Grasping the possibilities of bitcoin, blockchain and distributed ledger technologies is a key component of CU Ledger, a current proof-of-concept project led by CUNA and the Mountain West Credit Union Association.
The project, initiated at last year's CUNA National Credit Union Roundtable, an annual program run by CUNA and opened to members and nonmembers, aims to create a permissioned, distributed, shared ledger platform for credit unions.
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.
A blockchain is a public and distributed ledger of all executed bitcoin transactions. A distributed ledger is a digital record of ownership that does not include a central administrator or central location for stored data. According to the CU Ledger group, the original intention of bitcoins was for them to be decentralized and relatively anonymous. Proponents of blockchain technology believe it could introduce trust and transparency to any online transaction.
What the CU Ledger group found particularly attractive last year is that a distributed ledger keeps track of the same information on a large number of different servers, Bill Hampel, CUNA chief policy officer/chief economist, explained. “By spreading it out it is harder to tamper with it; because in order to tamper with the data one would have to tamper with all of those servers (called nodes).”
Not all distributed ledger systems require 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.
“We have chosen CU Ledger as the name for a reason,” Rich Meade, CUNA vice chairman, prime policy group, told CU Times last August. “The distributed ledger approach is very different than businesses focused on the bitcoin-like systems.”
The reality is that the technology, and the terminology surrounding it, continue to evolve.
CU Ledger differs from blockchain, often used interchangeably with 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.
The initiative's primary initial focus was on assembling committees with participating executives to help guide the project. CUNA and the MWCUA provide the staff and day-to-day management of CU Ledger, for which they enlisted Best's help. However, they take direction from the involved participating organizations on how to build the system.
“It is important to emphasize the research-to-action component. We’re involving many other organizations other than CUNA,” Meade said.
The CU Ledger concept involves a distributed ledger for the credit union system, where the elements of the credit union system own and operate various nodes, the remote servers.
The design of the research-to-action piece removes barriers to entry for all credit unions that want to participate. Project leaders are now 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 important distinctions are between permissioned and permissionless; sometimes people say blockchain is the permissionless and distributed ledger is permissioned. That's the semantics some people are still working out,” Hampel said.
Hampel noted one of the difficulties with distributed ledgers is trusting all of the owners of these distributed servers. “But if you have a network of servers owned by people that know and trust each other, which frees you up to do even more with it. That really fits the credit union system.”
The project is in the process of setting up DLT and running some proof of concept projects. The goal is to report back to the roundtable in May with either the successful or unsuccessful results along with some examples supporting their conclusions.
A shared solution surrounding member identity currently has the most potential. Hampel explained, “The idea is to get information on members that would uniquely identify them, which could be stored on a distributed ledger in a way that is tamper-proof.” If that works well, credit unions could also transfer this identity capability so that a member could use the technology to log into non-credit union systems.
There are other possible applications, such as account conversions that use switch kits and payments applications. “We’re trying to set up the technology and run a few proofs of concept across it just to see if it works. If we can get this to work we’ll start thinking more about other applications that can run off the technology,” Hampel noted.
Are there any game changers? Hampel admitted, “I don't think anyone really knows now what the killer apps that run on it are going to be, but the idea here was instead of waiting for everyone else to develop blockchain technology, or some form of distributed ledger technology, let's see if we could set one up credit unions and their partners could use as a utility.”
CU Ledgers’ private, distributed ledger network, if successful, would allow core providers to participate and manage non-currency essential processes, as well as offer a low-risk entry point for credit unions.
The project already has support from several 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.
Other state leagues, besides MWCUA, are also collaborating on the initiative, including the Hawaii Credit Union League, Heartland Credit Union Association, Illinois Credit Union League, Indiana Credit Union League and Utah Credit Union Association.
“We have a bunch of credit unions spending about a million dollars on a research project over the course of this year,” Hampel noted. However, it is not too late for others to get involved. “If credit unions are interested in getting in on it we will be happy to take their money too.”
Meanwhile, DLT development, also known as blockchain, is under way around the world and entails a lot of prototyping, innovation and experimenting.
Some of the world's largest banks and other financial institutions formed 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 collaborates 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. There is no current connection between CU Ledger and the R3 project.
Another new group agreed to create a shared platform to make domestic and cross-border commerce easier for European small and medium-size businesses by harnessing the power of DLT. The group signed a Memorandum of Understanding to develop and commercialize a new product called Digital Trade Chain, which would connect the parties involved in a trade transaction, online and via mobile devices.