CU Ledger Could Save Costs, Enhance Banking
CU Ledger, a proof-of-concept project based on distributed ledger technology and led by CUNA and the Mountain West Credit Union Association, was designed to prepare credit unions for the future.
“This could be a real game changer,” Rich Meade, chief of staff/COO for CUNA, said. “This technology could be the next email, the next internet, the next big thing, so we’re really excited about doing that.”
The CU Ledger project aims to create a permissioned, distributed, shared ledger platform for credit unions. A distributed ledger is a digital record of ownership that does not include a central administrator or central location for stored data. Asset owners use cryptographic signatures.
Meade said the MWCUA spearheaded the initiative after attending a blockchain technology presentation led by John Best, CEO of the Colorado Springs, Colo.-based Best Innovation Group, and a CUNA consulting partner.
“We wanted to be a leader for this solution,” Meade said. “So we’ve begun engaging with credit unions and CUSOs.”
Meade explained the project already has support from CUSOs, including CO-OP Financial Services, PSCU, CFCU and CU Direct. A number of credit unions back it as well, including the $4 billion, Phoenix-based Desert Schools Federal Credit Union, the $1.7 billion, Philadelphia-based American Heritage Federal Credit Union, and the $2.1 billion, Virginia, Beach, Va.-based Chartway Federal Credit Union. Many others are committed to helping fund and engage in the research project, he said.
Other state leagues are also collaborating on the initiative, including the Hawaii Credit Union League, Heartland Credit Union Association, Illinois Credit Union League and Utah Credit Union Association.
“It is important to emphasize the research to action component. We’re involving many other organizations other than CUNA,” Meade said.
He added the project is open to credit unions of all asset sizes.
At its current stage, the initiative's focus is on assembling committees with participating executives to help guide the project. CUNA and the MWCUA plan to provide the staff and day-to-day management of CU Ledger, for which they have enlisted Best's help. However, they will take direction from the involved credit unions on how to build the system.
“We see tremendous opportunity in a variety of areas,” Rick Cranston, director of business and product development for MWCUA, said.
Even though the CU Ledger concept originated at the MWCUA, Cranston pointed out it was never the association's intention to own and control the process.
“We want this initiative to be a credit union industry-wide program,” he said.
Project leaders are also working on adding more collaborators as well as defining some of the project's key concepts, such as bringing credit unions together in a shared network at enough scale to make the effort valuable, and earning credit unions’ trust by proving a DLT platform can enhance data security.
“The research to action piece is very important. We are hopeful this is going to remove barriers for entry for all credit unions that want to participate,” Cranston said. “The other thing we offer is the ability to normalize this platform before we start to use it. We’re going to have a chance to prove out what this thing can do for our industry.”
Cranston said he hopes the project will identify applications and solutions that can run on DLT. A shared solution around member identity currently has the most potential; however, there are many other possible applications, such as account conversions that use switch kits and payments applications, he said.
“We’ll let the credit unions and the industry leaders decide on the right approach, the right solutions and the right applications to put on the CU Ledger platform,” Cranston said.
Project leaders intend for CU Ledger to use Credit Union Financial eXchange to set standards that help identify network security. CUFX, created by more than 75 credit unions and vendors, offers an open, vendor-neutral, broad integration standard led by the CUNA Technology Council.
Meanwhile, DLT development, also known as blockchain, is under way around the world and entails a lot of prototyping, innovation and experimenting.
A blockchain is a public and distributed ledger of all executed bitcoin transactions. According to CU Ledger, bitcoins were originally intended to be decentralized and relatively anonymous. Proponents of blockchain technology believe it could introduce trust and transparency to any online transaction.
However, not all distributed ledger systems need to have the same mechanisms. There are different functions in the distributed ledger, such as data storage, validation and distribution. Not all blockchains need to be currency-based either.
CU Ledger differs from blockchain, which is often used as a universal term for distributed ledger technology. Blockchain is increasingly associated with only one particular type of DLT: Permissionless, proof-of-work ledger systems such as the bitcoin system. The CU Ledger platform is privately permissioned and does not include a currency element at this time.
CU Ledger offers a private, distributed ledger network where core providers can participate in and manage non-currency essential processes, as well as a low-risk entry point for credit unions.
“We have chosen CU Ledger as the name for a reason,” Meade emphasized. “The distributed ledger approach is very different than businesses focused on the bitcoin-like systems.”
Distributed ledger protocol, or blockchain, was launched as part of the cryptocurrency exchange. Some of the world's largest banks and other financial institutions are also forming private distributed ledger networks. One bank blockchain technology partnership, led by the New York City-based financial innovation company R3, includes Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, J.P. Morgan, State Street, Royal Bank of Scotland and UBS. The goal of the initiative is for financial institutions to safely, securely store and share data in a consistent, effective ledger outside a firm's firewalls.
According to Reuters, the R3 venture's initial focus is on an underlying architecture. The group will collaborate on research, experimentation, design and engineering to help advance state-of-the-art, enterprise-scale shared ledger solutions to meet banking requirements for security, reliability, performance, scalability and audit requirements. The banks seek to establish consistent standards and protocols across the financial industry.
Meade explained there is no current connection between CU Ledger and the R3 project.
“There might be an opportunity for some future collaboration,” he noted.
In another project, the London-based professional services firm PricewaterhouseCoopers recruited 15 leading technology specialists to explore the application and commercialization of blockchain technology as it is currently used for bitcoin.
PwC stated it decided to look into bitcoin and its underlying blockchain technology because of a growing demand from its clients and investors, as well as the belief it could significantly reduce costs and enhance traditional financial systems in various industries.
In a separate but related announcement, IBM said last year it is exploring the use of bitcoin's cryptocurrency shared ledger system in areas ranging from banking to the Internet of Things.
“It's a completely novel architecture for business, a foundation for building a new generation of transactional applications that establish trust and transparency while streamlining business processes,” Arvind Krishna, SVP and director of IBM Research, wrote in a blog post last summer. “It has the potential to vastly reduce the cost and complexity of getting things done.”
Krishna said blockchain-based systems could help radically improve entire industries, beginning with banking and insurance.
Meade and Cranston said they believe a permissioned, distributed shared ledger platform has the potential to make all types of financial transactions more efficient and secure for credit unions as well.
“This technology is coming, and wouldn't it be really cool if credit unions could create their own system that works best for them and is unique to them?” Meade asked.