Are bank-backed cryptocurrencies going mainstream?
One Ontario lender that's in later stages of developing product wants to find out
As mainstream financial institutions grapple with how to approach digital assets, one Ontario-based bank is diving right in.
London, Ont.-based Versabank, a digital-only “Schedule 1” bank best known for financing corporations and public sector entities, is in the later stages of developing its own digital currency, which it expects to launch later this year, an experiment that would make it the first Canadian bank with its own crypto.
Versa's coin — a so-called stablecoin because its value will be backed by real assets, in this case digital deposit receipts — will be known as the VCAD and was developed in partnership with Canadian crypto asset manager 3iq and blockchain developer Mavennet.
The way the coin works is straightforward: If a customer puts $100 dollars Canadian into the bank, they will get 100 VCAD in return. Versa's vision is that the coin, once it is market ready, will then, like other currencies, be exchangeable for goods and services, as well as other cryptos and fiat currencies. Unlike a regular cryptocurrency such as Bitcoin, which is free-floating, the deposits at the bank mean holders of the VCAD can always exchange them for the cash value in an interest-free transaction.
David Taylor, Versabank's president and chief executive officer, told the Financial Post that after VCAD is past its final development stages, it will go through a “closed-garden environment” testing phase to iron out any flaws and to put anti-money laundering processes in place before it makes its public debut. Once it checks all the boxes, it's expected to be a fully functional, market-ready coin, available to any jurisdiction that allows crypto exchanges.
“As opposed to JP Morgan's what they call a `walled-garden approach', this goes to the world,” he said. “It goes out into through the various cryptocurrency exchanges . ... So, it could end up in a wallet for somebody in Africa somewhere.”
Taylor doesn't see regulatory scrutiny facing cryptocurrencies as an obstacle in bringing VCAD to market.
“No hurdles, but because it's brand new, we're walking various regulators through every step of this,” Taylor said. “Every time we've come up with something new ... we've had to walk regulators through.”
Taylor doesn't expect to be alone in this pursuit, describing a future in which consumers will continue to embrace the speed and convenience of digital transactions on a secure and fast-paced blockchain network — a fast-approaching reality that he says banks cannot afford to ignore.
Tech companies such as Facebook have been trendsetters in the private-sector cryptocurrency space. The social media giant is backing the Switzerland-based Diem project, which plans to launch a pilot stablecoin pegged to the U.S. dollar this year. Facebook first pursued a cryptocurrency project in 2019 through the token called Libra, but faced immense regulatory backlash at the time.
Central Banks, including the Bank of Canada, have expressed concerns that private-sector cryptocurrencies could pose a threat to the financial system.
But Taylor said that Versa's plan aims to move the bar higher by ensuring the currency is created and traded in a regulated space backed by a chartered bank.
“Where the concern comes from, with respect to central banks and governments and such on the stablecoins, is that they're issued by non-regulated entities,” Taylor said. “In the last few years, there's been all kinds of examples of non-regulated entities disappointing the market, to say the least.”
Bank of Canada deputy governor Timothy Lane noted earlier this year that stablecoins need an appropriate framework to keep consumers safe. That's something Taylor agrees with.
“I embrace it, I love it. It separates me from the others. I'm already in a regulated framework,” Taylor said, adding that Canada's auditing system holds him accountable. “You see those comments, they're dead on. If stablecoins become a payment vehicle, and for some reason the asset wasn't there backing them up, there'd be a whole lot of very unhappy people. It could take the financial system down.”
Taylor's vision is nearing reality at a time as regulators are starting to come to grips with cryptocurrencies. This week, the Office of the Superintendent of Financial Institutions (OSFI), Canada's federal bank regulator, sent a letter to banks asking them for feedback on a global framework being developed by the Basel Committee on Banking Supervision
At the same time, the regulator said, OSFI itself is “beginning to consider an appropriate prudential framework for crypto assets, with potential implications for all capital guidelines.”
It is asking Canada's banks to submit their thoughts by the end of September.
No hurdles, but because it's brand new, we're walking various regulators through every step of this.