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The bank members are New York Community Bank, FirstBank, NBH Bank, Synovus, Webster Bank, ConnectOne Bank, Amerant Bank, Primis Bank and Atlantic Union Bank. They are experimenting with several use cases for the technology ranging from lending to loan securitization to international payments.
Its new CEO, Rob Morgan, was formerly senior vice president of innovation and strategy at the American Bankers Association.
Morgan says he joined the USDF Consortium because of the potential for blockchain technology to improve all aspects of traditional financial services.
“A lot of my career has been at the intersection of banking, technology and regulation,” Morgan said. “At the ABA, my role was standing up the office of innovation and helping banks navigate the rapid convergence of banking and technology. This feels like a really natural step.”
The changing nature of deposits and of money is the biggest opportunity and risk for the banking industry, “which is why I think USDF and tokenized deposits is the one thing that I can do that can best support the future of the banking industry in a digital economy,” he said.
USDF, like other stablecoins, is a smart contract that runs on a blockchain and is intended to always be worth one U.S. dollar. It operates on the Provenance blockchain that was originally created by Figure and is now available as open source code.
“For years we have heard the value is in the blockchain, it's not in the coins,” Morgan said. “It turns out the coins are still around and they're still really important. And in my mind, the reason for that is the coins allow you to communicate in blockchain. What USDF as an asset allows banks to do is talk blockchain together, set the rules of the road and allow for bringing all aspects of banking onto blockchain to leverage the efficiencies that we've seen play out in the market, but to do that with traditional financial services products and bring those efficiencies and gains to the real world. So I think what we will see are faster, more efficient, cheaper payments.” Following that, he said, will be digitized financial services, including loans.
Bea Ordonez, chief innovation officer at the $65 billion-asset Webster Bank in Stamford, Connecticut, also sees working with the consortium as a way to prepare for the future.
“We view our membership in the consortium as part of a broader digital assets-slash-digital technology innovation strategy,” she said. “We've been focused on our learnings and in having this crucial seat at the table through the consortium.” Ordonez was chief financial officer at Sterling Bank when the company first began working with Provenance. Webster acquired Sterling in February.
Blockchain technology lets financial institutions displace trust with truth, Figure CEO Mike Cagney said at American Banker’s recent Digital Banking Conference.
“I can create a loan on the blockchain where the composition, the provenance, the history of that loan are known for certain such that when you face off against me to transact, you don't have to rely on my reps and warranties,” Cagney said. Blockchain technology also allows two counterparties to face off and transact bilaterally without incurring counterparty or settlement risk. The trade happens instantly, and the money changes hands through the use of the USDF stablecoin.
“If I have $50 million in loans that I want to sell you, you have 50 million stablecoins in your wallet, we trade them in a decentralized exchange, and the loans get registered to you and the stablecoins get sent to me,” she explained.
Ordonez also sees blockchain technology as an efficient way of registering ownership in an asset and providing payment rails that can move money quickly and eliminate counterparty risk.
“The ability to service loans on chain relies on you being able to move money on chain,” Ordonez said.
Webster is currently building and experimenting with the ability to put real estate loans on the Provenance blockchain. Because it’s an OCC-chartered bank, before it can go ahead with any live activities, it would need to seek approval or non-objection from its regulators.
“We're engaged in conversations with the regulators to keep them apprised of how we're thinking about the space and where we are in our overall journey because we think that that's the right thing to do,” Ordonez said.
Webster Bank is also working with other vendors in this area, including Deloitte’s digital assets practice and the blockchain technology company Fin3, which has developed middleware that lets banks connect to the Provenance blockchain.
Ordonez is interested in the idea of issuing a stablecoin, but is not sure whether the bank will want to participate in a closed-loop system, like the one Signature Bank runs, or a more open one like the USDF Consortium’s.
“We're exploring all paths,” she said. “We think the work of the consortium is super valuable, and we think a bank-minted stablecoin or marker or tokenized deposit is the right way to go for the financial system more broadly and for the ability for financial intermediaries to harness the benefits of the technology.”
For a bank that offers residential mortgages and home equity lines of credit, another key benefit of using a distributed ledger like Provenance is the ability to perfect an interest in the underlying collateral on chain.
“This is a long journey,” Ordonez said. “We're not going to be able to do this tomorrow or the third quarter or even the fourth quarter, but if you look at those processes that any bank goes through to underwrite a loan, to fund a loan, to service a loan, all of them lend themselves to driving significant efficiencies, to the extent that you can tokenize assets.”
She also sees loans in the future becoming smart contracts that are just automatically executed on chain.
“That is the promised land, so to speak,” Ordonez said. “There are quite a few steps between here and there. The regulators are definitely paying attention, as they should. There's a lot of regulatory ambiguity that needs to get resolved in the coming quarters for regulated institutions like banks to be able to play efficiently in this space.”
Morgan describes the USDF Consortium as working in two phases.
“The first phase is building out the test of basic bread- and-butter payments, of moving a dollar on blockchain from point A to point B,” Morgan said. “So the first phase looks much more like a blockchain-based messaging layer, where funds will still settle at the end of the day, the same way a Zelle transaction, for example, looks like it happens in real time and the banks settle at the end of the day.” This will make payments faster, cheaper and programmable.
Phase two is to bring some traditional assets on chain and realize efficiencies that come from that, Morgan said.
“I think USDF is a great answer to a lot of what we have seen in the changing nature of money, the changing nature of deposits,” Morgan said. “As we look at the ecosystem, we've seen waves of fintech innovation come through, and I think there has been this narrative that disruption is coming, but ultimately it hasn't really changed customer relationships that much to date. Today we have new versions of private money in the form of stablecoins. We also have discussions around whether the U.S. government should issue its own version of digital tokenized, public money. In developed economies today, 95% of money is private money, and it's mostly digital and held in banks. How do we make sure banks maintain that role? The consortium is almost like insurance against future innovation.”
