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New bank consortium to explore economic benefits of blockchain, stablecoin

Community banks that try to break through legacy technology infrastructures are betting on blockchain to improve operational efficiency and drive the growth of deposits, loans and payments.

On Jan. 12, five community banks, together with fintech firm Figure Technologies Inc. and JAM FINTOP, launched a consortium to mint a stablecoin called USDF on the public Provenance blockchain developed by Figure. The goal is to use USDF as an on-ramp to facilitate real-time payments, loan and securities processing on blockchain among many more use cases. The founding bank members include New York Community Bank, NBH Bank, FirstBank, Sterling National Bank and Synovus Bank. On Jan. 19, the first transaction of such was completed on Provenance, where NBH Bank sent self-minted USDF to a customer of New York Community Bank.

While the stablecoin market is dominated by fintech companies as issuers, federal agencies released guidance in late 2021 signaling that stablecoins should be issued by insured depository institutions. The new stablecoin consortium is designed to be in line with those recommendations, in the sense that USDF will be issued by banks and backed by their deposits, said Mike Cagney, CEO of Figure.

The launch of the USDF Consortium is the latest example of community banks proactively exploring technology to strengthen their competitiveness. Compared to the money center banks, community banks tend to have fewer financial and talent resources dedicated to technology and they have long been using third-party vendors such as Fiserv Inc., Fidelity National Information Services Inc.and Jack Henry & Associates Inc. The legacy technology infrastructure often gets blamed for community banks' lack of agility in operations and falling behind in digital customer experience. In recent years, community banks have endeavored to work with their fintech peers through investments and partnerships, not only in traditional banking but also in the fast-growing class of digital assets.

"We are completely aware that we are in a revolutionary environment," said Andrew Kaplan, chief digital and banking-as-a-service officer at New York Community Bank. The bank wanted to lean into modern technologies to stay important and relevant and began its blockchain effort with Figure, Kaplan said. It has elaborated to its regulators the strategic plans regarding its participation in the USDF Consortium, including the New York State Department of Financial Services and the Federal Deposit Insurance Corp. The consortium has also held talks with The Office of the Comptroller of the Currency.

The novel blockchain technology will help level the playing field between small and large banks in technology, since an open source blockchain like Provenance will not be owned or administered by money center banks, Cagney said in an interview. The two main instant payments networks in the U.S., Zelle and RTP, are owned by consortia of the largest commercial banks, Early Warning Services LLC and The Clearing House Payments Company LLC, respectively, and the Federal Reserve-operated FedNow will not be available until 2023.

"I think what they did with USDF is that they actually leapt ahead at the money center banks in a way that they've never been able to do before," Cagney said.

The cost and the benefit

Unlike traditional payment rails that rely on a central operator to batch and settle transactions, the Provenance blockchain enables banks to move money 24/7 instantly following consensus rules set by smart contracts. This structure is meant to eliminate interchanges. Provenance is also open source to allow developers to build applications without extra permission from Figure.

A bank can get onboarded to Provenance in a matter of weeks for a total cost of less than $100,000, including a membership fee of $20,000 to $50,000 based on asset size, Cagney said. As the developer, Figure owns less than 15% of the USDF consortium, but there is no ownership of the USDF token, per se, nor any explicit economics in using USDF other than the membership fee, according to Cagney. Member banks are required to be FDIC insured with at least $1 billion in assets, according to a pitch deck.

New York Community Bank has identified several decentralized applications that will help reduce expenses significantly because certain intermediaries are no longer necessary on blockchain, said Patrick Quinn, the bank's general counsel. It anticipates that the applications with better economics will appeal to more customers and thus help grow its loan and deposit balances, he added.

"Payments volume will continue to move away from legacy rails, and that's going to present a challenge to the banking sector and others. It is our view that banks and other intermediaries really need to determine where they want to sit in terms of their adoption of these technologies," said Bea Ordonez, chief financial officer of Sterling National Bank. "There is certainly a risk in waiting too long."

More to come in bank-focused blockchain

The USDF consortium is not the first attempt by the banking industry to experiment with blockchain, and will not be the last one. Tassat Group LLC, which has developed blockchain-enabled payment platforms for Signature Bank, Customers Bank, Western Alliance Bank and Cogent Bank, is in the process of signing up banks to join its interbank network, Tassat Chairman Kevin Greene said in an interview. The payment network will leverage private permissioned blockchain and will be owned and governed by member banks. Tassat expects to launch the network in July, Greene said.

JAM FINTOP, one of the founding members of the USDF Consortium, is also leveraging its educational network and announced a new investment fund, JAM Fintop Blockchain LP, to engage with community banks on blockchain projects. JAM FINTOP decided to raise this fund in addition to the Jam Fintop Banktech LP fund closed in April, after seeing a compelling deal flow in blockchain among other banking technology arenas, said Ryan Zacharia, general partner at JAM Special Opportunity Ventures.

"The reason that we're so intrigued by blockchain is because we think it's going to be the dominant infrastructure for financial institutions a decade from now," Zacharia said.

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