When Avanti Financial hinted at a new bank-issued digital asset late last month, it was scant on details.
“Avit has no analog,” Avanti CEO Caitlin Long said at the time. “It is a digital asset. Blockstream is our technology partner. We’re not going to announce anything more than that. One could presume that the Bitcoin blockchain will be involved.”
According to Long, the Avit will be commercial bank money or programmable electronic cash, redeemable at par with a U.S. dollar. It’s also not a security token, or a digital representation of an investment that’s expected to generate returns.
The Avit represents one of several bank-led innovations in the digital asset space. With Goldman Sachs considering its own stablecoin issuance, Sygnum issuing a stablecoin tied to the Swiss franc and other experiments, Avanti has joined a growing list of banks that want to compete with startups on digital assets.
However, Long said she believes stablecoins are not the ideal digital asset for trying to bring fiat into the crypto world.
Unlike cash, stablecoins are generally issued as intangible assets, which means they aren’t physical or don’t derive their value from contractual claims like stocks and bonds do. Because of this, they have uncertain legal enforceability. Circle and Coinbase, the creators of the USDC stablecoin, acknowledge USDC transactions may not be legally enforceable in the coin’s terms of service.
When stablecoins aren’t issued as intangible assets, they exist under Article 8 of the Uniform Commercial Code, which requires they have intermediaries. Paxos is only able to issue its paxos standard (PAX) stablecoin without a middleman because Paxos is a registered trust company.
Avit will be issued under a different portion of U.S. federal and state law that Long would not name because Avanti has a patent pending for the Avit’s design.
While stablecoins are considered “property” by the Internal Revenue Service, Long said it is likely Avit will be treated as cash by the IRS and a “cash-equivalent” by accountants, making it easier for companies and individuals to use Avits without negative financial consequences.
However, Avits wouldn’t function like digital dollars or central bank digital currencies, Long added.
“We’re a second layer down,” she said. “It’s just bank money that happens to be issued on a blockchain.”
According to Blockstream CEO Adam Back, the asset will be issued on Liquid – a network developed and overseen by Blockstream that is meant to move bitcoins around more quickly than the Bitcoin blockchain itself. Assets on Liquid can be traded in atomic swaps, or smart contracts that allow for exchanging assets without an intermediary. In the traditional world, ACH payments to an exchange take several days to settle.
Avit would be the first time a bank had issued a digital asset on Liquid, he added.
Generally, Liquid assets can hide the number of coins that are transferred and the type of coins that are transacted on the network, while showing users what the total supply of an issued asset is, Back said. It's not clear if Avanti will take advantage of confidential transactions, he added.
Avanti and the Wyoming Division of Banking will see transaction details because of the Bank Secrecy Act, Long said.
“I don’t think the Bank Secrecy Act is Constitutional,” she said. “It does have significant overreach. However, we’ve also made it very clear that we will 100% comply with the law.”
While Avanti’s first announcement of Avit is a plan centered on Liquid’s Bitcoin sidechain, the bank also plans to release an Ethereum version of Avit and to support other protocols that have customer demand, she said.
“So it’s not exclusively one protocol for risk management purposes,” she said. “We will have multiple protocols upon which assets can be issued and the customer can choose.”
While Avit would not be pegged one-to-one to the U.S. dollar – because it’s a new digital asset, not a digital representation of a real-world asset – the currency would be 100% backed by a reserve of traditional U.S. assets. (The bank requires a reserve of liquid traditional U.S. assets for all the assets it custodies.)
In this way it resembles target2, the real-time gross settlement system run by the European Central Bank (ECB), said Stefan Loesch, director of tokenization firm eFractio and a lecturer at Cyprus’ University of Nicosia.
The ECB system fully collateralizes all of the euros it moves around so it can settle large transactions instantly instead of at the end of the day.
Loesch said the Avit will effectively become a dollar equivalent if the bank provides an easy pathway for it to be exchanged for a dollar. In this way, Avit would represent a certificate of deposit or a unit that is redeemable at any time against the U.S. dollar.
Avanti is also aiming to reduce the credit risk on the collateral backing the Avit, Long said. Avanti will likely denominate its Avit collateral in Federal Reserve deposits and U.S. Treasurys, which are higher-quality liquid assets than what would be held at a lesser amount as capital reserves at a bank that does fractional reserve banking.
“They don’t have to hold a hundred cents on the dollar,” Long said, referring to banks that lend.
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