Innovation | 01.23.19
Blockchain Makes Its Way to the Bank
With the dawn of ATMs in the 1980s, stodgy old banks suddenly found themselves on the vanguard of radically transformative technology. Tellers had been replaced by machines!
Might the stage now be set for yet another daring leap?
Signature Bank, with the blessing of New York State regulators, is leading the way. It recently took a radical leap toward the horizon, developing blockchain-based financial technology for transacting digital money on behalf of commercial customers.
Where It Began
Our story starts several decades ago in a most unlikely setting: a garbage dump.
This particular landfill was being run by the Lancaster County Solid Waste Management Authority. The LCSWMA is one of The Commonwealth of Pennsylvania's largest — and most clever — county-run agencies. Over the years, partnering with a private company, Covanta, the LCSWMA created not one, but two waste-to-energy facilities. Today, these facilities process 1,200 tons of municipal solid waste per day, producing 35.7 megawatts of renewable energy (enough to continuously power 30,000 homes).
This power that the LCSWMA produces is sold to GPU Energy, which serves much of Pennsylvania. Together with the Commonwealth of Pennsylvania, a triad of big players are transacting with one another in large amounts, regularly — so they thought, “Hey, why not cut out the middlemen and create our own currency system?”
Last month, they did. The LCSWMA began accepting real-time (not 10 days later) digital payments, transacting, sans fees, via American PowerNet's automated system connecting buyers and sellers of energy.
To facilitate blockchain-enabled digital transactions, American PowerNet turned to Signature Bank.
A Green Light on Blockchain-based Digital Payments
Before Signature Bank could provide American PowerNet access to "Signet," its blockchain-based digital payments platform, the New York State-chartered bank first had to seek approval from the state Department of Financial Services (NYDFS). A formal green light came giftwrapped on December 4, 2018.
Additionally, the Federal Deposit Insurance Corporation (FDIC) had to approve Signet deposits worthy to receive insurance. Around the same time as the NYDFS, the FDIC gave its blessing.
Signature’s digital dollars are called signets. They exist solely for use on the bank's proprietary Signet Platform. Signets, by design, cannot fluctuate in value; they perpetually maintain a one-to-one relationship to the U.S. dollar.
The ability to transmit funds at all times is an innovation for bank payment systems, allowing clients to make instant payments, said a NYDFS spokesman.
The leaders of Lancaster County, American PowerNet, Signature and Signature's blockchain settlement partner, trueDigital Holdings, all have demonstrated forward thinking, and a willingness to tread on experimental ice at a time when blockchain's potential is only begining to be harnessed.
New York’s top banking regulator appears to be on the same page in terms of embracing “fintech.”
“NYDFS is pleased to strengthen and foster regulated innovation in New York’s burgeoning financial technology sector, specifically within our state-chartered banking system,” said NYDFS Superintendent Maria T. Vullo in a public statement. “New York continues to support and help advance innovation through sound state regulation and with products such as Signet, which provide lower-cost ways for businesses to efficiently make payments.”
One of blockchain's key attributes is smart contracts protocols; essentially a structure for the creation and maintenance of a single shared ledger that can automatically hold and disperse payments.
Signature is calling Signet the first-ever blockchain-based platform of its kind launched by an institution insured by the FDIC.
Signature is a full-service commercial bank. It has 30 private client offices throughout the New York metropolitan area.
Last year, the Bank expanded to the West Coast. The bank currently has $45.87 billion in assets.
In a public statement, Signature CEO Joseph DePaolo said it was “gratifying” to receive approval from NYDFS, pointing out how regulated innovation helped the bank build up its platform.
“The ability to transmit funds between approved, fully vetted commercial clients of the bank at all times is very valuable," DePaolo said. "Especially in light of the increasing speed and frequency at which they conduct their business."
The NYDFS said its approval follows a comprehensive and rigorous review of Signature Bank’s application and is subject to significant regulatory conditions, all of which will be examined and inspected by NYDFS professionals, as well as independent consultants to ensure that important protections for New York markets and consumers are being met.
The approval is based on a stringent set of requirements. Signature’s Signet must implement, monitor and update effective risk controls to prevent money laundering or terrorist financing, or any potential or actual wrongful use of virtual currency, including its use in illegal activity, market manipulation or any other similar misconduct (as spelled out in NYDFS’s February 7, 2018, “Guidance on Prevention of Market Manipulation and Other Wrongful Activity”).
Signet must also comply with DFS’s transaction monitoring and cybersecurity regulations.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.