A New Frontier

News Provided by Tennessee Bankers Association

By Ian Dinkins

Blockchain and digital assets are revolutionizing the banking industry. And there is no turning back from where we are today. Digital assets are part of the financial system, and they are here to stay. As with any disruptor, cryptocurrency has its champions and detractors and brings on a steep learning curve to the system. The Tennessee Banker spoke with a few of Tennessee’s leading innovators in the blockchain and cryptocurrency space to get their thoughts on where we are and where we’re going.*

What is cryptocurrency?

Chris Black: To me, this is much more of a conversation about blockchain. Cryptocurrency is another currency that trades electronically and just exists in electronic form. If it’s bitcoin, one of the main characteristics is that there’s a finite amount of bitcoin available. So unlike U.S. dollars, which theoretically has an unlimited amount that can be printed, created, however you want to think about it, bitcoin in that sense does not. But there’s no difference from an economic transactional standpoint; we can electronically trade dollars. We can convert dollars to euros or to Japanese yen or whatever tradable currency there is in the world. And you can do the same thing with cryptocurrency. But it is finite and it’s limited, which is a distinguishing characteristic, which is why a lot of people are attracted to it.

Wade Peery: It is just a digital version of a currency, and the most dominant one in the news is bitcoin. Of course, it’s been around the longest and really the origin of it all. And so, it functions no differently than any currency. It stores value and it transfers value, and people believe it has value, although it doesn’t have any backing of precious metal or governments or anything like that. It’s just a digital representation of money.

Brian Heinrichs: It’s a lot of things to a lot of different people. In some parts of the world, people are using it to buy goods and services, so it is a currency in that sense of the word. In other cases, people are using it and see it as somewhat of a store of value akin to gold. And then in other cases, I think people see it as a speculative trading instrument.

Where is your bank in terms of the
cryptocurrency market?

Chris Black: We believe strongly that the foundation of banking is, and always will be, deposits, loans, capital, liquidity and payments. After that, we’re challenging every paradigm we can. Over 50% of deposit accounts opened last year were not at banks, so we’re realizing that, not only are consumers seeking different delivery methods of banking services, but they’re also highly focused on the experience of the delivery. Amazon and many other technology disrupters have set the bar high for consumer expectations. If banks want to remain competitive and relevant, they are going to have to do the same thing. We’re actually changing our name to Thread Bank to better represent how our bank is threading the needle with banking and tech, banking and long-term planning, and banking in our customers’ day-to-day lives.

Wade Peery: Blockchain technology will revolutionize financial services, and it will be on par with the disruption caused by the internet and the smartphone but in a good way, because it will allow us to kick innovation into gear in a way that we haven’t done it in a long time. We are one of five banks that founded an organization called the USDF Consortium. USDF stands for U.S. Dollar Forward. And what that contemplates is a digital token that we can issue on a one-to-one ratio to an existing dollar. So, we’ve been able to engineer a solution for that, and that’s to create a digital token on a blockchain. We are working closely with the regulators to ensure we have their approval before we move this into a mainstream offering.

Brian Heinrichs: Customers can buy and sell bitcoin directly from their Fourth Capital bank account. Our approach has been that we’re not really taking a view on bitcoin and/or crypto more generally. What we’re doing is acting on our belief that it’s our job to make it as easy as possible for our clients to use their money however they want. Our whole thing is digital tools with a human touch. And so, the idea of being tech-forward, making it easy for our clients to use their money, that was really our intention with this.

Hank Word: Our Open Banking division supports hundreds of fintechs around the country. Currently, we have about 8 million users in our fintech ecosystem. Many of the partners that we work with in our fintech ecosystem are performing crypto-related services in some way, shape or form. So, we support many of those by being the fiat “on” ramp and “off” ramp for a lot of those partners.

What are the challenges facing banks when they enter the cryptocurrency arena?

Chris Black: There are many challenges that could convince banks to stay on the sidelines, but doing so also represents significant risks. Our view is that it’s important to explore, research, learn, find trusted partners and put one foot in front of the other to get into the blockchain environment. Otherwise, the competitive disadvantages are significant for those banks that chose to look the other way and ignore this opportunity. This is a similar moment of the horse and buggy giving way to the combustion engine; the teller window to the ATM. For our part, we are fortunate to have several investors who are involved in blockchain, and they’ve helped start a bank tech fund which will help us in the future, as well as other folks in our network.

Brian Heinrichs: I think a lot of people are wondering, “If banks are starting to hold crypto on their own balance sheets, what does that look like,” and if you start to extend credit with crypto as collateral and those sorts of things. This is a space where some guidance and definition are going to have to come into play at some point.

Hank Word: I think regulation (or lack thereof). The landscape of regulations and how people respond to them are going to be the biggest challenge. It is important to be as nimble with your adoption of regulatory change as you are with the changes in the cryptocurrency market.

What kind of education has been needed for your staff?

Chris Black: The first thing we did was expand and bring in a diverse array of skillsets to the bank. I think, for everyone on staff, this has just been based on transparency, teamwork, all the tried-and-true things. It’s not a necessarily high-tech solution. Communication and leadership certainly aren’t new, but they will never get old. And the thing that we’ve worked hard on is that transparency part of communicating to people and make sure everyone is as informed as they possibly could be.

Wade Peery: It started with blockchain 101, and I tell everybody to look up the bitcoin whitepaper. In the first two paragraphs, you will understand everything that’s to come. It’s the best piece to start with. So, we’ve had to learn about the technology, not just what it does, but down into the details of how it works. At the end of the day, it’s just technology; but it’s revolutionary in what it will do for us in the long run.

Hank Word: We’ve done a lot of education within our Open Banking division because of our customers that offer crypto services. Part of that education is aggregating and refining a lot of the information that’s out there regarding digital assets and strategically sharing with our team. We also encourage employees to experience how exchanges work for themselves and how to buy and sell currencies on their own time.

How do you see cryptocurrency existing against other forms of currency?

Wade Peery: I think it will exist right alongside other currencies. I don’t think they replace currencies such as the dollar, and here’s why: They’re volatile in price.

Brian Heinrichs: In certain parts of the world, they’re already using it. So, the whole concept of monetary autonomy, or decentralized finance, there’s a lot of big conversations happening around where all this could go and what the future of the global economic system looks like.

Hank Word: I don’t think America’s initial use will be something as volatile as bitcoin as it can have huge intraday swings. I think the most likely direction for the U.S. is a central bank digital currency like a stablecoin. The United States Dollar Coin (“USDC”) is the crypto equivalent of a digital dollar and is backed on a 1:1 basis (one USDC equals one U.S. dollar). So, in many ways a stable coin.

What are the biggest advantages of crypto?

Chris Black: I think it’s the transparency, the traceability, the decentralized nature of it. It puts a lot of power in the hands of market participants, consumers, businesses. And it’s a forcing function to create transparency and traceability in a lot of ways.

Wade Peery: The reality is you can transact in crypto more quickly with less cost. In an immutable way, what’s done is done. It’s less cumbersome to do transactions.

Brian Heinrichs: I think we’re on a path that is going to evolve and ultimately play into the evolution of the payment space. We’re looking at things like giving our clients the option to take their monthly interest income from their deposit accounts and have that paid in bitcoin instead of dollars. We’re looking at offering rewards in bitcoin instead of dollars. So, there’s a lot of different things or possibilities that clients may or may not take advantage of. But I think it’s going to become more and more common to see.

Hank Word: There aren’t that many real-time payment options that are widely adopted right now, so I’d say the instant nature of the exchange between two parties is the biggest advantage. I think payments continue to move in that direction, and the ability for crypto to be exchanged instantly is key for that.

What are some potential pitfalls?

Chris Black: I served in the military for over nine years, so individual liberties and freedom, like most Americans, is a really personal, important thing. Just as easily as those tools can be used for good, they can also be used for bad. And I’m not just talking by criminal minds. There’s always a possibility that these kinds of things could be used for political means. That’s a real risk.

Wade Peery: I think the volatility is one, and the risk that most folks don’t realize that comes with custodial wallet providers. Pick one, any of those wallets out there. And those are folks that are just holding private keys in custody. What happens if they fail? Well, that business fails or is breached, and I can’t call my bank and say, “I lost my bank account number. Can you look it up for me?” Those keys are gone forever.

Brian Heinrichs: As with really any new asset class, the volatility is certainly higher. Also, I think there is a fair amount of regulatory uncertainty, not just in the U.S., but the central banks globally. They’ve got to figure out ‘how does this play into the global financial system?’

Hank Word: You have to be fairly sophisticated in order to participate in cryptocurrency as it exists right now. But as they lower that barrier to entry, it’s not taking away the inherent risks in the system right now. It is important to do research to learn about the nuances of cryptocurrencies.

Is crypto here to stay?

Chris Black: Yes.

Wade Peery: Without a doubt.

Brian Heinrichs: Yes.

Hank Word: Yes.