Why Wells Fargo plans to pilot its own cryptocurrency

Wells Fargo & Company this week announced plans to pilot an internal settlement service using a homegrown cryptocurrency backed by fiat money, starting with the U.S. dollar.

Wells Fargo Digital Cash, which will run on the bank’s first distributed ledger technology (DLT) platform based on the R3 Corda Enterprise blockchain specification, will enable internal book transfers of cross-border payments within the bank’s global network. It will also allow bank’s international locations to exchange that digitized money among themselves.

The world’s fourth-largest bank said it has already successfully tested the technology between U.S. and Canadian accounts using U.S. dollars. Additional currencies will be considered after the pilot, according to a spokesperson.  

“The internal DLT network will be a reusable enterprise utility for Wells Fargo to build and deploy multiple DLT-based applications,” the bank said in a statement.

“As a result of the increasing digitization of banking services globally, we see a growing demand to further reduce friction regarding traditional borders, and today’s technology puts us in a strong position to do that,” Lisa Frazier, head of the Innovation Group at Wells Fargo, said in the statement. “We believe DLT holds promise for a variety of use cases, and we’re energized to take this significant step in applying the technology to banking in a material and scalable way.”

Wells Fargo Digital Cash uses a smart contract application, a form of business auotomation software, to support the digital currency exchange process.

Wells Fargo’s cryptocurrency announcement follows a similar one earlier this year by JP Morgan Chase, the largest U.S. bank and sixth-largest worldwide. JP Morgan’s JPM Coin, as the bank calls its new cryptocoin, will also initially be backed by U.S. dollars in accounts designated at JPMorgan Chase N.A.

In the crypto industry, an instrument like JPM Coin and Wells Fargo Digital Cash is known as a “stablecoin” because it has an intrinsic value tied to fiat currency, unlike Bitcoin or Ethereum’s ETH coins, whose value is based on the supply and demand of virtual money.

“When one client sends money to another over the blockchain, JPM Coins are transferred and instantaneously redeemed for the equivalent amount of U.S. dollars, reducing the typical settlement time,” JPMorgan said in an online FAQ about its coin.

By 2022, at least 25% of cross-border payments involving U.S. banks will use stablecoins moved across blockchains, according to Avivah Litan, a Gartner vice president of research. “This train has left the station and will start moving very fast once it gains acceleration,” she said.

As major money movers, both Wells Fargo and JP Morgan are currently forced to work under the limitations of “antiquated money transfer systems” commonly used by U.S. banks, e.g., ACH and wires, Litan said via email.

Blockchain supports a substantially more efficient payment network, especially when implementations are customized for high velocity and highly secure private banking data.

Both Quorum (used by JP Morgan) and R3 Corda Enterprise provide scalability, privacy and security, Litan said.

“R3 Corda is often criticized for not being a true blockchain, but they were designed by financial services firms for speed and privacy and as such, they adjusted some of the common blockchain architectural components,” Litan said.

JP Morgan has already grown its international payment network to 300 banks, and just added “the mega Euro money transfer bank Deutsche Bank,” Litan said. “I expect Wells will help grow a competing network once it completes its pilot.”

Stablecoin isn’t just for banks

The financial services industry is not the alone in its uptake of stablecoin. Facebook plans to launch Libra coin, a stablecoin, and Calibra, a crypto wallet in which consumers can store it. Facebook is facing pushback from European nations, however; they’ve vowed to block Libra’s use within their borders because it could threaten the Euro’s value and unlawfully privatize money.

Meanwhile, Facebook has wrangled partner support from dozens of major corporations, such as eBay, PayPal, Uber and Lyft, as well as financial services providers such as Mastercard and Visa.

Earlier this year, Visa unveiled a debit card that will allow users to buy things using fiat money converted from cryptocurrency stored in online wallets.

Some stablecoin projects, such as IBM’s Blockchain World Wire, have targeted developing nations where citizens have few or no options to open a bank account and are forced to rely on expensive remittance services to send money home if they’re working outside their native country.

Wells Fargo said, for its part, DLT provides a permanent, highly secure and trusted record of transactions and will help the bank achieve “near real-time money movement” without affecting underlying account, transaction postings or reconcilement infrastructure with international transactions (where platforms and process differ).

Initially, the DLT technology and stablecoin will be aimed at corporate customer book transfers globally. “Benefits will expand once we broaden the network to all of our global Wells Fargo branches,” the spokeperson said via email.

Using a DLT network will also cut out any settlement middleman, reducing transfer time and costs, the bank said.

“Corporate clients will not have to change their payment processes, cash management responsibilities or relationship management practices to benefit,” the bank said.

The pilot, planned for 2020, is expected to be used at first to complete U.S. dollar transfers, with a goal to expand to multicurrency transfers and the entire global Wells Fargo branch network. The internal DLT network is proprietary and will not be connected to other digital cash solutions now emerging in the financial services markets.

“Wells Fargo Digital Cash has the potential to enable Wells Fargo to remove barriers to real-time financial interactions across multiple accounts in multiple marketplaces around the world,” the bank said.

Starting in 2012, businesses (mainly in financial services) started exploring blockchain through proofs of concept and pilots, according to Gartner Research. That exploratory phase is expected to last through the early 2020s, after which production networks are expected to rollout.

Gartner estimates that blockchain will generate $3.1 trillion in new business value by 2030. According to the research firm’s July “Forecast: Blockchain Business Value” report, enterprises will be ready to make a run at capturing some of that value by 2025, when blockchain technology matures.

Before 2025, industries will only see “incremental gains” from efficiency and operational improvements, according to Rajesh Kandaswamy, a chief of research and fellow with Gartner.

Specific to the use of stablecoins, such as Wells Fargo’s Digital Cash, Kandaswamy noted they do provide the benefits of cryptocurrencies like bitcoin but try to be immune to market volatility by being tied directly to fiat money.

“Price volatility impedes enterprises from adopting cryptocurrency, as they want to avoid market risk,” Kandaswamy wrote in his report. “By reducing the risk imposed by cryptocurrency volatility in blockchain applications, stablecoins can help open up blockchain-based applications and markets for you to make use of. But they are not ready yet; examples include using cryptocurrencies to accept consumer payments, and using cryptocurrencies to represent and exchange value within an ecosystem.”