Scott A. Shay, chairman of Signature Bank in this discussion with Emmanuel Daniel said that early adopters of cryptocurrencies saw a serious problem with how payments, money, and store of value were handled. The rethinking of that led to the bank developing its blockchain-based payment platform, Signet.
In addition to the early adopters, the bank is also focused on the commercial and business community that will be important Signet users who want the immediate payment and the store of value features that the system offers. The bank will also be expanding its product range to include “zero-loss” crypto backed commercial loans for business clients.
While built on open-source technology offering API connectivity, Shay stressed that Signet meets US banking standards and each client in the community goes through a US bank vetting process.
In his book “In Good Faith” published in 2018, he also tackled the topics of atheism, idolatry, and religion.
The following key points were discussed:
The following is the edited transcript of the interview:
Emmanuel Daniel (ED): Thank you everyone for joining us today for another session of RadioFinance, except that in this session, my guest, Scott Shay, the chairman and founder of Signature Bank in New York is way out there in New York, lunchtime, and I'm here at about midnight in China. I'm traveling in China and we needed to do this conversation for a number of important reasons.
Signature Bank has caught the attention of many analysts around the world for the way in which you are incredibly, deeply involved in decentralised finance and from a traditional commercial banking basis. We're going to cover a lot about what Signature Bank is, the essence of it as an institution, and also your sense of where finance is going and how that's going to shape up.
I came across the books that you've written: “In Good Faith: Questioning Atheism and Religion,” and “Getting Our Groove Back: How to Energize American Jewry.” That's a very groovy title for a Jewish religious book. Like you're trying to be contemporary. But I did read “In Good Faith” and the sense I got was, here you are, a commercial banker with venture capital and corporate finance background way back in your past, having started a commercial bank and in this book, “In Good Faith,” you were trying to be ecumenical about your Jewish faith. You were very inclusive in the way that you've described the areas in which the Jewish faith shares with other religions like Christianity, Islam and so on. And yet you went back to being very conservative, if I would say so. You spent a lot of time describing idolatry and tried to make it contemporary in a way that we see idolatry in contemporary areas. Now, are you a conservative man? Or are you a left liberal sort of a guy? I only ask this because you probably had the same struggles in finance, because here you are running a good commercial bank and your clients are players who are going to be redefining digital finance. Give us a sense of who you are.
Scott Shay (SS): My background is this, I’m the first person on either side of my family to go to college. My father was a holocaust survivor, you know, from the book. And he spent his life recognising that it was a whole bunch of miracles that got him from Lithuania to be able to get to Chicago, get married, and have a son. I’ve lived my life grounded in that, taking nothing for granted in knowing that there’s great good in the world, and there’s sadly, unfortunately, great possibility for evil in the world. That’s part of my upbringing. It was part of how I grew up. I consider myself really a centrist, part of the broad spectrum centre, which gets people on all sides pretty angry. Because these days, more and more people are true believers. I’m a real believer in looking at the facts and trying to solve problems.
Practicing reciprocity
SS: One of the things that is totally underestimated in the world, and this is from the book, is just the simple concept of the golden rule. Don’t do unto someone else what would be hateful or you wouldn’t like if it were done to you. Treat people the way you would like to be treated. And I think people could get away from a lot of big theories and concepts, and class warfare, and just think about how do we treat the other person we encounter fairly? We can make the world a much better place.
You touched on idolatry. I do spend a lot of time on idolatry in the book and in thinking about it in my life, because we think that we licked the old-fashioned idolatry thousands of years ago. But in reality, people don’t get what idolatry is really about. Idolatry is simply this, it’s ascribing super authority or super powers to finite beings: people, ideologies, or in the old days, animals, but not so much anymore. But we had the whole 20th century be a catalogue of god-king pharaohs, the same way as the ancient pharaoh in the book of Exodus. How did he survive? He used poetry, pageantry, power, secret police, and informers to get whatever he wanted to do. What he said was true, it was truth. If you disagreed, you were dead or you were canceled, or you’re out. We had that unfortunately in the 20th century. Look at the parade of Joseph Stalin, Mao Zedong, Pol Pot, the Assad family, the Kim family. I could go Hitler, of course. I could go on and on. These are people who are god-king pharaohs who did whatever they did because they were ascribed superpowers, super authority. Look at Stalin, he starved a quarter of Ukraine, he sent tens of millions to the Gulag and nobody ever questioned him. Nobody ever assumed he didn’t have the authority to do that. He wasn’t living by the golden rule, he wouldn’t want to send himself to the Gulag or starve himself. If you just get down to the person-to-person interaction, I think this world would be such a better place. And that’s what I try to live by, personally and businesswise as well.
ED: I hope that the people watching this conversation will read your books and get that part of your personality, the dimensions that you’re thinking about, and all of that you’ve just explained actually applies in everything, like the global issues today and in finance, this whole thing about crypto and traditional finance. But somehow, like you’ve done in your book, you’ve sort of embraced the challenges that you’re faced with and you’ve tried to incorporate that into a traditional institution. In fact, I’ve been coming to New York every year and I’ve been sitting with people who you know and they’ve been telling me that they’ve been sitting at the board of Signature, and I never once stopped to ask what is Signature Bank until last year, when I 3realised that there were three US banks that were going up on the stock market and you’ve done very well since October, $70 and now $250. And the other two banks, First Citizens Bank and Silicon Valley Bank, the three of you, we can see you from all the way here. You’re on our radar screen now. At first, I thought it was because you were tied to something that has to do with technology or innovation. But when I looked into your balance sheet, you’re a good, old-fashioned bank, with good, old-fashioned customers. So, talk us through a little bit of the journey you’ve taken and profile the institution, your loan book, and your customer base. And at which point does this DeFi-type of universe fit into your overall strategy?
SS: First, let me give you a background on Signature Bank because you scheduled this call for literally the perfect time. It was April 27, 2001 that we held the opening party for the beginning of the bank. We opened our doors on May 1st. That’s when we went literally 24/7 and May 1st is the 20th anniversary of our actual opening. We were working 24/7 to open the bank. When we opened the bank, we had $42.5 million in capital. Total assets was $50 million. And you know what? We broke even in 21 months; we went public in 34 months.
Banking triumphs
SS: I'm so proud to say that we were one of the few banks in the United States, actually the only bank above $4 billion in the United States, to never have a down year, never to report a loss during the financial crisis. We made more money in 2008, than 2007, more money in 2009, etc. That's because we always were focused on what does the client want? The clients want two things: they want sleep at night safety. That's why we always had a tremendous percentage of our balance sheet and low rate, really boring assets that we don't have to worry about, people can sleep at night. Second is just figuring out how can we help the client make more money? It's really putting ourselves in the eye of the other and that was the central idea of starting Signature Bank because there were plenty of banks in New York. We’re the only bank that really started from scratch that said, we're going to be business client-oriented. We’re not in retail, which is why most people haven't heard of us. We are very much client-oriented. We've never done an acquisition, ever. Every client who wanted to come into the bank decided they were going to open an account here on their lonesome. We didn't acquire any other banks where suddenly we had those clients we were trying to accumulate. We had to convince everybody to come in. That is sort of how we got to the crypto journey. And I can talk to you about that if you'd like.
ED: Yes, absolutely. I'm just trying to draw the story to where you are today. Do I get a sense that your clients are high-net-worth individuals, small business owners, family offices, something close to like a private bank would be in Europe? Then because you were close to them, you were able to hold your asset book well. In fact, you did very well last year, which is surprising because of everything that's been happening in New York. A little bit more about your clients and the journey that they've taken you on.
SS: The idea of the bank was to be very client-focused, but the big banks, the JP Morgans are already doing a good job taking care of the Verizons, the PepsiCos, and the IBMs of the world. They could also do a good job for retail banking because they had the mass advertising and the like. The idea of the bank was that there's this whole group of people and companies in the middle that were not getting the attention they should be getting. We focused on them. Our average size of loan has primarily been about $5 million-$6 million. It’s not huge. We're not a European private bank either, we're really not. We are a bank for business, probably 90% plus right now, as we sit here, of our accounts are business accounts, are organisation accounts, or municipal accounts, or something else. These are not retail accounts. We may bank the CEO, the senior management, the owners, and the family that owns the company, but we are not focused on classic private banking. We do some and we're proud of what we do but we really lead with the business and we focus on specialised currency. That's the middle market. We also focus on mortgage servicing, we focus on fund banking, but again, these are to the businesses, they're not to the consumer direct at this point. And it's worked well for us because we started from $50 million. In December 31, 2019, we were $49 billion. And currently were over $80 billion, and all clients have walked in and said ‘I want to be a client of Signature Bank.’ So, we're working on it.
ED: The fact that a good, old commercial banking story can still flourish today. There are obviously pockets of needs that a bank like yours is meeting. I noticed that your non-interest income is kind of small for a commercial bank, given the fact that your own background has been in corporate finance-type of activities, and then you're saying that you're helping a lot of businesses, right? I would imagine that some of that would be corporate finance-related, but that's not showing up in your non-interest income. Give us a profile of the income of the book.
Customer first
SS: Our non-interest income is growing. But you're right, it is relatively lower than most of our peers, but the thing that differentiates us and the reason it's lower is because a lot of our clients have substantial demand deposits with us, which are no interest. We have over 30% of our business book, actually overall, are non-interest bearing so to a certain degree, people are providing us with those non-interest bearing and are offsetting what would otherwise be fees. And that's what clients want. To a certain degree, they'd rather park money and not be hit with this fee, that fee, the other fee. Just let me leave some money and don't charge me fees. And people are happier with that. Again, it's by listening to the client, whereas we have the view. Here's the thing that differentiates us – and if you read any of our material, we're single point of contact – is that in many other banks, the cash management is a profit centre, Forex (FX) is a profit centre, mortgages are a profit centre, this is a profit centre. We don't do that. We have only one profit centre, the private client group, so the private client group can say, ‘You know what, because you've got this, that, or the other accounts, we can make judgments about fees.’ No, we're not giving it away. If someone can open a small account and expect to have fees waived, but if you're substantial and you have enough with us that makes it worth our while, then that's what clients want.
Despite the fact that my background was investment banking and I was an M&A banker for a good long while and in private equity, we don't do corporate finance, investment banking. So, we've really stuck to our knitting. Because also, one thing that we've heard from clients is they don't particularly like that conflict so much.
ED: It's a temptation that you've avoided and it's worked well for you. It's worked well for a number of small banks, but somewhat at a point, you grow a little bigger, I don't know if the temptation comes through. Probably because you have a business focus, it must be that your clients have been growing themselves quite a lot. You've been servicing clients who essentially have been successful in their business and I've heard a few banks have that kind of a focus.
SS: We're not trying to model ourselves over other banks. I mean today, yesterday, there was a merger and people asked us ‘What does that mean for you?’ And the truth of the matter is, we're less interested in what other banks are doing than what our clients are thinking. Honestly, when I get up in the morning and when my head hits the pillow at night, I'm not really thinking as much about what our competitors are doing as much as how can we make our clients make more money? And if we can do that, how can we make them happier? How can we make them make more money? Or help them make more money? How can we make them not worry about banking and pay less for transfers? And that's really what we're doing. If you focus less on your competitors and more on how to make the client happy, you're going to be more successful, frankly.
ED: It's good to know that there are banks like yours that have a story to tell in that way. Now, talk to us about your crypto story. There's a lot to learn for the rest of the world, because around the world, many banks have stayed away from crypto and stayed away from even taking on deposits of crypto players.What you're learning in your crypto business is absolutely important for just about every commercial bank around the world. Because as you add your customer base, there's this thing called the network effect in the crypto universe and you're obviously a beneficiary of that. And I want to be able to capture a little bit of that story. Now, at which point did you become interested in servicing crypto? And that's why I started this conversation by talking about your books, for example, because I wanted to get the philosophical orientation, the values that you have that got you into being one of the few banks in the US that actually accept crypto customers.
SS: If we just looked at what other banks were doing, we wouldn't be accepting crypto customers, crypto clients. By the way, we don't use the term customers at the bank. Because we want to treat everybody like a client, someone as a counterparty that we can help make better, and work with, and partner with. We didn't start by thinking, what are other banks doing? We started by thinking what is going on in this arena? What can we do to make it better? Maybe there's nothing we can do to make things better, in which case, there's no role for us. And that happens. We look in certain opportunities and we say there's no place for us. But early on, I had been thinking about this. If you go back and Google it, I had written an article in 2012-2013 about the cashless society. I was already thinking at the time about CBDC, the central bank digital currencies. I was thinking about the notion of trust. Because when you really think about it, what happened in 2008 was a breakdown in trust. We could talk forever about the more proximate causes of the financial crisis. But in reality, the mortgage crisis came because people didn't give trust appropriately, people mistrusted and misled other people in terms of values of mortgages. And this is at every single level, from the rating agencies who were giving what should have been rated junk bonds AAA, and ultimately, they had fixed them from underwriters who were just waving through mortgages and not checking. Even consumers who were saying they were buying a single-family residence to live in when maybe they were buying 11 of those to take advantage from Fannie and Freddie, who should have been the adults in the room who were closing their eyes to things, to the underwriters on Wall Street, who some of them, sort of kind of knew what was going on, as this later came out. Everybody was abusing essentially their trust. To me, it wasn't as much of a mystery than the pseudonymous Satoshi Nakamoto who said how can we get rid of having to trust these people? Because these people don't seem so trustworthy? How can we create a trust, a crowdsourced sense of trust? So that was intriguing to me. So I began to study what the blockchain was all about. We looked at it a lot. Obviously, those were the early years. At the time, regulators were still pretty skeptical, let me say that, I think that's fair at the time. Obviously, they’ve become less so, but still are a little skeptical. People, I don't think, recognised the opportunities about where cryptocurrency would take trust and transfer. Adam Smith made this point in “The Wealth of Nations,” fundamentally, what differentiates us humans and society from the rest of living animal beings is that we can make a trusting transaction between the two of us. I can give you something – it's a coin, it's something of value – and you'll give me something back. And famously, Adam Smith says he never witnessed a dog making a fair commercial exchange because that's not part of its capability but we as humans can make fair exchanges. But if what we're exchanging fundamentally, if I don't trust that what you're giving me is of value, then I can of course make the determination of what I'm giving you, we can both make determination that's a fair trade, then we have deep problems in society. Like every human-made innovation, cryptocurrencies have pluses and minuses. And they have good things and bad things. We recognised that from the get go and wanted to be helpful. So we came up with this notion of Signet. But before we get there, I think listeners need to understand the spectrum. When I say opportunities and threats, I don't think people mostly get the space, that they're all on the same wavelength. At the one hand, you can have a cryptocurrency where nobody knows who the recipients are, what the wallets are, anything. And there's anonymity. Bitcoin gives you a good chunk of that. And the good news is, I can do business with you and it's nobody else's business what we're doing. And that's fine. The problem is, of course, you could be making a transfer because you're involved in human trafficking, drug selling, arms trade. Pick the bad thing and you could be doing that and there's nobody to be able to tell that that transfer has taken place because of anonymity. At the other end of the spectrum, if we have a CBDC that is solely in the hands of the central bank, then every single transaction you do can be no. The government, if they don't like that transaction, or whoever controls that blockchain can say, ‘You know what Emanuel, you look like you're putting on a few pounds. Your wallet’s not going allow you to buy dessert.’ It can get that much control. If you want to go to a place where there's a protest and the people controlling the CBDC don't want that, well, it won't work for transportation there, or the people who are transporting people there won't be able to have their wallets be accessed. On the one hand, you have the possibility of total anonymity. On the other hand, you have the possibility of the government literally going the opposite. As I said, our humanity is to some degree, grounded in the fact that we can make free and fair exchanges. If the only exchanges I can make are those that are government authorised in the CBDC case, then that's the other end of the spectrum. That also will essentially deprive us of our humanity.
Centralised control
SS: I actually coined a word back in 2012. It caught on a little bit. There are a few people that have written and used this word. I called it “econgularity” and it's a mash up of the words economic and singularity. The econgularity point comes when the government literally knows every single transaction that you do and can control that real time. That's the danger and risk of CBDC. That's essentially one of the reasons why the digital you want is so attractive, if you want to have complete control. Once you have that sort of that singularity moment, where you control people by their economics, then deeply you've crossed a border.But once you cross that border, you've gone to a whole new place for humanity and for the ability for centralised control. That's a real risk for society, for all of us. On the other hand, that's a risk too of having no control.
ED: What are your thoughts in 2013? Because I let you go on about how you're describing this as an old-fashioned bank, and because none of your peers were talking this way in 2013.Here you are struggling as a banker to embrace this new force that gives the right back to the individual, and yet you're running an institution that needed to be careful to meet regulatory requirements. So how did you bring these two together? Because you did have know your client (KYC) requirements in your institution. So how did you make sure that your own house was in order, at the same time, you were open minded enough to the new force that you were dealing with?
SS: The first thing is having the right folks interact with the clients, because to a great degree, your marketing is your underwriting, you want to be dealing with the right people. If you have the right people, if your colleagues are the right people and they have the right values, then they will do the pre-screening of who are the folks we can rely on. We wouldn't have gotten going if we couldn’t have brought in Joe Seibert, who leads that area for us in terms of client contact, Sarmen Saryan, and David D’Amico. They really form the bedrock of folks that we could work with, and we brought them onboard. We ended up turning down many more clients than we bring up. The reason that many clients are with us as well is because we're not only taking their deposits but we're making their life better, easier. We came up with this concept called Signet and as most people know here, it actually came to me that this was a product that really could be helpful to the crypto community. It can be really important to other ecosystems as well and we're already discovering that in the power network area, the great shipping area. But let's start with crypto. The reason I love the crypto people is because they're early adopters. What we did with Signet is we said, okay, we want to be blockchain native. We don't want to staple on some products that will help these folks, we want to build from the blockchain itself. We built off the Ethereum blockchain that is the sort of the Signet raw clay.
Gated community
SS: We built what I like to call a “walled garden”. If you pass through this walled garden and you're a miner, you're an exchange, you're a custodian, you're essentially any of many types of participants or over-the-counter (OTC) desks but if you get through our vetting process – we have a strenuous KYC-anti-money laundering (AML) process because we are an American onshore bank – then you're going to get into this walled community, this gated community. You get access to Signet and Signet is a blockchain-enabled tool that you can use with other people who are part of this community and they've been vetted too. It's actually better than a stablecoin but you can work with it just like a stablecoin because Signet essentially allows you to transfer. If you're on Sunday morning, 3am and you're in Tokyo, Tbilisi, Timbuktu, Tel Aviv, and Toronto, I can do a trade among all of those people 3am, not using the Fedwire, SWIFT, anything else and it's good funds. We are on the pace to do this year something like $400 billion of transactions. Because people trust the system. We've never had one transaction be reversed because people know it can't be reversed. It's done. It's just like the blockchain. On the other hand, we're standing behind and watching the digital representation of the dollar. It's interesting I'm talking to The Asian Banker because we've had a number of clients from Asia tell us that they actually have been able to redeploy a lot of their banking team, because they used to have people up at this hour the day in your part of the world doing US banking transactions. Now they don't have to do that anymore. The good funds immediately transfer and this has been a nirvana of discounts for people. The other thing that makes it far superior to stablecoin is you don't have to wait for delays. You don't have to worry about the fact that miners or someone is taking a little piece. If I send you a $1,000, you get a $1,000. There's nobody taking a cut. Interestingly enough is that a lot of OTC exchange, large participants, like the fact that their trading is behind this gated community because people can't watch it from the outside. You can monitor the chain for bitcoin or stablecoin and people try to pick up hints on other people's trading. But you can't do that because we really don't allow that to be shared. You're within a gated community but at the same time you’re in a native community. Everybody's speaking the same blockchain language.
ED: Let me let me now take you through the many facets of Signet. Number one, a commercial bank and the amount of money that you have been spending on technology. From what I see for your balance sheet, I think you spent about $10 million a year on technology, or something like that?
SS: We spend a lot more than $10 million.
ED: But for a bank of your size, you need to be specific in how you spend on technology. Many banks your size would go out there and buy something instead of building it themselves. So, was Signet built internally? Is it a on us platform? Meaning that only your clients can participate in that and therefore they pay each other and it's not external to the banks’ non-clients? There are a number of blockchains like Ripple, for example, and others who want to be able to provide the technology to a bank like yours. Is it something that you decided to build yourself rather than subscribe to a vendor that is available out there? And this whole idea of token, now that crypto in general, not just Bitcoin, but a whole range of cryptos are being valued up and getting inherent value. There's a lot of technology being developed in open source, so you don't have to create it yourself. How are you engineering the architecture of Signet? How much of it is proprietary to you and how much of it will be growing as the technology becomes available? There's so much happening in crypto right now. And is Signet a token, as Ripple would be a token in that way?
SS: First of all, let me just say this about Signet. What makes Signet a little different is that it is a digital representation of a dollar.In stablecoin, you have a piece of a pool of money. Right? The money is in whatever it's in, at banks. Described in a press release, we’re one of the leading banks involved with the circle consortium in terms of US dollar coin (USDC). That's public. They have a pool of money and you have 1.00001% of that money. That's what stablecoin represents. What we have is a tad different, in that it’s actually a digital representation of this very dollar that I'm putting in the bank. It's actually a dollar in an FDIC bank account, it's not necessarily insured, it’s only insured obviously up to the $250,000. But it's actually a deposit at a bank, as opposed to a piece of a pool. I'm not saying that one's better than the other, but they are different. What we've tokenised, if you will, is that actual dollar you put into Signature Bank. And that also has some attraction for people. That's their dollar, as opposed to a share in a greater pool.
ED: Now I would I would say, oh my goodness, that's a CBDC!
SS: Well, you're right. That's why I wanted to set the spectrum of what we were talking about, but here's the thing, we're not the Central Bank, we don't actually care, as long as it's legal. You can have dessert as many times as you want, as far as I'm concerned. As long as it's legal, I don't care if it's fattening.
ED: So that means it works well for you. You've got $400 billion in transactions and that's amazing. That's pretty good.
SS: We're running at that pace for this year of transactions where people are transacting Signets between each other. People and analysts have come up with what we have, but we haven't publicly disclosed it. We have a significant amount. If you look at any of the analyst reports, they've sort of configured what we had. I'll just tell you what's public so you can do the math yourself. At the end of last year, we had $10 billion in deposits related to that. In the first quarter, we announced that we have grown another $4.4 billion. But the thing is, those deposits have velocity among themselves because they're being used to settle. That gives people a lot of comfort. That's what's allowed us to really grow because they get the safety and security of a bank, they get Joe Seibert, Sarmen Saryan, and David D’Amico, and the rest of team to call. They can actually call up and say, explain this to me. They know that the settlements are going to be settled on blockchain so there's no screw ups that are really evident. Again, we've never had any transaction ever where anybody's tried to reverse anything, because they know they can't, it's on the blockchain. All of that makes it a little bit different than stablecoin.
Now, let me say this about technologies. I'm going to use a US analogy, but it could apply to any sport. There are nine innings in US baseball and each inning is divided in two. And we're still in the first inning, were in the beginning of the first inning. There's a long way to go. From a Signature Bank perspective, the best is yet to come in terms of things that we're developing and thinking about. I don't think we've gotten to the end. I think that the technologies in crypto and in other worlds need to evolve. And I'll give you just one area that people are already talking about and it's embedded in everything we're thinking of, which is the whole environmental costs of crypto. This is something that is certainly on our radar screen and it's one of the reasons that we designed Signet to be a low a low carbon impact because every day, every hour, there are about 240 million transactions that take place on the VISA network, for example, 14,000 can take place on the Bitcoin in one hour-ish, I'm rounding both. But frankly, the cost of those 14,000 transactions is probably not much different than 240 million transactions, depending on how they're done. That's a big problem that ultimately, these technologies need to get better because if we ever use Bitcoin for buying a slice of pizza, we really would be boiling the oceans. That we can't do until we have clean nuclear energy or sun or wind. I mean, I don't know how much wind it needs to cover the ocean and windmills to use that the current technology.
ED: Here's a first inning question. In the first inning, has that made your back office smaller as a result? In that you find that a lot more is done on the blockchain that you don't need a whole compliance team. Has that reduced your back office?
SS: The short answer is no, because the business is growing so fast. There's no question, it’s easy to do things on the blockchain. But we're growing so that our clients are having smaller offices. As I told you, there's a number of clients in Asia that told us that they have redeployed their people who used to work from midnight to eight or from 10pm to 4am and they'd be sending them home. There's no question that the primary purpose of finance, if you think about it, is to make transactions frictionless and as costless as possible. If we can take on some of that burden for the clients.
ED: You have about 740 digital currency exchanges as customers, is that right? Is that the kind of number?
SS: Yes, we were growing almost as fast as we can do it on Signet. By the way, we don't do any retail. But the bulk of these would be institutions and OTC, you'd recognise the names, in most cases.
ED: Do you ever lose sleep that there might be a Mt. Gox there somewhere like in that pool of customers, in that pool of clients, that if something goes wrong, the regulators will come up to you and say, ‘Okay, we got to do an audit of this whole thing’. Do you lose sleep over that at all?
SS: We're not touching the crypto itself and we're not custodian for the crypto. We're facilitating the payments. If the regulators ever wanted to see where all the payments were coming, we're US-regulated banks, so they could always see as they could what's happening. We take a minority of accounts that apply to us because we do go through a vetting process that is substantial. To get into the gated community does require you to have certain financial wherewithal and to be a solid citizen. We don't just open up an account for anyone who wants to open an account. That's important and that's a differentiator. Frankly, that makes people who are transacting within Signet feel more comfortable because they have gone through a US bank vetting process. That's got its upsides and it's got its downsides. We are who we are, we're a US bank, and we're going to uphold the standards.
ED: Outside of the banking industry, there are any number of players trying to provide a Signet equivalent, trying to build a community, trying to sell it to specific banks and all that. And a lot of that technology is actually built using open source, in other words, stub, the whole world can contribute to how it’s built. Being a bank, is Signet proprietary? Is that something that you’re building from the ground up? So, when you go to the second inning, what is it going to look like? Is there a temptation of it becoming a token? You seem to speak like if Signet becomes a token, it becomes a stablecoin itself. Is that kind of a dream, an intention?
SS: Look, we're big on under promising and over delivering, so I can’t talk about the second inning, while we're still in the first inning. We think about how we can help our clients all the time, I just want to leave it at that. Whatever is built is going to be built because it has to meet US banking standards in anything we do and anything that our vendors do and anything that we’re involved with, because everything's got to tie in when we do have multiple tie-in points. It has to be bank robust. In the beginning, there were a lot of folks who are coming in saying, ‘We have this product, it's plug and play, or it's this and that,’ and the bulk of the issue is that there's one level of security and stability and robustness if you're dealing with non-banks, and then there's a whole another if you're in the banking community, so open source is good. We built it off the Ethereum raw clay so we're going to do that, we're not going to not use an open source. But on the same token, the way it works with all the other systems is once you start getting into systems integration and middleware, APIs, our clients need application program interfaces, how that's done in a way that touches their bank account, touches Signet. Once you deal with APIs, you're going to touch other banks’ systems too, not US bank systems, and our bank system. All of these goes beyond just using open cloud. The short answer is way beyond just taking all open-source software and saying great, let's do this.
Testing APIs
ED: Have any of your bank clients built APIs yet? Is that the intention, is that the second inning?
SS: We do have API connectivity with clients today. It's good. And we created a sandbox because it's so complex and I'm getting probably into the weeds, but we created what we call a “sandbox” for people to test on it, where it doesn't actually interface where our systems were sort of off network, so that they can test their APIs and as importantly, we can test their APIs too. You have to play in that sandbox and the API has to be vetted. It has to work. Once we're really comfortable, we can attach your API to the system. That's when the big cost savings happen.
ED: This is the first time I heard the word sandbox from an American banker, by the way. It's something that many regulators around the world use and I don't really like that phrase. But here's the question, has the New York Federal Reserve come around to audit Signet? What were the questions they asked? Are they happy with it? Is it taking you where you want to go?
Building a collaborative relationship
SS: I can't speak for our regulators but we have good relationships with our regulators, we keep them informed. I want to give a special shout out to the New York Department of Financial Services, because we came to them with Signet. And we're still the only FDIC-insured US bank that has a blockchain 24-hour instantaneous, money transfer system using blockchain, and they got it. They did a tremendous amount of work to make sure that all of those items that I just touched upon with you, in terms of connectivity and touching our systems all work. They asked a lot of questions. They did a lot of work. And we have a strong and open dialogue. I'm thankful that we have a primary regulator who is with it when it comes to blockchain and cryptocurrencies. When they give a licence to someone else in this arena, it also helps us feel a lot better about working with those clients.
ED: Is there a business to lend against crypto? Is there a business to go into Exchange Traded Funds (ETFs) into derivatives? What else can you do with your crypto community?
For the best and biggest clients
SS: First of all, we're in that very beginning. I'm sorry, I keep using that baseball metaphor, US-centric. But we're really in that first inning. We announced just recently that we are starting a project that we have been working on for a while to be able to lend to some of our biggest clients and best clients in this arena. It will be secured and we're building this to be a zero-loss business. It wouldn't be a retail business, it would be with some of our institutional clients. It wouldn't be derivative, it would be where a custodian was holding the appropriate cryptocurrency and essentially, under our control. There's further to go. But we have announced that and we do plan on starting to book loans. But we're not betting the ranch on it. We’re still a conservative lender where we look to be a zero-loss lender.
ED: Is there a first mover advantage in what you're doing? In that you're probably further down the road learning about how to deal with this community of crypto clients. I call them crypto clients, but I mean them in a general way. Because around the world, banks have been avoiding even providing a deposit account and transaction account to cryptocurrency clients. And now, regulators are sort of stepping back a little bit and giving them the chance, but you are well into that community. There's this thing called the network effect. Do you see them transacting a lot more with each other? Is that a cumulative effect on your business?
SS: I definitely see more. There's no question there's a network effect, given the numbers that I told you with the pace that we're running on right now for this year. It builds and builds. It's a virtuous circle. We are focused on other communities that are going to be important Signet users and who will find people in the cargo shipping business who were delivering shipments on strange hours or on weekends and want immediate payment. I hand you the shipment and you immediately release to me the money. That removes all the credit risk. That's huge. Going to the big picture, the folks who were early adopters in the crypto arena saw that there was a serious problem with the way that payments and money, and stores of value are being handled and they crowdsource, then again, we don't know who the pseudonymous Satoshi Nakamoto is but others were thinking along those same lines. And they adopted it. But those same thoughts are occurring to other people in other ecosystems. While we're focusing here on the ecosystem from at least my perspective, I think it's about rethinking payments, rethinking stores of value. I personally feel that bitcoin has today proven itself as a store of value like gold and the like, in certain regards. But as a payment system, we are still first batter up, if you will. We're at the beginning of the first inning, because as a payment system, having thousands of miners involved in your wanting to buy a cup of coffee is not really that efficient. And it’s not good for the world and the environment.
ED: What's the market rewarding you from October last year to where you are right now and share price? And is that a mirror of what's happening in the crypto market? Do you think that a lot of the upside on your share price has been because of your crypto story?
SS: Emmanuel, if there's one thing I've learned, it's I don't comment in on our share price. We're like the guys or the gals in the pitch playing the game. And there are people in this game, they can decide to cheer, they can decide to boo.
ED: It's my job to ask this question. And I'll ask you the same question three ways. I'm curious, because it's good to see your share price doing well but the correlation with how the crypto market is doing. A final area for the sake of completeness, the US regulatory environment has been changing dramatically under the new administration. You have Gary Gensler going into the Securities and Exchange Commission (SEC). I like the man because I watched him speak on crypto, he seems to be very open minded, but at the same time, like yourself, very focused on what regulators should do. There’s Hester Peirce, who made some comments a month or so ago, and then you have the Reddit episode with GameStop, and so on. What's happening in your environment that you pay attention to and you think that it's a changing world, and then that might be opportunities for you. All the systems should be tightened, that retail customers should not be given the opportunity to influence markets the way institutional customers do. Just an overall comment on what's happening in the US. This huge battle between decentralised finance and traditional banking.
Focus on system safety and stability
SS: What we have is a philosophical debate that frankly, is not shaken out by political party or by liberal and conservative. It's a fundamental do we just say that people should be allowed to trade as they wish to trade? And good luck to them, as long as they know what they're doing in there. If there are people who want to sit in the basement and trade all day, well, they can do that. Or do we want to have someone else decide what people should speculate on? I would err heavily towards saying, here's the facts if you want to go and risk your money and maybe lose your money. You’re a consenting adult. We don't want to tell you what to do in other aspects of your life and why should we tell you, as the government, what to do in this aspect of your life. There's a lot to that. The system did work in the sense that despite huge swings in pricing, the clearing houses and others stayed solvent, there wasn't really a risk of that. And so, what the government should be appropriately focusing on is the safety and stability of the system, whereas individuals might make or lose money. If we're not going to try to regulate what adults do in other areas, I'm not sure that we should be limiting them with respect to speculating, even if it makes no sense to me, it takes more than one person to make a market.
ED: Scott, this conversation can go on and on because I can already see branches in terms of the areas that we can drill deeper into. I hope to be able to speak with you again in the future when you go to the second inning, third inning. To be honest, what you're building, many banks around the world will be doing the same. They will be paying attention to what you've been learning in the process. You've been able to make that connection with what banking traditionally is. With your clients and the way they're growing, you've kept a very conservative balance sheet and that comes across very clearly to anyone who takes a look at your numbers and technology. Signet is worth watching and we will keep watching, and see if you're going to be calling it a token very soon.
SS: Well, Emmanuel, don't forget to recommend that everybody buy my book “In Good Faith,” which you can get at quality bookstores or at Amazon, or you can go to ScottShay.com. I'm always up for a shameless plug and if you don't do it, I guess I'd have to do it myself.
ED: Well, you've been doing that right through the conversation so I just let you speak. And it's very interesting, calling a book “Getting Our Groove Back” is like, okay, I get you, I get it. I've already bought your first book, I had to buy that because I wanted to read how you think. And that comes across very clearly. That's why I started this conversation by pointing out the struggle that you have, philosophically in religion, which you also have practically in running a good commercial bank in a changing world. Thank you very much for this conversation. It helps me to build my own idea of how the industry is evolving. Thank you very much.
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