Banking the blockchain is still a beast.
In fact, even after nine years since bitcoin birthed blockchain into the world, gaining the support of traditional financial institutions can still be so difficult that not even a fresh round of venture capital, a marquee endorsement from one of the biggest technology companies in the world, and a coveted position on one of the most valuable blockchains proved enough to win support from one federally insured bank.
While today still marks the official launch of a new cryptocurrency exchange, called Stronghold, built directly on the Stellar blockchain, and complete with its own digital asset called a stable coin, the launch last night made a sudden, and last-minute change.
The San Francisco-based startup last week announced a $3.3 million investment, has the firm endorsement of IBM, which says it wants its clients to use the token, and was billing itself as one of the first venture-backed entities on the Stellar blockchain to become an “anchor,” meaning it can hold cryptocurrency deposits and issue credits.
But during research for this story, Forbes learned that the Federally insured Signature bank, which both IBM and Stronghold were expecting would custody the U.S. dollars that back the crypto-tokens, had gotten “cold feet” as one IBM representative put it, and would no longer be providing the service.
“Signature has declined to be mentioned in the release as a result of the language around stable coin,” said Jesse Lund, the head of IBM’s blockchain services. A stable coin is a cryptocurrency designed to avoid the fluctuations of most blockchain assets by tying them to baskets of other assets, or in this case, a more-stable fiat currency. “I don’t know any more details.”
How Stronghold got here is a case study for how difficult it can be to break into the $273 billion cryptocurrency market, even with a significant support structure.
As recently as last week Lund says his team at IBM took a phone call from Signature, and there was no immediate reason for concern. But when Forbes reached out to the New York-based company to get further details a representative explained that while the bank “has a banking relationship with the company,” it would not be dealing with stable coins.
“Signature Bank was never part of a plan to custody the funds,” the representative said. The company declined to share further details.
While cryptocurrency startups have long had difficulties opening bank accounts to hold the revenues they generate, this instance is unusual in that at least some of the services that were denied the firm included holding U.S. dollars that backed the cryptocurrency itself.
Not to be deterred, Stronghold says its launch of a stable coin backed by U.S. dollars, is proceeding in partnership with Prime Trust, a Nevada-based trust company and qualified custodian dealing with cash stocks, bonds, cryptocurrencies and real estate.
“We are working with Stronghold and acting as trustee for them,” confirmed Prime Trust CEO, Scott Purcell. “As well as providing other services.” In particular, the trust that holds most of its funds at US Bank, is performing anti-money laundering services for Stronghold, helping create the tokens, and working with customers to move funds into trust via ACH, wire, check, and cryptocurrency.
Stronghold itself will let its users send and receive bitcoin, ethereum, and Stellar’s native asset, the lumen (XLM) at the time of launch. The stable coin will be available for purchase by commercial banks and more at the time of launch, with further access expected to open up to retail investors at a future date.
In spite of the difficulty of getting a licensed bank to actually custody funds, Stronghold CEO, Tammy Camp expects that the appeal of merging the stability of fiat currency with the speed of cryptocurrency will someday appeal to more than just commercial banks, but to central banks themselves.
“The settlement can happen in three to five seconds,” said Camp who previously worked at Stellar. “Whereas if you were to use something like Transferwise it would take several days because it would have to go through all the correspondent banking to settle.”
While anyone can download the software to become a Stellar anchor, each entity that does so must grant permission to the others in order to do business, making the blockchain a hybrid of sorts between publicly available platforms like bitcoin, and permissioned platforms popular among enterprises.
As a result, Stellar’s lumen cryptocurrency now has the seventh largest market capitalization with a $4.4 billion valuation, and similar to ethereum, can support the creation of any number of digital assets. So far, there are about 20 stellar anchors, and a total of about 3,000 assets that have been created, including for mobile-minutes, loyalty points, and a number of international currencies, according to Stellar director of partnerships, Lisa Nestor.
But this is only the second anchor that Nestor says is issuing U.S. backed tokens. Following just weeks on the heels of the White Company, which launched its own similar stable coin last month, the director says the two launches mark a transition for the blockchain platform.
“USD is really the bridge currency, and it’s really what a lot of institutions want to use,” she said. “For all the Stellar partnerships, it’s a huge value add.”