Long Island bank, partners rolling out crypto payment system

A Long Island bank and its partners have created a cryptocurrency designed to have the stability of the U.S. dollar with the advantages of emerging financial technologies.

Hicksville-based New York Community Bancorp Inc. — whose divisions include Queens County Savings Bank, Roslyn Savings Bank, Roosevelt Savings Bank, and Atlantic Bank — is a charter member of the consortium that is launching the new "stablecoin" known as USDF.

The initiative is one of the latest indications that cryptocurrency and blockchain technology are going mainstream.

In March, President Joe Biden signed an executive order directing agencies to study the creation of a digital currency and how to regulate existing cryptocurrencies.

Stablecoins are versions of cryptocurrency that are pegged one-to-one to government-backed fiat currencies, such as the U.S. dollar, or other anchors such as a basket of currencies, cryptocurrencies or commodities.

That contrasts with bitcoin and other cryptocurrencies whose value fluctuates based on market forces. 

Stablecoins and other cryptocurrencies run on secure digital ledgers known as blockchains.

The USDF Consortium says that using cryptocurrency instead of cash would offer advantages in: mortgage payments (reduced settlement time and lower servicing costs); international remittances (lower costs as processing time shrinks from days to seconds), and merchant services (lower transaction fees and faster payments for businesses compared to credit cards).

USDF consortium chair Ashley Harris said that the lower transaction fees for merchants would create a recruitment and retention tool for the banks.

"Customers in the store pay the merchant, who receives their money immediately," she said, while the incumbent credit card processors can take hours or days to reconcile accounts.

In January, NYCB, the 42nd largest U.S. bank based on assets as of Sept. 30, conducted a demonstration USDF transaction with a subsidiary of fellow consortium member National Bank Holdings Corp.

That was the first test of "interoperability" among banks, NYCB chairman and chief executive Thomas Cangemi said in a January conference call. "It's the first time it's ever happened in the banking industry. … That's a big step."

The USDF is expected to go live to the public in the second quarter, though member banks will set their own timetables.

Cangemi said NYCB is consulting with the Federal Deposit Insurance Corp. and is seeking a "non-objection" ruling from the New York State Department of Financial Services to roll out the stablecoin program.

Competition in offering new financial systems is expected to be fierce. For instance, in September, credit card issuer Visa announced it is developing a "universal payment channel" to interconnect digital currencies around the world among central banks, businesses and consumers.

In a research paper issued in January, the Federal Reserve cited the more than 500% annual growth of circulating stablecoins to nearly $130 billion as of September.

The paper offers a number of possible scenarios, including more efficient payment systems using stablecoins and "tokenizing" financial markets where securities are converted into digital tokens that reflect ownership. These tokenized securities are traded using stablecoins.

Regulators, meanwhile, have sought to ensure that issuers of stablecoins are transparent and have the assets they claim. 

In February 2021, the issuer of Tether, the largest stablecoin by circulating supply, agreed to halt trading in New York State and pay an $18.5 million settlement with the New York attorney general's office.  In October 2021, Tether agreed to pay $41 million to settle a dispute with the U.S. Commodity Futures Trading Commission. Both cases revolved on whether Tether's dollar reserves were sufficient.

USDF consortium members include Sterling National Bank, Synovus Bank, First Bank, Webster Bank, Amerant Bank, ConnectOne Bank and Primis Bank.

All of the banks in the consortium are insured by the FDIC, but it is unclear whether that insurance would extend to transactions involving the USDF cryptocurrency.

By Ken Schachter

kenneth.schachter@newsday.comkschach

Ken Schachter covers corporate news, including technology and aerospace, and other business topics for Newsday. He has also worked at The Miami Herald and The Jerusalem Post.