One of the hardest problems for traditional financial institutions right now is how to bridge legacy technology and infrastructure gaps to get to 24/7 on-chain finance. Moving on-chain isn't just a technology lift; it's about rethinking culture, compliance and coordination across legacy systems, and building a strategic framework that bridges what exists with the desired outcome.
LEADERS is a flagship channel that spotlights C-level executives and top experts as they discuss transformative topics for an audience of key decision-makers. We deliver thought leadership on the most pressing issues driving financial services. The LEADERS series is made possible by the support from top industry collaborators including Uphold.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Penny Crosman (00:19):
Welcome to this episode of Leaders. I'm Penny Crosman, executive editor of Technology at American Banker. Our panel discussion today is bridging the gap between Trad Fi and Defi, and we have three panelists who are all involved in building that kind of bridge each in a different way. So we have Sahil Goswami at Dart Bank. Can you tell us a little bit about what Dart Bank is doing, for instance, with Kraken and in other ways in your own way, building a bridge to Defi?
Sahil Goswami (00:53):
Sure thing. Thank you for having me. DART is a over a hundred year old community bank based in Michigan. First auto loan in the US has a storied history of supporting farmers and agriculture, and we pivoted to the FinTech space about a couple of years ago, moved over from another bank and it was a tight administration. It was a tough environment, but we launched our FinTech program supporting Kraken ok x crypto.com for all their fiat needs and looking to kind fill the gap left behind Afters signature went under.
Penny Crosman (01:28):
Okay, interesting. I think we'll circle back to that later, of course. And we have Yuval Ruse who is co-founder and CEO of Digital Asset Holdings. I guess it's just digital asset now. What are some of the things you guys are doing right now in the area of bridging to mainstream finance?
Yuval Rooz (01:50):
Yeah, sure. So as you said, I run a company called Digital Asset and we created what we believe is the first layer one blockchain that allows privacy, that is compliant and other features that we believe are needed to bring Tradify to be natively on chain. And we can talk more what that means.
Penny Crosman (02:18):
And we have Robin O'Connell, who is CEO of Enterprise at Uphold, and what are some of the things Uphold is doing in this space? Great.
Robin O'Connell (02:26):
First of all, so Uphold is a digital asset company that's been around since the early days. So we're kind of an OG platform in crypto. We have a retail side of the business where any individual or business can go and sign up directly. We're fully compliant. We're regulated in the United States, Europe, uk, and support, I think 145 different countries, users in 145 different countries. We build an amazing platform and basically what we do in my group is we work with other companies, banks, fintechs, brokers, to offer our platform and the ability to buy, sell, hold crypto as an example, and I can talk about some other use cases, but our whole deal is if you want to move on chain, build on Uphold, because you can do this stuff yourself, you can invest in it and you hire the people, try to figure it out yourself and work with lots of little companies, or you can just do it through one API, which is what we offer and we'll kind of guide you through the process. So that's what we do.
Penny Crosman (03:36):
So why should banks care about this from all of your point of view? What are some of the use cases that you think are the most
Robin O'Connell (03:44):
Compelling? We'll go this way and then we'll just keep going
Penny Crosman (03:45):
Back forth.
Robin O'Connell (03:48):
So it's interesting, and there was just a panel before here and they touched on a few, but certainly what we're seeing is cross-border payments. Okay, so everyone knows the old story of SWIFT and correspondent banking and how long that takes and how expensive that is. Well with stable coins that can open it up and make instant payments secure, et cetera, et cetera. So if that's of interest to you as a bank, that's one thing. Another example that we're coming across is in the payments industry. So if you're a merchant and you want to actually get a settlement 24 7 through the weekend, that's a huge deal and depending on your industry. So normally it's like, okay, you have a bunch of activity on a Friday. Well if you have payments to make during the weekend, where's that money coming from? So that's a real meat and potatoes use case where we're working with some of the largest acquirers in the world where we provide a compliant platform to facilitate those merchant settlements.
(04:59):
That's an example. Then finally, I think one of the ones that ought to be talked about is just allowing your bank customers, whether they're retail, consumer or small businesses to get exposure to let's say Bitcoin, right? And we're getting a lot at Uphold. We get small businesses that are coming to us from Michigan as an example. There's a tire store in Michigan, and we're like, why is a tire store in Michigan signing up for Uphold? Well, they want to have a certain portion of their treasury or their funds in Bitcoin. Why wouldn't you? I mean read if you follow the news, all of these companies are doing that. And so I think that's a huge opportunity for community banks and credit unions who already have the trust of the regional merchants to be able to support something like that. Maybe I should stop talking. You kind of wind me up. One more is good. I'll come back to more
Yuval Rooz (06:05):
Down the list. So I think when I think about this technology, the slogan that we use is we want to enable finance to flow as intended in the sense that we use a lot of terms in finance a lot of times like DVP, and there's this kind of assumption that things just happen, that things just settle and that's just not true. There's a lot of friction in the system. So I kind of take a step back and I just think about what is the value of this technology? And we use the word instant payment, but really it's asset mobility. So it's the ability to mobilize asset in a frictionless manner. It could be a stable coin, but it could be other asset classes. I think that there is another element of the technology which is composability, and this is really where DVP comes. I will move a payment instrument against an asset instrument and it will give you the guarantee that they will all happen at the same time or will not happen at all.
(07:04):
And it is the combination of these type of features that really allow markets in general, not just Bitcoin, not just equities, not just collateral, to be significantly more efficient. It allows a lot of redundant costs to be removed out of the system and a lot of what I would say systemic risks to be removed from the system. And as a result of that, not only were we going to cut on costs, which will improve margins, but asset mobility, if you think about it, we American banker, you need to meet capital requirements. Well, what is capital requirements? It's making sure that you have enough cash in a legal entity. Well, right now, because cash doesn't move fast enough, well, you need to over collateralize a lot of your legal entities. So now suddenly, if you can move assets real time 24 7, you get better return on equity across your legal entities. And it's really these features that finding themselves, repeating themselves across use cases. So we do today on Canton, close to 10% of the US repo market. We do about 400 billion of repo every day. We process commodities on a daily basis, mortgages, life insurance, and all the way even to sports wagering, I think. But when you kind of take a step back, I'm much more interested in why is that happening and it's really this asset mobility and asset composability that this technology enables.
Penny Crosman (08:36):
And you have a project with the DTCC,
Yuval Rooz (08:39):
Happy to talk about that. Yeah, I mean again, but we all use the word tokenization, but really what the whole goal in my opinion of this technology is really to bring assets to exist natively on chain. So I personally don't like the word tokenization because it implies you're creating a new asset class. For the most part, when you look at what people will call a tokenized product, you're not by holding the token, you're not entitled to the legal rights of the underlying assets. You're actually holding a derivative product to me that is actually sending the industry back instead of forward. So what we're trying to do, and this is what we've done with the DTCC, is can an issuer or someone who manages books on record trust a blockchain system or a ledger to be their official books on record? And by doing that, you actually get to be the legal holder of the asset by holding the token.
(09:38):
So we announced the first US treasury natively on chain. So if you are a FIC member and you have paid in treasuries at the DTCC, you can hold them on Canton. And the first transaction that we did is trade web, which a lot of people know is an exchange build a repo product on Canton and four entities. So Virtue and DRW were the ultimate beneficial owners and through their prime brokerage relationships, so Bank of America and SocGen, they did a repo transaction over the weekend. And again, this ability to manage your balance sheet 24 7 in real time allows you to have much better financing from a capital perspective. And really what we're going to start seeing is that instead of just doing overnight repo, people will actually be able to start doing repo transaction with seconds precision. So that's what we've done with the DTC.
Penny Crosman (10:40):
Goodbye to your money in seconds. Sahil, what do you think are some of the most compelling use cases right now?
Sahil Goswami (10:47):
So as a bank, and I think that's what's most interesting is that you do have this, we're in a very different position today than we were a year ago as a bank, as the industry overall when it comes to regulatory clarity as well as when it comes to where the industry is headed as opposed to where the industry is starting to fear. And I think that's allowed us to really play in three areas. We have traditional banking, so fiat rails, wires, a CH, et cetera for all the exchanges to conduct trading. I think that's just table stakes. We have the payment side, acquiring the issuing side, we purchased Westtown payments and support stable coin settlement for merchants. And then on the third bucket, we have the sandbox area where we are now free to innovate and free to push boundaries that I don't think we could have done earlier.
(11:34):
And that means Bitcoin lending. That means bringing together us as a cannabis focused bank, the cannabis and under banks, industries that exist out there that need a lot of help to really think about how money movement works and really untapping capital that is stuck between 5:00 PM on a Friday and 9:00 AM on a Monday. And I think really it's crazy that we think about those, just talk about those things today in the year 2025. But that's really what we're trying to solve for and that's where we'd like to innovate. So the bank is just headed forward to try and work with the right players to do so.
Penny Crosman (12:07):
I hate to bring up painful memories, but three years or so ago a bank you're familiar with and some other banks were building some really interesting pilots and some projects around putting money on digital assets, offering people digital wallets where they could store their crypto offering crypto custody offering related services. And then FTX collapsed and all these projects were shut down. They're just on ice in a mortuary, dead and gone. How do you think about that? I mean, could that happen again? What's different this time?
Sahil Goswami (12:49):
It's an old trope, but it is different this time. I think we have clarity, we're barreling towards even more framework coming out of Congress. I don't anticipate that we see that kind of black swan event have the level of impact that FTX did on the market or what Silver Gate and Signature and SVB had on the market. That being said, I think the industry has matured. It has put in place a lot more guidance around what is and is not appropriate in terms of how business should be conducted. I think banks have put in place the right people, the right talent, and perhaps that's the broader issue right now is in order for banks to really meet the ambitions they have, finding the right talent is an issue because a lot was shook out during that time.
Penny Crosman (13:35):
Anybody else want to offer a thought
Yuval Rooz (13:36):
On that? Yeah, if a bit of maybe a contrarian view is that, first of all, I think that FTX shook crypto market, not necessarily capital markets that we're pushing forward, I can tell you that a lot of our clients that we were working with during that time continued to work. I think that I agree that a lot have improved since, but we've seen some of the meltdown as a result of auto de-leveraging and things like that just a few weeks ago, which actually shows that there's still a lot more to improve. So again, to me, just generally speaking, when you are thinking about new technology and you're pushing the boundaries, generally speaking, if you just think about it from a statistical distribution, majority of the market will be risk averse and there's going to be kind of that two sigma type of players that are always pushing themselves.
(14:36):
And I would tell you that FTX did not shook those organizations. They just said, yeah, this is the risk and potentially also the opportunity is for us to keep plowing ahead. And it's just the reality that if something bad will happen with ai, people will become very risk averse with AI for the most part. But there will be still those companies that keep on innovating. So I think that every time some of these events happen, there's a lot of good lessons learned, no different than what just happened recently in this small meltdown in crypto where a lot of defi protocols, some of the weaknesses still in the design have been exposed. And again, that's a good thing. You want to have these kind of moments where you get to learn and get better and improve the industry.
Robin O'Connell (15:25):
I guess I just add, so I agree, the regulation is a lot clearer. Obviously that's just been the boom really this year in terms of people jumping back in and the regulated or tradify institutions all piling back in. I think the other thing is there's been a lot of adoption across consumers in the United States and globally where if you're a bank, you've got to be thinking about, do I hang back and let the upholds or the Coinbase or the Robin Hoods participate with my customer in a financial way? And so that I think is a really key component here, which hopefully will be the catalyst for getting a lot of the credit unions, community banks. I mean you're already seeing the bigger banks leaping in, but what was it, SoFi came back after. I think they only maybe shut down because of the regulatory uncertainty.
(16:36):
But the idea is that you could go log into your SoFi bank and right where you have all of your other financial services, you can also buy, sell, hold cryptocurrency. I think that will be what will be the status quo. And so why wouldn't you as a bank if you're already trusted? So back to the trust element, why wouldn't you high that with your customer, especially if you have why be with an FTX if you can be with the bank and then if you trust the bank, you should be able to trust us with your cryptocurrency as well.
Penny Crosman (17:17):
Well along those lines, a lot of people or a lot of traditional bankers have this fear or they've been told to fear that deposits are going to flow out of banks into stable coins and other kinds of digital assets. Like some estimates are $6.6 trillion worth of bank deposits could exit into the defi world. Do you guys see that as a threat for traditional banks?
Sahil Goswami (17:50):
To some extent that's true. We will see flows, we will see stable coins and or other currencies co-opt cash as we think about it today. That being said, I think the narrative that a runaway train and it's it's too late is false. There's plenty of opportunity in the market, there's plenty of time for some of these banks to get in, not as much as they think, but I think what we've seen is a lot of our peers there is that kind of duality of is it a passing fad or is this something we have to pay attention to? I think it'd be silly not to pay attention. I think given the focus that we've seen from Congress to make sure there's a framework, the focus we're seeing from the bigger banks, it behooves any bank period with a charter to think about what it means to be a bank today and what table stakes will look like in two, three or five years. I think if we think about stablecoin settlement, we think about trading. I mean tap to pay was three to 5% of all transactions in 2020. Pre COVID, 60% of transactions today. I mean, I don't think I need to carry my card anymore.
Sahil Goswami (19:02):
Think that's just an analogy of things can change from a trickle to a flood very quickly and that's where we're headed. So I think banks need to be mindful.
Yuval Rooz (19:13):
I think your point about tap to pay is such a good one because to me the way I think about it is it's not that stable coins are going to cause the deposits to go away. It's the user experience. And I don't think that banks necessarily have an existential risk inherently because of the technology. They have an existential risk if they don't do anything. And I don't think that it's unique to this technology, any technology. If your business relied on people calling you and then you put in on the radio, where is the next taxi? Guess what, you're out of business. If people needed to come and rent a DVD from you, guess what? You're out of business. So consumers will inherently flow to where there is a better user experience. That's it. So what's stable coins and on chain assets are showing is that you could have a significantly better user experience.
(20:05):
That's really all it comes down to. A stable coin is not a yield bearing cash instrument where technically speaking your bank deposits, I say technically speaking because they're not always really, it depends on your bank. The point is we're seeing now, for example, we just announced with Franklin Templeton that you could have a money market fund now natively on chain. Well, you could use it for payments, but it's already yield bearing asset as long as it's in your wallet. Here you go, a great user experience and you get the yield and that's not a stable coin. So my point is I think the tap to pay is a really, really good kind of way to think about it is if you are going to create a better honey trap, people will flow there. Whether it's a stable coin or something else, it doesn't really matter. It's what will give the best utility to the consumer.
Robin O'Connell (20:56):
And then I would just add, it's not just about stable coins. In fact, we did a recent deal with Vast Bank and so they came out with tokenized deposits. What's the difference? A stable coin is a representation of a US dollar. It lives somewhere apparently, but your tokenized deposit is your actual dollar. That's FDIC insured that you can earn yield from that you get all the benefits you do from a bank and it's just can travel on the blockchain. And so to me that's where things will go in terms of participation from banks, whether it be that or integrating into stable coins. But yeah, a hundred percent. I think your question started with is it a threat? I mean I think yes, it's a threat. Of course it's a threat and so hopefully it's something that the banks start to adopt
Penny Crosman (21:59):
And why should consumers care about took a nice deposit? Are you saying it for things like remittance payments?
Robin O'Connell (22:05):
Well, so for instance, you basically get, so say I have my money in a Coinbase or an upholder, what have you, that's essentially it's in a bank account that doesn't necessarily have your name on it and it doesn't have all of the same protections as the dollar that's in your own bank account, but a tokenized deposit it is, it literally is the same money and it's yours and you get all of the same access to a normal bank account. And the only difference is now I can move that instantaneously across into an uphold, into a Coinbase or these other places and get access to Defi. So it is a connector into defi, but that comes with all of the protections of a bank account.
Penny Crosman (22:58):
So we're here to talk about bridges between Tradify and Defi as we have been. What do you guys each see as the biggest obstacles? Is it legacy technology? Is it messaging? Is it payment rails? Is it not enough interoperability or protocols that could allow the exchange of different types of digital assets? We'll start with you.
Sahil Goswami (23:25):
Is all of the above an option? There's a lot that has to change in order for us to really move forward. I don't think this has ever been replace situation. I do think there's a lot of partners out there, a lot of middleware that can allow banks to really bridge that gap and get to where they need to be from a technological point of view. I think making sure that they have the right folks on the risk and compliance side to make sure that they are able to sustain what they need to stay compliant, make it through exams and stay relevant. I think we've seen it with Bridge Jack Henry Bank and we've seen Jack Henry just acquire Victor Fi. The middleware we use to connect to Kraken to x crypto.com. And I think that's how we've been able to succeed in the space. It's just partnerships, the right partnerships, and I think if we can see that continue to grow, that allows for interoperability, that allows for, I'd say faster advancement. You can't always just build, you have to partner. And I think that's what we've seen the broader industry do so far.
Penny Crosman (24:32):
Are other banks going to need to wait for their core provider to make an acquisition like that or offer some kind of API to digital asset exchanges,
Robin O'Connell (24:43):
So forth? I was going to say that,
(24:45):
Yes, kind of right? I mean, if you're a community bank or credit union and you're using Jack Henry or Fiserv or what have you, you're ultimately, you can look at your customers and say, this is something I want to to do. And there would be a way technically of making it work. But I think for it really to take off, and what is probably a hindrance now is that it's not readily available into the core systems. I can tell you that we're talking to those middleware providers, right? Because we know that if we go to a bank and they say, Hey, that sounds amazing. Yes, of course we want to offer that. Then the next fantastic, put us on a phone call with all of your developers. It's easy. It's an API. They'll say, what are you talking about? So it's got to all connect into the core banking systems. But that is happening, I can tell you that's happening.
Penny Crosman (25:37):
And is there a cottage industry of middleware providers that
Robin O'Connell (25:40):
Are
Penny Crosman (25:41):
Building the
Robin O'Connell (25:41):
Connectors? Yeah, we just came from Money 2020. Were you there as well? Yeah, yeah. And yeah, it's not just us going directly into those core banking systems. There's a lot of smart people who are creating the middleware solutions that already have offered FinTech solutions to credit unions and community banks, and we're working with those guys too.
Sahil Goswami (26:09):
Core integrated middleware, I'd say was something that you'd hope to see 18 months ago, and now it's a talking point with a lot of providers to say, Hey, we're Pfizer, FIS, Jack Henry integrated. It's a lot easier for you as a bank and we have a suite of clients on the other end, and that's really what's bringing a lot of folks together. So I think to some extent, yes it is, you want to see those acquisitions happen, you want to see that direct integration. But for now, I think there's a path which is finding the right providers that have already done the technical work to integrate.
Penny Crosman (26:42):
What do you look for in a provider besides that they work with your core?
Sahil Goswami (26:46):
The exact same thing that I'd hope a client looks for in us is reliability, technical prowess, the ability to execute when we need them to, and the ability to support 24 7. This market doesn't stop. I think that means that these providers can't either. And it's a very different ball game when you have a user or institution that has cash at your bank and is looking to transfer money Saturday at midnight to try and take care of something in the market. And you're relying on your own banks 24 7 network that relies on the middleware and directly integrated into your core. And I think that can't be fallible in any way. You need to make sure that those things work to a T with zero downtime.
Penny Crosman (27:29):
What do you think banks should look for as they're thinking about partners they want to work with?
Robin O'Connell (27:36):
Well, we would be a potential option. One of the things that we boast is we've been around, I think as I kick this off for 11 years, we're battle tested and we have tens of millions of users and have done billions of dollars of transactions. So I think that's important because you're going to get people who come in with, Hey, this is what we have. But if they haven't been battle tested, if they don't have the right licenses, if they don't have the right compliance, then those are the elements that I think you're going to want to look for. But then also the technical piece may be less important for a bank because you're integrating into the core, but that's key.
Penny Crosman (28:25):
Anything to add to that?
Yuval Rooz (28:27):
Again, I think that everything that was said is critical. I also think that a lot of times vendors in this space come a bit naive. They look at crypto, which is high stakes monopoly. It doesn't come with a lot of the regulation and controls and that are required by banks whether we like it or not. It's not for me here to judge if it's the right amount of regulation or not, but it's just the reality. So I think that what have helped us along with a lot of our clients is that we also just understand their business, right? It's not just like, Hey, I have cool technology. I also understand what are the risks that you think about when you operate your business? And I think that a lot of vendors in the space just come at it from thinking like, crypto is cool. Look, I can move assets 24 7, and then you come to a bank that has fiduciary duty. Just even the word fiduciary is not necessarily something that they understand. And to me, that's just something that I would wish vendors came to understand more.
Penny Crosman (29:34):
Oh, I wasn't going to bring this up, but there is a fair amount of money laundering and drug selling that happens
Yuval Rooz (29:42):
In cash
Penny Crosman (29:43):
On crypto, well in cash, but also on crypto exchanges.
Yuval Rooz (29:46):
Oh, I see, I see. Got it. Okay.
Penny Crosman (29:49):
So how should traditional banks think about that kind of risk? And do you think that's already been solved by the chain analysis?
Yuval Rooz (29:58):
I would say if yes, but again, I think that there's a lot of bad activity that also happens in the traditional banking system and in cash and in many technology is not going to prevent bad actors from trying to find loopholes and ideas. If anything, I would say that it's probably pretty risky for you as a criminal to use this rail to conduct criminal activity. I would actually assume that a lot of the agencies love the fact that criminals use this technology would be my guess. There's better tools. When I talk to regulators, I say, you should also look at this technology as an opportunity to be able to do your job better, to actually be able to conduct, because most of the work that regulators do today is actually finding people as an afterthought rather than actually be able to look at market stability and market conduct in real time. So I actually say to regulators, you should actually flip it around and rather than think about all the negative things which do happen, this is not me to say that there's no negative, but they happen elsewhere in other technologies where you don't have the real time visibility. All you can do as a regulator is to say, as an afterthought, let me verify. I think you did something bad. Let's go and dig through everything to hopefully find out bad conduct.
Penny Crosman (31:36):
Yeah, I mean there's certainly a lot of monitoring systems that banks have in place to try to detect suspicious transactions. But yeah,
Robin O'Connell (31:44):
I guess I would add, so, and I'm not familiar if your companies do this or not, but we have to operate off of money transfer licenses in the United States to offer what we offer in terms of crypto access and custody, et cetera, et cetera. Money transfer licenses, that's all about A-M-L-K-Y-C transaction monitoring SARS reports. I think our second biggest group at uphold is our compliance group. Maybe that's not something to be proud of, but number one is our developers. That's something to be proud of. So I actually think, and I've been personally in FinTech and finance my whole career working on the banking side, et cetera, et cetera. So I would pit our compliance up against any banks, and I think that's important. I think you asked, I should have probably answered this when you asked in the previous question, when you're looking at as a bank and you're looking at who you want to partner with, make darn sure that it's somebody that has experience with and is regulated and has all the right controls in place, et cetera.
Sahil Goswami (33:01):
When we first entered the space for the first six months, we took on $0, just built out our compliance team, built out the risk functions, made sure we had the adequate transaction monitoring in place before we took on that first dollar of client money. Once transactions started, we allowed for two months of low volume transactions, met with our regulator, demonstrated what we had done and have gone from there. It's just been from a cost perspective, compliance and transaction monitoring is number one. We're sponsor bank. That means we're having fintechs that are relying on the bank
Robin O'Connell (33:36):
In
Sahil Goswami (33:36):
Lieu of mtls. And I think at the end of the day, it behooves us to make sure that we are setting ourselves up for success because the thing that we've seen with banks in the past is that they're only as good as that one program that may create contagion. And you want to make sure that if you're a client that's working with a bank, that bank is robust enough that if they're working, so with some other clients that may not necessarily be in the best position, they're able to see that, find that out and rectify it. And you're not necessarily worried about redundancy. And I think that was the theme for a couple of years is banking redundancy. We want to make sure that we have backups ready to go just in case. And I think we've mitigated a lot of that with just pouring a lot of our resources into having the right systems in place.
Penny Crosman (34:21):
And what do your regulators set your examiners say when they look at all this? I mean, have they given you a tacit approval of everything you're doing with Kraken and so forth?
Sahil Goswami (34:36):
So we just wrapped our fourth exam in 18 months, and that's a pretty fast clip in terms of gap between when we receive our report and when the examiners are back in. I'm always happy to anyone listening from the FDIC to create room for you guys in our offices, but at the end of the day, there is this great relationship that we formed. I think there has been a shift in how the examiners think about the industry. I think there is appreciation for a lot of the work that was put in to making sure that we weren't building the plane as we flew it. And I think that's what a lot of our peers had done prior to 23 in that some banks entered the space and they really built what they needed to after the fact and we wanted to make sure we weren't in that position. So we're chugging along and they're well aware and supportive of our growth plans.
Penny Crosman (35:28):
All right. Well you're in a good spot. Do any of you have advice for other banks that are just starting out, just figuring out their partnerships, talking to their core vendors, what are some of the key building blocks that they should have in place? You talked about a few of them before they start working with digital assets or upholds.
Sahil Goswami (35:53):
I have a strategy. I think you need to have buy-in. You need to make sure the board is aligned. There has to be education, there has to be, you can't necessarily have strategy dictated by headlines. Crypto has a very, I'd say a knack for being judged by perceived risk and not really underwritten to actual risk. I started my career as a subprime mortgage trader, so I've seen what underwriting looks like and what risk can be. And the reality is that you can underwrite to most forms of risk and you can find ways to mitigate. And I think being able to understand this space with that perspective then allows you to come up with a strategy and then to go forth and conquer. How
Yuval Rooz (36:37):
About you? I agree strategy. And within the strategy I would actually say do something that you have business value conviction. We see a lot of tourism in this space. I need to report to the board that we're doing something with the technology. And then you find some random use case that will require, and we already talked nascent technology, so your regulators already like laser focus on it. The board is worried about this, so you're already starting from a bad position and then you're going to spend money and time and then there's going to be no buy-in from clients. So a lot of times when we work with clients, we actually spend a good chunk of time and actually understanding what is the business value and how hard it would be to actually manifest some of this value. So if you need to do a wholesale transformation, it will take years to see the first positive margin from this investment. It's usually not a good idea. And there are a lot of opportunities to do things that are in under a year where you could actually start seeing your clients getting some value from using the technology. What
Penny Crosman (37:53):
Are some examples of that?
Yuval Rooz (37:55):
I mean, we build a fund admin in the private credit space and in just over a year had multiple hundreds of funds of a big provider, putting them on chain, like I said, mortgages, the sports wagering, there's plenty. So even the project with the DTCC was, I think the first transaction was under half a year. So I think that the problem is that the attention span these days is very low and people want to see results. So I always say when you use this technology, try to break down your project into the smallest components that you can to actually show return on the investment as fast as possible. First of all, it builds confidence that you actually can do the things that you need to do and you can do them well. And it actually also gives more motivation to your board or whoever are the people that approve the budget to continue investing. I see a lot of projects get shut down before they even get to the start line.
Penny Crosman (39:06):
Do you agree with that? You need quick ones.
Robin O'Connell (39:07):
I was just going to say I agree with the general concept, but use cases and I just would come up with a dead simple use case, which I brought up before. If I'm a community bank or a credit union, do I want my customers getting exposure and interacting with companies that are not my bank When I could be doing that, I already am coming from a place of trust, I truly believe in two to three years. Every time you log into your bank, regardless of where you are, you'll have that optionality of buying and holding Bitcoin. As an example, within your bank account, I just came back from Germany last week, they have an equivalent of a community banking system that's very regionally based. Every single bank is going to have that functionality in Germany. Hey, and if Germany is doing, we better do it.
Penny Crosman (40:07):
Does the bank need to have a modern core to jump into this space?
Robin O'Connell (40:13):
Well, I think not necessarily, right? Because if they're already leveraging the Jack Henrys and the FI serves and the FIS, which I know for a fact are enabling this, and then there's even the middleware on top of that. So I think that their systems will be able to adapt
Penny Crosman (40:35):
Even the older ones. Even
Robin O'Connell (40:36):
The older ones. Yeah.
Penny Crosman (40:40):
Do you have an opinion on that?
Sahil Goswami (40:42):
I mean, as a Jack Andre Bank, we've seen there were gaps when we first started. They're being plugged at the end of the day. There is a massive industry out there of vendors to work with, partners to work with to plug any of those gaps. So it may be patchwork in a way, but it can be done.
Penny Crosman (41:02):
So another aspect of interoperability is digital assets being interoperable themselves. For instance, if every bank were to issue a stable coin of its own, it feels like that would not be an efficient market because nobody would be able to interact with anybody else. I mean, where do you guys see interoperability as banks are building out their own digital asset offerings?
Robin O'Connell (41:33):
I'll take this one and then we'll go backwards this way. So first of all, at uphold we are kind of agnostic. So we support I think 40 different chains every stable coin. And so the idea is that you can go from anything to anything instantly, and we can be that router if you will. But if I'm just going to sort of think about how that can happen because a big question, none of us know the answer of how that's going to play out exactly. But I think one corollary would be if people know the story of how Visa MasterCard started. So it started with Bank Americ card. I dunno if you remember, but they had, you'd put a decal for a bank Americ card on the actual merchant shop and then Crocker Bank came along and said, well, I want to do that. And then Wells Fargo and dah dah, dah, and then all of a sudden you're in a situation where, well, that's not going to work. So then there was a consortium that came together. I think we're going to see something like that. That would be my best guess.
Yuval Rooz (42:43):
Commercial money today is not fungible and interoperable. To be clear. I mean if you hold a deposit at JP Morgan, it wasn't fungible with Silicon Valley Bank and if you were at Silicon Valley Bank, well you lost your money. So to me, I mean the reality is that we are talking about fungibility of assets and when an asset is issued by an institution, it comes with the characteristics of that institution. I think that more the point that came up with Visa is how do you make the movement from one asset to another as seamless as possible? I think that that is something that you will see. Market dynamics no different than Zelle, for example, was created by the banks to create better fungibility across banks. What is fungibility across bank is I can move my deposit from one bank to another, but really behind the scenes they just manage their counterparty risks in terms of exposures and then they eventually settle it through Fed wire because at the end of the Fed, the Fed is the fungible asset that they all have in common.
(43:50):
I think stable coins today, there's already ways how you can swap stable coins instantly for almost no fees. And over time, one of these mechanisms that replaces fungibility of these assets will win and will become kind of like the winner that will be, whether it's Visa or MasterCard or something like that. So interoperability is a topic that comes a lot, but today we have many systems in the traditional world that are not interoperable. And that's kind of back to where I started. That's the friction that exists I think in these assets because they can move in real time and they have access to them 24 7. Actually creating these kind of connectivity layers that remove, that allows you to swap is actually easier than in the traditional world. That's why we're seeing that moving from Fed Wire legacy to Fed now is taking so long where I promise you, if all bank deposits were on crypto rails creating the equivalent and let's imagine the Fed had their money on a crypto rail, not saying that that's what we should do. Creating a Fed now would've been much easier. That's really my view.
Sahil Goswami (45:12):
I mean as we see the adoption of Fed Now and RTP, I think that's exactly right. Interoperability exists on chain. I think it is the traditional side that suffers today. Fungibility. Fungibility is far few in between, and I don't necessarily see us being in the business of trying to pick winners. We'll respond to demand, respond to what our clients are looking for. Okay, X and Kraken or founding members of USDG, we know that there's a lot of our clients that are looking to settle in USDC, so we're not really looking to try and pick and choose. We we'll support what clients look for.
Penny Crosman (45:48):
So we've been talking about building bridges, but to what extent are banks, and we sort of touched on this before, but to what extent are banks at risk of just being completely bypassed by the ability for businesses to use digital assets to move money around without necessarily having to go through a bank?
Robin O'Connell (46:13):
I don't think that's going to happen, honestly. I'd say right now where you have the banks that are supporting the crypto companies or the FinTech companies or what have you need the banks at the core. And then the question is how far are they going to play and how much of their customer's lives are they going to be a part of as it relates to their money. And so I don't think it's ever going to be totally extracted, but I do think there's a huge opportunity for them to take advantage of their position and to offer more services to their customers.
Yuval Rooz (46:57):
Before blockchain, that was Venmo and Cash app. So I mean, again, it goes back to this user experience. I mean, banks offer trust in most cases and credit intermediation, that's really what they offer
Robin O'Connell (47:14):
FDIC insurance too.
Yuval Rooz (47:15):
What
Robin O'Connell (47:16):
FDIC insurance. Yeah,
Yuval Rooz (47:17):
That's not the bank offer that's someone else offers. That's the US government. But my point is that you trust a bank would hopefully do things different because they're regulated. They have, and again, I think that consumer will look at those things and will assign a value to it and then will assign value to being comfortable and having more utility. And if this side of the utility will be more valuable than the trust and the credit and mediation, banks will get disintermediated. And that's why I'm saying you said it like people trust banks and as long as they take advantage of that and offer better utility as some banks do, then people will continue to use them. But at the end of the day, if the consumer will say, you know what? That trust and credit intermediation is something that I really don't see much utility in because this thing just works and it's the user experience is so much better.
Penny Crosman (48:26):
I trust that now.
Robin O'Connell (48:27):
And a generational shift too, right? I'd say the older Americans trust banks maybe more than Gen Z, and the way that Gen Z is interacting with money with Venmo, et cetera, is very different. And so the banks can't rely on that. Trust is going to always be their only key draw and they're going to have to adapt.
Sahil Goswami (48:57):
I mean the genesis of Bitcoin and crypto as a whole was a response to the GFC, right? If we think about the lack of trust in banks at that time. And I think Good point, yeah, it really is about the utility that banks continue to offer. If banks can step up. I think at the end of the day, wires a CH as we think about the skinny Fed master account and that concept being floated, you will see some of what banks do be diversified and you'll taken on by other providers that are non-bank providers, but it behooves any bank to make sure they stay relevant. A lot of what we do is future-proofing. We think about where can we provide value that other banks cannot today or are unwilling to. If they're unwilling to because of perceived risk, that's fantastic. We'll underwrite what the actual risk is, roll out those products and be a value add for our clients. And really that's all you can do as an evolving business to make sure you stay relevant today.
Penny Crosman (49:52):
Alright, well I think that's a good note to end on. So thank you so much to the panelists and thank you all for watching today.
