Despite crypto turmoil, this firm is following the customers

While many in the financial world are running away from crypto and its perceived dangers, there are others who see lots of opportunity.

Gene Grant, CEO at LevelField Financial, joins us on the BAI Banking Strategies podcast to talk about what his company wants to do in the crypto space, and why now is the right time to do it.

A few takeaways from the conversation:

• Many crypto customers want to be able to access banking services, so the right time to get positioned is when things are watch-and-wait, as opposed to when they are booming.
• Grant sees digital asset products and services becoming a standard bank offering for institutions of all sizes in the not-too-distant future as banking continues to evolve digitally.
• The payments space could lead the way into that future, as customers already expect 24/7 access to financial services. With the technology available, banks will have to adapt.

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INTERVIEW TRANSCRIPT

So, Gene Grant, CEO at LevelField Financial, welcome to the BAI Banking Strategies podcast.

Thank you for having me.

Gene, can you start us out with an overview of LevelField Financial as it’s currently operating – your lines of business, the services you provide, how long you’ve been in business, that sort of stuff? And also if you could include in that maybe a little bit about your background in the financial industry.

So LevelField Financial, we’re a little over five years old. Currently, we have limited number of products out there. We have a broker-dealer operation, so we are doing private placements and helping firms raise capital. On the digital asset side, in 2022, we actually launched, in what we’re calling early-access mode, means it’s mostly invitation only to a select number of customers in a select number of states, some digital asset products. Primarily, we have the ability for our customers to come in and buy and sell Bitcoin only at the moment and we have some advanced custody services so that our customers can hold digital assets. As for me, I’ve got a little over 30 years in the financial services industry. I spent the bulk of my career in the corporate investment banking side working in some of the world’s largest investment banks. I was heavily involved in interest-rate derivatives, credit derivatives and the full gamut of trading products. So it’s been a pretty good career so far, and I’m really looking forward to the next phase.

So that’s where LevelField is today, and thank you for your background as well. But what is the vision for the company in the years ahead in terms of becoming what you say will be the first FDIC-insured institution offering digital asset services nationwide?

Our objective of LevelField Financial is to serve the defined niche of customers who are interested in the digital asset class. In the old days, a bank could set up anywhere and they would have more or less a moat defined by the geography. People had to be able to drive to the bank, be able to get access to the bank, and therefore, they didn’t need to have any other strategy than location. Now, those days have long since passed, and today, in order for a bank to thrive, particularly a new entrant, one needs to define their target market. And what we’ve done is we’ve defined the customers that we’re interested in as those niche of customers who are interested in digital assets. So LevelField Financial is putting together a full-service bank that has the full array of products and services that one would find in the community bank, but in addition, we want to add those specific products and services in order to support the needs of those customers who have that defined interest, which is digital assets.

What kinds of services are we talking about there?

Well, the simplest one is the ability for customers to buy and sell digital assets in a safe, simple and secure manner, so we will have what we call an “on and off ramp.” The next is custody. Customers shouldn’t have to worry about the safekeeping of their digital assets. So, we will have accounts – we don’t call them wallets, and that’s a very important differentiation. When the assets are stored in our safe custody, it is an account. We take care of them for you, all the standard services that comes with an account structure. In addition to that, we know from the marketplace that customers who participate in the digital asset class are always seeking to get some liquidity essentially to unlock that stored value in their digital assets without selling those assets, which creates a taxable event. So we’ll provide the ability to borrow off the digital assets themselves, so another service that makes digital assets more friendly, more easy to use, and will promote adoption.

Do you envision that all you do will be digital assets? Will that be the entire structure of the bank? As we look at Silvergate and the troubles that they’re having, what’s the risk side of that?

Far from it. In fact, I think the model that we have and the model of Silvergate couldn’t be more different. We intend to operate the bank such that no more than 50% of our assets come from digital asset side. Putting it another way, 50% of our loan activity will be very much community banking, working with those customers in the geographic footprint in which we exist. The bank that we’re purchasing is located in Chicago, but we’ll be opening additional branches in Houston, Austin and Miami, and we’ll be working with the small and medium-sized businesses in those areas to provide traditional loan services, whether that’s providing inventory financing, or commercial real estate lending, or residential real estate lending, so that our balance sheet is always going to be 50% driven from that community banking side. On the digital asset side, we’re not targeting the firms or the fintechs. We’ll be targeting the individual consumers, the end users so that we don’t have the volatility that’s associated with fintechs moving large amounts of money in and out of the bank, but rather consumers, and we want to become their primary banking relationship.

You mentioned the bank that you just bought in Chicago… That bank is called Burling State Bank and their headquarters is just actually a block away from ours in the heart of the Chicago Loop. I looked it up, and Burling has about $200 million in assets. It’s a small institution, and its focus is on being a community bank for the Chicago area. So, as you were out bank shopping, what attracted you to Burling, and what makes it the right vehicle for LevelField to pursue this digital asset services strategy?

When we looked for a bank, we looked long and hard, and ended up doing a pretty deep dive in eight institutions before we ended up deciding upon Burling. Burling is a fantastic bank, and its origins came from working with the trading community in Chicago. So, from their history in 1989 onwards, they have the background in working with institutions who are involved, and individuals who are involved more in the trading side of things. And when the trading industry in Chicago started switching and then moved away from the in-person trading so that the branch, which is in the Chicago Board of Trade building, no longer got that foot traffic and the kind of activity that used to be very predominant in the early years, they started switching their business model and they started expanding into different business areas. One of the business areas that they have looked at and are participating in is already in the digital asset world. So it’s an ideal match for us because we’re going to take what they’re currently doing, add in the additional technology that comes from LevelField Financial, add in our expertise in risk management, and actually expand and de-risk their activities at the same time.

Is this a good time for a bank to be getting into crypto in any capacity given what we are living through, what many are calling another “crypto winter.” It seems like every week there’s something new and negative from the industry, including the failure of Silvergate Bank and even more recently of Signature Bank, and other crypto-friendly institutions are still teetering. How do you think about the opportunity with crypto in 2023 and beyond that you’re trying to tap into?

We don’t think of it as getting into crypto because the bank will never take a principal position in any digital asset. We will never have direct exposure to cryptocurrency. Our business is customer facilitation. We work with the customers to ensure that they can execute any activity they wish to in a safe, simple and secure manner. So the bank is not at risk at any time to the movements of some cryptocurrency – up, down, sideways. We don’t take principal positions. The great thing about the digital asset world or the cryptocurrency world, it has been around for over a decade now, and despite multiple times where people are calling for the death of it, or people calling it “crypto winter,” which I’ll come back to you in a moment, it has continued to thrive, continued to grow out, and continue to get more and more people interested in the ecosystem. I’m not personally going to say whether or not we’re proponents of any given crypto asset, but what I do know is customers are. Customers are interested in this asset class, and continue to be interested in the asset class. The volatility for those customers should be in the asset, and not in the provider. Now, where we are today, the asset class has currently got a valuation somewhere around $1 trillion. It is currently in some turmoil, as you pointed out, and you used the phrase “crypto winter.” Having been in the industry for a little while, I bristle a little at that because I hear it being used by insiders who I think are using it to cover up some activities in their firms. And what I mean by that is “crypto winter” as we lived through in 2019 was an activity of an incredibly low price across the digital asset space. Bitcoin was around $3,000. Activity was basically non-existent, so there was hardly any trading activity, and people were just waiting and watching it move sideways. Now, let’s bring it forward to today. Bitcoin is roughly $20,000, so it’s clearly not at $3,000. Volume, we’ve seen some record days in the past year, and we’re routinely seeing days that are far in excess of any activity in previous years. So it’s hard to say really that we’re in “crypto winter,” price is down, but it’s all relative, because $20,000 to me is a lot higher than $3,000. And for anybody who’s built a business, everybody knows, that’s done it successfully, the best time to build a business is when things are quiet, not when things are booming. And this gives us an opportunity to lay in the foundation, put in the people and ensure that our business is robust so that we can ride the wave up, provide that superior customer service to our customers as the market accelerates.

That’s a nice segue into my next question, which is, you have written several articles lately that are critical of crypto banks, and one of those articles ran on the Forbes website last month under the headline, “Banking can work with crypto, but crypto banking does not work.” Can you share with us how you think about the meaningful differences between a crypto bank and a bank that works with crypto, and also why crypto banking doesn’t work?

Well, thank you for reading my forbes.com article. I am a contributor to forbes.com, I try to write a handful of articles and at least I know I got one reader. That article, I think, was quite well-received, and I stand by everything I wrote because banking and crypto are not enemies. The problem and the thing that I’ve been critiquing is for people who don’t understand banking, deciding that because they’ve walked into a bank branch, they suddenly understand everything there is about banks. Then these same people decide, “Hey, you know what? I’m going to open up a facility and I’m going to deal with customers and I’m going to call myself a crypto bank.” That really irks me because some of us have spent years in the profession, and understand there’s a lot more to it than just putting up a website saying you’re a bank, and particularly a crypto bank. It is clearly not easy to run a chartered bank in the United States. There are absolutely multiple layers of oversight, there are regulations – if you’re leading a bank, you want to cry simply because of the amount of energy and effort put forward to meet these requirements. But from a customer point of view, it’s safe and it’s sound, and that is incredibly important. When we look at crypto banking, however, the so-called crypto banks don’t have that same degree of regulation, they don’t have that oversight necessary to ensure that they’re operating in a safe and sound manner, they don’t have capital, and they don’t have appropriate levels of capital for their lending activity, and they don’t have the controls and processes that are the minimum expectations within chartered banks. As a consequence, it is my belief that today that borrowing and lending of digital assets doesn’t belong within the banking space – it very much should be restricted to institutions who want to deal with each other, it shouldn’t involve retail today. And we may see that evolve differently in the future, but we’re not there yet. The LevelField plan – we will not be involved in the taking of deposits and digital assets or the lending of digital assets. We’re staying in dollars, we’re managing the bank prudently. And perhaps that’ll change over time, and we may be having a different discussion in two or three years. But for now, I do continue to bristle at people who want to get into so-called crypto banking without understanding the full ramifications of dealing with the public.

In January, the Federal Reserve Bank of Kansas City rejected the application of a Wyoming-based crypto institution called Custodia Bank. Custodia was trying to get a Federal Reserve master account that would’ve allowed it to access a range of payment-related services. The reason for the denial was Custodia’s “novel business model and proposed focus on crypto assets presented significant safety and soundness risks.” So I know what you are trying to do is different from Custodia, but its experience makes me wonder what kind of scrutiny you are getting from the various regulators, which are obviously on heightened alert after FTX and its aftermath.

The regulators certainly are on heightened alert, as the public is, and I’m not saying that’s necessarily a bad thing. I think the biggest difference between Custodia and Caitlin Long and her plan and ours is we, LevelField Financial, are not proposing anything novel. There’s nothing in our business plan that chartered banks do not already do today, or have permission to do today. And I think that’s a huge differentiation. We’re very much in line with what the regulators are concerned about. Our job as we’re getting through this application process is to prove to the regulatory agencies that we’re operating in a safe and sound manner. And that means ensuring that they understand that we have the policies, procedures, processes and people in place to ensure that all the risks that they highlighted are appropriately understood and mitigated. And I think we’ve done that, and I continue to work with our team and with the regulatory agencies to ensure that they understand that.

Gene, let’s wrap it up here. Obviously the strategic focus of your bank will prioritize digital asset services even if yours is not a crypto bank, and you made that distinction earlier. But for most banks, this line of business likely won’t be as front and center as it is with yours. So, for these banks where crypto is less central, less impactful to the P&L, how big is the longer term opportunity? And given that it’s a trillion-dollar market, given that customers obviously want to be able to participate in this market, do you see us getting to the point where, regardless of a bank size or location, digital asset products and services will eventually just become another standard bank offering?

I see that future not too far away. As the market evolves, and as customers start to participate more and more, and we see that difference eroding between the traditional financial system and the digital financial system, and more importantly, we start to see the advantages of the payments world – the less friction in digital assets for payments – I think we’re going to see more and more customers getting involved in the space, and that means banks providing more and more services. At some point, I believe that the U.S. Federal Reserve will launch a central bank digital currency. I’m hoping that they do it in the spirit of what we call stable coins today, which are not controlled necessarily by any entity, but are created and then really traded much like dollars. And if that should happen, then banks will be forced to adapt in order to accept this digital currency, and then we’ll start to see a real transformation in the way that banks operate. So if the Federal Reserve introduces the digital version of the dollar, then that digital version will be available 24/7. Customers already expect to be able to access their financial services 24 by seven. So then we’ll have a meeting of the two things. We’ll have the customers expecting 24/7 and the technology available to deliver 24 by seven, so that means banks culturally will have to adapt and change to be 24 by seven. And I hope LevelField is leading that transformation.

Gene Grant, CEO at LevelField Financial, many thanks again for joining us on the BAI Banking Strategies podcast.

Well, thank you very much for having me.