Transcription:
Penny Crosman (00:03):
Welcome to the American Banker Podcast. I'm Penny Crosman, tech editor at American Banker. At our digital banking conference in June, American Banker Editor in Chief Chana Schoenberger interviewed Margaret Butler, head of the financial services practice at the law firm BakerHostetler, and Kristiane Koontz, director of treasury services and payments at Zions Bank about the opportunities that are emerging for banks in cryptocurrency and other digital assets. In today's podcast, we are sharing these two interviews in their entirety.
Chana Schoenberger (00:33):
Hi, I'm Chana Schoenberger. I'm the editor in chief of American Banker, and I have with me here Margaret Butler, who is the head of the financial services practice at the law firm BakerHostetler. Welcome.
Margaret Butler (00:44):
Thank you very much, Chana. I am so excited to be here for Digital Banking 2025.
Chana Schoenberger (00:50):
So tell me what it is you are doing in defi right now. What's going on?
Margaret Butler (00:54):
So I am watching with bated breath because the regulators are in a flurry of activity and I'm excited for the things that they put forth so far in order to implement the January executive order. And I'm also excited for what I believe is coming before the end of this year. The most exciting thing that I've seen happened just this past Thursday. The SEC issued a statement that staking activities on proof of stake networks are not securities and therefore they don't require SEC registration. This is huge. Previously, the SEC had been legislating by enforcement and they had taken a very broad definition of what a security is. This is now a use case that is clear and defined and it's going to open up a lot of activity
Chana Schoenberger (01:55):
That's enormous. So what could this mean for banks and for payment companies?
Margaret Butler (02:00):
So I think bank and payment companies had been hesitant to adopt blockchain-based technologies because of the regulatory uncertainty. But the technologies are excellent, the technologies are fast. They offer enhanced transparency. They're just very efficient. So if banks feel more comfortable that it is lawful to engage in these activities and there's a clear roadmap, I expect to see much broader fintech adoption this year.
Chana Schoenberger (02:37):
That'll be enormous. What will this mean for things like stable coins?
Margaret Butler (02:42):
So I think stablecoins are something that's being addressed. I don't think this particular announcement goes directly to stablecoins. However, I am seeing a lot of interest in stablecoins. I'm seeing M&A activity with respect to stablecoins because I think stablecoins are just the most logical bridge between defi and traditional finance. They're really an on-ramp and an off-ramp, and they create the opportunity for those two financial systems to interact.
Chana Schoenberger (03:16):
It's going to be so interesting to see what happens next.
Margaret Butler (03:19):
I am incredibly excited. Another regulatory development over the past six weeks is the Office of the Comptroller of the Currency put out guidance permitting, essentially banks to custody crypto assets, which is another area we had been waiting for. This is going to particularly impact investment funds, and once we have additional clarity around that, we can also just expect more investment activity into these assets. So again, I think we are going to finally bridge defi and traditional finance with this additional regulatory guidance.
Chana Schoenberger (04:02):
So is this 2025 is going to be the year that crypto goes from a bro thing to a real bank thing?
Margaret Butler (04:09):
I want to say yes, I think, but I think it's both, right. So I think we're seeing the maturing of the defi industry. We're seeing M&A activity within the industry, which I think will be helpful because right now there were very ad hoc technology stacks underpinning a lot of the applications, and that introduces risk to the system. So I think we're seeing some maturity, some M&A activity, which will help defi be a more robust product. And we're also seeing a lot of interest in stablecoins and a lot more guidance and positivity from the regulators, which I think will definitely allow banks to feel comfortable using blockchain technologies.
Chana Schoenberger (05:04):
So one thing that I've heard from banks is that, and this was not in regards to defi, this was actually in regard to KYC and other sort of bank regulation supervision issues, is that they're a little afraid to change their procedures because even if the regulators are okay with it now, there's no telling what regulators in four years are going to say, and they might look back and say, oh, well you dropped all your KYC guardrails. I know the government told you to, but we're the government now and that's not okay.
Margaret Butler (05:32):
So I think that's a fair point, and obviously the financial services industry being so highly regulated needs to be very cautious. However, I do think the technology is sort of inexorable and it's not just the blockchain technology that will be relevant to AML/KYC, it's also artificial intelligence technology. There are already applications of AI that can down the costs of AML and KYC dramatically, and those are just efficiencies that banks will have to adopt, right? Because as soon as they can't online, they can't afford not to.
Chana Schoenberger (06:10):
Yeah, that's another thing that I'm really interested in is the intersection between defi and AI. I think it's sort of like the world getting completely taken over by software.
Margaret Butler (06:21):
So you always raise a very interesting and sobering point. I mean, I think the idea of the world, it's a little scary, right? It's a little scary, but I think in addition to being a little scary, I do think, and I'm not a technologist, I'm a lawyer, but I do think those technologies go together. I think the blockchain's ability to be used to trace and authenticate really compliments AI's ability to generate and solve problems more quickly. I also think venture capital investment is going to drive a lot of this innovation, and just as blockchain had its moment, I think AI also had its moment. And I think now people are really interested in how those technologies operate together. I can see an agentic AI layer on top of blockchain technologies really helping to solve a lot of the centralization and governance concerns if we can fully automate the process,
Chana Schoenberger (07:29):
If it works.
Margaret Butler (07:30):
If it works.
Chana Schoenberger (07:31):
Yes. That sounds really interesting. I mean, it's sort of like the irrational exuberance phase is almost over, and now we're at the phase where we're thinking about how we can actually use the technologies within financial institutions not to blow the whole place up or have cartoons of apes, but just things that actually make banks work better.
Margaret Butler (07:52):
Absolutely. Yes. I am very excited for these applications. But you again raised a very important point, which is people want to create technologies that work well and where they acquire, they want to acquire technologies that work well. And there are risks just as the financial services industry has had to deal with risk traditionally with these technologies. The primary risk, I think, is technological, right? You want to make sure that technology works well. You want to make sure that it's not vulnerable to hacking. That remains a huge problem, even though defi is supposed to be resilient to that, but that's not the only area. Data privacy is going to be very important. What's interesting about finance and about defi is kind of the vast set of regulations with which those products have to comply. So we're talking Federal Bank Secrecy Act, right? We're talking kind of supernational concerns that people have about money laundering. And then we're talking just on the ground, like consumer protection laws, which
Chana Schoenberger (09:06):
Are different in every jurisdiction. And especially now in the us, there are going to be, it looks like there will be fewer consumer protection laws at the federal level, but some states are still very serious about the New York, for instance, they have stepped up and they seem to want to take a more national role,
Margaret Butler (09:22):
Right? And so I haven't seen it yet in the blockchain space, but absolutely in other areas. We're already seeing the states try to level up their regulatory game to address what they see as changes at the federal level. And that makes things harder in a lot of ways because it's easier to comply with one set of regulations than 50. I think we will get a clear roadmap from federal regulators, at least from the SEC, hopefully by the end of 2025. And if we can get a few years of traction before any other potential changes in regulation, I think that will give the industry a great head start.
Chana Schoenberger (10:07):
Great. Well, thank you so much for joining me here. I really appreciate having you in.
Margaret Butler (10:11):
Thank you so much, Chana. This has been fun.
Penny Crosman (10:16):
So that was Chana's interview with Margaret Butler. Here's her chat with Kristiane Koontz.
Chana Schoenberger (10:22):
Hi, I'm Chana Schoenberger. I'm the editor-in-chief of American Banker, and I have with me here Kristiane Koontz from Zions Bancorp. Tell me what your title is now.
Kristiane Koontz (10:30):
I'm now director of Treasury Services and Payments.
Chana Schoenberger (10:33):
So exciting. So welcome to Florida where we're having our digital banking conference this week.
Kristiane Koontz (10:38):
Thank you. Thank you. Great to be here.
Chana Schoenberger (10:40):
Should be fun. So you have responsibility for payments Now. Tell me what you guys are doing in payments these days.
Kristiane Koontz (10:47):
We're up to a lot of really exciting things. We're focused on helping our customers, in particular with improving efficiency and creating competitive advantage with payments.
(10:57):
So one of the areas that I'm most excited about is instant payments. We've been accepting real-time payments for a number of years and we're now piloting instant payment sending through RTP. And so that is creating a lot of opportunities for customers, not only for efficiency. There's so much there in terms of the finality of the payment, reducing reconciliation and some of the other work that goes along with other forms of payment, but also looking at ways to create competitive advantage. So we heard, for example, from the speaker this morning about stablecoin and he said, well, banking is so five days a week only within business hours. Well, real-time payments are already pushing the boundaries of that, right? Transactions can settle outside of business hours seven days a week. And then that finality payment is something that particularly as we talk to our commercial middle market customers, we're seeing a lot of interest in.
(11:59):
So a lot of really exciting conversations that we're having in that space. And then from a treasury management perspective, we're really talking to customers about how we go more deeply within their payments processes. How can we actually embed more of the bank inside of their companies to take over portions of the process? So integrated receivables, integrated payables, helping that full sort of value chain of payments, not just running on the rails of the bank for the simple transaction, but what happens before the transaction and after transaction is actually where the magic happens. And I think where a lot of the value is. So that's sort of a very business focused lens and that we really are sort of known as a small business and commercial market bank. And so that's the primary areas that we're watching. And then of course, you can't have any conversation these days without mentioning stable coin. And so not in payments. No, not in payments, no. And so at this point, that's something that we're watching and waiting to see how that evolves.
Chana Schoenberger (13:01):
So what do you anticipate stablecoins will do for your business?
Kristiane Koontz (13:05):
I think it's really, there's a lot of promise there, and it's going to be really interesting. Clearly we've got a regulatory regime that is very pro stablecoin. Something is going to happen here imminently, and there's no stopping that as a bank. Some of what we look at is how are consumers going to respond to this? Are we going to get widespread adoption of this? Is it going to be the kind of engaged folks that are already in the crypto space or is this something that's going to go and become kind of mainstream and much broader than just the crypto folks? Today you talk about stablecoin and that implies stability. But some of the questions that we have and that we're watching is there's obviously a lot of opportunity for this to create instability in the banking system. And so how will that play out? Fundamentally, banks are in the business of lending money and in order to lend money, we take deposits, and we turn them into loans. So imagine a world where stablecoins become mainstream and consumers are perhaps holding their assets not in U.S. dollars in bank deposits, but maybe they're holding those in a stablecoin with a tech company that's now issued that, or a top 10 bank.
Chana Schoenberger (14:34):
Which by the way, if they hold it with a tech company that is not FDIC insured.
Kristiane Koontz (14:38):
Correct? I mean, the entire regulation that we've seen so far that's proposed and not passed actually explicitly clarifies that there's not FDIC insurance on these assets. But imagine is a consumer going to understand that, probably not. Think about USD and am I going to understand that? That's not really FDIC insured. It sounds like a U.S, dollar. It looks like a U.S. dollar, smells like a U.S. dollar. If I can pay with my phone at a point of sale in purchase that's denominated in dollars, do I really know anything different?
Chana Schoenberger (15:14):
Right? Right. Yeah. And there are all kinds of rules about you can't advertise that something is FDIC insured if it is not guaranteed, if it's not held in an FDIC member institution. They have regulatory supervisory actions against that all the time. So I wonder what that will mean. Maybe they'll come up with rules about what you can call a stablecoin. You can call it pizazz coin, but you can't call it dollar coin, for instance.
Kristiane Koontz (15:41):
Yeah, I worry about the proximity and consumer confusion around that. And then I think we go through cycles. And so when you're in a period of relative stability, you forget about the importance of FDIC insurance. Certainly pre 2023, we had been in a very stable banking environment for quite some time. And so people weren't thinking about FDIC insurance limits. They hadn't really given that a lot of thought since maybe 2010.
Chana Schoenberger (16:08):
Well, there was also the whole issue of the Synapse bankruptcy last year,
(16:12):
Which has nothing to do with crypto at all, or stable coins or payments, but it really did bring to the fore the precariousness of a lot of bank-fintech partnerships. I think there were a lot of banks that may not have realized, or certainly there were a lot of customers that did not realize exactly what was going on and the fact that it was all kind of held together by string and chewing gum. And there definitely was not a consumer understanding in the mass market that if you have money in one of these quote accounts, it is not actually a bank account in your name.
Kristiane Koontz (16:45):
Absolutely. I think the other thing that example really shows is it just takes a while for these products to mature.
(16:52):
And so undoubtedly there's a lot of promise with stablecoin and with tokenized deposits, but it's going to take us some time to learn what some of the risks and the stop gaps are to harden risk processes and governance processes. And so I do have some concern that over the next few years as those processes get hardened, if we see really rapid widespread adoption of this, we may end up learning some very painful and costly lessons as a result. So I think it's just a matter of really good risk and governance frameworks, really thinking through this. And then I think we should be clear on who this is for.
Chana Schoenberger (17:34):
Who is it for?
Kristiane Koontz (17:35):
Right? I mean, if you look at this, we banks today can tokenize U.S. dollar deposits in their traditional form. You don't need a stablecoin to do that. In fact, Zions participated in a proof of concept around a regulated settlement network with CFA and a number of large banks that completed earlier this year and published a white paper.
Chana Schoenberger (17:55):
We wrote about that.
Kristiane Koontz (17:56):
And that white paper basically showed that within the existing regulatory framework and the technology that we have available today, you can tokenize deposits and securities and use those to create real time settlement using blockchain technology without actually needing crypto or a stable coin per se. And so what I haven't heard a really clear response on yet, and I'm sort of trying to understand myself is what do people see is truly the benefit of a stablecoin versus simply tokenized deposits? And if you ask yourself that question and you say, well, who is it for? I mean, the main difference is the participants. And so stablecoins, take this outside of the banking network and open this up much more broadly. And so you got to ask yourself the question, is this coming from consumers or is this coming from a handful of people from criminal enterprises and from those that really stand to benefit from those kinds of changes?
Chana Schoenberger (18:56):
Well, there's no question that a lot in the whole defi world, there's definitely a tension between very sort of logical business driven applications that allow you to do things more efficiently and that is good for everyone, banks and consumers. And then there are certainly on the edge there seem to be quite a few things that are mainly about fraud.
Kristiane Koontz (19:21):
Yeah, I have those concerns. And then I think you've got to be really careful around sort of the regulatory guardrails as this kind of legislation goes in. So we've talked about FDIC insurance and the current regulation not allowing that. The current regulation as it's proposed also says that you shouldn't be able to earn yield on these kinds of assets. And that's sort of what they're pitching as the hedge, the sort of safety measure. We've seen this time and time again, though there's so many ways around those kinds of regulatory guardrails. I can think of five products just sitting here of how I might create a yield earning vehicle around a stable coin. I won't talk about those. I'm not going to give those ideas out to anyone, but so certainly the regulation is not going to prevent that,
Chana Schoenberger (20:12):
Right? Well, we all grew up going to those carnival arcades where you get the tickets coming out of this ski ball machine, and that's essentially what you would get.
Kristiane Koontz (20:21):
Yes,
Chana Schoenberger (20:22):
I'd like to buy Tootsie rolls with mine. I don't know about you.
Kristiane Koontz (20:25):
I want that really big stuffed teddy bear, the one that you can never get, and you just keep feeding it all your money to finally get that perfect number of tickets. And you realize that you don't really see a lot of people walking around with that big teddy bear.
Chana Schoenberger (20:39):
No, you really don't. And so many retail markets, it's not clear that this is really set up to benefit the retail. I mean, I want to say investor, because now we're almost talking about investments, but we started talking about savers, which is again, that's a banking term. Yeah.
Kristiane Koontz (20:55):
Now, what I did think was interesting is the speaker that we heard earlier this morning from
Chana Schoenberger (21:00):
Anchorage
Kristiane Koontz (21:01):
From Anchorage Digital, terrific perspective, really insightful around how he's thinking about it. But one of the things that he talked about was inflation and the age of inflation and consumers wanting a vehicle essentially that protects them from inflation. And so he saw benefit in crypto and stable coin as sort of an inflation protected asset. Now, clearly that hasn't necessarily played out always historically, depending on the timing. Blockchain is up and down, and we obviously saw the crypto winter a few years ago. What I think is interesting though is consumers are very interest rate aware and sensitive. They woke up over the last few years and they are and have been conditioned to search for yield.
Chana Schoenberger (21:45):
And
Kristiane Koontz (21:45):
If you think about U.S. financial history, and the last time that happened, it was sort of the late seventies, early eighties, the era of hyperinflation. And you think about all of the innovation and disruption that happened then the surge of money market accounts and the move of assets away from banks into many money market accounts, the ability to write checks. Now in that case, banks were handicapped by regulation like Reg Q that capped the amount of interest they could pay. And so they simply could not compete with the money market managers. I think what's really important here is that we don't create a scenario where we are disadvantaging banks from a regulatory perspective as we go through what I think is going to be a pretty unprecedented era of innovation over the next few years.
Chana Schoenberger (22:36):
Well, you can do that. You can make it so that it's better for consumers to have accounts with fintechs only, but then you won't have a banking system anymore that, and then you're not, the public utility aspects of that are going to go away because fintechs are not regulatory obliged to do things like community reinvestment or
Kristiane Koontz (22:58):
That's right. That's right. I mean, I just spent two days in DC last week with the American Bankers Association and a group of colleagues on our core platforms committee, and we were starting to really talk about what is the bank of the future? And so you talk about, well, what does the customer need of the future? And a lot of really smart CEOs in that room, and I think we all came out of there with a grounding that community banks, for example, have a responsibility to serve their communities and are regulated and chartered in a way that enforces that. And so you think about those fintechs, like you said, or tech companies broadly, they don't have those requirements, and that's not in their governing documents that, and so that is now the purpose that they've been created for, the purpose that they've been created for is to maximize shareholder returns, absent other factors as well. And so you got to ask yourself, is that the society that we want? Is that the economic system that we want?
Chana Schoenberger (23:59):
But it's difficult because, and I know you, Zion's famously did a decade long core conversion, so you know all about bringing a bank from traditional to digital, but customers now just assume that everything is Uber, everything is Starbucks, and they don't want, or most of them don't want a bank that is stodgy where you have to walk into a branch. What they want is to be able to go on their phone and see everything gamified. And I'm the same way. I want my Starbucks stars, and that's why Starbucks is one of the biggest payments networks in the country because even knowing better, I will load an extra $10 onto my account so that I can pay with my app. I understand the economics here, and I still am doing it anyway. So that's what customers want. And whenever we do customer experience surveys, that's what we hear.
Kristiane Koontz (24:52):
Yeah. What we find is customers want to do digital. When they want to do digital. They want to frictionless experience and to be able to self-service, and then they do want to talk to a banker when it matters, a high value transaction. When we see fraud, they want to reach someone. And by the way, that's one of the common complaints about some of these fintechs is something goes wrong and there's no one I can call. There's no one I can talk to. But I think back to the central premise around what do customers want and need? All of that's actually possible with the technology that we have today.
Chana Schoenberger (25:25):
Banks
Kristiane Koontz (25:25):
Just need to invest in that. And then we do need to see broader adoption of things like instant payments and tokenized deposits that would further reduce friction and give us a realtime settlement network.
Chana Schoenberger (25:39):
Great. Well, thank you so much for coming in. Really appreciate it.
Kristiane Koontz (25:42):
Thank you so much. This has been really fun.
Chana Schoenberger (25:44):
And enjoy the conference.
Penny Crosman (25:45):
Thank you. Hi, Penny here again. So I see three main takeaways from these conversations. First, the SEC has said staking activities on proof of stake networks are not securities, and therefore do not require SEC registration. This opens a door for banks that would like to provide digital asset custody for proof of stake distributed ledgers.
Second, the OCC has said that banks can custody crypto assets more broadly — again, presenting an opportunity for banks that want to keep as much of their customers assets within their own walls as possible.
Third, banks are interested in issuing stable coins, but wonder whether there will be consumer demand for them. They also wonder what the risks will be.
Thank you for listening to the American Banker Podcast. I produced this episode with audio production by WenWyst Jeanmarie and Adnan Khan. Special thanks this week to Chana Schoenberger, Kristiane Koons and Margaret Butler. Read us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crossman and thanks for listening.