A community bank consortium launched Wednesday to help its members mint and use stablecoins.
The USDF Consortium’s founding bank members include New York Community Bank, NBH Bank, FirstBank, Sterling National Bank and Synovus Bank. The online lender Figure Technologies and the bank-owned venture fund JAM FINTOP are also founding members and will seek to facilitate the adoption of the USDF stablecoin,
For banks like Synovus, of Columbus, Georgia, joining the consortium is part of a broader strategy of incorporating digital assets and related technologies to stay competitive.
“We believe that digital-asset capabilities are going to be foundational, not only to continue to execute as a bank in the future, but also to compete for new customers to provide better and new services,” said Zack Bishop, executive vice president of technology, operations and security at the $56 billion-asset Synovus.
“At the end of the day, we want to be a part of helping set and blaze a trail that others will follow and bring our resources and our expertise and our desire to do those things to bear within the industry,” said Matt Maxey, head of innovation at Synovus. “It’s not just a reaction — we're not going to follow the me-too products. We want to build and invest, whether it's through capital or expertise positions or being a founding member, in addition to offering some of these early products in a safe and sound way to our customers.”
Maxey hopes the consortium will become a large network of banks backed by the Federal Deposit Insurance Corp. that moves digital assets within and among the members.
“What I like about that is it stands behind the already existing business and regulatory infrastructure of banks, [and] it stands behind the existing [anti-money-laundering] and identity-verification programs,” Maxey said. “It’s about installing a somewhat revolutionary technical backbone that can power innovation and product insights and product development for the future.”
USDF can be used to send and receive payments and other digital assets in real time, he said. In the future, it could be used “beyond use cases that we can currently contemplate,” Maxey said.
“Fintech won't be the only ones innovating in this space,” he said. “Banks are going to do it as well, individually and as a group.”
For Bea Ordonez, chief financial officer at the $30 billion-asset Sterling National Bank in New York, the USDF Consortium, the Provenance blockchain and the USDF stablecoin will provide a framework for regulated financial institutions to move cash in a compliant manner over a blockchain. (Sterling Bancorp and Webster Financial have received regulatory approval to merge in a deal that is expected to close on February 1. The combined company will have approximately $65.5 billion of assets and operate more than 200 financial centers in the Northeast region.)
“The USDF Consortium seeks to address the regulatory concerns that have been raised in connection with nonbank-issued stablecoins,” Ordonez said. “Transactional activity will occur on a network that is comprised of FDIC-insured institutions, where the sender and receiver of that digital currency are regulated institutions and customer-initiated activity is driven by customers that have been through a member bank’s regular anti-money-laundering and know-your-customer processes,” she said.
Legacy payment rails are inefficient, slow and expensive, Ordonez said. They don’t provide the modern architecture, real-time availability, certainty of settlement and customer experience that banks are looking to deliver and that customers increasingly demand.
“What we see at a macro level globally is that more and more payment volume is moving on-chain,” Ordonez said. “From our perspective, banks and other financial intermediaries really need to figure out where they're going to sit on that adoption curve.”
Sterling is evaluating several use cases, Ordonez said, though she declined to share specifics. These could include potential use cases in a number of the bank’s commercial business segments, including its factoring and payroll finance business, the loan syndications market and its banking-as-a-service business.
“We think the ability to move money in real time, 24 by 7 by 365 in a cheap, efficient and compliant way will allow us to streamline our operations and crucially, drive differentiation in our product offerings,” Ordonez said.
On a global scale, increasingly assets are being tokenized and traded in a technology-enabled way. This includes loans, private securities and tangible assets from fine art to rare sneakers, Ordonez said.
“As that happens, there will be a greater and greater need to be able to facilitate those transactions efficiently and with less friction,” Ordonez said. “You need a way of moving money digitally in a way that is fast, efficient, cheap and compliant.”
Sterling hopes to go live with offering transactional capabilities in USDF sometime during the first half of this year. This is subject to customary approval from regulators for the covered activities, Ordonez said.
Like any stablecoin, USDF is a smart contract that runs on a blockchain. In this case, it’s the Provenance blockchain that was originally created by Figure and that now is available as open source.
USDF acts like a stablecoin in the sense that it’s intended to always be worth one U.S. dollar. Figure’s leaders call USDF a marker.
“It's different from the stablecoins that are out there,” said Ashley Harris, the general counsel of Figure. “It really is like a marker of a bank obligation on a blockchain.”
One difference between USDF and public stablecoins like USDC (Circle’s U.S. dollar coin) and USDT (the stablecoin run by Hong Kong-based Tether) is that USDF only operates within the Provenance ecosystem.
“The way that smart contract is programmed today, it can only travel between the wallets of customers of member banks,” Harris said.
Another difference is that it's an obligation of a bank itself and may be eligible for deposit insurance, as opposed to an obligation of less-regulated entities whose reserve assets may or may not be held with a bank, Harris said. Each USDF is backed by a bank and redeemable on a one-to-one basis by a bank.
“That’s much safer for consumers and also, we think, from a systemic risk perspective,” Harris said.
“The ease and immediacy of using USDF for on-chain transactions was demonstrated this fall when NYCB minted USDF used to settle securities trades executed on Figure’s alternative trading systems,” said Mike Cagney, Figure's chief executive. “We are tremendously excited that NYCB expects to be minting USDF on demand and on a regular basis in the coming weeks.”
Several years ago, financial institutions rushed to sign up for blockchain projects, including the Enterprise Ethereum Alliance, Hyperledger, R3 and Ripple. For the most part, the projects fizzled out or morphed into something else.
What’s different now, Ordonez said, is that mainstream adoption of cryptocurrencies and digital assets has grown exponentially among consumers and institutional investors, and banks have added deposits and fee income by actively banking this sector while integrating the technology into their existing architecture.
“I think that continued mainstream interest in the digital asset space and the accelerating pace of digitization more generally is going to help drive broader adoption and, necessarily, interoperability in the stablecoin space,” Ordonez said. “Banks and other financial institutions will need to be able to integrate real-time, on-chain payments technology into their operating framework, driving efficiencies and allowing them to deliver differentiation within their core businesses.”
The technology behind the Provenance blockchain also is an improvement over earlier blockchains, she said.
“The open-source nature, the speed at which you can transact and the efficiency of that network in moving value is very different to some of those other earlier frameworks in the space,” Ordonez said.
