By Roy Urrico
Fort Worth Texas-based BankSocial, in collaboration with several industry partners and advisors, announced the proposed DEFY Federal Credit Union – described as “the first digital native, self-custody credit union powered by distributed ledger technology (DLT) and the ethos of credit unions.”
BankSocial consists of a team of credit union and DLT experts who are merging credit unions with decentralized finance, or DeFi, to create a financial ecosystem that it says unites and empowers all people and businesses with fair and equitable access to financial tools. DeFi uses evolving technology to eliminate third parties and centralized institutions from financial transactions.
DeFi components such as cryptocurrencies, blockchain technology and software allow people to transact financially with each other. According to BankSocial, dissimilar to centralized ledgers, DLTs offer flexible systems of recording information. A network of computers in different locations can share and duplicate DLT databases.
“We're building an open banking platform that utilizes Web3 principles as the mechanisms or the technology infrastructure for actually being able to solve the problem that inherently credit unions feel can't be solved in the current technology paradigm,” said John Wingate, CEO/founder of BankSocial. “Our open banking platform is not just an idea anymore, it's not just a dream, it's not just an aspiration, it's now a reality.”
In the first of a two-part article, Wingate discussed with Finopotamus the significance of BankSocial, Web3 and the proposed DEFY Federal Credit Union.
BankSocial’s Role
Wingate underlined how BankSocial’s ecosystem and the credit union movement have a philosophical synergy. “I started Bank Social in 2021 as an experiment in regulatable compliant decentralized finance. As we came through with the first (minimum viable product), I started looking around for a place with the kind ethos of people having control, people helping people, people over profits. The whole idea of a credit union is that the shareholders are the members. It was a perfect fit.”
BankSocial components include:
· The BankSocial app, which is at the heart of the proposed DEFY Federal Credit Union’s self-sovereign, open banking for all model. BankSocial’s open banking products give members self-custody control of their money and digital assets.
· A feature called “Verified,” which provides a know-your-customer (KYC) verification tool. Behind the scenes, a real time payment solution allows payments using both standard imbursement rails and the Rivia stablecoin $rUSD on the Hedera ledger.
· Secura Decentralized Recovery (DeRec), which offers self-custody key management and protection. With Secura, each member’s key receives mathematically protection at trusted partner credit unions. No one but the customer ever has control of their keys. BankSocial collaborated with and built upon the DeRec work of Dr. Leemon Baird of Swirlds Labs to create this solution. Dr. Baird explained how decentralized recovery works: “When you have enough ‘helpers,’ your key — your secret — is shared among all of them in pieces. None of them can individually see your secret.” BankSocial-affiliated credit unions are candidates to participate in decentralized key recovery.
Moving to Web3
The Web evolution began with Web 1.0, or Web1 in the 1990s and contained foundational pieces including HTML (hypertext markup language), URI or URL (uniform resource identifier or locator), HTTP (hypertext transfer protocol, and the introduction of web browsers). Web 2.0 moved to the next and current generation model using the internet fortified by the development of mobile devices to embrace interactivity, social connectivity, and user-generated content.
Now here comes Web3, a blanket term for a new stage of the internet driven by the cryptocurrency-related technology blockchain. Web3’s defining features include decentralization; artificial intelligence (AI) and machine learning; and connectivity and ubiquity.
Because it is based upon open-source software, Web3 will also be trustless (i.e., the network allows participants to interact directly without using a trusted intermediary) and permissionless (meaning anybody can participate without authorization from a governing body).
Device Controlled Certificate Authority
Wingate pointed out with Web 1.0 a certificate authority permeated through the internet experience. “In Web 1.0, the certificate authority was the telephone company, and the certificate was the phone number. And then you dialed into it and trusted that company to deliver the right data and the right content.”
Then Web 2.0 came along and people and business stayed connected at all times, submitted Wingate. “And the challenge of how do I trust people was a thing that needed to be solved. And the certificate authority of Web 2.0 were these centralized companies like Google, GoDaddy and KOMODO. They would issue you a certificate, (and) a public and a private key. Then that public and private key would encrypt messages.”
Wingate added, “That's how e-commerce and the whole web security mechanism functions (and) what allowed for apps, websites and e-commerce and all the things we know about the internet. Web 2.0 came out of that version of the technology set.”
Wingate explained in Web2, the centralized authority keeps all this data. “And the only way for that data to be useful is for APIs (application programming interfaces) to open up that information to be shared. The risk with that is now you have created 100,000 people that need access to that data, and one constant and ever-changing security model of how you keep that data safe.” He warned the more connected or disseminated data gets the worse this problem becomes.
“Web3 solves that by doing things like creating self-sovereign identity records or digital identity records tied to the user, tied to the application, tied to the wallet,” said Wingate. He noted the current development to Web3 features distributed certificate authorities.
Wingate pointed out, every person, wallet, device, program, application, core, credit union, institution, business can now create their own certificate. “Authorities can become their own certificate authorities…without giving up information. In the Web 3 version, you are the (certificate) authority, when you are uncomfortable with the current situation, you can revoke my certificate with the push of a single button.”
Wingate said, “We are building a platform that takes all the traditional things that credit unions and financial institutions do and brings them forward into this self-sovereign, self-custody where these hackers have to go attack everybody's individual device or every single program that has its own (certificate).”
Proposing a DEFY FCU
“Another thing that credit unions have going for them is over half of the bankable population of the United States has a credit union account,” Wingate said. “And they do that because they love the rates. They love to get their car loans; they love to get their home loans.”
Wingate, however, perceives most credit unions lacking some of leading-edge technological capabilities members expect and thereby end up seeking with other banking entities. “We have to bring credit unions way forward. Let us bring something that completely reimagines the way a financial institution can work in a way that is still collaborative. That still utilizes the founding principles of what a credit union is.”
Wingate pointed out most credit unions are small financial niche institutions, but that each one serves an important purpose. “They work for the member, they work for their group, and they work for their field of membership. And we said, ‘let's bring an entirely new model, an entirely new ideology to how this new ecosystem could manifest itself in a regulatable way.’”
So, in 2021, Wingate said, “Okay I am going to start a credit union. I am going to put up the money. I am going to talk to the NCUA.” Wingate described how he then started the charter process and went through the NCUA’s field of membership approval, which took him through first phase of approval.
“As I started working on phase two, I was hearing from the NCUA, that it probably was a good idea if I found somebody from the credit union space that could help me with the kind of things I didn't understand.”
Wingate found that person in Becky Reed, a credit union industry veteran and thought leader with more than two decades of management experience in credit unions and credit union service organizations (CUSOs). She took on the role of chief operating officer at BankSocial. “Not only was she somebody who had extensive experience in the credit union space, but she was also a forward thinker from the technology perspective,” said Wingate.
“She embraced the idea that credit unions had the opportunity to change and needed to change in order to take advantage of this kind of coming wave of financial revolution,” Wingate explained. Reed helped him understand CUSOs and how they could create more collaborative opportunities for more credit unions.
Meanwhile Wingate admits, “We continue to refine our message. It is one thing to walk into a room and say ‘Crypto is going to change the face of credit unions,’ and everybody looks at you ‘Like, yeah, didn't some guy just get booked for fraud?’ Then, you know, it is a much more difficult conversation.”
In the last of a two-part article (posting Monday) Wingate discusses how BankSocial intends to promote crypto technology to the credit union community and what it will take to complete the credit union creation process.