A community bank in Doylestown, Pennsylvania broke ground by agreeing to sell commercial loan stakes to a digital currency platform.
In a deal announced Friday evening, HV Bancorp, parent company of Huntingdon Valley Bank, with assets of $571 million, will syndicate portions of new commercial loans to MakerDAO, creator of the Dai digital currency. MakerDAO has pledged to invest $100 million in HV loans.
MakerDAO and HV 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 similar to a central bank. Instead, decisions are made by a decentralized network of participants.
MakerDAO’s currency is backed by assets pledged by participants, who convert collateral for their ownership into Dai stablecoins – a type of cryptocurrency that attempts to peg its value to a real-world asset, in the case of Dai the US dollar. Given that there is currently little effective regulation of the collateral that underpins cryptocurrencies, injecting real-world assets like a bank’s home loans can provide a critical boost to the credibility of cryptocurrencies. a cryptocurrency, according to Hugh Ragsdale, general partner of Lupine Capital in New York.
“It signals an intention to integrate, as opposed to escape regulation,” while providing “an out-of-the-box solution for real-world asset returns that generates crypto-uncorrelated and relatively stable returns” , said Ragsdale. in an email.
For HV, whose loan portfolio stood at $388 million as of June 30, the $100 million pledged by MakerDAO represents a substantial pool of new cash, though executives promise it won’t result in big changes in the way the bank conducts its business. Prior to the deal with MakerDAO, HV made syndicated loans in excess of its legal lending limit of $8 million to other banks. HV can now take advantage of a pre-financed relationship with a single partner, which greatly simplifies the lending process, according to Director of Loans Hugh Connelly.
A longtime mutual institution that converted to stock ownership in January 2017, HV operates six branches in the Philadelphia area.
“We think it’s almost a watershed event,” Connelly said of Friday’s deal. “We are the first, but we will not be the last” bank to align with a cryptocurrency.
Connelly said he expects other banks to quickly follow in HV’s footsteps, seeking similar relationships with MakerDAO or other cryptocurrency platforms, as they offer lenders the ability to tap into a new stream of low-cost funding at a time when the Federal Reserve is shrinking its balance sheet and many lawmakers are concerned about the size of the federal budget deficit.
MakerDAO alone wants to commit a total of $1 billion to acquiring banking 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 may be expanded to include commercial and industrial loans and other types of commercial credit as MakerDAO’s comfort level increases, said Travis Thompson. , Chairman and CEO of HV.
Under 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 by dollars it has converted from stablecoins.
Ted Peters, President and CEO of the Community Financial Institutions Fund and former President and CEO of Bryn Mawr Bancorp, expressed concern that the injection of such a large amount of additional funding could cause HV lenders to make larger and riskier loans. For their part, Thompson and Connelly noted that 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 are small and we will continue to do what we do.”
As of June 30, HV’s non-performing assets amounted to 0.46% of total assets. Net allocations amount to 0.03% of outstandings.
HV has made it clear that it keeps its balance sheet free of any crypto on the asset and deposit side. The company “worked for months” with regulators to make sure they were comfortable with the idea of a community bank partnering with a cryptocurrency platform, Connelly said.
“We started really early,” Thompson said. “We wanted to be very transparent.”