HV Bancorp, the holding company of Huntingdon Valley Bank, said it has become the first U.S. regulated financial institution to form a commercial loan participation with a decentralized digital currency.
The partnership is with MakerDAO, a decentralized autonomous organization (DAO) composed of the owners of its governance token, who vote on changes to certain parameters in order to ensure the stability of its stablecoin cryptocurrency, Dai.
The arrangement effectively converts a digital currency to a real world asset that generates a stable yield for Dai while simultaneously providing commercial loan funding to Huntingdon Valley Bank for lending into the Philadelphia region.
Through this transaction, Dai stable coins were converted to U.S. dollars by a U.S. regulated broker-dealer and those funds were deposited into a Delaware Trust Account. MakerDAO will prefund the account with $100 million converted from Dai and is making the balance of these funds available to Huntingdon Valley Bank lenders for future commercial lending.
The goal of the transaction for MakerDAO is to allow the Dai to be supported by yield-generating commercial assets originated through a U.S. regulated financial institution. Doylestown-based Huntingdon Valley said it benefits by being able to sell loan participations and expand its lending activities in the Philadelphia region because it can now consistently syndicate portions of new loan originations to a Delaware Trust Account.
Huntingdon Valley Chief Lending Officer Hugh Connelly called the partnership transformative for Huntington Valley Bank because it will allow the bank to double its legal lending limit — now around $8 million — without having to raise capital and without breaking regulatory rules or guidelines.
“I now can literally do twice as much lending to a borrower because I can participate half of the loan to the maker community through this partnership,” Connelly said. “So for us, we now have the legal lending limit of the organization twice our size without having to dilute the current shareholders with an equity raise.”
In December 2020, Huntington Valley participated in the Main Street Lending Program, one of the many Covid-fueled stimulus programs that consisted of non-forgivable loans at a low interest rate that the Federal Reserve would ultimately buy from lenders. In its case, the bank sold 95% of the loans to the Federal Reserve Bank of Boston. Connelly said that was quite helpful to the bank because it allowed Huntingdon Valley to have about 20 times its lending authority due to the fact that it kept only 5% of the loans on its books. The bank became the largest Main Street Lending Program lender in the region. It applied the experience from that to the MakerDAO arrangement.
“I now can originate a $6 million loan but now I have a friendly, easy-to-deal-with non-competitor in the Maker fund who’s got $100 million pre-funded waiting for Huntington Valley Bank to put that money to use,” Connelly said. “So I could literally do $200 million in new loan business, put $100 million on the bank’s books and sell the other $100 million to the Maker fund. So it’s a huge advantage for a bank like Huntington because, small banks have a disadvantage in that we can’t make big loans even though we have lenders who have experience doing $100 million loans.”
Connelly said the deal will wind up adding an extra $100 million in business lending in the Philadelphia market. It will not increase the balance sheet of $650 million-asset Huntingdon Valley, though, because most of the assets will be sold. But the bank will be paid to service those assets.
Connelly said a customer was involved in the MakerDAO community and knew it wanted to collateralize its cryptocurrency with real world assets. They just didn’t know how to do it.
Huntingdon Valley Philadelphia Market President Dan Krewson brought the customer’s idea to Connelly’s attention and the bank decided to partner with Gregory Di Prisco, CEO of RWA Co., which specializes in assisting clients who wish to access funds from MakerDAO. Di Prisco introduced the bank to the broader MakerDAO community and worked with Connelly and Krewson on the structure of the arrangement.
The cryptocurrency world is viewed by many as quite risky, but Connelly said that’s only if the bank doesn’t understand the market. He believes Huntingdon Valley found a safe path with MakerDAO.
“We’re not going to put cryptocurrency on our books. We’re not going to take cryptocurrency as collateral. We’re not going to do anything on the blockchain. We’re not going to do anything with smart contracts,” Connelly said. “We basically read all of the government guidelines on what not to do with cryptocurrencies and then simply followed those governmental rules to the letter. And that’s how we were able to do it in a safe way.”
Connelly said he and Krewson took a class at MIT taught by current U.S. Securities and Exchange Commission Chairman Gary Gensler.
“This is the most heavily regulated transaction of its kind because of all of those different layers of protection,” Connelly said. “And I think it’s going to be the template for other banks to follow who wish to go down the same path with Maker, and then who knows what other currencies would come into play. But this was the first one and I think in many ways it’s going to set the table for how other people will follow.”
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