How SoFI Continues to Reshape Banking with Stablecoins

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Welcome to Mint Condition, where we go beyond the headlines to understand how payments companies and financial institutions are actually leveraging crypto.
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Today we're focusing on SoFi and how they're building the bank of the future.
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You probably know SoFi is a consumer bank, but recently they have launched a number of new business lines and products.
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So firstly, they've launched institutional banking for both fintechs and payments companies and actually banks as well, denominated in both Fiat and stablecoins.
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They've launched SoFi USD, a tokenized deposit and stablecoin hybrid, and the first of its kind issued by a nationally chartered US Bank.
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And they've made some serious strategic hires to back it up.
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I'm joined today by two of them.
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Ben, who is an SVP and head of big business banking at SoFi.
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And he was previously the president and chief strategy officer at Silvergate, with experience working at BitGo and BVNK as well.
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And then there's Simon, who leads SoFi USD.
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He's a former chief product officer at BVNK, which was recently acquired by MasterCard, and the Chief Business Development Officer at Silvergate.
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Which brings us to where we're going to start.
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Sen, which was first launched by Silvergate.
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Sen was Silvergate's payments network, which processed over 2 trillion US dollars in transactions.
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SoFi is rebuilding it.
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Let's get into what that actually means.
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Yeah, so we are we are launching Sen at SoFi, to your first question.
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And we're really excited about that.
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As we've talked with our prospective customers, there is, we hear from them that there's still a gap in the marketplace.
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And one of the things that they're really excited about is the balance sheet of SoFi.
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So SoFi is a $50 billion bank regulated by the OCC, $10 billion of permanent capital.
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And so to be able to have that type of a balance sheet, which reduces your counterparty risk, and to have the technology stack to support something like SEN is really sort of unprecedented, right?
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The ability, you know, to have an API and to be able to send funds 24 hours a day, seven days a week.
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So now if we zoom out a little bit and say, okay, well, what was SEN?
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You're absolutely right.
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If you were a customer of Silvergate, um, what it enabled you to do is it enabled you to move dollars between each other, almost like a Zell or a Venmo, right?
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But do it $10 million at a time, $50 million at a time, 24 hours a day, seven days a week, over an API.
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So initially the problem that we were trying to solve was that there was all of this pain from both um crypto exchanges and institutional investors in terms of moving dollars around the ecosystem, right?
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So if you think about the banking system, so one of the um early clients of ours was a company called B2C2.
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They're still around today.
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Um, and um the founders there said, you know, look, Ben, we spend 60% of our time just moving money around the ecosystem.
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And it's really capital inefficient because money gets stuck in correspondent banks, it gets stuck on nights, on weekends, all of these different places.
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And so we have to we have to have way more capital than we would need if you created something like Sen.
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Meanwhile, you go talk to the exchanges and they were saying, you know, hey, for us, it's all about liquidity.
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Liquidity begets liquidity, and the more liquidity you have, the more trades you can do.
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And so that's really where the idea was born and it was uh in 2016.
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So as we've been out talking to players in the ecosystem, our understanding is that they're still looking for that service.
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Now, to the second half of your question, like why is it still needed today?
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Right, when you think about stable coins and how they move around the ecosystem, and stable coins are 24-7.
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And I think that's one of the reasons why they've gotten the adoption that they've gotten is because they do move without friction, low cost, 24 hours a day, seven days a week, which is consistent with the way the markets trade.
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What you find though is that the amount of capital that firms need from time to time in the ecosystem changes, right?
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So they still have this fundamental need to go between dollars in a bank account and dollars on a blockchain.
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There's also a lot of friction in going between dollars and stable coins.
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And so if you have the ability to just move dollars at almost no cost, um, it eliminates some of that, some of that need.
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So we're super excited about the launch of uh of Sen at SoFi.
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Um and um early early signs from from customers are are really positive.
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Sen was wildly successful, launched in 2017 at a time when banks wouldn't touch crypto.
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It was fundamentally a private dollar settlement network.
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Think something akin to Venmo, but for crypto native institutional flows.
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Clients held accounts at Silvergate, and moving dollars between these client accounts essentially was an internal transfer.
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Instant, frictionless, and available when traditional banking wasn't, which was fundamental for the crypto companies it served.
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Because on-chain money movement has always been 24-7.
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But without SEN, for these companies, their fiat positions didn't reflect their on-chain money movement, which was a problem.
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Now, when you think about SEN, you start to understand why SoFi is a perfect institution to launch the next iteration of it.
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And also why they decided to launch their own tokenized deposit stablecoin hybrid.
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Here's a nuance that most people miss.
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A Sen style network lives or dies on the reliability of its dollar lick.
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In the original version of SEN launched by Silvergate, that was straightforward.
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Pure fiat held at the bank.
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But in today's market, these same institutions need to be able to move seamlessly between dollars and stable coins.
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It's not just enough to have a fiat-based solution.
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If you're dependent on a third-party stablecoin for that bridge, you've introduced a counterparty into that critical part of your settlement network.
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One whose reserve management, redemption timelines, and regulatory standard are outside of your control.
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For a network built on the promise of frictionless, always on settlement, that's a meaningful structural weakness.
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By issuing SoFi USD and by virtue of it being an insured depository institution, SoFi closes that gap entirely.
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But I mean, I think just to the point on SoFi and its differentiation, I think everything that you mentioned is exactly right.
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Maybe the other piece, and this kind of gets the risk management piece, is that we are an insured depository institution.
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What that means is we have a Fed master account.
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So when we're holding stablecoin reserves, we can hold those directly in our Fedmaster account.
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And what that enables us to do is be like, you know, like 100% liquid, right?
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In other words, if 100% of token holders for SoFi USD came to us in a single day and said, hey, here are my tokens, I want my dollars, we would have the cash at the Fed, right?
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And so there's no there's no interest rate risk, there's no duration risk, there's no liquidity risk because we're managing it in that way.
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And so the way we look at it is you put the combination of that, and you've kind of summarized this, but if you put the combination of that with good tech, with being regulated by the OCC, and you put those things together, and I think it does create um this unique opportunity for um for SoFi.
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What Ben is describing is actually one of the most underappreciated structural advantages in stablecoin issuance right now.
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And it maps to a dynamic that we all know well from traditional finance.
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Simon breaks this down further.
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Yeah, and I think liquidity is perhaps the least well-understood part about issuing stablecoins in general.
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Um so, as an example, the way that the proposed rules under Genius work today is that every stablecoin issuer can only have a 40% concentration with any single bank.
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And in and on the basis that national trust banks, generally speaking, don't have access to a Fed account, so they can't earn interest on cash in their own bank account, they have to place cash with other banks.
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You end up having this scenario where even though the issuer is trying to do the right thing and kind of distribute their deposits, the banks that they're placing those deposits with actually themselves don't have you know a one-to-one reserve backing.
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Then they're under no obligation to hold 100% of those reserves against the stablecoin in cash.
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And so I think for us, in many ways, we think the problem is a lot simpler by being both the issuer and the bank, because ultimately we can hold the lion's share, if not 100% of these cash reserves in cash at our Fed master account.
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And therefore, from a liquidity perspective, when we talk about the stablecoin component, it is very, very straightforward.
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We don't have any um any duration risk, any bid offer risk, um, any settlement risk because everything is being held in cash.
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And so we think that's a really important test.
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And obviously, our attestations, you know, prove that fact out as well.
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Um, but more than that, you know, we can make sure we have a hundred percent line of sight in terms of liquidity profile around the stablecoin.
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Maybe traversing onto the piece around tokenized deposits.
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At the end of the day, what is a tokenized deposit?
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It's a blockchain representation of a bank deposit that doesn't have the same reserve requirement.
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But understandably, in a world where you know you can distribute that deposit on-chain anywhere in the world 24-7, it's going to carry a different liquidity profile from a deposit perspective than let's say, I don't know, um, a high yield savings account with a fixed term.
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And so I think just given the fact that, you know, today, you know, banks already have an existing kind of liquidity management framework.
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And generally speaking, the ones that are sort of the most advanced actually are able to kind of calibrate their liquidity management based on the types of deposits that they hold.
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Um, we think we're actually very well situated for that piece as well, because we can have complete interoperability between the two, but ultimately we're in complete control in terms of you know the assets that underpin 100% of our tokenized deposits as well as the stablecoin.
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What Simon is pointing to is really a maturity curve.
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The stablecoin market has grown incredibly fast, and the infrastructure and risk frameworks around issuance are now catching up, which is exactly what the Genius Act is trying to formalize.
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Now, of course, the T-bill market is one of the deepest in the world, but there is still a bit offer component in terms of you know paying, um, ultimately paying to sell that bond.
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And furthermore, the the standard settlement cycle for a T-bill is T plus one.
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So what you see is this dynamic where suddenly you actually have a liability, asset liability mismatch.
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Now, it might only be by one business day, but if if we're talking about you know, today's a Friday and the next business day is a Monday, perhaps it's a Tuesday because of you know um federal holidays, suddenly you could have kind of three days where you actually have a bit of a liquidity gap.
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And and what we've seen historically is if if um stablecoin issuers are unable to kind of redeem generally real time, even though mostly the SLAs are generally T plus two business day, but but there can be a pretty significant shift in confidence if you're unable to um redeem your stablecoins for cash kind of same day.
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And so as a result of that, you know, you know, go back to kind of like Silicon Valley Bank, where there was about three billion dollars of stablecoin um proceeds kind of trapped there for a period of time, which led to a DPEG event.
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Um, like that there is this kind of like inherent liquidity risk that again is generally poorly understood.
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So, you know, from our perspective, the way that we've countered that is we're gonna say, listen, we're really not gonna try and optimise for yield, we're simply gonna optimise for liquidity first and foremost.
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And with that liquidity, we think comes transparency.
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You know, that's really the position that's being you know part of our audits and attestations that um you know that we'll publish monthly.
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But kind of more than that, actually, what that should do is it should give any holder really the confidence that, you know, if you want your cash back, you're gonna get it in literally the fastest period of time available.
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What's easy to miss in all of this is that Sen and SoFi USD together are really a reimagination of correspondent banking infrastructure, just native to the stablecoin era.
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Traditional correspondent banking works through Nostra and Vostra accounts.
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Banks hold in pre-positioned balances with each other to facilitate cross-border settlement.
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It works, but in slow, expensive, and capital intensive.
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Money sits idle, waiting for the right moment to move.
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For international players in particular, this matters enormously.
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Access to US dollar liquidity has historically meant navigating the correspondent banking hierarchy.
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But in a stablecoin native era, a bank in Latin America or Southeast Asia can now access dollar liquidity and settlement infrastructure directly without needing a web of intermediary relationships to get there.
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And now you start to see the bigger network effects.
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Every institution that plugs into this network, this CEN network, becomes a distribution node for SoFi USD.
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As more banks and payments companies hold and transact in SoFi USD, that liquidity pool deepens, utility expands, and the stablecoins network effects compound.
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Um my expectation for my customer is that all happens virtually instantaneously.
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And in order to do that, ultimately, as a provider of that technology, you know, I need to have the SoFi USD available to me instantly.
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Now, practically speaking, how does a company do that?
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Well, you have to kind of pre-position, right?
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You you either have to have a treasury inventory to be able to support that activity, or you have to have the ability to have very fast settlement.
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And so one of the things that certainly I learned through that experience is actually that a lot of the largest liquidity providers generally settle on a T plus one basis, with some exceptions being T0.
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Um, but actually, this is where when I talk about liquidity being so important, it's actually just as important when you're actually trying to redeem.
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So go from stable coins back into cash.
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And that's where a number of programs exist today where actually you're even charged if you want the cash same day.
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And so it's a big part of our value profit so far that you know we're not going to charge any fees for um redemption um or minting SoFi USD.
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You know, all of that has to happen 24-7, and frankly, it should happen at zero cost.
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So I think probably the only biggest challenge that the on-and-off ramp providers are gonna have is like that margin compression.
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Because from a banking perspective, we probably see a world where these are kind of services that we really start to provide for free or a very low cost, you know, really being some of the kind of the infrastructure costs around gas and so on.
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Um and therefore, I think in order to sort of like create a wedge, it's gonna come down to a lot more around you know how you're actually delivering those services for your customer.
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Certainly, I think probably the biggest opportunity there is still very much like an embedded finance play, which is where, let's say, unregulated platforms have the ability to embed those services into their platforms, and that's something that BVNK does a great job of.
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Liquidity and risk management are key when it comes to launching your own stablecoin, and it's a key wedge and differentiator that is typically overlooked.
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But for Ben and Simon, there were a lot of lessons about liquidity and risk management that were derived from their days at Silvergate.
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Silvergate was one of the early banks to take a strategic bet on crypto.
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That decision and the launch of CEN in 2017 made it the de facto banking backbone of the crypto ecosystem, processing over 560 billion in transactions in 2022 alone, with clients spanning every major exchange, market maker, and institutional investor in the space.
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That same concentration proved to be its undoing.
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When FTX collapsed in late 2022, the contagion hit Silvergate harder than almost any other institution, triggering a bank run and ultimately a voluntary liquidation in 2023.
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I'm glad you asked this question.
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Um, you know, it's it's painful at times to to to um to rehash, but um I actually welcome the question.
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I mean, I think, first of all, uh on the Silvergate side of things, it was a point of pride for us that we managed the balance sheet in a way that all of our customers got their deposits back, and the FDIC never came in and took um control of the bank.
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So what happened what you know, just what happened there was there was a bank run.
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Um, we think it was close to 70%.
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Um, and all of those depositors got their funds back.
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Um the regulators did start to ask questions around concentration risk.
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And um, and I think that probably was um our fatal flaw was that we were heavily concentrated on the on the crypto industry.
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So um in you know, one of the things about being a bank is it's really important that you go through, you know, safety and soundness are the you know, is really the foundation.
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And so um at SoFi we don't have that challenge because we have 50 billion of non-commercial activity, right?
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I think really the first the first part to this was well, you know, we have almost 15 million consumer customers in the US.
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Um, we interact with you know hundreds of institutions on our software as a service business.
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And so therefore we're already doing literally billions of dollars of transactions every day, um, both from a pure consumer perspective, but also supporting some of these institutions.
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And so for us, knowing that things like the card networks were moving to a world where they can actually accept stable coins as payments, and we're doing anything from 10 to 100 million dollars a day of settlements just with the card networks, suddenly we we start to look at that opportunity and say, actually makes an awful lot of sense for us to use our own stable coins, you know, for this purpose, as opposed to sort of using a third party.
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Whilst we have focused heavily on SoFi's institutional banking product, Sen and SoFi USD, SoFi is doing more than just that when it comes to restructuring itself as the bank of the future.
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Whilst payments may initially be a key aspect of how it embeds crypto for both its institutional and retail clients into its products, things will evolve.
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Yeah, and I think the answer is it's it's certainly all of those.
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It's definitely an and as opposed to an or.
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Um, you know, I think the the the sort of the headline that's got the most attention is, you know, when you think about stable coins of payments, 24-7 availability, sort of cheaper, faster, um, more transparent.
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Um, but I think that's that's much more of a sort of historically, it's been much more of like a cross-border use case than necessarily a domestic use case.
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And again, with our customer base being mostly focused, um, certainly on the consumer side, entirely focused in the US, but mostly focused around the US and Latin America on the institutional side today, um, you know, the payment piece alone was probably not enough to kind of get us there, um, just in terms of kind of cross-border emittance.
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Um, but but I think very much kind of when we zoomed out, we were like, well, if you look at the size of the crypto market relative traditional markets, and again, we we operate a broker dealer, we're involved in a lot of kind of investment um products as well, we really see this kind of like migration towards a world of kind of tokenization.
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And then you start to like kind of think about those things and you say, well, actually, um, you know, for us, I think there's I think there's sort of this this opportunity there for us to be using our stablecoin both as kind of a countercurrency for you know investing on traditional assets as well as on the crypto native side.
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Maybe to kind of go back to a question around distribution, though, I think the only way that a stablecoin issuer can be successful with is with the right partnerships.
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And really those partnerships kind of take a number of different forms, right?
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Obviously on the blockchain's blockchain side, you know, partnerships with Solana um, you know, are kind of critical to that.
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But again, like actually think about the kind of the different um actors involved in distribution.
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You've got everything from you know the infrastructure players, you know, to the you know, the to the traders, the centralized exchanges, the decentralized exchanges, as well as DeFi.
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And so for us, we've been very much kind of like working on creating partnerships so we can kind of at least interact with the entire ecosystem.
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Albeit I would say probably DeFi at the moment is probably the one space, just given everything that's happened, is is the one that we're going to be most kind of cautiously moving into, just because we think we're we think there's an incredible utility for the technology, but there's certain vulnerabilities that we have to just be kind of very measured about, kind of launching with, just because obviously we're a US-regulated bank.
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Now, having experts such as Simon and Ben means that of course I'm going to ask some additional and interesting questions beyond what's happening at SoFi.
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So then if you're like the likes of a let's say a CLS who you mentioned, how do they actually adapt and continue to maintain relevance or market share or space?
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Yeah, well, the the one thing I think we can agree on is that we we know that the regulators don't move um always uh as quickly as kind of the market itself.
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And so certainly some of the protections that exist from something like CLS really are a fun fundamental um component of like how central banks operate, right?
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And the fact and some of the controls that central banks want to have.
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Obviously, one of the main concerns was around systemic collapse, and that that happened with, you know, I think it was Herstattbank in whatever it was, the 80s.
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I'm sure my age now.
00:21:10.079 --> 00:21:14.799
Um so really it was kind of primarily to protect against those types of systemic issues.
00:21:14.799 --> 00:21:20.720
So I don't think I don't think the regulators will perceive that those that you know the underlying risks have changed.
00:21:20.720 --> 00:21:33.599
But I think it's really down to CLS and really any market structure to be able to show sort of the value prop of of of how they can use technology, not just for their own purposes, but really to benefit the customers that they're they're working with.
00:21:33.839 --> 00:21:42.160
So when you say infrastructure play, are you talking more about whether it's from a payments perspective or whether it's actually from like now a FX prop trading perspective, or do you see a fusion of both?
00:21:42.559 --> 00:21:44.799
No, I think it's a I think it's a bit of a fusion of both.
00:21:44.799 --> 00:21:56.799
But but really my point is like the FX markets themselves are fairly well optimized in terms of like you know how narrow the spreads are in the interbank market and you know how the depth of liquidity available and those things.
00:21:56.799 --> 00:21:59.759
Um but really I see all the opportunity really around.
00:21:59.759 --> 00:22:00.960
kind of the settlement piece.
00:22:00.960 --> 00:22:04.319
And so when I talk about infrastructure, it's really kind of that side of it.
00:22:04.319 --> 00:22:18.079
And ultimately, you know, the ability to kind of do cross-border payments, you know, using the the the the chains, as opposed to necessarily, you know, you know, people outside, let's say for example, outside the UK having a strong demand to hold a GBP stablecoin.
00:22:18.079 --> 00:22:20.240
You know, there will be some demand for that.
00:22:20.240 --> 00:22:29.039
But I think for me it's much more of like a you know how do you kind of optimize that infrastructure to sort of engage on this kind of cross-border, not just trading but settlement as well.
00:22:29.359 --> 00:22:34.880
What today's conversation makes clear is that SoFi isn't just adding crypto as a feature.
00:22:34.880 --> 00:22:40.319
It's rebuilding its infrastructure around the assumption that the future of finance is on chain.
00:22:40.319 --> 00:22:42.480
Sen and SoFi USD are the foundation.
00:22:42.480 --> 00:22:48.480
But as Simon outlined the use cases extend well beyond institutional dollar settlement and payments.
00:22:48.480 --> 00:23:06.160
For example, how stablecoins can be used as a countercurrency for tokenized asset trading or how SoFi USD can be embedded across card network settlement use cases that already run tens to hundreds of millions of dollars worth of transactions every single day.
00:23:06.160 --> 00:23:17.359
And as an institutional banking stack that can serve as a correspondent banking node for payments companies and banks globally, denominated in both fiat and stable coins.
00:23:17.359 --> 00:23:20.480
What makes this credible isn't just the product vision.
00:23:20.480 --> 00:23:31.920
It's the institutional foundation behind it, a $50 billion OCC regulated balance sheet, a Fedmaster account and an incredibly experienced and knowledgeable team.
00:23:31.920 --> 00:23:36.640
That combination of structural advantage and hard won experience is rare.
00:23:36.640 --> 00:23:42.079
The broader lesson here is one for any bank or payments company still sitting on the sidelines.
00:23:42.079 --> 00:23:57.119
The regulatory environment has shifted the infrastructure is maturing and the institutions that are moving now thoughtfully and with the right foundations are the ones that will define what banking looks like in 10 years plus time.
00:23:57.119 --> 00:24:03.680
So Fi is making a clear bet on what that looks like thank you for listening to the mint condition