AURORA, Colo.–With so much confusion, misunderstandings and myths around crypto, the blockchain, DeFi, NFTs and more, credit unions here were given a basic explanation of all of those and more, along with a prediction on where lending technology is headed and why credit unions need to get experimenting and moving—now.
The Blockchain 101 presentation was appropriate, as it was given by Dr. Lamont Black, who teaches at DePaul University in Chicago. Black was formerly an economist with the Federal Reserve until 2013.
In remarks to Origence’s Lending Tech Live event in Colorado, Black called the blockchain the “platform of the future.” Black also offers additional significant resources and information at LamontBlack.com.
Black, who acknowledged the skepticism in the market over blockchain and crypto as well as his own initial reservations, said he now believes the case for both is “compelling,” and he made that case to credit unions here in urging them to explore moving their own lending processes to the blockchain.
He walked his audience through all of the aspects of crypto, blockchain, DeFi and more in terms aimed at helping credit union leaders to better understand the rapidly emerging technologies, almost as if teaching a class—which he was.
Here’s a look at Black’s overview, explanations and predictions:
Crypto
“Most people buy crypto as a digital asset and as something to own to improve their financial well-being,” said Black. “This is where many people are focused in 2022. They are not buying it to spend it. It’s an investment. Many credit unions are starting to look at this as an emerging asset class, and asking how does that relate to financial well-being. Many members are now investing in crypto as a way to grow their wealth. Sure, some of them are gambling; it is a speculative investment. But many credit unions are partnering with fintechs so their members can buy crypto through the credit union.”
While the recent downturn in cryptocurrency values has led many critics to say “I told you so,” Black said the cycles crypto has gone through are now different than other technologies, and the decrease in values has mirrored those seen in the broader stock markets.
Black urged credit unions to think of crypto as being at the frontier of fintech.
“In a risk-off environment, people sell crypto,” Black said. “My position is once we get through the recession fears or an actual recession, crypto will start to outperform the Nasdaq.”
Crypto as a Payments System
Money, noted Black, doesn’t have intrinsic value. It’s only after a community starts to adopt certain things as a form of currency that it can function as money. That is what’s taking place with crypto.
“I would argue that the future is digital cash. I use that phrase specifically. We are moving toward a cashless society. If you think about PayPal, Venmo, Zelle, none of those things are digital cash. They are all electronic funds transfer,” said Black. “The beauty of cash is that it is pure peer to peer. There are no third parties. We do not have a digital version of (a $20 bill). That’s what I think we need for a digital economy and that, I think, is the paradigm shift for bitcoin. It’s about transferring value on the Internet.”
Bitcoin maintains the concept of a wallet, he said, where value can be held and transferred.
“The other piece with bitcoin is money becomes data. This is important to understand about money in the future,” Black said. “People don’t like crypto because it’s not real. But we are shifting to a digital future. It’s just data, and data used as a form of money.”
Black said he does not believe the future of money is bitcoin, but instead cryptocurrency, as the concept is it is an application built on the blockchain.
“It verifies and tracks these transfers of value. So, we are in a world in which credit unions manage data on behalf of their members. We’re already kind of in this world already. What blockchain does is move from individual institutions to a network,” he explained.
Black further explained that the blockchain is a system for shared recordkeeping, such as accounting and data. Some have called it a “single source of truth” that does not require reconciliation, he added.
How Do You Do That?
“If various organizations need to coordinate around information, how do you do that?” Black asked. “Our traditional financial system is built on this model of constant reconciliation. In contrast, blockchain is a distributed ledger. It’s a fancy word for shared. Everyone has a copy; there’s not a single copy sitting somewhere. The problem is how do you agree on what goes into that ledger. That’s what the consensus mechanism is.”
Black called crypto an efficient method of recording payments from Party A to Party B. Less efficient, he said, is the traditional payments system that requires two ledgers and multiple steps to reconcile.
Auto Lending as Data Management
Black urged credit unions to start thinking about auto lending as digital management.
“This is where I think auto lending is heading,” he said. “Auto lending is a big part of what credit unions do. It’s still traditional lending with paperwork and handshakes. A credit union funds a local member’s auto loan with local deposits. Think about how much technology has changed the process. The user interface has gone from in-person to mobile, the data has gone from character to FICO, the underwriting has gone from judgement to algorithm, and the funding has gone from retail to wholesale.”
Indirect auto lending is an example of how auto lending has changed, according to Black, who noted indirect auto loans are much more about the data. “It’s less personal and more quantitative and it is part of the investment portfolio.
“The future of auto lending is data and analytics,” he continued. The course I teach now more than any other course is business analytics. We have replaced business calculus with business analytics. This is where data is headed.”
Document Management Systems (DMS)
Black said his impression of the current environment in credit unions is document management systems, in which the CU must create, store, manage, track and distribute electronic documents. He challenged the whole idea of using the word “document,” saying the concept is much larger now.
“Indirect lending is built on DMS integration for data transfers, it’s trying to get all the loan details in one place,” Black said. “At a lending tech conference, the question we should be asking is, ‘Is there a better way to record and transfer this data?’ If money is data and crypto is just moving data around on a blockchain, can we move other forms of data around on a blockchain? The answer is yes. This is where I want you to start thinking about auto lending as a blockchain application.”
The Blockchain Platform
Blockchain is a platform for building applications, while crypto is just one blockchain application, Black explained. The ocean shipping giant Maersk uses blockchain for supply chain management, while Walmart uses it for food distribution, he said.
“There are many use cases out there and I want you to think about auto lending on the blockchain,” Black said. “I think it makes sense for a blockchain application because it’s multiple parties sharing information. If you’re talking about internal data management, blockchain is inefficient. But for external data management it is very efficient… Another way to think about it is permission--only authorized parties can participate in the business network.”
DeFi, NFTs and the Future of Lending
Decentralized finance (DeFi) is another topic that has gotten considerable discussion with credit unions, even if it is often misunderstood. Black offered his explanation.
“Decentralized finance is finance built on blockchain. DeFi uses smart contracts as code for automating a financial service,” Black said. “This is where it can get technical and people get lost. Think of smart contracts as little pieces of computer code like a program. Blockchain is like a distributed computing system. Instead of being a desktop or a mainframe, a smart contract is running on this blockchain. Smart contracts are how to do automated services on a blockchain.”
DeFI and NFTs, said Black are the areas credit unions need to be thinking about in terms of their business models going forward.
“Almost all of this is secured lending. DeFi is basically borrowing one crypto against another crypto. It’s not particularly interesting right now, but the technology is there to start doing other things that are more interesting.”
The New Securitization
So, how do credit unions bring auto lending “on chain?”
“The key is tokenization,” Black told the Origence meeting. “Tokenization is the new securitization. It’s turning a non-token asset, such as a car, into a tokenized asset. It’s taking something that isn’t a security and making it a liquid security. This is the world of non-fungible tokens (NFT)s. A lot of people think NFTs are whack-a-doodle. A non-fungible token is a record of ownership of a unique asset. Bitcoin is fungible, meaning one is the same as another.
“At the other end you have non-fungible. They are designed to be unique,” Black continued. “This is why they have taken off in the creator economy. NFTs can transform the way we think about ownership in the digital age.”
Black said DeFi for secured lending already exists, as do NFTs for physical assets that already exist.
“It is just a matter of time before we connect them together and connect them to auto loans,” he predicted. “Blockchain is an ideal platform for storing and sharing this information.”
How to Get There
Black noted current auto lending solutions use document management systems and that next step will be to attempt to use the blockchain as a data management system.
Black encouraged credit unions to experiment with blockchain to explore a vision for on-chain auto lending using DeFi, even if it is a “little more radical.”
He especially urged credit unions to leverage their cooperative nature.
“Blockchain could be the future platform for auto lending,” said Black. “Credit unions are well positioned to explore this. Let’s start building it together.”