Blockchain could disrupt every financial service, says PBF’s Anthony Moro

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(Kitco News) – As the adoption of blockchain and the concept of tokenization expand into areas historically controlled by legacy financial institutions, a new breed of companies is arising to fill the gap and help institutional investors navigate the complexities of distributed ledger technology.

One such non-profit is the Provenance Blockchain Foundation (PBF), the Foundation supporting the Provenance blockchain, a sovereign layer-one (L1) protocol that is built specifically and solely for financial services.

To gain more insight into the world of institutional blockchain adoption and tokenization, Kitco Crypto interviewed Anthony Moro, acting CEO and managing director of the PBF.

“We think financial services is one of the largest use cases for blockchain technology going forward,” Moro said. “And we thought the world needed a blockchain that was not focused on some of the crypto activities that have gotten so many headlines but focused more on the tried and true back office needs of regulated financial services in an effort to make them cheaper, faster and safer.”

When asked about the level of interest that Provenance has received from institutional investors so far, Moro said the network is “the world’s largest public blockchain as measured by Financial assets on-chain,” with roughly $9 billion worth of assets locked in the network currently. He added that they have transacted more than $15 billion worth of crypto assets since launching.

Moro noted that while many in the blockchain industry are focused on crypto trading, nonfungible-token (NFT) art, and the metaverse, “that’s not what we do,” he said, as Provenance is focusing their attention on helping firms get up to speed with blockchain technology.

“We are working with some of the world’s largest banks, asset managers, and also some of the more interesting, innovative early-stage companies to transform financial services, becoming the operating system of global financial services,” he said.

“If you think about your brokerage account or how you interact with your bank or an asset manager, the front end is generally pretty well done, it’s pretty modern. But once you’ve made your trade or signed your documents, the technology that runs financial assets is antiquated,” he said. “In a lot of cases, the technology and programs being used were written in the 70s, 80s, 90s, and it just hasn’t been modernized.”

He said that blockchain technology has the ability to transform financial services and advance them to the modern age, and their goal is to make Provenance the operating system for financial services going forward.

Use cases for tokenization

When asked what kinds of tokenized assets they are seeing the most demand for, and what types of assets comprise the $9 billion in value locked on Provenance, Moro said the only asset class “that has been truly disrupted by blockchain to date is residential lending.”

“Right now, despite all the talk, I think only one asset class has been truly disrupted by blockchain to date is residential lending, in the form of mortgages and home equity lines of credit (HELOC),” he said. “When interest rates are low, it’s a cash-out refinance mortgage. When those rates are high, it’s a home equity line of credit.”

When PBF originally launched in 2018, they utilized their in-house blockchain to start to build a mortgage and home equity line of credit business, Moro said. “They have since scaled to about 6 percent of all originations in the HELOC space in the last couple of years, and have grown to become the largest non-bank lender of HELOCs in the U.S.,” he added.

The platform has gained notoriety in the field, and “something like 10 of the top 20 non-bank mortgage originators now use the tech stack,” Moro said. Applicants can complete an application in five minutes and get funded in five days, and that is done through their Web2 interface, he added.

Once they go to write the loan, “they ledger it on the blockchain, and all the documents that are needed to be secured to the loan are held in an encrypted object store and hashed to the blockchain,” which is more efficient than the traditional way of handling the process, Moro said.

“But where the material revolutionary effects come is when you go to warehouse and then sell those loans as every mortgage originator generally does,” generally in the form of asset-backed securities, he said.

“In these packages might be 5,000 loans. And the traditional way was if you were a buyer of those loans, you would have to go back and audit all 5,000 loans,” Moro said. “But by having certain documents cryptographically hashed through the blockchain and having a single source of truth for the loans, it cuts out a lot of that time. It allows you to save well over 100 basis points on the process of doing a securitization, and that 100 plus basis points can theoretically go back to the homeowner in terms of lower rates for the loan.”

He said the mantra of utilizing blockchain for financial services is “cheaper, faster, and safer. If you can solve all three, you can disrupt the financial services industry.”

Moro said that so far, once a firm understands the process, they come to the realization that “they almost have to engage with blockchain, there’s just no other way.” The efficiencies offered by the technology make for a better, safer, and less expensive user experience. The real debate at these firms centers around the cost of their existing infrastructure and how they can make the transition as cost-effectively as possible, he said.

“When I started in this business more than 30 years ago, we were ledgering things on paper, and then we moved to Excel spreadsheets, followed by a transition to data centers, and most recently to the cloud,” he said. “Blockchain is just the next iteration of how to ledger assets.”

“The technology allows you to create a dynamic, digitally native, and completely distributed spreadsheet of where the assets are,” he added. “If you can now have financial services, financial institutions, asset owners, servicers, investors, and borrowers all utilizing a shared ledger, it brings massive efficiencies to the space and it disintermediates a lot of intermediaries whose jobs have been to provide safety to the process for a fee.”

These intermediaries add time to the process of asset settlement and increase the costs “because everybody has to get paid,” he said. “Blockchain can diminish that time and it can remove intermediaries. Over time, I think every financial service will be handled on distributed ledger technology (DLT).”

Moro made sure to stress DLT versus blockchain, which he said is often conflated with tokens and a variety of other activities that are “different from the traditional financial realm.”

Challenges to tokenization

When asked about the challenges faced when tokenizing assets, Moro said getting “risk-averse financial services firms to think differently” has been a struggle.

“It shouldn’t take us two days to settle a stock transaction, and seven parties shouldn’t be in the middle of you selling a hundred shares of something to me,” he said. “But in today’s world, that’s the way it is.”

“My broker is Charles Schwab, your broker is Merrill Lynch. There are clearing agents, there are settlement agents, there are custodians, there’s the DTC. Each one of those firms sits in the middle of our trade. Each charges a little bit of a fee, and by the time you get the shares and I get the money, two days have passed, but your shares have been in limbo for two days, and my cash has been in limbo for two days,” he said. “Not with blockchain.”

“If we could make that transaction on blockchain, we could settle right now,” Moro said. “I would have your money, you’d have the shares, and no one would need to be involved in that. You can’t argue that it isn’t safe because the transaction could only happen if I had proof of funds and you have proof of shares. And then it would atomically happen on the blockchain by a smart contract and settlement would be instant.”

“Cheaper, faster, and safer, with fewer intermediaries,” he said. “That’s the mantra. What is really needed is a much better user interface (UI) and user experience (UX) around it.”

Moro said that is where firms like Charles Schwab and Merrill Lynch can help contribute to the solution, by adapting their businesses and making the process more welcoming for the average user. The biggest barrier to them doing this is the billions of dollars that banks and other security servicers earn in the current system, he said. “A lot of that will go away over time.”

He noted that even with debit card transactions where there’s a 3% fee, “there’s very little risk.”

“If you, the merchant, have something I want, and I, the customer, have the hundred dollars to pay for the item in my bank account, that transaction shouldn’t cost 3% and it shouldn’t take a couple of days for you to get your money,” he said. “If I have digital money in a wallet and you have a QR code that I could scan, that transaction should happen instantly and without a fee.”

The big banks and asset managers are going to have to adapt, he said, as well as private equity and other funds. “Anything in the private sector will need to adapt to blockchain because it’s so incredibly efficient.”

Moro said that private funds have also utilized Provenance to hold their digital assets, and while they are not subject to T+2 settlement, they have other stipulations, such as a seven-year hold period.

“The problem with that is, generally, you can’t trade a private fund and you can’t use it as collateral for loans, which would be a killer use case,” he said. “But if it’s on blockchain, it makes both of those processes simpler. There has not yet been a robust market that has developed for lending or secondary trading in the private space, but they are certainly killer use cases, and they’re coming.”

He noted that other areas, such as know-your-client (KYC) and anti-money laundering (AML) checks, will evolve alongside the integration of blockchain.

“Several firms provide a token that you can attach to your profile that says you are who you say you are and would allow you then to not have to fill out the exact same paperwork every time you make an investment,” he said. “You could carry that token with you in an ecosystem, and the ecosystem would know that you’re an approved investor. You may have to update it every six to 12 months, depending on the criteria, but the token would be applicable across a whole range of investments and platforms, meaning you won’t have to complete the KYC process more than once.”

Future horizons

When asked about what other assets could see an increase in demand for tokenization, Moro said, “Private credit is extremely interesting right now, so anything in that space is of interest to several hedge funds who see good risk-return profiles.”

He also said there were “some builders doing things like life settlements, which is a very interesting space previously untraded,” home equity investments like reverse mortgages, and receivables in a variety of industries, including trucking or the movie business.

“Any place where you can take massive inefficiencies out of an existing market and make it more efficient is something that we think is pretty exciting,” he said. “On the other side of that, we’ve got the big globally significant banks who are all doing some sort of a tokenization project. One is working on having their investors be able to rebalance their portfolios on several different public blockchains. The innovation is scaling every day.”

When asked about the drawbacks to tokenization, Moro said, “Like any new technology, the early days are choppy.”

The industry’s reputation is “surely an issue,” he said. “When you talk about blockchain, people automatically equate it to crypto, and then they automatically equate it to FTX and Genesis. I like to say that people didn’t stop investing in the Nasdaq because of Bernie Madoff, and people didn’t stop buying stamps because of Charles Ponzi. Scammers will be at the beginning of any nascent technology.”

“But it had nothing to do with the technology, it had nothing to do with Nasdaq, it had nothing to do with stamps, it was just a bad actor,” he said. “When crypto is done right, when blockchain is done right, it’s cheaper, faster, and safer. You have to make sure the bells and whistles are in place, the controls are in place. There will be different risks, but not more risks, and that’s what it keeps coming down to.”

Moro said that most people agree that blockchain will be cheaper and faster than traditional financial services, so what it really comes down to is, “Will it be safer?”

“I always say the risks will be different, but at the end of the day, I think it will be safer,” he said. “And safer takes into account time and cost.”

He went on to note high-profile cases in traditional finance that could have potentially been avoided with blockchain technology and smart contracts – including a $900 million mistaken payment by Citi which ultimately resulted in a $500 million loss for the firm.

“In the great financial crisis, a lot of the problem was caused by mortgage delinquencies, and a lot of that was the lack of a line of sight on who was delinquent and when,” he said. “Theoretically, with blockchain, you have a real-time view of who’s current on their payments and who isn’t.”

“This means that for the TradFi world, they wouldn’t have to wait for the servicer to come out with a report every 45 days,” he added. “Theoretically, if that market could have been remade on blockchain today, you’d see a day-by-day ledger of who was delinquent, what type of FICO scores, what locations in the country, and you could act appropriately. You could hedge appropriately with fewer surprises.”

Moro said there will always be different risks in the financial system, from fraud and cyber attacks to simple human input error, so it’s more important to “get our organizational head around what the risks are.”

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Regulatory clarity

On the topic of where firms like Provenance are looking for greater regulatory clarity, Moro said, “We’d like some more clarity on the layer-ones themselves. Are layer-ones securities or are they commodities? I think regulators are struggling with that a bit, and maybe it varies from protocol to protocol.”

He said issues related to centralized exchanges won’t get resolved until the L1 question is resolved. “There’s some regulator work to be done and we’re leaning in and helping wherever we can, but in general, it’s not a hindrance.”

“Apollo is issuing securities, JPMorgan is issuing securities, Goldman Sachs, Bank of New York Mellon – they are all servicing blockchain native securities on Provenance, so it’s already here,” he said.

When asked how the move toward tokenization will affect financial markets from a macro perspective, Moro said, “I don’t think it needs to be as big a deal as people make it out to be.”

“It’s just the next iteration of ledgering,” he said. “People didn’t have a big concern about cloud technology when everyone moved on from large data centers to the cloud. Honestly, I think of this as the cloud to distributed ledger.”

He suggested that blockchain has always had a strong use case but has been hampered by developments in the crypto market. “It’s been the hype of the crypto blowups that have caused blockchain reputational harm.” He also pushed back against the movement to call securities on blockchain “real-world assets.”

“These are not real-world assets,” he said. “These are just assets held in digital form. For example, the HELOC loans that get put on Provenance every day – they don’t exist in the real world. They only exist in a digitally native form.”

Moro said that he likes to bring the conversation back to real-world applicability. “Yes, it’s revolutionary. Yes, it’s interesting. But the cloud was revolutionary and the cloud was interesting over prime data centers as well, so it’s just the next iteration of that technology.”

As for how long it will take for companies to get up to speed, technically speaking, and for the tokenization trend to progress forward, Moro said he thinks it will happen faster than most people are predicting.

“It’s important to understand that it’s largely new assets and not existing assets that are the ones that scale,” he said. “Most assets are held with a cap table. We’re not at the point yet where you can take an existing cap table and easily transfer it onto a blockchain cap table. The type of assets we’re starting with today start at zero and grow from there, native on the blockchain. Those are the types of assets that do the best. A new loan, for instance, not an existing loan pool.”

He also said it “will take a little while to scale, but once assets turn over like that, I think it happens extraordinarily quickly.”

“I think it’s important to lean into the technology, to have a great UI/UX, and for the vast majority of investors or asset owners or asset sellers to not even know that they’re interacting with blockchain,” he said. “An environment similar to web2, where people can just go to the website and sign in, is the type of environment where it will work. No one needs to know whether their ledger is in the cloud, or in a data center, or on a blockchain.”

He said that would be the job of those who run the infrastructure. “They will foster the UI and UX, helping to make it better, stickier, and less expensive for users at the end of the day,” he said. “So I think it has great potential to do societal good, to take out a lot of expenses that investors and purchasers don’t need to pay right now. But, because of that, it’s also going to be very disruptive to traditional financial services that exist to intermediate and earn fees.”

“It’s still early days,” he said. “Maybe the first or second batter of the first inning. And as we go through the game, I think it will get very exciting, very quickly.”