Building blockchain infrastructure for banking
Rob Morgan, CEO
Our nation’s diverse banking system is an asset that no other country can match. Our 4,796 banks are the lifeblood of our economy, providing small businesses access to credit that they need to expand, create jobs, and drive growth. Access to banking services is transformative for families, allowing them to save for the future and accomplish lifelong goals such as homeownership.
I am passionate about the banking industry and have spent my career helping banks navigate the rapid convergence of financial services and technology. Innovation in banking has the potential to make financial services more inclusive, promote economic growth, and ensure the United States retains its competitive position in the global economy. We need to lead the way as consumers look for easier access and have the banking sector work for them.
I joined USDF, a network of banks built to further the adoption and interoperability of a bank-minted tokenized deposit (USDF™), because I believe that tokenized deposits are the single most important opportunity for banks to innovate, compete, and maintain the critical role that they play for their customers and communities around the country.
Having spent the past 11 years at the American Bankers Association (ABA), I built ABA’s Office of Innovation, designed to help banks navigate the rapid changes in the banking market. Moving to the USDF Consortium is the ideal continuation on the same path, allowing me to continue working with banks to innovate and leverage the latest technology. The USDF’s commitment is a recognition of the changing nature of deposits and the potential of blockchain technology to improve traditional financial services products.
As a bank-minted alternative to existing stablecoins, USDF digital markers represent deposits of an individual depositor at U.S. insured depository institutions and are redeemable on a 1:1 basis from Consortium member banks. USDF is able to address the consumer protection and regulatory concerns of non-bank issued stablecoins and offers a more secure option for transacting on blockchain.
Going forward, there are several reasons why USDF is best positioned to support the future of banking.
USDF is Best Able to Unlock the Potential of Blockchain
Blockchain has tremendous potential to improve financial services and create more inclusive and affordable banking products. To realize these benefits, we need to bring banking onto blockchain.
By bringing bank deposits on-chain in the form of the USDF token, we are enabling banks to “speak blockchain” together. Banks will make faster, cheaper payments leveraging modern blockchain-based rails. Additionally, it will let banks bring traditional financial services products on-chain, adding transparency that can make traditionally illiquid assets (like loans) more liquid. As a result, consumers will just receive faster, cheaper products that will allow more Americans to access financial services. Today we have the opportunity to bring blockchain innovation into the real world and create a modern, safe, and inclusive banking system.
The Changing Nature of Deposits Must Not Undermine Banking
Banks are facing existential threats from new deposit substitutes like stablecoins and central bank digital currencies (CBDCs) and must innovate to remain relevant.
Pundits have warned that banks are facing an “Uber moment” for years. While the industry has modernized at a breakneck pace, banks have yet to see real disruption. Much of that is because bank deposits and banking relationships are very sticky. People don’t like changing banks.
While many fintech innovations have changed the way we engage with deposits, few have fundamentally altered the nature of deposits. Today, there are a plethora of digital alternatives to bank deposits. Some of these alternatives, like a Venmo balance, ultimately sit at a bank while stablecoins and retail CBDCs could completely remove banks from the picture. Both seek to create an alternative to bank deposits that bring fiat money onto blockchain. These non-bank alternatives would forfeit important consumer protections and forego the many benefits that our banking system provides.
Unlike other fintech disruptions which impact a portion of a bank’s business, the changing nature of money risks undermining what it means to be a bank. This will not be a slow shift,
these new forms of deposit-like instruments are more liquid and will scale quickly. We should all be worried that bankers that ignore this trend will wake up one morning and realize their businesses are gone.
Fractional Reserve Banking is Necessary and Only Works With Banks
Banks play a critical role in our economy. There is tremendous value to bringing fiat dollars onto blockchain, but as we do so, we should be careful to maintain the numerous benefits that our banking system provides today.
Banks engage in maturity transformation taking short-term liabilities in the form of deposits and using those funds to extend long-term assets in the form of loans.
When a bank makes a loan, it creates new money in the form of a deposit in the borrower’s account that did not previously exist. A portion of that deposit must be held as capital, but the remainder can be used to power further lending. This system, called fractional reserve banking, means that a $1 deposit can power up to $10 of lending. These loans allow businesses to invest in new employees or capital goods that create jobs and drive economic growth.
In a recent speech, Acting Comptroller of the Currency Michael Hsu noted that role of bank deposits “is the result of a carefully architected monetary and banking system.” He added that this reliable architecture, along with the rule of law in the U.S. and the growing economy, “ has supported the role of the U.S. dollar as the world’s reserve currency.”
Non-bank instruments like stablecoins or CBDC would eliminate this important function. There are many forms of stablecoins, but the recent high-profile failure of Terra’s UST has led to a push for fully collateralized stablecoins that hold one dollar in assets for every dollar of the stablecoin. This means that a $1 stablecoin can only ever support $1 in lending.
There simply isn’t enough capital in the system to support fully collateralizing every financial asset. Today, there are nearly $200 trillion in U.S. financial assets supported by $18 trillion of commercial bank deposits. In a recent post, New York Federal Reserve staff reinforced the importance of this in a recent post titled The Future of Payments Is Not Stablecoins  where they argue for tokenized bank deposits. Similarly, Federal Reserve research finds that stablecoin deposits at commercial banks, such as USDF are the only model that supports fractional reserve banking.
The only scalable way to bring traditional financial assets on-chain is to leverage the banking system to support that by tokenizing existing bank deposits.
Banks Offer World Class Safety and Consumer Protection
Trust is the most critical aspect of banking. Deposits often represent a family’s life savings and are a key component of their hopes and dreams. Banking is one of the most highly regulated industries in the United States because when things go wrong, it can have serious consequences.
As banks innovate, they do so within an established regulatory framework, backed by strong supervision and oversight that ensures robust customer protection and ensures the safety of deposits. No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.
Unfortunately, customers often forfeit these critical protections when they turn to non-banks for financial services. Many innovators have a “fail fast” approach that may make sense in other sectors, but doesn’t suit banking. The failure of Terra’s UST is a recent example of the impact on customers when financial innovation is not delivered responsibly.
The stable value of stablecoins creates tremendous value, but also creates unique risks. Stablecoins are unique in that they are an alternative to a bank deposit. When they fail there are serious consequences for the depositors who trusted in the stable value. The failure of algorithmic stablecoins such as Terra have brought a sharp focus to this, but similar risks exist in asset-backed stablecoins. Recently it was reported that hedge funds are shorting the largest asset-backed stablecoin, Tether, making a bet that it will not maintain its dollar value.
These risks are exactly what banking regulation was designed to address. It is no surprise that as policymakers have evaluated stablecoins they have pointed to the importance of the banking regulatory structure to ensure consumers are protected. Recently, the President’s Working Group of financial regulators issued a report that recommended stablecoins be issued exclusively by insured depository institutions like USDF.
Bank regulatory structure is already well-equipped to supervise stablecoin issuance from banks. Randal Quarles, the former vice chair of the Federal Reserve, noted on a recent podcast that “if you are a bank, then there's nothing much more that needs to be done with respect to your ability to issue with the stablecoins.” The liabilities will be viewed like any other liabilities on the balance sheet to determine supervision and regulation, he said.
Simply put, USDF and its member banks, are the best option for realizing the potential of blockchain while leveraging the protections of the bank regulatory framework.
This is an exciting time to serve in this role in the U.S. banking industry. Banks have always had the ability to innovate and bring their customers the latest technology from a trusted partner. Working with banks, technology companies, and regulators, we will build the future of banking together.
Please reach out and work with us as we build the USDF Consortium and help deliver the promise of blockchain to banking.
ABOUT USDF CONSORTIUM
The USDF Consortium™ is a membership-based association and is not an FDIC-insured bank. We are working to coordinate the efforts of banks in minting USDF in a regulatory compliant manner; build out the bank network; and ensure interoperability of USDF to realize the full potential of blockchain technology to better serve consumers. The USDF Consortium is making the market safer, cheaper, and more reliable for consumers who want to transact on blockchain by ensuring banks continue to play an important role in the financial ecosystem as blockchain adoption proliferates. We are committed to building the foundation and advancing responsible innovation that will allow banks to harness this technology. To learn more, and for a full list of the founding member companies, please visit the Consortium's website at www.usdfconsortium.com.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION:
Certain statements in this press release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to any of the following concerning the USDF Consortium, Figure, JAM FINTOP, and/or any of the referenced Banks or respective bank holding companies (each a "Referenced Entity"): the Referenced Entity's beliefs, goals, intentions, and expectations, including those regarding revenues, earnings, strategic relationships, acquisitions, USDF minting, and membership; the Referenced Entity's estimates of future costs and benefits of the actions the Referenced Entity may take; and the Referenced Entity's ability to achieve its financial and other strategic goals, or expected synergies and operating efficiencies in, or as a result of, the subject of the forward-looking statement within expected timeframes or at all. These forward-looking statements also include, without limitation, those relating to the terms, timing and closing of any pending or proposed material transaction or initiative undertaken by the Referenced Entity (each a "transaction").
Forward-looking statements are typically identified by such words as "believe," "expect," "anticipate," "intend," "outlook," "estimate," "forecast," "project," "should," and other similar words and expressions, and are subject to numerous assumptions, risks, and uncertainties, which change over time.
Additionally, forward-looking statements speak only as of the date they are made and none of the Referenced Entities assumes any duty, and does not undertake, to update such forward-looking statements. Furthermore, because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those indicated in such forward-looking statements as a result of a variety of factors, many of which are beyond the control of the Referenced Entity. Factors that could cause actual results to differ materially include the following: the occurrence of any event, change or other circumstances that could give rise to the right of any party to terminate a transaction; the outcome of any legal proceedings that may be instituted against a Referenced Entity, including those with respect to a transaction; the possibility that the subject of the forward-looking statement, will not occur when expected or at all because required regulatory or other approvals are not received or other conditions to the occurrence are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated; the possibility that the anticipated benefits of the subject of the forward-looking statement will not be realized when expected or at all; and the other factors discussed in the "Risk Factors" section of a Referenced Entity's latest Annual Report on Form 10-K and in the "Risk Factors" section in a Referenced Entity's subsequent Quarterly Reports on Form 10-Q , and in other reports the Referenced Entity files with the U.S. Securities and Exchange Commission (the "SEC"), which are available at http://www.sec.gov and in the applicable SEC filings section of the Referenced Entity's website.
 https://www.occ.gov/news-issuances/speeches/2022/pub-speech-2022-37.pdf  https://libertystreeteconomics.newyorkfed.org/2022/02/the-future-of-payments-is-not-stablecoins/  https://www.federalreserve.gov/econres/ifdp/files/ifdp1334.pdf  https://home.treasury.gov/news/press-releases/jy0454