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Why now is the right time for banks to get into crypto


While many in the financial world are running away from crypto and its perceived dangers, there are others who are running toward it.

Gene Grant, CEO at LevelField Financial in Houston, joins us to talk about what his new bank wants to do in the crypto space, and why now is the right time to do it.

A few takeaways from the conversation:

  • Many crypto customers want to be able to access banking services, so the right time to get positioned is when things are watch-and-wait, as opposed to when they are booming.
  • Grant sees digital asset products and services becoming a standard bank offering for institutions of all sizes in the not-too-distant future as banking continues to evolve digitally.
  • The payments space could lead the way into that future, as customers already expect 24/7 access to financial services. With the technology available, banks will have to adapt.

INTERVIEW TRANSCRIPT

So, Gene Grant, CEO at LevelField Financial, welcome to the BAI Banking Strategies podcast.

Thank you for having me.

Gene, can you start us out with an overview of LevelField Financial as it’s currently operating? Your lines of business, the services you provide, how long you’ve been in business, that sort of stuff. And also if you could include in that maybe a little bit about your background in the financial industry.

So LevelField Financial, we’re a little over five years old. Currently, we have limited number of products out there. We have a broker dealer operation, so we are doing private placements and helping firms raise capital. On the digital asset side, in 2022, we actually launched in what we’re calling early-access mode, means it’s mostly invitation only to a select number of customers in a select number of states, some digital asset products. Primarily, we have the ability for our customers to come in and buy and sell Bitcoin only at the moment and we have some advanced custody services so that our customers can hold digital assets. As for me, I’ve got a little over 30 years in the financial services industry. I spent the bulk of my career in the corporate investment banking side working in some of the world’s largest investment banks. I was heavily involved in interest rate derivatives, credit derivatives and the full gamut of trading products. So it’s been a pretty good career so far, and I’m really looking forward to the next phase.

So that’s where LevelField is today, and thank you for your background as well. But what is the vision for the company in the years ahead in terms of becoming what you say will be the first FDIC insured institution offering digital asset services nationwide?

Our objective of LevelField Financial is to serve the defined niche of customers who are interested in the digital asset class. In the old days, a bank could set up anywhere and they would have more or less a moat defined by the geography. People had to be able to drive to the bank, be able to get access to the bank, and therefore, they didn’t need to have any other strategy than location. Now, those days have long since passed, and today, in order for a bank to thrive, particularly a new entrant, one needs to define their target market. And what we’ve done is we’ve defined the customers that we’re interested in as those niche of customers who are interested in digital assets. So LevelField Financial is putting together a full service bank that has the full array of products and services that one would find in the community bank, but in addition, we want to add those specific products and services in order to support the needs of those customers who have that defined interest, which is digital assets.

What kinds of services are we talking about there?

Well, the simplest one is the ability for customers to buy and sell digital assets in a safe, simple, and secure manner. So we will have what we call an on and off ramp. The next is custody. Customers shouldn’t have to worry about the safekeeping of their digital assets. So, we will have accounts – we don’t call them wallets, and that’s a very important differentiation. When the assets are stored in our safe custody, it is an account. We take care of them for you, all the standard services that comes with an account structure. In addition to that, we know from the marketplace that customers who participate in the digital asset class are always seeking to get some liquidity essentially to unlock that stored value in their digital assets without selling those assets, which creates a taxable event. So we’ll provide the ability to borrow off the digital assets themselves, so another service that makes digital assets more friendly, more easy to use, and will promote adoption.

Do you envision that all you do will be digital assets? Will that be the entire structure of the bank? As we look at Silvergate and the troubles that they’re having, what’s the risk side of that?

Far from it. In fact, I think the model that we have and the model of Silvergate couldn’t be more different. We intend to operate the bank such that no more than 50% of our assets come from digital asset side. Putting it another way, 50% of our loan activity will be very much community banking, working with those customers in the geographic footprint in which we exist. The bank that we’re purchasing is located in Chicago, but we’ll be opening additional branches in Houston, Austin and Miami, and we’ll be working with the small and medium-sized businesses in those areas to provide traditional loan services, whether that’s providing inventory financing, or commercial real estate lending, or residential real estate lending, so that our balance sheet is always going to be 50% driven from that community banking side. On the digital asset side, we’re not targeting the firms or the fintechs. We’ll be targeting the individual consumers, the end users so that we don’t have the volatility that’s associated with fintechs moving large amounts of money in and out of the bank, but rather consumers, and we want to become their primary banking relationship.

You mentioned the bank that you just bought in Chicago… That bank is called Burling State Bank and their headquarters is just actually a block away from ours in the heart of the Chicago Loop. I looked it up, and Burling has about $200 million in assets. It’s a small institution, and its focus is on being a community bank for the Chicago area. So, as you were out bank shopping, what attracted you to Burling, and what makes it the right vehicle for LevelField to pursue this digital asset services strategy?

When we looked for a bank, we looked long and hard and ended up doing a pretty deep dive in eight institutions before we ended up deciding upon Burling. Burling is a fantastic bank, and its origins came from working with the trading community in Chicago. So, from their history in 1989 onwards, they have the background in working with institutions who are involved, and individuals who are involved more in the trading side of things. And when the trading industry in Chicago started switching and then moved away from the in-person trading so that the branch, which is in the Chicago Board of Trade Building, no longer got that foot traffic and the kind of activity that used to be very predominant in the early years, they started switching their business model and they started expanding into different business areas. One of the business areas that they have looked at and are participating in is already in the digital asset world. So it’s an ideal match for us because we’re going to take what they’re currently doing, add in the additional technology that comes from LevelField Financial, add in our expertise in risk management, and actually expand and de-risk their activities at the same time.

Is this a good time for a bank to be getting into crypto in any capacity given what we are living through, what many are calling another “crypto winter.” It seems like every week there’s something new and negative from the industry, including the failure of Silvergate Bank and even more recently of Signature Bank, and other crypto-friendly institutions are still teetering. How do you think about the opportunity with crypto in 2023 and beyond that you’re trying to tap into?

We don’t think of it as getting into crypto because the bank will never take a principal position in any digital asset. We will never have direct exposure to cryptocurrency. Our business is customer facilitation. We work with the customers to ensure that they can execute any activity they wish to in a safe, simple and secure manner. So the bank is not at risk at any time to the movements of some cryptocurrency – up, down, sideways. We don’t take principal positions. The great thing about the digital asset world or the cryptocurrency world, it has been around for over a decade now, and despite multiple times where people are calling for the death of it, or people calling it “crypto winter,” which I’ll come back to you in a moment, it has continued to thrive, continued to grow out, and continue to get more and more people interested in the ecosystem. I’m not personally going to say whether or not we’re proponents of any given crypto asset, but what I do know is customers are. Customers are interested in this asset class, and continue to be interested in the asset class. The volatility for those customers should be in the asset, and not in the provider. Now, where we are today, the asset class has currently got a valuation somewhere around $1 trillion. It is currently in some turmoil as you pointed out, and you used the phrase “crypto winter.” Having been in the industry for a little while, I bristle a little at that because I hear it being used by insiders who I think are using it to cover up some activities in their firms. And what I mean by that is “crypto winter” as we lived through in 2019 was an activity of an incredibly low price across the digital asset space. Bitcoin was around $3,000. Activity was basically non-existent, so there was hardly any trading activity, and people were just waiting and watching it move sideways. Now, let’s bring it forward to today. Bitcoin is roughly $20,000, so it’s clearly not at $3,000. Volume, we’ve seen some record days in the past year, and we’re routinely seeing days that are far in excess of any activity in previous years. So it’s hard to say really that we’re in “crypto winter,” price is down, but it’s all relative, because $20,000 to me is a lot higher than $3,000. And for anybody who’s built a business, everybody knows, that’s done it successfully, the best time to build a business is when things are quiet, not when things are booming. And this gives us an opportunity to lay in the foundation, put in the people and ensure that our business is robust so that we can ride the wave up, provide that superior customer service to our customers as the…



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