BankChain Puts Community Banks in the Digital Money Race

Thirty-nine state banker associations this week announced plans to create an industry-owned, industry-designed and industry-governed blockchain network capable of supporting smart payments, tokenized deposits, stablecoins and automated settlement. But the most important verbiage in the BankChain Alliance’s Tuesday (Aug. 25) release wasn’t “blockchain.” It was “owned.”

After all, strip away the blockchain vocabulary and the strategic calculation by these community bankers becomes clearer: America’s smaller and regional banks are confronting an infrastructure problem that gets more difficult as money becomes more programmable.

Large institutions can build. FinTechs can specialize. Networks can aggregate. Smaller banks need another answer. BankChain has proposed one, and it is to pool their scale.

Read more: Three Charts Show Who Wants a Federal Bank Charter and Why

The Competition in Financial Services Is Moving Down a Layer

Community banks have historically competed at the customer layer while sharing expensive infrastructure underneath it. Card networks, correspondent banking, core processors, ATM networks and shared technology providers have allowed institutions with vastly different balance sheets to all collectively participate in common financial infrastructure.

Artificial intelligence, tokenized deposits, stablecoins and other financial services innovations are testing that digital divide at scale, however. Large banks can spend hundreds of millions of dollars modernizing payments infrastructure, experimenting with tokenized deposits and connecting themselves to emerging digital-asset networks. Smaller institutions cannot reproduce every new rail individually.

That makes BankChain less a cryptocurrency experiment than a test of whether cooperative infrastructure, which is one of banking’s oldest competitive tools, can be rebuilt for programmable money. Community banking has always depended partly on separating competitive advantage from infrastructure scale. Thousands of institutions compete for deposits, loans and relationships without individually constructing every network underneath those products.

The same economic logic may now be reaching digital money. If tokenization becomes simply another capability purchased from a technology vendor, the bank remains a customer of the infrastructure. If banks collectively own the network, they potentially become something else: participants in the economics and governance of the rail itself.

The initiative also mirrors the Open Standard program, which was announced this June when more than 140 companies joined a consortium to launch Open USD, or OUSD, a dollar-backed stablecoin. The companies include stakeholders from both traditional payments and crypto-native ecosystems like Visa, Mastercard, Stripe, American Express, Coinbase, BlackRock, Google Cloud, BNY, IBM, DoorDash and Fireblocks.

Read more: Open USD Just Turned the Stablecoin Race Into an Ecosystem Contest

Bank Deposits Are Becoming Technology Products Whether Blockchain Happens or Not

Deposits historically come bundled with considerable friction. Moving money between institutions, across borders or between different payment environments requires systems that operate at different speeds, schedules and costs.

As Biswarup Chatterjee, global head of partnerships and innovation, Citi Services at Citi, told PYMNTS in an interview posted in December, blockchain is not replacing traditional financial infrastructure, but rather being folded into it.

“What really excited us is the fact that we are able to integrate [blockchain] into our operating model … create a 24/7, always-on, on-demand ecosystem for our clients,” Chatterjee said. “But the key word is integration.”

Programmable money, whether a stablecoin or a tokenized deposit, attacks some of that friction. A corporate treasurer deciding where to hold liquidity may eventually care not only about yield, credit quality, service and lending relationships, but about what that money can do once deposited.

See also: Crypto Stopped Fighting Banks and Started Copying Them

“Today, stablecoins are like a drug trying to treat 20 different problems,” Nium Founder and CEO Prajit Nanu told PYMNTS in an interview this summer.

“Where we see a significant amount of opportunity is stablecoin not as a payments value, but as a settlement value,” he added. “Where we think stablecoin has the biggest value as, is a treasury layer across all the entities, where I can move money instantly among my entities.”

The June installment of PYMNTS Intelligence’s Credit Union Tracker Series, “The Wallet Effect: How Credit Unions Can Close the Digital Currency Access Gap,” a collaboration with Velera, revealed that stablecoin awareness falls short for 70% of credit union members.

And, at the end of the day, building shared infrastructure is easier to announce than to govern. A consortium representing thousands of institutions creates purchasing power. It also creates coordination costs. That same issue was flagged here in an earlier PYMNTS analysis of the OpenUSD consortium, where it was noted that, “Governance is the real competitive test. Success will depend less on blockchain infrastructure than on who makes decisions when members commercial interests inevitably diverge.”

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