This week Chris Nichols sits down with Mike Cagney, CEO of Figure Technologies, Adam Aspes and Ryan Zacharia of Jam Partners, and Adam Yarnold of Fin3. They discuss how blockchain is changing the future of the banking industry and what it means for community banks.

The views, information, or opinions expressed during this show are solely those of the participants involved and do not necessarily represent those of SouthState Bank and its employees. 

SouthState Bank, N.A. – Member FDIC

Intro: Helping Community Bankers grow themselves, their team, and their profits. This is The Community Bank Podcast.

Caleb Stevens: Well, Hey everybody, and welcome back to The Community Bank Podcast. My name’s Caleb and I hope our time together helps you grow yourself, your team, and your bank’s profits. Today’s show is all about Blockchain Technology and how it’s shaping the future of the banking industry. Our director of capital markets, Chris Nichol sat down with Mike Cagney, CEO of figure technologies, Adam ASPI and Ryan Zaria of jam partners, and Adam yal of Finn three. So, this might be the biggest podcast episode we’ve ever released in terms of the number of guests on the show. So, it’s a full house, big panel, but if you’re a banker and you followed blockchain and cryptocurrency for any length of time, I think this is a show for you before we get there, though, you might know that there are several rate increases projected this year for 2022 and one of the ways we’re helping lending teams like yours, prepare for the rising rate environment is through the arc program. The arc program allows your bank to offer your borrowers up to a 20-year fixed rate loan, allowing them to lock in before the rates rise while your bank books, a floating rate loan on your balance sheet and benefits from the arising rates, and the best part is this is not your typical interest rate swap program. There’s no derivative on your books, there’s no dot Frank reporting, no hedge accounting. All you’ve got is a floating rate loan while your customer gets the long-term fix rate that they desire. And so, to learn more, visit that to see how we can help you win and retain more deals through the art program. Well, without further ado, here is Chris Nichols interview on the future of banking and blockchain. Thanks for joining us.

Chris Nichols: Well, welcome everyone. Appreciate, you all for joining us today. We really want to get into, not only crypto but blockchain and FinTech in general. So, with that with us today, we have Adam and Ryan, Jim Fin top, FinTech forward fund that also has the latest blockchain fund up that I want to talk about. We have Mike Cagney, CEO of Figure, and we have Adam Arnold, who’s with us from F3, talk about some implementation issues. Adam, why don’t we start off with you? Tell us about what’s happening in the market. I see your name all over the place, lots of banks are signing up for your fund. Why are they doing that? What are you guys working on out there? And what’s the latest?

Adam Arnold: Yeah. Thanks, Chris. Appreciate, you having us on and always enjoy reading your blogs and posts, on Bank Tech. You’ve been really one of the great forward-thinking voices for the industry, especially around blockchain. So, Jacob’s asset management, we’re an investor in financial services, 27-year history, hedge fund, private equity funds, and really just have always had a huge emphasis on Community Banks and really felt like Community Banks were falling behind the curve in technology in that if they didn’t fix their tech stacks, they could face obsolescence, And so we started a Bank Tech Fund with a venture capital partner called Fin Top, it’s a really impressive group of former operators and entrepreneurs had built, ran sold Fintech and we went out and raised, 150 billion from 66 banks to invest in the bank tech that these banks need to know about in order to stay relevant and competitive, to compete against the large money center banks and nimble FinTech’s.

And as part of that journey, it just became really clear and evident to us that we also needed a fund to invest in blockchain that the world is moving so fast and the technology is now available and ready at any forward-looking bank really needs to start to lean in and think about the future. All assets that can be digital will be digital and then we needed a lane to make those investments. And so, we just closed on 110 million that funds our network is now at 79 Banks represents a combined 1 trillion of assets. So, a really formidable group we’ll do a final close in Q1 and round out that fund and we’ve been fortunate to partner with Figure and Mike Cagney as a strategic lead investor in that fund, which has also led to the USDF consortium, which is now up and live and running and banks are leaning in.

Chris Nichols: So, I want to delve into those one by one, but one of the reasons why we wanted to have you on is the success, of the number of banks that have signed up for your fund. I think that’s a mark different from what we’ve seen in the past where most banks kind of are fast followers, not even maybe fast followers, maybe middle followers, but now we’re seeing, I think a lot more interested into I expected in blockchain. What are most of the banks telling you about their level of interest and what do you hope to accomplish with the fund and with the leadership there?

Adam Arnold: Yeah, I mean, one of the main things we heard from banks was they didn’t know where to start on innovation and when they decided they wanted to start learning more about FinTech, they was like the drinking through a fire hose. And so, we’re super-engaged with our banks. We’ve got a lot of one-on-one conversations, we did 180 demos between FinTech’s and banks last year, we’ll host monthly webinars, annual conferences, we have six different committees that meet regularly tech stack surveys. We’re super engaged, helping our banks being introduce to the technology they need to know about, and in many cases, there just aren’t enough bodies or expertise for them to sort out the 12 different companies coming at them with slick demos. And so that’s a lot of what the role that we help them with.

Chris Nichols: So, the advantage there for a bank is you help with the due diligence, you help with leadership. I imagine you help with strategy overall and a banking kind of pick and choose where they play. Is that kind of how it comes out to those banks?

Adam Arnold: Look, we think the future of banking is open embedded industry, specialized niche-focused, and we’re trying to lead banks down this path of areas like banking as a service, big opportunities where we think deposits could literally grow by like a trillion dollars over the next couple of years, and to take advantage of areas where they might not have been looking previously.

Chris Nichols: Absolutely. There’s probably not a day that goes by that I don’t get hit up by someone asking me if I have, we have a banking service after application API yet, and can they open up accounts, etcetera, payments, all through it. So, definitely a need for that, even more of a need in my opinion, when it comes to blockchain, I know between you and Ryan, you guys have been one of my sounding boards or how banks come out as a view it now, as banks going to have to be involved in a variety of Defiance applications and different chain. What’s the latest thinking on that, but given where we are in the cycle, the average Community Bank out there, what’s your recommendation on how to get involved?

Adam Arnold: Yeah, look, I mean, I, I think it’s early but I think figure, and Mike’s team at figure has done an incredible job of demonstrating that you can actually, derive real benefit, and demonstrate real use cases on-chain, and so I think that there’s kind of a bridge over the next couple of years where you can lean in on some of the use cases that figure is just dating or that other third-party developers are going to bill on-chain, and that’s going to be a bridge to kind of the broader transformation within financial services where financial services companies are re-engineering their processes and kind of making, more broad stroke changes to the way they kind of manage their processes and cater to their customers.

Chris Nichols: So, let’s actually delve into that a little bit, and let’s maybe pivot over to you, Mike. I saw the announcement earlier last year on New York Community Bank and that kind of really opened up my eyes about the efficiency of what happened there. Tell us more about what figures all about and what you’re doing with banks these days.

Mike Cagney: Sure. So, the fundamental premise behind figures, we believe blockchain is going to have a massive transformational effect on financial services, and when we talk about that we really distill blockchain down to two things that are value, which is, it allows you to displace trust with truth. So, creating native digital assets, whether that’s native, digital, Fiat, or loans, or what have, and it allows you to transact bilaterally without counterparty risk. So, you and I can face off on a blockchain without any inter remediation and transaction. Let’s say I’m selling you a pool of loans. You would move stable coin to my wallet. I would move the loans to your wallet real-time and simultaneous, and therefore not incurring any counterparty risk and settling instantly and when you intersect these two things, you create marketplaces where you’re agnostic to your counterparty and if you think about financial services, it’s a set of marketplaces where you can’t be agnostic to the counterparties. So, you think about how exchanges work, how the now or I work. You’ve got DTC sitting in the middle and then a five-party brokerage settlement process. Think about how interchange works. You’ve got visa, MasterCard sitting in the middle in a five-party settlement process. And so, bringing this ability to do bilateral transactions, and be effectively build these agnostic marketplaces is going to be hugely transferred for the and SDF was a clear example of that.

Chris Nichols: So, let’s keep going, down that. So, give us another example of how this might work is your one, what blockchain are you on?

Mike Cagney: Sure. So, we build a blockchain called Provenance and that’s, it’s a public decentralized open-source blockchain, so anyone can use it, there’s no permission required, there’s no centralization or central actor, controlling it. It’s, what we call distributed stakeholder blockchain. So, it’s very fast and very cheap, it’ll handle over 10,000 transactions, a second, the gas fees to move things on provenance are very, very small. So, for example, when I put a loan on Provenance, I might incur a couple of gas fees and that’s it. But what Provenance does is effectively as, and especially as it relates to U S D F it’s open loop and this is a huge difference between how people have been approaching payment networks have been really approaching this in the context of either an Abu structure like Zelle or a closed-loop system, like Task it. What we’re trying to do with Providence, and what we’ve done with SDS is as we’ve created an open-loop framework where any bank can attach into that consortium and any bank can KYC a wallet and you have a stable coin, U S D F that can move from wallet to wallet 24 7, 365 without friction. So, if you think about the original on use case, the NYC B use case you talked about, that was one where we were running a marketplace for figure equity, and we needed the buyers to be able to have Fiat in their wallets to be able to transact bilaterally to the sellers. And so, New York Community bank sold U S D F to those buyers, got the fungible liability on their side. So, they had the cash deposit and then supported that marketplace. That’s obviously one-use case related to U S D F, but the larger use cases are really underpinning around the 24 7 365 payment rails.

So, USDF allows any USDF customer. So, let’s say I’m a retail customer at NYCB and I’m transacting with a small business or a small, medium business that banks with NBH. I can do that transaction through a USDF rail, real-time versus interchange or ACH wire, where the merchants getting the benefit of real-time settlement, no counter, no charge back, no interchange fees, and the consumer ideally is getting the benefit of the merchant pushing rewards back to them to leverage that transaction framework. So, the paradigm here that I think is pretty interesting is what U S D F does aside from being this 24 7, 365 payment rails, it opens up some interesting use cases for the banks where it changes are economic model somewhat. So, rather than earning the economics as the issuing bank and a card framework, they can actually earn the economics as a merchant acquirer to go to their small bank customers and say, I will set you up on this USDF rail to take payment. And so, they’re basically competing with the stripes and the squares of the world who are the big merchant acquirers today, and step in and saying, no, we, the bank can do that on the USDF rail.

Chris Nichols: So, let’s delve in that a little more, because that’s real interesting. So, for any bank to get involved. One, I need to have a stable coin USDF in this case back at dollar for dollar, and then that allows me to both sets a message and value instantaneously in real to irrevocably. Is that, do I have that right?

Mike Cagney: Yeah, that’s right. And it can be explicit in the sense that your customers could see U S D F in a digital wallet, but it could be implicit in the context of a mobile banking customer transacting with a merchant. There’s no need to ever call out U S D F or produce a wallet in that construct. It’s a seamless experience. User’s going to go to the merchant they are going to scan a QR code and rather than going through an interchange rail, it goes through a U SDF rail to settle. So, a whole bunch of different ways that you can touch it. But, basically, it’s a 24 7, 365 payment rails.

Chris Nichols: And to your point is it’s really in the background. No one really needs to know that we’re transacting U S D F other than the merchant.

Mike Cagney: So, I’ll give you a good example. We have between Figure and HomeBridge, we have over 150,000 mortgage customers, and historically they pay us with ACH and it’s an absolute nightmare. Because every day we get a bucket of money and we don’t really know who it came from and three days later, some of it gets clawed back. And so, 50% of my servicing expense is dealing with ACH transit actions, for loan payments. We’re giving all of our customers figure, pay with this embedded U S D F rail to it and they’re going to pay us their loan payments on this mobile application. We’re going to pay them to do this, I can actually incent them with cash to do this because net I come out ahead by my servicing cost expenditure, my servicing savings. They never know they’re on U S D for they’re using a digital wallet. They’re, they’re just seeing it as I’m paying figure the $1,500, I got to pay them this month for the loan. But what I’m getting is real-time receipt with certainty as to who sent that and no club at risk. So, it basically cuts my service expense for performing loans to zero.

Chris Nichols: Okay. And so, for actually let me pivot back to the merchants. So, if I take this to one of my merchants my pitch to them is, hey, I’m going to take two, 3% out of your transaction and presumably maybe I give some back for loyalty, etcetera, like you mentioned. But for the most part, I can save them a whole lot of cost, clear transactions instantly. I don’t have to pay for ACH, right? I don’t have to see pay fed wire fees, etcetera. So, my costs are lowered as a bank, everything clear is instantaneous, I’m not processing batch. So, my operating costs are a lot less my chargeback and my risks are a lot less. So, it’s a win-win-win all the way around seems to be

Mike Cagney: That right. So, and that’s the first-level win. The second level win is that as that merchant takes more and more transactions through U S D F you as effectively, the merchant acquirer in that construct have real-time visibility to the cash flows. So, it puts you in a stronger position to be able to lend proactively and preemptively rather than reactively to a 30-day old statement the merchants providing to you. So, again, it really is leveling the playing field with something like square, where square is a merchant acquire and then square cash is the lender against that high-frequency data, U S D F opens that up for any bank to be that merchant acquirer, and then have that high-frequency data to be a creditor into that merchant.

Chris Nichols: And it’s square. And it’s also Amazon that we’ve lost a lot of business to as they finance. So, now I can get the payment stream and work out with the merchant about how to pay back that loan that have that call on that, on that cash flow. And then going back to your asset securitization example, or just any sale of assets normally to your earlier point, I’d have to go through a whole bunch of due diligence is if I get this right, I’m just querying the block stream. Do I have all my FICO scores to meet my goals? Do I have all the background documents, etcetera, I can ping that and get an instantaneous response back and have certainty.

Mike Cagney: Yeah, that’s right because what you’re trying to do in the context of displacing trust for truth? So, for example, when we originate loan on the blockchain, let’s take a Hemlock. As an example, we put a Hemlock on the blockchain, all the underlying information that goes into that loan packet, whether it’s income, property, value, credit title, it’s all digitally signed by the source of that data and the OS references to that data. It doesn’t key it in it ingests it directly. And so, when you look at things that are construct from that data, like a DTI calc, or an LTV calc for certainty, what you’re seeing is true, at least as true as their source data was that came to you, that was signed by source. And so, the scope of your TPR process can narrow significantly. So, your third-party review structure can focus on things where there is human intervention and potential error, but you can cut out the time and the cost to do that TPR process and effectively get to a structure where you get the loans downstream as quickly as possible. So, in figures context, we don’t keep our loans. We sell them, but we literally sell our mortgages. Our, he locks our personal loans. The day we fund them because the buyers have that certainty and limited scope of TPR, they need to perform to be able to take the asset.

Chris Nichols: And in your mortgage securitization, if I saw that correctly you took more than a point out of cost in that transaction. Is that right? It’s a

Mike Cagney: It’s a huge saving. Yeah, it was about 117 basis points and one of the largest cost savings was every mortgage transaction up until that point, since the crisis, since 2008 had a hundred percent loan packet audit. So, people were paying AMC or Clayton to come in 300 bucks a loan to review every single loan because of blockchain, Jeff that were lead left on that transaction only did a 10% packet audit as they felt the blockchain effectively. De-risked a lot of what you needed that TPR process to do. Subsequent transactions have run as low as 1% packet audit. So, that’s obviously 300 bucks alone, a pretty significant saving in terms of economics

Chris Nichols: And speed.

Mike Cagney: And speed. That’s right.

Chris Nichols: Going back to payments and Ryan or Adam, either Adam, this may be a question for you as well. One of the things that I’m very optimistic about and looking forward to is spark contracts. So, using U S D F how do you all see that rolling out? And what’s the latest with how I can handle payments with that’s programmable money?

Ryan Zacharia: Well, I could jump in and take that. Thanks, Chris. So, I think you’re really hitting a key design issue and opportunity here, which is smart contracts and programmable money. So, once banks have U S D F as infrastructure deployed, there’s an ability to build applications on top of U S D F that use USD F for payment, um, figure has the figure pay app, which banks can integrate into their system, which we’ve talked about, which has its own smart contract infrastructure. But I think that the fact that you’re on a programmable layer, one blockchain provens blockchain gives developers the ability to create new business applications, that utilize smart contracts to code complex legal and business agreements. So, for instance, commercial real estate loans online, I know figures working on commercial real estate loan funding, you can have a number of different payment applications that I think will be developed on top of U S D F as a digital settlement rail and I would say that over the next 12 to 24 months, I’d expect that significant migration of new developers looking to build on top of Provenances.

Mike Cagney: So, Adam, I’ll just build to that a little bit. And Chris, I think this is super important differentiation versus, alternative payment methods that are coming down the pipe like Fed Now, for example, so Fed Now is going to promise real-time payments, but it’s not programmable and that programmable feature allows you to do things that you weren’t able you historically. So, Adam mural mentioned commercial real estate, so typical commercial real estate close. You’ve got six to eight wires going off at once on that close, and half of them get rejected or miscut off, and you run into escrow issues and so forth. So, with U S D F you just fund the U S DF smart contract and tie digital signatures to that contract. So, when the last loan agreement has that digital in it immediately disperses U SD F to all parties real-time.

And it doesn’t matter, it was past five o’clock or whatever the cut-up period is, everyone gets their money. Think about payable, receivables, right? Where one of the biggest challenges as you have in payable receivables, one is double pledging of invoices when you factor them. Obviously, you can create digital invoices to eliminate the opportunity for double pledging, but two is the payment itself trying to redirect payment instruction to a factoring agent or a lending agent against those receivables. Well, with U S D F you can basically encumber the receivables so that it knows that when Fiat comes through it goes to either the lender or the factoring agent, not to the underlying party. And so, you’d eliminate the idiosyncratic risk of the pay you getting paid, and then having to pay you, or having to deal with the payer and changing payment instructions. You just use U S D F to redirect the flow and do that in a way that doesn’t interface or create friction with either the payer or the payee. So, I just think there’s a ton of these use cases that are going to be, that are going to come up and be built on through the programmable nature of the money.

Ryan Zacharia: But Chris, I think it’s a great point, which is everyone talks kind of constantly about real-time payments, but I think the programmability of money is actually just as if not more important that obviously speed is important, but being able to kind of remove the interation from a lot of these payments transactions is critical.

Chris Nichols: And so there’s no real limit, right? So, that’s the other aspect versus most of the current payment channels and even RTP is I have a limit there and presumable, I could set my own limit for any given real estate transaction. Is that right?

Mike Cagney: That’s right.

Chris Nichols: And the other major I think item is I can actually include an unlimited amount of messaging or at least a large bulk of messaging. So, I can include an invoice or I can include document documentary evidence of that payment, all the same message, which I can’t do with almost any other payment channel now.

Mike Cagney: No, that’s right. That’s right. So, you could have a full data room that goes with the payment.

Chris Nichols: So, as that payment goes, I can get bill presentment or invoice, or my paved stub, what have you.

Ryan Zacharia: And to the extent, it’s a loan, a payment again, existing loan. That’s really just payment data, that’s appended to the loan file. So, it becomes kind of incorporated in the overall kind of record of permanent record of that loan.

Chris Nichols: That’s right. A, a record that can’t be changed.

Mike Cagney: That’s right. It’s immutable

Chris Nichols: So, what are the risks here? So, as a bank coming on, all this sounds fantastic for me, it’s just a question of time before most banks get on it, but tell us about the regulatory environment right now, and kind of the risk of getting hacked or of splitting the blockchain, or what have you.

Mike Cagney: Yeah, the blockchain, obviously the decentralized nature and the immutable nature, the blockchain, can make financial institutions a little bit nervous. And when we started with provenance, we actually started it on a different form where there was some level of centralization because the banks all said, well, who do I call? Something goes wrong, and obviously, in a decentralized block, there’s nobody to call and something goes wrong. And rather than have fight the argument about, look, the whole nature of this is that things can’t go wrong. We said, fine, we’ll set it up with an administrator that has some control over the chain, and after three years when no one called the administrator, everyone was okay that we could actually move to a structure where it was decentralized. I think the regular standpoint, one of the great things about U S D F is it’s a hundred percent aligned with the treasury working group on digital, on stable coin and so I think it, it is a compliant structure as the current regulatory structure sees it. obviously, the banks have had to work with their regulators, ECC, the fed, the F D I C, their state leaders, and I think people are very comfortable about the controls that are in place. It’s, one of the interesting things is what regulars want to see is, are the wallets KYC, and can I track how the money moves and the wallets are obviously KYC, that’s the structure of USD F it can’t enter a wallet. That’s not the KYC by a member bank, and then because it’s a public ledger, you can see the movement of that U S D F coin as it moves from wall to wall. And so, I think it’s actually a very regulatory favorable structure.

And so I think there aren’t regulatory headwinds. There obviously there’s a lot of structure around the operating agreement for U S D F and the event of fail because the banks all settle with each other on a 24-hour basis. That’s no different than what you have with ACH today. So, it’s basically the same kind of interbank dependency or interbank, issues that you have in terms of dependency that’s there, and then in terms of just the blockchain itself again the structure of U S D F, it’s what I would call non portable token in the sense that it’s limited to the wallets. It can go to. So, the real risk of a is it’s relatively, you never want to say it’s zero because even the fed accounts aren’t zero basis, but I’d say somewhat the neighborhood, the amount of risk that you’re taking.

Chris Nichols: And when I read the feds working or the white house’s working paper. This is kind of what it’s alluding to, that the banks are kind in a pre in a position to handle the regulation and to make sure that everyone’s playing by the rules. So, this seems like a decent construct and framework, to start off and if you’re…

Ryan Zacharia: The banks already are regulated and there’s robust supervision already for the bank, so it can kind of exist in the existing construct already. I mean, the conversations we have around U S D F is that it is a kind of core, functionalities that the banks already do. It’s just kind of a slightly different way of getting there, but it is relevant and germane to the business of banking, and what it enables is relevant in Jermaine to the business of banking.

Mike Cagney: That’s right. I mean, I think an important thing to consider is if your customer has an account with you, they’ve qualified for U S D F right. There’s no incremental work that needs to be done. They’ve effectively passed the K YC process.

Chris Nichols: So, I want to come back to KYC and identity before I do. This seems a little difficult is my core system going to be able to handle this and how do I get integrated? Sam Arnold, maybe that’s a question for you.

Sam Arnold: Yeah. Thank you. So, Fin Three offers a turnkey solution. It’s a cloud-hosted service, that runs the middleware and a pool of proven century nodes. That’s required to mid burn and transfer, U S D F we integrate with a core system, and make calls such as account authorization, balance checks, transfer to and from customer DDA accounts to a segregated bank omnibus account. So, we’ll integrate with the various different cores and integrate with a bank’s tech ops and logging and security incident monitoring, functions, which ties back to the regulatory piece that you touched on earlier. Chris, we think it’s mission-critical for banks to be able to understand everything that’s happening with their system, and then B demonstrated to the regulators, and then also integrate with the banks UI depending on the bank use case, whether they want clients to explicitly see their U S D F wallet balance, or have it in the background.

Chris Nichols: Got it. And a typical implementation, to get a, my core, how long would that take and just ballpark type of effort?

Sam Arnold: It depends on a bank’s testing requirements and the promotion to production, but I think a realistic timeframe would be anywhere from two to five months.

Chris Nichols: Going back on K Y C I think identity is kind of an interesting aspect here. So, we talked about digital assets. We talked about payments, smart contracts, etcetera, but touch on K Y C see because that’s kind of a game-changer as well. Right now, most banks have a variety of KYC efforts for each different product and each different entry point, and while it’s all governed the same, the processes are different here. It seems like I’m starting to standardize it and can lever really leverage blockchain for that, Mike, anything going on Providence on that?

Mike Cagney: Yeah, there’s a bunch of work around it around KYC and also obviously identity and then investor accreditation as well. And the premise of what we’re trying to do is basically allow a one-stop process where you get your KYC, your accreditation to the extent is relevant. It sits in your wallet and who’s with you from transaction to transaction and we’re working with some of the big, players in the KYC space, so that some consumers of that data. So, like Apollo, for example, which we have a strategic, a relationship with to agree to a set of standards for this so that they’re willing to take that KYC passport rather than having to read KYC and accredit investors as they come into their funds. So, the idea is to do it once and have it travel with the customer. Obviously, you’re still going to have a recurring off a process that has to happen per the regulations. But, but to minimize the amount of repetitive KYC from a consumer from their experience,

Ryan Zacharia: But just speaking to U S D F I mean, a bank does not need to kind of recreate their KYC process. So, a customer can onboard the same way they do and with the same requirements and documentation in, and then the bank can basically issue the KYC attribute against the wallet on Provenance.

Chris Nichols: Kind of. I was just going to say to build on that if a U S DF customer went to Figures marketplace, for example. So, figure host a whole set of funds venture funds, private equity funds, but also private company equity and secondary trading. If a U SDF customer goes into that marketplace, there is no incremental KYC process because you’re already KYC through the U SDF framework. And so, there’s accreditation to the extent that it needs to happen there, but there isn’t are KYC structure that happens because we will take whatever that K YC process is from the banks and accept in marketplace. I think you’re going to see more and more standardization of that where you’re not having to subject the consumer to going through the process more than once.

Chris Nichols: Yeah. So, a couple of interesting points underlying what you all said though, is one as a bank, I can provide information so others can validate it, others on that we invalidated and as a business owner or individual it’s all in my wallet, so I can somewhat control, what’s seen and what’s not seen and have some control over my KYC, which I don’t have now, am I reading that right?

Ryan Zacharia: That’s right.

Chris Nichols: So, I think that’s a game-changer for how we currently do things want to give feeds into the current PRI privacy trends and two makes everyone more comfortable, with identity overall. Tell me about it, okay, so this sounds great. U S DF sounds like, an alternative that some banks should consider, but there’s probably five other, four other consortiums that heard about talk to etcetera and Ryan, maybe this is a question for you. What’s the future when there’s a group of these bank, consortiums? It just one that’s going to win out or do the folks over at Zel form their own consortium. And I got to interface with them and I’m now on three or four different blockchains. This gets complicated real quick. So, how do as a bank, how do I think about the future of defi with various blockchains?

Ryan Zacharia: So, I mean, speaking specific to the payments network, I mean, I think what we’re endeavoring to do, and the membership of SDF is endeavoring to do is kind of create as low for friction, a way to onboard banks. And so, we would hope that in relatively short order, we’re getting significant buy-in from a lot of banks to be able to do this. So, I think hopefully that’ll kind of separate U S D F out from the pack for the respect to that. But I think…

Chris Nichols: You mean the size of the network obviously has some benefits. So, you guys, you’re going to be one of the biggest, so that’s a plus, but we certainly say no.

Ryan Zacharia: But irrespective, assuming there’s not a hundred percent market share, there’s going to be platforms that you’re going to need to interface with and I think that the Providence, blockchain, and other blockchains are kind of generally built around this premise of inter blockchain connectivity and the ability to kind of bridge across chains. So, I don’t know that there needs to be any kind of supremacy here. I think that ultimately, there will be or there can be the free flow of U S D F kind of cross, networks if that’s what you want to call unique layer, one blockchain, Mike, I don’t know if you have a different perspective.

Mike Cagney: Yeah. I mean, Providence is built using cosmos SDK. So, it’s not a cosmos chain, but it was built using their software developer kit, and inherent in that is IOP to other levels one chains. So, I don’t think if you’re using Provenance and someone else is using Ethereum, there’ll be a point in time in the not. So, this future that U SDF will be able to move onto that Ethereum chain, and so you’re not limiting yourself in that context, they’ll be true interoperability, but there are economies at scale and that’s one of the things that we’re pushing on right now in terms of what we’re trying to do for the community banks, which really is leapfrogging over the OUS construct of Zelle and, and giving them this real-time payment network that ultimately the money center banks, I think will lean into this and in fact, some of them already have started to lean into it because it’s just as you said, you could say, it’s too good to be true. The value prop is pretty hard to meet, to be right. It’s a relatively easy way to integrate in its owned by everyone. It’s not owned by anyone, and it’s 24 7, 365, zero latency, and very low transaction costs.

Chris Nichols: So, you just talked about being owned by no one yet everyone, touch on a little bit about the governance of this because that’s a little different than most how most banks think about it.

Mike Cagney: Yeah. There’s a five-bank steering committee for it. The original founders and as banks come in, they’re buying into that membership. It’s AOUS amount of money to buy into that membership. It’s not significant but the steering committee is setting the standards in terms of the rules and criteria of who comes in, who comes out at some point I think it will end up looking like a, do decentralized autonomous organization, out of the gate, there’s not enough critical mass to make it a do but I think ultimately it migrates into that but effectively it’s set up in a way that the banks are ensuring safety and soundness. Again, very similar to ACH construct that they’re making sure that the banks that join are sufficiently capitalized, to fulfill their obligations and can leverage the network appropriately and just the initial rules and guidelines and as those are established, I don’t think there’s a lot of incremental work that needs to be done and I think it will become more like a do and everyone will have a say based on their ownership.

Chris Nichols: Got it. And that’s different than most exchanges right now. And the Visa and MasterCard rails, obviously, where I don’t have any influence on.

Mike Cagney: No, that’s right and if you’re a community bank, you don’t have any influence with Zelle, and the challenge with Zel is you’ve got the economics of Zelle and then you’ve got to fund round of this account position and so you’re not getting the benefit of those liabilities and your balance sheet, and so this is a very different structure where you’re holding your own cash, and you’re basically interacting in this open-loop network.

Chris Nichols: So, a real quick touch on the economics real quick, just for clarity, I pay to integrate, my back office, my, my core, pay to have someone stand by and to help me solve problems. But other than that, tell me about the transaction costs or any minimums or how the business model works in terms of using problems.

Mike Cagney: Yeah. There’s no minimum mean, the point of this is unlike the current payment rails. This should work when you go to the gas station and buy a $2 Coke, right. They don’t need to throw a dollar minimum on top of that because there’s a minimum transaction charge. So, you’re paying validators on the network to validate the transaction, that can be basis points. In fact, it is low single basis points in terms of what you’re paying to move money through.

Chris Nichols: And instantaneously, I mean, literally, I know we talked real-time, but this is as fast as you can possibly be versus same-day ACH.

Mike Cagney: Yeah. The explicit network costs. I mean, as the fed wire and ACH, they have an explicit cost. That’s not what the burden is. The burden is your operations team that has to deal with all the reconciliation related to that what this is going to do is eliminate that operations function. Like you shouldn’t have a reconciliation issue. It’s a real-time payment platform. If you do things like integrating this into your banking product you end up not having things like overdraft because you can’t because it’s all real-time. There’s no latency on the ACH side. So, it’s not the explicit network transaction costs. It’s the amount of overhead that people incur supporting the old way that I think you free up with a new way.

Chris Nichols: Excellent. So, if I’m a 500 million bank or billion-dollar, and I want to get involved what’s, and this is to the group, what’s the best way to start off, how do I call, walk, run on this?

Mike Cagney: So, specific to U S D F there is at least for the time being, a minimum asset threshold of a billion dollars. Which is always subject to review but otherwise the membership criteria is pretty straightforward, and you can just go to the website,, and there’s a button for how to join that kind of walks through. It’s pretty straightforward and the fees for the initial membership cost are kind of outlines right there on the site.

Chris Nichols: So, for 2022, if I just wanted to kind of look to see what’s going on and have a front-row seat, that’s a pretty good way to do it.

Mike Cagney: Yeah. I mean, joining the consortium, the membership, is expected to develop the competency and ability to mint burn and transfer U S D F. So, it’s not just, excuse me an organization we’re looking for passive membership. We are looking for the members to actually kind of leverage the technology.

Chris Nichols: All right. Any thoughts as we close out any other items everyone wants to bring any predictions, anyone wants to make about what banking we’ll see and finance will see in 2022?

Ryan Zacharia: I’ll throw it back to you, Chris, because I think you posted like three months ago on LinkedIn that by, I think 20, 23, 20 5% of banks would have a director of blockchain. And I’m curious, three months later, if you think that number is going higher or lower.

Chris Nichols: Well, I think I’ve increased my probability given, just the interest level that you guys have had with the blockchain fund. Those be the names that I saw invest with you guys. I think open up my eyes that these are some forward-thinking banks more than I thought. So, I think the next iteration is yes as I would, we try to figure out where our priorities are within the blockchain, all sorts of decentralized applications coming on. Whether we, you know, I don’t think there’s a day goes by that we don’t have a customer that comes and wants to borrow against their NFT or their Bitcoin holdings or Ethereum holdings, Cardon holdings. And so, I think, each bank is going to have someone figure that out as well as try to figure out how to cross chains and how to deal with different protocols. So, I think it’s inevitable.

Mike Cagney: Yeah. One, thing I’d add into this is I think digital assets secured lending, whether it’s crypto secured lending or other types of digital assets, secured lending, I think it’s going to take off in 2022 at a huge opportunity for the banks and especially, the ability to get perfect perfection of collateral, especially when you have a 24 7, 365 liquidity market to manage that collateral. It’s a huge opportunity for the banks and they just need a little bit of help in terms of how to lean in and do that. But the idea of doing 25 to 50 LTV Bitcoin secured loans at 8% should make any regional bankers salivate in terms of that return profile against that risk.

Chris Nichols: Yeah. And even if it’s not a return I always say that the day’s going to come very shortly when I’m going to need to take digital collateral and I don’t know how to do it right now. So, at a minimum, even on the defensive play, banks are going to have to get conversed, nothing else but then I see, what you mentioned real estate transactions, commercial transactions in particular, and all that friction and how hard that is. I just want to pound my head against the wall sometimes just closing our own transactions that we can control and I, no doubt how our customers feel. So, that’s another one between that insurance distribution, even payroll. All that is just for radical change and I think banks could claw back an area that we long for safe and decades ago to other FinTech companies, companies like visa, where now I have an opportunity to get back in the stream of things and be engaged last call to the order. Anything else that our listener should know, we covered a lot of ground. I think this was a master-level class at blockchain. So, I thank you all and payments look forward to hearing many great things from you. I’m sure for Jam top guys, what’s the next move? Are you closing your fund this month?

Adam Aspes: We’ll to probably have a close at the end of Q1. And again, we’re focused on all those areas. You just mentioned, you know, it’s compliance, identity custody, it’s all the infrastructure for layers that have to be dealt with for banks to have the opportunities to lend on those digital assets. So, if anyone’s interested, they can go to and learn more.

Mike Cagney: And that’d be another way to start to get involved and start to monitor what’s going on in gaining an education. I often tell banks that has we see more and more of the fed’s movement towards a central bank, digital currency, and working with you all and working with companies like figure and U S D F is kind of a great way to prepare for that, as I think it’s an eventuality.

Chris Nichols: Guys, thank you all very much for the time we look forward to hearing more.


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