Future of Finance: The tokenized future of banking (Part 1)

Welcome back to Money 2020 and the US Bank Lounge here in Las Vegas. This is the next in a series of The Future of Finance. And today we are talking about the tokenized future of banking. We've got a nice panel with us today. First off, from US Bank, Mike Villano. He's Senior Vice President of Enterprise Innovation with US Bank. We also have Jose Fernandez Da Ponte. I rolled the R, just for you. President and Chief Growth Officer for Stellar Development Foundation. Last but not least, Kurt Fields. He's a Director and the Block Chain Lead for PwC. Gentlemen, thank you very much for being here. Thank you. Let's jump into this, because if there's one thing I learned when I arrived on Sunday, I went to a summit and it was immediately about Stablecoin. And I'm just seeing that all over the place. So this is almost as relevant as we could get with the embedded payments here in Las Vegas. Mike, why are we talking about Stablecoin at all? You know, Steve, you set the context for that very well. That everybody here is talking about Stablecoins. And there's a combination of factors for that. There is legislation with the Genius Bill that was passed back in July that provides a framework for banks to issue Stablecoins. There's multiple Stablecoin issuers who are applying for bank charters. We also have, in quarterly banking calls, questions coming out about Stablecoins, including U.S. Bank's quarterly earnings call, where we had questions come in about Stablecoins. And you may have heard our CEO, Gunjan Kadia, talk a little bit about the work. And some of the work she mentioned is we're doing pilots for Stablecoins, and we're building. And what we plan to talk about today is the exciting work we have when it comes to issuing Stablecoins that we're partnered with PwC as an advisory company and consulting company to help us developing on the Stellar network and in partnership and collaboration with the Stellar Development Foundation. So we're very excited for that. But to your question around why Stablecoins, it's another way to move money on a blockchain. And we look at blockchain as an alternative payment rail, and we're very interested to see what use cases are gonna manifest from that and what customers are gonna be most interested in. So this is a case study of sorts. And so, Kurt, what was it? What went down? What was the program? Where did you take this thing? Well, I think the primary objective was to demonstrate the promise of blockchain in a trusted bank-grade environment. So we've been talking about blockchain for years, and we're at a point now where it's not about innovation anymore. It's about practical application in a rigorous, highly-regulated environment where we're taking advantage of the tooling on-chain, in this case on the Stellar network, to demonstrate that the promise of programmable money actually yields benefits for not only the institution, but the customers that they serve. And so that's a mix of not only, again, being able to move out of an environment where you're just doing the testing and demonstration of the technology, but actually looking at how this needs to integrate back into an environment that oftentimes has systems that have been around for 10, 20, 30, 50 years. You're changing process. You're changing the way people have to work around this asset. In many cases, you're also actually rewiring the ecosystem of companies that do business with each other. So it's a huge lift. It's a huge paradigm shift from the enterprise mindset of building systems, building products, building a business around this new offering, this financial product. It's a huge shift for not even just one company, but for an entire industry. And you mentioned one of the critical words here, the regulation, where it's been, where it is now, what's going to happen. That is also a big piece of that dialogue. Mike, if I can get back to you a little bit, you did mention that Gungeon's made some comments on it. How does this project and what moves forward, how does that align with the previous thinking at US Bank? Sure, you know, innovation is one thing, but responsible innovation is the most important thing. So as we've been evaluating this, out of the box, stable coins provide faster, cheaper, 24-7. And that's true out of the box. But for bank customers, we have to think about other protections around know your customers, the ability to online transactions, the ability to call back transactions. One of the great things about Stellar Platform as we did some more research and development on it was learning that they have the ability at their base operating layer to freeze assets into online transactions. Often you might write that into the business logic in itself, but in this instance, you could do it at the core blockchain layers. That was very interesting to us. But beyond that, it's thinking about what compliance rules, what business rules you can build into this program, this new programmable money and how we can potentially deliver that safely, securely and reliable, which is when you go back to Gunjan's presentation earlier Monday morning, those are the three words she used to describe the future of payments and really borrowing them here for that's what we're trying to do. And we're trying to do that on blockchain with this use case. And to bring your voice into this, Jose, why engage Stellar? Why have you be a part of this group of this test team? So if you look at the blockchain landscape, there is a very vibrant ecosystem of blockchains out there. You can do open source and permissionless. You can do permission. You have blockchains building payments and payments companies building blockchains. There is a wide variety of options that if you're an institution trying to deploy on a blockchain, you can choose from. One of the reasons that I think that is that we are really a good tool for that job is we've been payments and financial services from the very beginning. There are very few blockchains that were designed and very, very few is kind of a nice way of saying we are the only one that I know that was designed from the get-go for financial services, the mission of the foundation from the first days, access to everyday financial services. We will build from the ground for payments, the functionality that Mike was talking about, our consensus mechanism, the speed, the privacy, all those things were very much thought with the payments first mindset. And then the other aspect is we've been around for a long time. So there are the Stellar blockchain has been around for 11 years. We have 99.99% uptime for the last 10 years, which is when you are doing mission critical systems and when you're doing financial services and you're moving consumers' money, we need to make sure that your blockchain is going to be there. So we are very honored to have the confidence of U.S. Bank and the partners at PwC. And we take that confidence and that trust very, very seriously. Well, thank you for bringing those two words up because confidence and trust are also two thematics that we've had as we've gone through this series. And if you each could give me a little bit of insight of why did you said, hey, yeah, we need that because of what they've done. Everyone talks about the trust of U.S. Bank. Obviously, PwC carries with it a lot of great credentials. Tell me a little bit, what do you feel was good about the collaboration or the coming collaboration as you go through this between the three groups? Kurt, let's start with you. I think the bank took a fantastic approach and continues to take a fantastic approach about bringing not only the product-facing, customer-facing teams, the innovation teams to the table, but also the enabling functions that are responsible for, to use Jose's words, protecting the customer's money and making sure that they're engaging with the ecosystem in the right way. And we come in always with a critical lens of what can be done better in terms of making sure that those protections are brought front and center to a product, to a technology. And I think the combination of the bank's rigor of engagement plus the robust and very intentional focus at the foundation around the needs of an enterprise allowed for this collaboration to go quite well. I think the Stellar Network is very unique in that they embrace the needs of a highly regulated entity. Blockchain, of course, is a prolific innovation ecosystem, but for us to really meet where an enterprise is in terms of how they operate as a regulated entity, it requires changes to some of the tooling that's native to the network. And so that collaboration has been really exciting to be able to kind of meld the world of innovation plus the experience and the prowess of an institution that's been around for decades. I think the honesty around also being able to look at the impacts across an organization around how a product is going to change the way that the business operates, that openness, I think is really key to getting to the next stage. Again, leaving that innovation motion and moving into true commercialization, the focus on practical application for our customer. That honesty, I think, is unique in this equation here. Yeah, Mike, what do you think on that? I'm pretty certain you're not going to say anything that's opposite of that, but you've got your own thoughts on what that collaboration felt like. Sure, you know, U.S. Bank announced two weeks ago that we're standing up a digital assets and money movement business line within our organization. Right, and that speaks to U.S. Bank's investment from moving from an innovation state where we have these subject matter experts that have been focused on this for the past five to seven years to within the business, within the digital part of the organization where we can work across various business lines and look to build that platform and bring product to market. There is opportunity to continue to accelerate that, and that's where PwC comes in. They allow you to accelerate your work very quickly. They also have a group of subject matter experts on the risk side, the operation side, the use case side, the value proposition side, the business economics side, and that was very important to accelerating the work. Similarly, Stellar Development Foundation was an excellent partner. You know, we were very interested in the platform for the low-cost transactions that it made available. Other institutions like Franklin Templeton, WisdomTree have also built on top of Stellar, and when it came down to it, when we came across technical items that we needed solved, Stellar was there to help us with that, and we did come across one item that we hope to continue to work on with Stellar in future phases, which was around privacy, and one of the things a U.S. bank would expect when we deliver a product to market will be to maintain the privacy of some of the balances on a blockchain, and now Jose might have some perspective on that. Yeah, if I may add to that, when you're in a blockchain foundation, when you're on Stellar's side, we do a lot of the work of maintaining the code base for Stellar, so our folks love to discuss, we love to geek out about liveness and consistency and privacy and cryptography and tens of thousands of lines of C++ code that maintains the blockchain. In the end, for the users, that will not matter, and I think that if it's something that we learn during the fintech wars is that we need to abstract that complexity, and we need to hit mass distribution, and users will interact with these technologies in the platforms where they are already now, and they are at a U.S. bank now. They are at the banks, and it's incredibly important in these early adoption stages. Maybe not so early. If you look, there are probably 15% of Americans have already interacted with digital assets in a stable, consistent way, but at this stage, when you're gonna hit mainstream adoption, being able to find a forward-looking institution, who's saying, who's taking a bold, at the same time, that is responsible approach and making this available for folks who don't want to discuss cryptography with me, so they want to be able to move money fast in the platform where they are and in the experiences that they are comfortable with, so I think that's where the magic happens, when you can combine the hardcore crypto knowledge that you need to probably engage with the experts for that with the platforms that consumers are using on where they want to keep up. I think if you walk outside of this booth, you'd probably find tens, if not hundreds, of people who will nerd out with crypto with you, so if you're feeling lonely, just step outside. You'll find those people, but you mentioned a word that I think triggers something else. You talk about something in the abstract. Kurt, where are we in terms of the tangible? I think what we've seen, as Mike and Jose both highlighted earlier in the summer with some of the progress down in D.C., we've seen a pivot from pressure testing the technology to now trying to understand where demand is going to come from, and we're now at this point of, if we can assume that we're getting both retail and institutional customers into a stablecoin environment, then we start to look at the next unlock of, well, where do you go next? Where can you earn yield? Would you go to a tokenized product that earns you some yield? And it's starting to manifest what we had talked about for years, which is this rewiring of the financial services ecosystem on-chain. And I think the other thing that's starting to happen is we're looking at how institutions like a U.S. bank can lean in to also service this ecosystem, something that wasn't really on the table even a year ago, and it's opening up an opportunity for banks to lean with their expertise around providing these trusted frameworks for how to service this ecosystem, this digital asset ecosystem, and further that adoption curve. Similarly, when you look at networks like Stellar and the foundation behind Stellar, they have taken a really robust focus around making sure that they, again, are rising to the occasion of, if an enterprise is looking to drive a new product on-chain, we have to be able to ready to meet them where they need to be when it comes to tooling. So privacy has been something that we talk about very consistently, but the other thing that I think is really unique here is we're talking about programmable money. So what does that mean then in an enterprise environment? It's kind of similar to almost the AI conversation around, well, if we're driving this transformation around process and moving process into an automated environment, decision-making could happen in real time. What does that then unlock? You're freeing up people's time. You're freeing up system capacity. You're opening up new customer channels. So these are now the things that are gonna be the next set of questions that we have to answer, where if we're getting some of those efficiency gains, we're driving greater trust, what does that then unlock for product innovation and where we go next on chain with some of these offerings? We've talked quite a bit already now about the why behind of this and the who, but getting a little bit more to the what, what benefits are you exploring for this at the enterprise level? So the narrative around stable coins has been faster, cheaper, 24-7. And I know I said that earlier, but if that plays out to be true, and starting with cash and starting with fiat is a organic place to start, particularly when you're a company like US Bank who services the payment industry and who has been servicing the payment industry for decades. And we often see that as the first connection point with our customer base. But if that turns out to be true, that it can move that quickly, that it can move internationally, you can extend that to other asset classes. So Kurt mentioned a second ago, tokenized assets, and we're also doing some additional research around tokenized assets, where if you could take the value proposition of moving quickly, moving 24-7, and moving it very efficiently, you can apply that to all sorts of other asset classes that come along with it. So we're excited to see where that research goes for us as well. Kurt, anything you wanna add on that, the way you see it? I think that we're at a moment in which we have already proven, so stable coins have proof of existence, right? So there are billions of stable coins out there. I think the points that Mike said on speed and cost are very, very appropriate for this. I think that we're moving now to the next level of, we need to add detriments. So there is a lot to a payment that goes beyond a transaction. So the fundamental functionality of, let's move value from a wallet to a wallet, that is solved, that works, you can do it. Now we need to make it work for the people who are saying, well, my problem is that I need to have $10 million that need to arrive in Indonesia in the next 10 minutes, and it's a Saturday at 5 p.m. So those are the rails that, and we need to build on that, the privacy preserving features. We need to buy, to build the credit mechanism. We need to build something that just goes beyond the cost, because the cost is there. You can run transactions on the Stellar network at $0.0001 per transaction. It will not matter if you make it 0.0001. So it's already basically free, and it's already tens of times cheaper than an ECH transaction. So the universe likes a low energy state, and we're saying there is no cost of things. Let's imagine that there is no cost of things. What do we do with that? And the use cases, some of them are gonna be very plain vanilla existing use cases today that you just can do faster and at scale. It's for corporate treasurers who want to deploy treasury to foreign subsidiaries. It's for a business that want to pay other businesses. And then there are gonna be arcane cases that, quite frankly, we don't know about. I can put a few of them in the table that are gonna happen is, as an industry in payments, we have never been able to do efficiently sub $1 payments. If you're gonna do a payment that is less than $1, it costs you probably 15%. If you can have basically free payments, then you start to think about stuff like, hey, I'm going to watch a movie. I'm gonna pay by the minute. You can do streaming payments. Your car can pay by the mile on a toll. There are things that we're not there yet. And I don't want to be a starry-eyed because I think there's plenty of work to do on migrating the existing use cases on chain. But that's the promise of the technologies. Let's think of, we're having all thinking from a scarcity mindset in terms of the cost of payment. If you remove that and you start to think with an abundance mindset, where do you go next? Well, you know, obviously innovation comes from a little bit of starry-eyedness. You gotta be able to see what is it that you're trying to achieve that hasn't been achieved before. You also want to try and make sure that you're getting it quickly. You want to be out there first. You want to make sure that you're making it more cost-effective. All of those are critical elements of innovation, right? Safe, sound, how do you make sure that you're keeping it safe and sound while still being able to move at that kind of pace in innovation, Mike? No, that's the way we've been approaching this research is that there's an element of net new technology where we're exploring building on blockchain, looking at wallet provisioning, actually moving money via stable coin, but U.S. Bank is a risk, we mitigate risk, right? We're in the business of making sure it's money is safe and sound. So that's what we do every day, all day, and that's what we've always done. So that mindset in the controls and policies we have built and operational procedures can travel over to the new technology, but it is determining what's net new about the technology and what's net new about operational that would have to be addressed. So none of those core tenets of safety and soundness change at all. It just becomes, with this net new technology, and even taking an agnostic approach to technology, if it's more efficient, it's more efficient, great. Let's take our frameworks for the way we've secured assets and secured payments for the past 100 years, well, maybe less than that because we're talking emerging technologies, so maybe the past 30 years or so. Apply that to this new technology, and that is a way that we can continue to deliver safety and sound money movement or safety and sound asset growth. Not to shift too much, but to shift, Kerr, where does asset tokenization fit in all of this? I think it goes back to an earlier point around, with this assumption that we're seeing more customers move into a stable coin environment, they're going to want to earn yield. Very natural proposition, and so looking at things from money market funds to tokenized equities, bonds, you name it, we're going to see other assets that exist in the current system move into a tokenized environment on chain. I think it's also going to be part of a larger transformation that we're seeing where, again, the bank has an ecosystem of companies and customers that they engage with. Stellar, the network itself, powers an ecosystem, and so what you're seeing because of this technology, because it's a distributed system, is it's allowing for the rewiring of where both individuals and companies do business. No longer does it have to be point to point. You could have a net settlement event across an entire group of individuals or companies across these ecosystems now, and that's where it starts to get really interesting in terms of how we think about value portability, identity, and the agility to move in the markets in the way that you want to move. So I'd like to finish the discussion here because we talked about collaboration, talked about the trust between the groups. What is it that you want other partners, other peers to take away from your participation in this? Either because you're going off and creating new partnerships or, hey, you're thinking about U.S. Bank, here's why we like them, here's why we like that collaboration. What do you want the legacy of collaboration be from this particular program? If I get started, I think that is, as we were saying, it's a combination of deep expertise in the technology, the ability to translate that into something that is actionable for the end user, and the platform and meeting the users where they are today. I think that's something that, and it's very, very rare that just one institution will be extremely good at those three things. And that's why I think that we are bringing all different strengths to the curve. What about you? I think I go back to, again, ecosystem effect. So as this continues to be proven out between the bank and what they're doing on the Stellar Network, because of their own respective ecosystems, it's going to start to bring up new ideas, new questions around who else can we connect to? Who else can collaborate with us on this technology? What does that mean for product offerings? What does that mean for the way that we operate? How do we engage with stakeholders in different ways? And we're just going to see more and more permutations of that in a very positive way. It's going to drive natural collaboration across a number of different stakeholders in the industry. Yeah, it's a recognition of what others do well, a little bit of fearlessness, right? And taking your best practices. Mike, close us out. I think it's about going from idea state to capability state and working with a company like PwC helps accelerate that work and working with the Stellar Development Foundation on the Stellar Network, bringing in their technical expertise also accelerates that work. It's a misnomer to think we know it all. We know how to deliver a product, we know how to do it safely and soundly. But at this state where we're getting hands-on experience with it, it's important to pull on your partners and their knowledge becomes your knowledge and you continue to build on top of that. Mike Villano from US Bank, Jose Fernandez de Aponte from the Stellar Development Foundation and from PwC. We've got Curt Fields. Thank you all very much for being a part of this and looking forward to see how the next phase goes. Thank you. We're gonna be back with more. Come on back and join us from the US Bank Lounge here. Money 2020, the future of finance.