Inside a Banker’s Digital Asset Journey: Insights from a Pioneer

Nancy Ozawa (00:06): Welcome to Banking Out Loud. I'm Nancy Ozawa, Chief Marketing Officer here at PCB and I am also one of the co-hosts of this show. We know here at PCBB that stablecoin and digital assets is on everyone's minds. So we are committed to exploring this topic to help our industry understand the ins and outs, the challenges, the opportunities, and even the steps that you might want to consider doing today just to keep up with this topic. Our goal is to educate the industry about this topic so that we're all prepared. Our chief operating officer, Sheila Noel, leads PCV's payment strategy to advance our capabilities and streamline our processes. She currently serves on ICBA's digital asset subcommittee, which examines and deliberates on issues related to the central bank digital currency as well as digital monetary assets. That includes cryptocurrency, digital assets, stable coin, tokenized deposits, and other items. (01:07): We recently had a great conversation between Sheila Noll and Patrick Gerhart, who heads up the Telcoin Digital Asset Bank. That bank is a blockchain-based digital asset depository institution under the Nebraska Department of Banking and Finance. It was an interesting conversation focusing on what do we need to know today and what are some of the lessons that Patrick and his institution learned while they were setting up their digital asset bank. So let's listen in on this conversation. Sheila Noll (01:38): Hello and welcome. I'm Sheila Noel, Executive Vice President and Chief Operating Officer at PCBB. And today we're talking about digital assets and why they're becoming harder for community banks to ignore. To help get us into that, I'm joined by Patrick Earhart. Patrick serves as president of Telcoin Digital Asset Bank, which is a blockchain-based digital asset depository institution under the Nebraska Department of Banking and Finance. So before we dive in, Patrick, can you give us a quick overview of your background and what led you into digital assets and building a digital asset bank? Patrick Gerhart (02:13): Yeah, I'd be more than happy to. Again, my name's Patrick Gearhart. I am President of Telecoming Digital Asset Bank here in Norfolk, Nebraska. I am by trade a banker before I got into digital asset realm. I was president of bank at Newman Grove, Nebraska right up until the point where honestly, digital asset legislation came into the state. How I kind of got involved was I was on a government affairs committee when the Nebraska Financial Innovation Act came in 2021. Um, what happened was Telcoin's CEO, Paul Neuner, had started Telcoin back in 2017 in Singapore, um, has its native token wallet and was looking at coming into the United States because that was the emerging market when it came to digital assets. So he reached out to his former college roommate, then State Senator, now current Congressman Mike Flood about coming to the United States and specifically the Wyoming Speedy Charter, because that had just been brought up, um, and was passed in that state and Mike's view was, "Well, why don't you come here to Nebraska? (03:16): Why don't we try this out here?" And right around that time, I was looking at moving on from the Bank of Newman Grove and the legislation came through, which as you can imagine back then had a lot of detractors and just people were very skeptical in regards to digital assets, specifically stablecoins within the US financial industry, you know, let alone the banking industry. So I got a pretty good education over crypto, stablecoins, all types of digital assets during that time. I was familiar with it. I was curious about it. I was really curious about the blockchain and how that worked out during that time. And I actually became one of the early proponents as a traditional banker of this piece of legislation being passed. And I really didn't think much of it. It passed the first go around, which is surprising for any piece of legislation, let alone financial legislation that could help change financial policy in the United States. (04:08): But shortly thereafter, they reached out to me asking if I would be interested in running their bank here in Nebraska. Um, I had a background in traditional banking and I had a interest in digital assets. So that's basically how I got brought in in, in a nutshell. Sheila Noll (04:24): That's fantastic. Well, I myself have spent most of my career helping community banks navigate change in payments, liquidity and technology. So I've seen firsthand how quickly customer expectations can shift while regulatory and operational realities stay very grounded. In the case of stable and digital assets, regulatory realities are changing now as well. So over time, it's becoming clear that digital assets are not just a niche. They're starting to really touch payments, deposits, and treasuries in a way that will impact community banks, whether they embrace it or not. So I feel like our conversation is very timely. So kind of from an early insights and really the turning point, when you first really started into this, what did you see that traditional banking players, your, your peers were missing? Patrick Gerhart (05:15): I think the first thing was that first off, it was new and anything new in the financial realm is immediately met with skepticism, which is understandable. The last thing you wanna do is interrupt a very strong, very well-regulated market, which the US already has. So I think there was skepticism at first, but the biggest part was just understanding what this was, understanding what the blockchain is. It is a digital ledger online that is transparent, it is safe, and you can easily move transactions through. Understanding that, understanding how that works within not just your bank but your customer's funds, how they can utilize that, how they can take their fiat currency, transfer it into, let's say, a stablecoin and utilize that on the blockchain to make payments, to receive payments in a way that is safe, well-regulated, which we're working on right now and the biggest thing, timely. (06:05): We're living in a world right now where payments on a timely basis are huge and you make payments in the United States, between states, internationally. It can take time. It can take time to transfer funds, but with stablecoins, it can bring that down to seconds, you know, very quick, very transparent, very safe transactions. And I think once the US financial industry, specifically banking, bankers out there who are listening, once you understand that, how that can work within your own ecosystem of your bank, I think it'll not only benefit your customers, but it'll also benefit your organization. Sheila Noll (06:39): Well said. I think that aligns a lot with our thoughts. Many traditional players view digital assets as either pure speculation or pure threat. Mm-hmm. And both views can really miss the point, right? So what we see is a new set of tools for settlement, liquidity, and cross-border transfer that could either disintermediate banks or it can be successfully harnessed by them. Mm-hmm. So again, timely conversation. As community bankers look at this space and when you talk to other community bank leaders today, what do they most consistently underestimate or misunderstand about digital assets, whether on the risk side or the opportunity side? Patrick Gerhart (07:19): You know, a lot has changed over the last year with the legislation that was passed last year in Congress and with the CLARITY Act coming through Congress right now, it went from where you talk to a lot of bankers and they just either didn't wanna deal with it, they didn't understand it, which is a fully understandable place to be in and just a belief that it wasn't for them. But over the last year, it's gone from that point of view almost to a, "Okay, it's here. We have to deal with it. My customers are asking about it. How can this benefit them, like I said earlier, and how can it benefit us? How can we ... " And it's not even just the large banks, because we've talked to large banks. We've also talked to a lot of smaller banks, banks well under 100 million in assets who are interested in possibly getting involved in this. (08:01): The narrative has changed considerably over the last year and right now it's full on education. It, it really what it comes down to is educating bankers on not only how they can utilize it, but what it is, what it means to their banks, what it means to their bottom lines, how they can describe this to their directors, how they can describe this to their customers and how it can benefit them. Sheila Noll (08:22): Yeah, exactly. Certainly on the risk side, to add to that, you know, many underestimate how much digital asset exposure they already have indirectly- mm-hmm. ... through their customers, through exchanges, fintechs, and while it's funded from the bank accounts at their institution. Mm-hmm. So they may think we don't touch digital assets. They may think we don't touch crypto, but in reality, they are already in the flow. They just may lack some of the visibility and control and the opportunity to provide services to their, their clients in the space. So again, on the opportunity side, misconception that digital assets are an all or noth proposition and that's not the case either. You either become full-blown crypto bank or stay out entirely. And in reality, there's a spectrum of opportunities that are here today, but even more will come in the future as well. And to your point of education, that's going to be critical through all of this. (09:17): So as an early, um, kind of pioneer, if you will, in this space from a banking perspective in particular, uh, what's one lesson you learned the hard way while building telcoin's digital asset banks, something you wish you knew day one that community bank leaders should hear now? Patrick Gerhart (09:36): I would say the biggest thing right now is understanding how closely you need to be in lockstep with your regulators, whether it's the State Department of Banking, the Federal Reserve, FDIC, OCC, understanding what their needs are, what they think that you need w- within your institution, understanding how your institution can utilize this is huge. I knew jumping in when we started our charter to get the digital asset charter here in Nebraska, that that was gonna take time. I just didn't realize how much, especially considering we are one of the first ones to really pursue this. And we're with the Nebraska Department of Banking and Finance, which was one of the first state institutions to take this on to start their own department. So there was a lot of education on both sides, not just with us, but with them too, because they, they knew what was in the Nebraska Financial Innovation Act and so did we, but they didn't know what our business model would be and we didn't know exactly how our business model was gonna be regulated. (10:32): So that was a big educational standpoint that luckily for somebody like us, we've gone through it once, we've done that and we're still working with them, but it could be a huge leg up for any other institutions moving forward, especially here in the state of Nebraska because there is a state regulator who already gone through this with somebody like us. That, that's probably the biggest thing right now is really understanding what it needed to take for us to, to pursue this endeavor and to make it happen. Now that we've done it, I know if I had to do it again, I could do it, you know, help guide somebody like that moving forward, something I was not planning on from the get- go. You know, I, I never in my life thought I was gonna be starting up a digital asset bank, but now I have a rough idea how that goes and why it's so difficult for even a de novo, like a regular traditional bank. (11:17): I mean, just to give folks at home an idea, we were basically treated as like a traditional de novo just in the digital asset realm. So if you've ever done a de novo or have an idea of what it takes to, to start a de novo, it's a lot. Sheila Noll (11:31): That's amazing insight. Thank you, Patrick. I think another lesson in there that I think I'm hearing from you is that regulators do not expect you to have all the answers, but they do expect you to have a discipline process, transparency, and a willingness to adjust as risks continue to evolve. So engaging early, sharing your thinking as you indicated and being clear about what you're not going to do, what you're going to do is just as important as anything and just staying is very engaged- Nancy Ozawa (11:59): Yes. ... Sheila Noll (11:59): With your regulators. So that's, that's fantastic advice. If you were to start over, is there anything you tried to build in- house that you would now maybe partner for or you would have maybe built something that you partnered? So kind of both sides, you know, what should community banks be thinking about when they think about build versus partner? Patrick Gerhart (12:20): So this is a great question because this is kind of where our business model comes in. You can kind of go about this two ways, at least here in the state of Nebraska. You can either be a freestanding, already established financial institution and build a division, build your own stablecoin, build everything in- house. You can work with FinTechs to do all your outsourcing and stuff like that, but in, in essence, making your own ecosystem inside. Or what you can do is partner up with groups like us. We are a digital asset depository institution, but we can partner up with traditional banks. We've already done all that so we can establish your stablecoin, you know, utilize our stablecoin, bring it into your customer base, bring it into your core, establish those connections without having to start everything brand new. And I can't imagine we're gonna be the, the only bank doing this moving forward, but to make things easier, find a group like Telcoin Digital Asset Bank, partner up would be probably the easiest way moving forward. (13:16): But if you're a smaller, even mid-size bank and you, you know, bare minimum when we started this for capital raised was $10 million You know, that was in statute. Things have changed a little bit, a little bit easier at this point in time, but even for a midsize bank, that's a hefty lift just on the capitalization side, whereas you don't have to do that now with an established digital asset bank. Sheila Noll (13:37): Definitely options out there, so thank you for that, Patrick. Telcoin being one of them, and really like the build versus partner decision in my mind really starts with a simple question. Is this capability truly strategic and differentiating for your institution or is it a complex utility that you just need to have work reliably? Most digital asset plumbing falls into the complex utility category that really may be better sourced from a supervised partner. Mm-hmm. While strategy, customer experience and risk appetite are where banks can really remain firmly in the driver's seat confidently. There are a lot of things to contemplate here, but that was great to see what that looks like on, on both sides of that. Nancy Ozawa (14:22): Mm-hmm. Sheila Noll (14:22): How about building the right team and capabilities? What have you learned about the skills and roles needed to execute well in digital assets? Where does it make more sense to upskill internally versus bringing in new talent or partners? Patrick Gerhart (14:38): That's a great question. The areas that you're gona have to upgrade regardless of what route you go in getting in digital assets, compliance is probably gonna be the number one thing, risk, really upgrading your department in that area. Whether you partner, build your own system, the compliance regulatory aspect is gonna have to be upgraded or the digital asset realm. I mean, and a lot of it comes from traditional banking. The basic rules, regulations, steps that you're gonna do that you would normally do in a traditional bank, you will do in this order. It's just geared towards digital assets, working with the blockchain, understanding how connecting the blockchain that ledger to your bank core, those areas are gonna be huge, quite possibly if you're big enough upgrading your engineering side of your bank. If not, that would probably be the area to kinda look to outsource more to get somebody who has that experience, who has that understanding, finding a company that can help, you know, a third party vendor to help you out in that aspect would be huge. (15:32): But I'd say the first thing you would need to do, because when we started pitching our model to other banks, it was the compliance department that we really had to sit down with and really walk through what we were doing and what that meant. 'Cause a lot of even mid-size banks, their compliance departments are only so big, you know? And adding this type of a product, a new product onto their plate can be a lot, especially for a bank that's not traditionally used to going into this type of FinTech realm. So I would say compliance would be the first area that I would seriously look at within your institution before moving forward to really kind of see what your appetite is in regards to getting into this product. Sheila Noll (16:12): Yeah, that's consistent with what I find myself also talking to community bankers about. I tend to advise that this is really not an area that you just bolt into your existing risk and governance framework as an afterthought. You really have to be deliberate. You have to design the business model, the product set- mm-hmm. ... and controls in parallel again with that regulatory engagement from day one. So, um, yeah, you're honing in on some really important things there. What else have we maybe missed? Maybe how do community banks get started without overcommitting and being concerned overly about risk? Patrick Gerhart (16:52): Well, the first thing I would do is do your homework, educate yourself, really understand that what is going on within the digital asset world as a whole, but also I'm gonna go back to the regulators. What are your regulators doing? How are they treating this realm? I would look into the strength of, like I just said, your compliance department, see where they're at. The first thing I would do before anything is get all the, you know, just your ducks in a row in regards to your education and go to your board, you know, see what they wanna do. One thing I like to mention is that some people are thinking this is gonna take over. You know, maybe 50 to years down the road, I don't know it could take over. Um, but at the end of the day, I look at this as just another product in the marketplace. (17:27): Think of it when debit cards came in, you know, back in like 80s and whatnot, people were scared of it. Banks didn't want anything to do with it. It was another burden on their profits, o- on how they operate. And over time, it became adopted. Did it fully take over? No, but it was another product you could offer your customer. That's what digital assets are. That's what stablecoins can be. Stablecoins, which are backed one-to-one, at least ours, by the US dollar, regulated by a state institution, hopefully someday a federal institution. We're waiting on the CLARITY Act information to come out hopefully any week right now. Uh, but really understanding that you can go in there, have your customers deposit their Fiat currency, get stablecoins minted into their self-custody wallet in our example, able to utilize that, be able to use as their payments for goods and services in a timely manner, in a safe manner. (18:22): It's another quiver in your arsenal. This could be one of those things where you can bring in customers, especially if you get in early, you could bring in customers from other banks who want to use stablecoins, digital assets on a regular basis, which would be huge. And it's not just the ability for those customers to utilize those services. Where are those reserves held? You can hold those reserves. Right now, people, bankers, I know out there listening right now are, are sitting there watching people send their fiat currency out of their checking and savings accounts into Coinbase where they utilize it for just these things. Why not keep that in- house? Put that into a reserve account, earn interest on that, keep that within your ecosystem. Don't let, don't let these funds leave your institution for another institution or to another non-banking institution in a lot of these cases. (19:14): Keep it in the US financial system. This is the future of that. And to really understand that and to jump on board with it is gonna be huge for US banks. I mean, podcasts like this, conversations like this are needed across the board because it, the future is here, not to sound cheesy and it came a lot faster than a lot of us were planning on. I mean, 10 years ago, we were talking about just like Bitcoin. What is that? How does that work? Ethereum. And a lot of them failed. You know why? 'Cause they weren't regulated. They were put on by bad actors and we're trying to go about the right way of doing this. Allow people to utilize this technology to transfer funds in a safe, sound, and efficient manner that doesn't take three, five, seven days to happen like it does right now with a YRACH. (19:59): This is something for the banks for the future that I think one way or another, they're gona get on board and they will benefit from. Sheila Noll (20:05): Yeah, for certain. And just as importantly, their clients will benefit. Mm-hmm. Study after study shows that in this space, whether it's a corporate client or a consumer, would much rather go to their trusted financial institution to really offer these services again in a trusted and sound manner because it is a bit of a brave new world out there. And, uh, we are in, very much in a different place today than we were five years ago talking about digital assets. The opportunities with blockchain are amazing even outside of payments. So it's, I'm with you there. The more we can have these conversations, uh, the better. Mm-hmm. So really I would say starting tomorrow, treat digital assets and digital dollars as a strategic planning topic, not a side conversation anymore. Put it on the board agenda as, as Patrick indicated, establish a point person internally and begin documenting your view of the risks and opportunities because there are opportunities. (21:04): Even if that opportunity is, "We're gonna move slowly and maybe only do this through partners," that's something that's, that's being engaged. Mm-hmm. And, um, I would also urge you to not wait for perfect clarity, no pun against the Clarity Act. We are all waiting for that, but don't wait for perfect clarity in this space, you will rarely get it. So if you don't build some internal understanding and optionality now, you may find yourself reacting under pressure later when it's maybe the worst time to be making decisions in a new risk area that are strategic in nature. Now, that said, it's absolutely not too late. If you've not started this journey, you're fine. There's, there's still plenty of time here. Mm-hmm. So this is not a sky as falling conversation. There's lots of opportunity. Um, but if you're not engaged in learning and, and really, um, educating your board and having those conversations with your clients because they absolutely some of them are in the space, whether you know it or not- mm-hmm. (22:05): ... you know, two to five years from now, it, it maybe will be too late or be, uh, it will be a lot- Yes. ... more uncomfortable, I would say. So looking three to five years out, get your crystal ball out, Patrick, what do you think will be table stakes when it comes to digital assets and digital dollar capabilities that a healthy community bank will need to offer? I Patrick Gerhart (22:25): Think in three to five years, you will not only have banks involved in digital assets, specifically Stablecoins, because that is, to me, the easiest way to get involved, but you will see, you'll see debit cards that you can use your stablecoins through Apple Pay, Android, the point-to-point transactions, I, I feel like in three to five years. So you can go to the store, you can go to the gas station and pay with stablecoins. I think all of those opportunities will be up and running and more importantly, for everybody listening, will be regulated. It will be regulated to a point to where it's not just safe for your customers, but also to your institution. I think that's gonna be the big next step so you can see these real world transactions happening with digital assets. Sheila Noll (23:06): Yeah, well said. Definitely see the opportunity for community banks to be moving value on behalf of their customers twenty four seven with near instant settlement and clear transparency on these and risk. Mm-hmm. You know, whether that underlying rail is FedNow, RTP, tokenized deposits, or as we've been talking a lot about regulated stablecoins- mm-hmm. ... community banks won't need to offer every digital asset product under the sun, but they will definitely need to plug into modern rails that may be tokenized under the hood. So again, back to just the opportunities that are there, it's amazing. Mm-hmm. Um, any last thoughts, Patrick? Patrick Gerhart (23:44): No, now we're off the top of my head, you kind of ended that perfectly. The only thing I would say is what I've been saying since the day one is that stablecoins, digital assets are coming. The consumer is better off with the US financial system, specifically banks, involved in this. It brings peace of mind, as you mentioned earlier, that that connectivity to the community bank, but also it, it allows more and more access to it and the availability to get involved and they're gonna wanna get involved. These younger event generations are getting older and they understand it as best as anyone and they're gona want the institutions that they deal with to deal with digital assets. Sheila Noll (24:23): Very good. I can't think of a better way to wrap up. Thank you for your time, Patrick, and for joining us on this episode of Banking Out Loud. Nancy Ozawa (24:32): Wow, that was a great conversation. Listeners, I hope you found the conversation valuable and that you're walking away with a few new insights on digital assets and what they could mean for your institution. It is a complex and evolving space, but staying informed is the great first step and that is what PCB is dedicated to doing is tracking and staying abreast of these issues for you. If you haven't already, be sure to check out our other episodes and subscribe so you'll be the first to know when new content is released. We do have another upcoming show on Stablecoin also have coming up an upcoming series on AI where we'll sit down with two different AI experts to discuss everything from legitimate AI use cases to leveraging AI for prospecting for lenders and other sales individuals and enhancing that ongoing relationship management. If there's a topic you'd like us to cover, or if you're interested in joining us as a guest, we'd love to hear from you. (25:32): Please reach out to us at bankingoutloud@pcbb.com. Thank you again for listening. Until next time, happy banking.