Bank Deposits Go Onchain: How a Full-Reserve Dollar Differs From a Stablecoin

Alright. We got this one Scott Shay, founder of NeXT, joining us on StableDash live. Scott, thanks for joining us. Good to see you. Good to see you, Zach and Drew.

Great to meet you. You know, it's... It... I'm excited to have you on. I know we've kind of gone back and forth a few times. And before we dive into the conversation, I'm actually gonna just read your your kinda quick what you submitted, when I could ask you what you wanna discuss. And you said you wanna discuss... Are you the first full reserve bank in The US and bring tokenized deposits to clients outside our walls.

They previously founded four banks, including Signature Bank and Signet, and you're convinced NEX will be the most revolutionary bank ever. I love just kinda straight to the point. No fluff. Sometimes I get I get essays when I ask people, what do you wanna talk about? But I love this very straight to the point stance. So help us unpack. We're excited to talk about stablecoins versus tokenized deposits. They're a big buzz right now in the industry. We haven't really got to dig into the nuances of the two.

So that being said, maybe we'll just give a quick intro into a little bit more about your background and why you think NEXT is so revolutionary when it comes to tokenized deposits.

Well, I'm... I'd love to get into all of that. I just wanna say I was listening to you before this interview. And so it's not my first rodeo. And we're based in the place with the the biggest rodeo, the best rodeo in Cheyenne, where it's the Frontier Rodeo. So anybody who's... Wants to see a really serious rodeo, go to Cheyenne sometime June, July. It's great. So

Diane, Texas?

Cheyenne. No. And Wyoming. By the way, I tell people we're located at 222 East... Cheyenne, Wyoming. Yeah. Cheyenne, Wyoming, and they think they're going down to Flatiron or to the East Village, and I say, no. Cheyenne, Wyoming. So...

That's awesome.

So I've spent my life in banking. I founded four banks. Some of you are speaking of Texas, founded... Co founded Bank United of Texas with Luerneri, Co founded Merrick Bank, which is a credit card bank with Lou, Bob Perro, and Don Berman, and Dave Watson. Then I'm probably best known as the founder of Signature Bank and the creator of Signet. Signature was the first bank to be crypto friendly. It was also... There was one other bank out on the West Coast that was crypto friendly as well, Silvergate.

But we created, and I created actually, I can take credit for this, the first 24 by seven blockchain enabled money transfer system ever. And it enormously, enormously, and I can't stress that enough, propelled the crypto arena. I mean, when we started with with Circle, they were like $67,000,000,000. You know, Coinbase, Galaxy, I mean, they were much much smaller companies, and the ability to actually get on and off ramp to get USD was just super duper transformative. And Signet, by the time...

By the end of twenty twenty two, was transferred over a trillion dollars, which is pretty good for a, you know, for a for a bank. And what I'm doing right now... So obviously then March 2023 happened when, as your listeners and viewers will recall, the US government decided to, actually started in December to kill crypto, And they killed us sadly, unjustly, wrongly, unnecessarily. I could go on and on, but that's not what I like to talk about, like to go forward.

So I really thought, but something so traumatic like that, if it happens to you, you know, it's like you've been thrown from building and you're looking up at the sky. Think what can I learn from this? And I learned, hey, the the only bank that makes sense and and sort of gets it what Satoshi was talking about is a full reserve bank. Where you don't need an FDIC who can one day wake up and say up, you know, we don't want to do insure, we don't want to insure you, or a lender of last resort.

We are a bank, so on one side, and I'll stop the monologue after this, but this is the On key one side, we're just US dollar deposits. On the other side, all we own are direct treasury obligations, very, very short term, one month ish. So we... And we keep the... We keep it in a t plus zero environment, and we get the receipts, the custodial receipts. Literally, have receipts, safekeeping receipts from the treasury. So... Or on the treasury bills.

So no matter what happens, there's no distance between the US dollar deposit on one side and the treasuries from the only folks who are allowed to print dollars on the other side. And that's really important because when you hear about stablecoin sandwiches or all sorts of interoperability, there's there's chains. And I wanted to remove with my partners, Jeffrey Wallace, Aurel Bennell, and Kyle O'Donnell. Remove all of the places where there's risk and just become the clean protein of monetary markets.

So I'll stop there because I said a mouthful.

Oh, no. No. Just ask. Protein of monetary markets. I've never heard that analogy. What what is the pro Terry... Protein of of these markets? How would you... What's the what's the fifth grader answer for that?

The fifth grader answer is I just... Take a just to interject here. Yep.

Sorry if my my my network's No. Go. Little spotty. But, Scott, I just wanted to thank you. I feel like before we kind of go down all these different rabbit trails, thank you for Signet, and thank you for building Signature. I feel like... I was at Coinbase when I first heard about Signature Bank and learned about the role that it played with USDC and growing it, like, pretty... It it was definitely one of those, like... I obviously wasn't the one getting thrown off the building, as you said, but I felt like as a...

Someone working in the industry during that weekend, it really felt like a rug pull, and it was really heartbreaking to see what happened. And, personally, I'm... You know, I would would love to... We can we can spend this time looking forward. We'd love to talk about next, but I know there's probably just so much... There's so there's so many bricks you've laid for the industry and what you've built.

So excited to know you, thankful to just be in relationship with you here, and excited that you'd continue to, like, go continue building. Because I think so much of even a show like this, like, what started as a stablecoin focused media brand has is like...

Well, that wouldn't have been possible if Signet and Signature and folks in this lane didn't lay that foundation to help these companies who are trying to do things by the book during this, like, very, very weird time in the industry post twenty twenty one, twenty twenty two crash. Like, I just... For those who aren't familiar, like, Signature Bank was such a structural fundamental player. So, yeah, it's an honor honor to keep seeing guys like you build. So let's let's talk more about it.

Well, first of all, thank you for those kind words.

I really appreciate it. It was a strange year. There were times when the regulators looked at you so funny, if you were even doing something in it. And time and time again, you know, I'd have to... We, I would have to explain, you know, the larger group for sure too, that what we were doing was not only safe and sound, but in some ways safer and sounder than the banking system. Mhmm. People don't get that. I mean, the bulk of problems happen within... That happen, happen within the banking system.

And so thank you for that. And when I'm building with my partners today with a like a... Not like, but with a fantastic team of like tireless engineers, And, as I say, they're not actually probably tireless, they're probably very tired from working as hard as they work. Mhmm. But they really have built a beautiful system that is, when I say clean protein, I mean we make sure that everything works with taking out all of the pieces of risk that that people just take for granted.

So for example, I started up by saying we have no distance between the US dollar deposits and the and and the actual treasuries or cash. We... There's no there's no stable coin sandwiches, there's no six interoperability, there's no handoffs. I mean, all the stuff that people brag about, we don't have. We're fundamentally a US Dollar Bank. So a lot of the big banks are now touting systems where they're doing something with crypto. And in reality, they're saying, hey, you have this wonderful cellular fund.

This wonderful cellular phone. We big bank, we're gonna do something amazing. We're gonna plug a wire into it. And they actually end up dumbing down the crypto world. What we've created is we get the full value for the dollar, the full value for the dollar. There's no bid ask spread. It's not like a stable coin. But it has the functionality of a stablecoin. And within the bank, it... It's seamless. So I see that below you're talking about our...

What we've announced and, you know, can talk about that at some length, but what we're essentially have announced and awaiting final approval to execute is to allow people who have clean listed wallets to be able to transact with our actual US dollars outside of the walls of the bank. So, this just... I'm gonna have to unpack this just a little. The way that stablecoins work, for example, is anybody can get a stablecoin, they can send it anywhere. And as you know...

And by the way, I'm an original stablecoin advocate, so this isn't a a a... This isn't putting us in huge cases and immense need for stablecoins. We're just a little bit different. All 95% of USDT and USDC stablecoin transactions are within four hops of a sanctioned persons or a sanctioned country. 70% are within three, which is an astounding statistic.

So, we've been trying to say, what we're saying to regulators and to others is, what we're saying is we're creating a dollar that is always a dollar that can that can transact on chain, on the Ethereum chain, at this point. And anybody who wants to transact has to have their wallet clean listed.

So in other words, if I'm a account holder and I want to send money to Zach and and Zach wants to send money to Drew, but they're not account holders, I could say here's, Zach's account, here's Zach's wallet, and if it's clean, it's good to go. And then that Zach can say, here's someone else's wallet. Again, we don't know the name, but we look at we look at certain features of the wallet, and that can be good to go.

So, you can be transferring these dollars wherever you want, all the while that it sits in a lockbox at the bank. So again, it's not in a... Any complicated way. Instead of being in my account, it... With my name on it, it goes into Zach or Drew's account. We don't know the name, but it's in a lockbox. And so you get the the safety and security of a full reserve bank, and that can have a lot of a lot of knock on benefits for for for for clients, and for just, I think, the world.

That's why I think it's revolutionary. And I think it's safer than banking.

Yeah. I mean, let's unpack that. That's really what I wanna unpack more like this safer than banking and comparing and contrasting the... These two paradigms. Because I think to, like, the average people and maybe even a lot of the average treasury manager, like, they see a... A dollar looks like a dollar. Like, USDC looks the same as a deposit token. But under the hood, you know, you explained to us that, yes, these are these are very different. Does... How they get... Is how they get used different?

How do you bring this to market, you know, versus, like, a traditional stablecoin that's, you know, seeing integrations with banks and, you know, the neo banking platforms of the world? Like, who ends up being the user of your deposit token?

So a couple of things. So you're right when you say a dollar is a dollar to the degree that it's backed by a dollar. It's like a money market fund that you can't directly redeem to. So what happens is is you take your stablecoin and you provide it to a liquidity provider of some sort, and they have a bid ask spread. Usually, it's under five basis points, so it's not a lot. But it's a derivative. You're you're selling a derivative security of a dollar. With us, it's just a dollar. So, there's no bid ask.

There's no concept of a bid ask spread. So, it's not... So to a treasurer, to a corporate treasurer, for example, it's a... A stablecoin is a cash equivalent in The United States. And I believe, for most treasurers outside of The United States under IFRS rules, International Financial Reporting Standards or something like that, that actually stablecoins are an intangible asset. With us, it's cash, so it's cash in the bank.

So, if someone abroad owns this, they just translate this from US dollars into their local currency. The other way that I think in in terms of users is I think increasingly institutions are participating in all sorts of markets. Prediction... All sorts of prediction markets that happen anywhere, perp markets, etcetera. With us, you never need to leave the dollar. So you you can be transacting to own a tokenized, either a tokenized bet or a tokenized, you know, security. You actually never go into crypto.

You're just trading cash for whatever security or commodity or perp. And if you want to be within assured that you're only dealing with... You're dealing with... You're not dealing with any sanctioned parties, you're not dealing with anybody who The United States Government doesn't want you dealing with, then it's safer to deal with us than a stablecoin because everybody who deals in NDD is clean listed. Or what we really like is for institutions to have...

To just be full members of the bank, and then they can just transact privately. Nobody needs to know from them. It doesn't even need to be on the Ethereum blockchain because we're not a privacy standard, you know, we're not sort of a privacy protocol. We're just you're just within the bank. So you have the Bank Secrecy Act. So I think we're doing a few things that like that actually nobody else is doing.

Yeah. Well, I I'm I'm... Wanna unpack this statement. This might be our last question. Maybe Drew can sneak in one more. You you go to your website, you scroll to the bottom, not FDIC insured, and it says by design. By design. Next is a fully reserved bank. That is like, you know, if I talk to my dad and or his friends and you talk about stablecoins, the first objection you... I'll get a lot from, you know, average consumers, even average business owners is, why I don't wanna use a stablecoins?

They're not FDIC insured, and I'm not gonna use any banking product, that isn't FDIC insured because there's this paradigm that this this is a gold standard. Right? This is the stamp of approval for a a safe bank. You kind of alluded to that in the earlier, part where we're talking about, your your history. Yeah. Why is that by design? What do people misunderstand about FDIC insurance and and why you chose for that to be the design for the product?

That's an excellent question. And one we thought about a lot before we started. So first, what... FDIC insurance was a workaround, essentially. Remember, we had the Great Depression, the Great Crash in 1929. Banks in general in The United States became insolvent, and so the government provided insurance up to, at the time, a small amount, now up to $250,000. But that means that means a couple of things.

Number one, when you move money in a fractional reserve bank, because let's face it, if the three of us put in $10 in the bank, plus the producer and the... Or two of your producers put in $10, we all think that we put in... We have $10 of cash there. But in reality, 40 of it's been lent out. So, anytime, anywhere a fractional bank can be in trouble. In Signature's case, by the way, it was not in trouble, and it was just a decision, which is a different story, you know. We told it...

Again, that's a totally different that would take the whole... We would love we would love to tell that story when the time is right. That could be fun. That it would be. And... But it gives... It means you essentially give your sovereignty to the FDIC, who can make a political decision if they so wish. And... But that's not the the problematic part. If you're an institution, even if you're an individual, you're actually not moving a dollar. So remember what I said, we have the dollars here. This is a...

It sounds philosophical, but it's really critical. We have all the accounts here, all a 100% of the dollars plus our bank capital here. When you move a dollar on the chain, you move a dollar. It's immutable, it's final settlement. With any fractional bank, any fractional reserve bank, is every other bank in The United States, you move a promise to pay. If they fail to make that promise to pay, then yes, they can apply to the insurer for up to 250 k. But beyond that, you're on your own. Right?

So if you're an institution, and most institutions 250 k is way below what they have. They may have... We had folks at Signet with 250,000,000 on the system, not 250 k. So you're on your own. And what Satoshi wanted to do, among other things, we don't fully fulfill his idea, but I think we would have been the bank that Satoshi would have created because we move a dollar immutably. We don't do it with, as he said, you know, without some other aspects, but we move it immutably.

Fractional bank does not ever move a dollar immutably. It's it's debits and credits all the way down. So we're a safer bank. I say that I believe we're I believe we're a much safer bank than any fractional bank. And that's the revolutionary part. We're doing something that hasn't been done before. And I love doing that. I... That's what gets me up in the morning and my juice is flowing.

Awesome. That's awesome stuff. We, we do have to transition. This is such a nuance and deep conversation, and I think there's a really awesome story to tell. I know you don't... You said you don't wanna focus too much on the past, but I think the past matters. And like you said, it influenced so many of this... The decisions that went into architecting next. I was gonna message you after this, but I'll just throw it out here. We do Stable Minded. That's our in person podcast.

If you are open to it and coordinating something in person where we can really unpack that story so people understand really what went wrong and then how we're, you know, how we're remedying this, what the what what the learnings are to unpack this and and position NeXT as the the the bank that you believe it to be, we'd love to do... We'd love to partner on that with you. So Yeah. Pleasure. I'll shoot you a message after this and and see if we can coordinate something.

But thanks so much for coming on the show today.

Thank you. Zach, Drew, always a pleasure. You do a great job. You're a key part of this industry as well. So thank you. Great to meet you, Scott. Thanks. Thanks, Scott. Thanks for coming on.