporting clients in the digital asset industry.

“Our clients are all over the globe and they need to transact and settle transactions 24/7,” said Joseph DePaolo, president and CEO of Signature Bank. “So our platform had to be 24/7, it had to be low cost. We had to have the utmost security on these transactions.”

Signature Bank recruited cryptocurrency experts from Metropolitan Commercial Bank, also in New York, and put Frank Santora, Signature’s chief payments officer, in charge of the effort.

They built a blockchain-like payments platform with a New York technology partner, True Digital, which has since changed its name to Tassat.

Tassat recently announced plans to launch a digital interbank network called Tassat Pay early next year. It will connect individual banks’ blockchains and let banks move money among each others’ customers. Customers Bank and Western Alliance Bank have signed on to use it.

“We’re creating an ecosystem of bank partners that want to participate in this network in the coming months,” said Ron Totaro, Tassat’s CEO.

The Tassat Pay network will be bank-owned and bank-governed, Totaro said. Tassat will provide the technology, negotiate terms and manage the network.

Tassat’s ledger is based on a privately permissioned fork of the Ethereum blockchain. Its tokens are ERC 20 smart contracts that act like stablecoins. Its digital ledger sits on top of a bank’s existing core banking system.

“You can effectively take funds from your direct deposit account and move those funds into a common bank-held omnibus account,” said Kevin Lupowitz, Tassat’s chief information officer. “Once that happens, we generate the corresponding amount of tokens and put them in your blockchain wallet. Then we move those private tokens as you request to anyone else on the platform.”

One of the benefits of the system, Lupowitz said, is that the sender of money gets immediate confirmation that it was received on the other side.

Another benefit is speed.

“If you give somebody a choice — you can wire funds and wait a day or two or three days, or you can do it instantaneously — it doesn’t matter what industry you’re in, you’ll take instantaneously,” Lupowitz said.

Signature’s blockchain was launched Jan. 1, 2019. As of Sept. 30, 2021, the bank reported $23 billion in total digital asset deposits. It’s used mostly by the bank’s cryptocurrency business clients. Over time, the bank expects clients in all industries to use it.

In early December, Western Alliance signed up for the Tassat Pay network. Like Signature, it was looking for an always-on payment platform for clients.

“You’ll be able to transfer funds to anyone else within the network 24 hours a day, 365 days a year, and not have to wait for the banks to be open or for Swift to be open, or for ACH,” said Dale Gibbons, the bank’s chief financial officer.

Gibbons and his team were in the process of creating Western Alliance’s own blockchain for this purpose. They learned about what Tassat was doing and decided it would be quicker and cheaper to partner with the company.

Western Alliance plans to let all business customers send and receive payments on the blockchain. It should especially help those with international supply chains, Gibbons said.

“Funds can be made readily available to them on a Saturday, for example,” Gibbons said.

The more banks join the network, the more customers will be able to use the platform, as their counterparties’ banks support it.

Western Alliance expects to be live on the Tassat platform in the spring, Gibbons said. It’s developing interfaces that will link the bank’s systems to the Tassat ledger and it’s testing those connections.

The bank will first offer faster payments. Then it will build other treasury services that can run on a blockchain.

Why now 

One development making blockchain-like technology more palatable to banks now versus five years ago is the advent of stablecoins.

“For most transactions, if people are not speculating in a digital currency, they are interested in U.S. dollars,” Gibbons said. The use of stablecoins also averts currency-conversion or exchange costs, he pointed out.

Also, blockchain-like technology has become more accepted overall.

“This technology has been around for a decade, but it hasn’t been widely implemented,” Gibbons said. It’s an option many bank competitors don’t have that clients will find helpful, he said.

Another driver of the current projects is that small and midsize banks are feeling pressured to deploy new technologies to stay relevant and compete with megabanks, Signature’s Santora said.

“A network like the one that Tassat is looking to develop would give these small and midsize banks the opportunity to compete in this ever-changing financial landscape,” he said.

Some earlier multibank blockchain plans, by players like R3 and Ripple, were too grand, Santora added.

“They were trying to bring all the banks together at the top,” he said.

In the approach Tassat and Provenance have taken, each bank starts with a private blockchain designed to meet clients’ needs and immediately begins allowing real-time payments in a regulatory-compliant manner.

“However, as time progresses and as those ecosystems expand, then the opportunity to connect with other banks will arise,” Santora said. “The demand will be driven by the client and by the banks to grow that network.”