New Hampshire bankers are nervously monitoring U.S. and state attempts to push cryptocurrency into the mainstream of the nation’s financial system.

Cryptocurrency – the online digital currency that operates as a decentralized financial network largely independent of the banking system – has been slowly seeping into the national and state economies via residential and commercial real estate deals.

New Bitcoin ATMs are also popping up in commercial locations across the state and nation. Cryptocurrency is even being used for some cross-border international trade transactions, according to local financial experts, in addition to its popularity on the dark web and in other criminal contexts.

But last year the U.S. Congress and New Hampshire lawmakers separately amped up cryptocurrencies’ legitimacy by passing new laws designed to further integrate the digital assets into everyday uses.

In Washington, D.C., lawmakers, urged on by the Trump administration, last year passed the Guiding and Establishing National Innovation and U.S. Stablecoins (GENIUS) Act. The act is considered the first government-approved legal framework for regulating digital-asset payments in the U.S.

Meanwhile, Granite State lawmakers last year passed a first-in-the-nation law establishing a so-called “strategic bitcoin reserve,” which allows the state treasurer’s office to invest up to 5 percent of state monies in Bitcoins, other digital assets and precious metals.

In addition, the quasi-public New Hampshire Business Finance Authority last year approved a first-ever municipal bond backed by Bitcoins, in yet another attempt to mainstream blockchain currencies.

The reaction of local bankers to cryptocurrency actions by the U.S. and state governments? Decidedly mixed.

Is Crypto Regulated Enough?

While saying they’re in favor of financial innovations, they’re also expressing concern about “deposit flight,” or funds flowing from traditional regulated banks to very lightly regulated, at most, digital-asset products.

“We don’t want money lured away to stablecoins and other unregulated [cryptocurrencies],” said James Kisch, CEO of Passumpsic Bank, which has four offices in northern New Hampshire.

“Banks depend on deposits for money that we lend out to local businesses” and households, said Kisch, a member of the recently created New Hampshire Commission to Study Stable Tokens. “For bankers, it comes down to an element of fairness. Banks are more regulated. It’s made our banking system extraordinarily strong. But [cryptocurrencies] aren’t as regulated. We welcome innovation. But there has to be fairness and rules of the road.”

Of the recently passed cryptocurrency laws, bankers are most concerned with what they’re calling a loophole in the federal GENIUS Act that allows third-party blockchain operators to effectively pay interest and other rewards for those switching their funds over to stablecoins.

Stablecoins are cryptocurrencies pegged to relatively stable assets, such as the US dollar or gold, and designed to minimize the extreme price volatility common in digital assets. Stablecoins are primarily meant to be used in payment transactions.

Local bankers are also concerned about New Hampshire’s recently passed “strategic reserve” law that allows the state treasurer to invest up to 5 percent of state assets in cryptocurrencies and precious metals.

To date, the office has yet to invest any state funds in cryptocurrencies or precious metals, according to spokesman for Treasurer Monica Mezzapelle.

Concern for Deposit Flight

As for the federal GENIUS law, Chris Logan, president of the Bank of New Hampshire, said the rule pegging stablecoins to assets like the dollar is a sound and welcome idea.

He noted that GENIUS act specifies that stablecoins can’t pay interest and other rewards to attracts customers.

The idea behind that prohibition: to safeguard the nation’s critical banking-deposit system.

Yet third-party blockchain operators, as a result of various provisions in the law, are indeed indirectly offering interest and other rewards for stablecoin users, violating the spirit of the GENIUS Act, Logan said.

“It’s a huge concern,” he said. “It’s really, really concerning. It could lead to dollars leaving banks in huge amounts.”

Indeed, some reports have estimated that trillions of dollars in capital could flow from traditional bank deposits to stablecoin products in coming years, said Logan.

As for New Hampshire’s new “strategic reserve” law, Logan said there are some concerns about shifting funds from relatively stable accounts to “very volatile” Bitcoins and other cryptocurrencies.

“We have to be really careful about this,” he said, once again expressing concern about banks losing state deposits in favor of cryptocurrencies.

NH Bitcoin Bond ‘A Good Move’

Not all digital-asset moves of late are drawing the ire of bankers.

In particular, Logan and others said they have no problem with the state’s new $100 million municipal bond that backed by Bitcoins, as recently approved by the state Business Finance Authority. The new bond is awaiting routine approval by the state and the authority’s governing council.

“It’s actually a good move,” said Logan of the $100 billion Bitcoin-backed bond. “The risks are low to the state due to the way it’s structured.”

In effect, the Bitcoin-backed loan product is a “conduit bond,” in which the state merely acts as a broker between a borrower and bond buyers wanting to conduct business via digital assets.

There are no taxpayer dollars at risk – and the state stands to make potentially thousands of dollars in broker fees per bond transaction, said James Key-Wallace, executive director of the state BFA.

The state already has a potential borrower lined up for a deal: a group of clients represented by Wave Digital Assets, which describes itself as a crypto asset management, treasury management and strategy consulting firm dedicated to furthering the growth of digital currencies and assets.

And the Los Angeles-based Wave Digital Assets is reportedly handing numerous inquiries from potential bond buyers, said Key-Wallace.

“There’s a lot of interest in the bonds,” he said. “It’s a very attractive investment space for some institutions.”

Setting aside the state potentially making money as the bond’s broker, why issue the bonds?

“We do hope it’s the first of many [crypto-backed] bond deals,” said Key-Wallace.

“We’re trying to bridge the divide between [cryptocurrency] and traditional finance. This is a new structure for new assets. We’re trying to create something new here – and we want New Hampshire to be at the forefront of this new [trend].”

Bank officials stress they’re not against cryptocurrency products in general – as long as they’re properly regulated.

“We just want to make sure there’s a thoughtful framework in place,” said Kristy Merrill, president and CEO of the New Hampshire Bankers Association.

“There’s a lot of learning going on – and bankers are trying to understand all the use cases involved. We’re all trying to understand what the rules of the road are today.”