Blockchain and Stablecoins as Payment Rails for Traditional Banking

Transcript

We heard buy Bitcoin. Wow. That's a financial advice or not? Who knows? We're moving forward uh with we've heard about stable coins a lot as means of international interbank and global settlements between banks source and and assets around. And next up, we'll be hearing about blockchain and stable coins as payment rails for traditional banking. So, uh, I'm very happy to welcome on stage and it's our honor to have from the state secretariat for international finance Switzerland Ralph Sutter. Thank uh on stage we also have in this fireside chat Damian uh Dami

Damian Fontadil from Forge Society General and the moderator of this panel will be Chris McAir from six. So I would like to ask you to come on stage. I hope you are around. Oh just being m up. Good. No worries. I forgot to mention Christian Berry. Okay. Sorry. Yeah apologies. Christian Biri from the Swiss stable coin. Yes. Apart. Yes. Please take your photos and put your hands together optimally under your name. Yeah. And Karina Lasso. Maybe there is a mistake on my register.

Apologies. Obviously. Kina Losto from Lexellence will be also on the panel. And Chris is about to join. Here we go. Hello. Hello. Hello. Okay. Great. Thank you, ladies and gentlemen. As we heard not too long ago, um the volume of stable coins continues to increase. Uh I believe our colleague from Google Cloud mentioned around the five trillion in volume per year last year, but actually I I checked um just before coming and it's gone up quite a bit. last year was up to 15.5 trillion in volume and even a couple of days saw in the uh 30 20 to 30 billion dollars of trading volume in a single day towards

the end of 2024. So clearly it's in the area of surpassing Visa in terms of uh volume per day. We're seeing lots of adoption. Today we're going to talk not only about stable coins but what makes for effective stable coins. what are the conditions um that you need to consider if you're looking to offer that as a a traditional banking facility. What's the use case behind it? We're going to hear from the regulators. We're going to hear from an issuer. We're going to hear from a bank and we'll get the legal perspective as well. So, we have an all-star panel today. It's my absolute pleasure and honor to be able to moderate this panel. And I would love to give the opportunity to all our panelists to introduce themselves. So,

Demiier, would you like to kick us off? Yes, thank you very much for the invite. My name is Damian Fontani. I'm in charge of business development at Socal Forge. I joined Forge three years ago and prior to that I spent 20 years in traditional finance selling structured product and equity derivatives. Socal forge is the digital asset subsidiary of the socal group. We started in tokenizing financial instruments, bonds. We moved into launching stable coins and we are helping the association group to enter blockchain and digital assets more generally.

I'm Ross Ser. I'm here for the uh state secretariat for international finance where I cover uh the AML CFT and sanctions angle of crypto amongst other topics. I um a lawyer and chronologist by training having worked uh 11 plus years in the private sector as head legal head compliance and all the nitty-gritty part in the past. My name is Christian. Um I've joined Swiss Stablecoin about a year and a half ago. Um before I've been working for 20 odd years in the traditional finance industry although not in banking but

it's little sister insurance. Um Swiss stablecoin is a startup that aims to issue widely used uh stable coin uh back to the Swiss Frank. Good afternoon. My name is Katrina Lassa Heler. Um I'm lawyer. I am founder and managing partner of Lexalons. It's a legal law firm with offices in Tuk and in Zurich. I uh have been in the space of fintech for more than 20 years. I've run through SPSD1, PSD2, PSD3, now recently Mika. I am a huge supporter of CBDC's. I'm open for discussion about it and uh but more importantly, I'm coach

of regulatory working group within crypto valley association. From time to time we issue statements where we try to educate and inform including CIF or ESMA or EBA or sometimes FINMA. We are open organization and we're looking always for open-minded lawyers. So whoever is here join CVA and join our regulatory working group and I'm very much looking forward for the discussions today. Great. Thank you everyone. So we will start the scene um by diving right into the meat on the bone with um uh one of our guests of honors Ralph um and talking a little bit about the regulatory framework here in Switzerland. Can you maybe um share with

the audience how does the state secretariat see the role of stable coins in the market moving forward? Yeah. Um, CIFF say sees uh stable coins as one of the means of payment uh besides uh CBDC's and u tokenized deposits and um what position exactly is decided by the market. What uh the role of the legislature is is not take that decision but to offer a balanced legal framework balancing innovation with financial market integrity and protection of the

clients. And that's exactly what we're right now working on together with all the stakeholders of the uh crypto ecosystem including private sector, academia and everyone who is interested. Could you maybe share with us what keeps you awake at night? What kind of risks are are is the CIF keeping an eye out on the market? Um, of course, having worked um as FIU for very many years.

um I cannot start with AML CFT and FCC risks in general but also as we have seen the peg the stability of the peg is important so it's important that the mechanism of pegging the stable coin to the underlying is very important and the customer should be able to change fiat into stable coin and stable coin back to fiat without unnecessary problems. And that's also um what we aim to draft in legislation right now.

Great. Not an easy task, but we're working on it. That's right. Uh Dier may be moving to you at Cic. you've recently uh well maybe not recently but uh Cecil Fal is active in the stable coin space. Can you maybe give um your colleagues here in the baking space um insights into what kind of business case you saw? What was the impetus for F to to dive into the stable coin market? Yes, as as I said we started with tokenizing bonds. We did the first digital issuance of the European Investment Bank back in 2021.

And to materialize the benefits of blockchain in terms of speed and cost, you don't only need the security, but you also need the cash on the ledger like Marco from SDXG in a previous panel. So that's what prompted our idea to launch a stable coin. We did this early on in uh April of 2023. So it's almost two years now. And we foresee really three use cases for for stablecoin. The first one I alluded to which is the settlement on chain allowing DVP having cash on ledger together with the security on the same infrastructure. We implemented this use case in 23 with a digital green bond

issued by sog tokenized by us and settled using uh our stable coin. AXA investment manager uses the stable coin to do that. The second use case which is most obvious to the audience is trading trading of crypto assets um with uh as a pivot currency with other cryptos. So we're are listed on exchanges. We're also present with market makers and brokers to uh to be used as pivot currency but also as a safe assets when you the times are a bit um troubled in uh in the crypto space. And the third one which is also widely known is crossber uh settlement crossber

transfers. Can you move assets? Can you move uh electronic money because under Mika this is what stable coins are uh at uh to other countries at uh very uh in a few minutes and at a fraction of the cost of what to transfer would uh would be. So these are all the three use cases we're working with uh with partners. Great. So that I think that gives us a very good insight as to the why. But maybe touch a little bit on the how. What were some of the biggest challenges you faced um that may be valuable insights for for the audience here who are thinking of going that same direction. So we launched uh before Micah uh so before where Mika was in

place. So we uh had a model that was based on a whit listing of addresses. So every holder had to be identified and I think it's still the case for Switzerland and with MA we moved to a blacklist model. Uh so that's that was really a gamecher for stable coin to facilitate distribution. Also, what uh required a lot of efforts was to get the Mica license, meaning being an electronic money issuer. That comes with with a lot of constraints, including the uh ability for every holder to claim redemption at zero cost with the issuer because we're not a retail institution. So, we need to rely with partners. But the strength we

have with our stable coin is the backing of SoCal Group. So our collateral is 100% cash account at Soc General. We publish uh the the the collateral on a daily basis and that gives a lot of confidence for the users. One of the extra use cases that we're seeing implementated is collateral. Uh how can you put collateral that is trusted and with a good credit you can have various uh in the crypto world various elements. we we're start seeing money market funds, but the bulk remains stable coins.

Being from a compliance background, I took special note of your um comment about um the move from whitelisting down to to blacklisting. So, we'll have to pick your brain on that a little bit afterwards. Um Cass, maybe if you wanted to um share with us a little bit um of insights as to how uh stable coins are regulated in the EU versus Switzerland. Maybe it's it's a bit of a basic question but just to make sure that that's really clear and we've covered the basics for everybody. Okay. So I will start with Mika might be because it's very very interesting and quite important to know the difference really and I have the phone with me not because it's so boring and I have to

read my Instagram account but I would she brought the book she's a lawyer so I'll give you that. um something what we call stable coin in the Mika is actually um the the abbreviation will be art asset reference token means a type of crypto assets that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof including one or more official currencies. We have many reference goods here where the stable coin is pegged to.

Now in relation what electronic money token is when we're talking about e- money means a type of crypto assets that purports to maintain a stable value by referencing that value for of one official currency. So we see already the difference stable coin when mika has been developed the art which is the the way how European commission and then ESMA and then EBA discussing stable coin or art has never been meant to be mean of payments. mean of payments under Mika is e- money token and the biggest difference really is that the or the stable con might be um paid like the customer have claimed

by market value if it's included in wine paper and in relation to to e- money there always must be a redemption rights by par value so that's the huge difference and yes I think what you Gone done with the e-man license. That's also something. Then in order to issue e- money token, you have to go through a PSD2 regulations actually to get the license to issue e-man token in within um withkin uh in European Union. You have to go to one national authority and you can passport it through the whole European Union. where we have in Switzerland a bit still unclear

situation and we have the discussions actually now what is stable coin how we want to regulate it mikma has a very strong approach to it basically saying hey if you want to issue a stable coin which you want to treat as a mean of payments actually you would have to have a banking license that's will be finema I guess cif has a little bit different approach taking into what the economics is about the token right and um this but what I just want to say it's I think it will be good to have some more clarity in Switzerland because if we then at the end want to offer the Swiss stable coin on European Union market we need to comply with the

regulations there reverse solicitation rule very strict you cannot simply offer and then say nothing has happened you need to comply with those rules You need to have a white paper in place. You need to have a license. And if you don't have it, you can only relate on this reverse solit solicitation rule that somebody in Europe will somehow by you wonder will be informed about your project. So to keep the Swiss um financial market innovative digital I think it's really time to do something to clarify but also to keep um really in mind that we need to go

with the innovation. I like the previous panel where um your colleague from a said hey we have a great basics here in Switzerland. That's true, but let's stay innovative. So that that speaks to the regulatory framework. Are there specific legal risks that um traditional banks need to keep in mind when thinking about um offering products and services relating to stable coins? Banks in Switzerland in a happy position because they would by definition have the license. They need to inform Finma that they changing a little bit the business model. But the problem for them is in the balance sheet. How you treat them are the segregated assets or are they on balance sheet and if they are you need to take

into account all of the issues related to huge volity how much you have to have in reserve to just in case people all of them will want to redempt the rights how much assets you need to have in in place. So I don't see so many legal risks for the banks. I rather see economic and balance sheet related risks. Okay, good point. So, Christian, I now come to you as a our lone Swiss issuer on on the on the panel. Anyway, um what has what have been some of your biggest challenges in coming to market uh considering the regulatory framework or otherwise?

Well, we we we're still about to come to the market. Um but the challenges are not necessarily I would say technical. Obviously on the technical side you have to balance cost you have to balance scalability uh together with um you know making sure that your stable coin is secure and confidentiality is is ensured all the time and and you are compliant. Um the legal regulatory framework is obviously in flux at the moment. Um we designed our um stable coin from the beginning uh with the aim to be regulated. Uh that was from the beginning kind of our mantra and so we kept a close dialogue with the regulator

to make sure that uh we fulfill their compliment their their um their requirements which means we had to implement a whitelisting concept and we have an an onchain whitelisting concept and we work together with regulated Swiss banks to uh for the custody of our collateral and getting a bank guarantee that's part of the um part of the design And while we think it is possible to issue a stable coin under Swiss regulation at the moment, it is definitely costly um that regulation and makes you in some instances quite uncompetitive against differently regulated um stable coins maybe from foreign foreign stable

coins. And it also makes some traditional um use cases that you have for a stable coin particularly the uh peer-to-peer crossber payment very very difficult. So that traditional use case is almost off the table. Nevertheless, I think the biggest challenge for us is just simply getting getting traction and getting adoption. Um particularly with our focus on the Swiss market. I mean I hear the five billion transaction numbers or even bigger numbers now in stable coins but making the uh traditional economy the traditional finance um financial uh businesses and but also uh traditional real economy changing from their current

payment habits processes and means which generally work quite well. They might be expensive and sometimes cumbersome, but they work quite well to something new like a stable coin. That's uh not that easy. We're working on that. We're trying to find the use cases where stable coin brings enough um advantages so that people want to make the switch. But that's that's our biggest challenge I would say. So maybe if we can put a positive spin on that, how do you how do you position your product uh visa v the market given the competitive landscape of CBDC's and stable coins that are competing for you know attention and uh cash cash flow well first of all I

think we don't necessarily see every other um option as a competitor in the sense that I believe Switzerland for example as a country has to come to grips how the payment landscape in the future will look like and there will be different coins, different types of coins serving different purposes and necessarily not necessarily competing but rather complementing each other. Um but we position ourselves then visav particularly all the stable coins and the traditional um payment uh solutions as an efficient direct payment solution uh which as I said is regulated uh allows

obviously instant payment and allows additional features which current traditional rails don't offer and that's that's our positioning as uh Swiss stable coin visa v the traditional and other competitor Great. Thanks. Okay. So, I think given the audience here, maybe what we could do is just a a quick a quick round um what would be um your your top advice if you were to be hired as a consultant by one of these these banks um about moving forward with stable coins? What kind of um you know, risks, concerns, opportunities would you highlight if you were given the chance? I'll kick you out kick off with them.

Um it's uh as of now you have very few banks that issue their stable coins. That's the status of the market. You have US banks that did tokenized deposits but that's the closed end system whereas stable coins have the aim to go beyond your barriers and and to circulate freely with the bar list I alluded to before. So as a bank you uh we will see more and more banks doing it in the future. I mean, you've heard the CEO of Bank of America alluded to the fact that when regulation comes into play in the states, they will launch their stable coins. Uh, so I think we're going to see uh banking players entering this

market with the use cases I mentioned before. I mean, settlement, uh, crossber payments, uh, trading uh, of crypto. uh it's uh it's it's um it's an effort for a bank to enter into stable coins because you're entering an infrastructure that is not familiar to you and also you have to ensure AML CFT in a freely transferable instrument. So that's why internally we uh put a very strong emphasis on monitoring the transactions and ensuring that the blacklist is effectively imposed and reviewing these parameters on a regular

basis and that's what our paper white paper allows us and our regulators. So the banks have to have a clear idea about the business they want to support with with a stable coin. Select the right regulatory framework you want to step in. uh you're going to have US, Swiss, European, you have already Singapore and also find the right partners to distribute and promote it because it's not because it's on the shelf that it sells. It really has to serve specific use cases in order to see adoption, trading volumes and AUM grow.

Excellent points. Thank you, H. Well, as I said before, um the uh confederation is not taking a decision for the market participants. Um what we are is neutral with regards to both technology and centralization or decentralization. And uh we've we observe uh the developments in other jurisdictions who have not the majority of them have not decided on how decentral or central they will move forward including not only other

jurisdictions but also the multilateral level the FSB. So um as a regulator uh and legislator we follow the situation. We try to enable the part par uh the market participants uh and take on board their feedback and work with them. As you know, I have to say that uh we the community um sort of and the whole wider Swiss ecosystem is is very lucky to have you in that role.

For those that you that don't know, have um is one of us, so to speak. He used to be uh the chief compliance officer at Signnum. So, he knows what he's talking about when he relays the concerns um to the regulator about uh about the industry. and he's perfectly positioned as an attache to to bridge that gap in terms of of knowledge and and help build the bridges in terms of partnerships which uh we've been able to do just recently. Um yeah, just let me moderate the enthusiasm. I I I'm very thankful for that. But as I have worked in the industry, I have also witnessed all the hiccups, not to speak of the fuckups.

So you know our dirty laundry that's not good. Great. Thank you. Okay, Christian, final thoughts. Well, if if you think this through and take the analogy of of credit cards, um, basically every financial institution these days has their own card. Um, the question is a bit will block well sorry, will stable coins go in that same direction? Will we have in the future a global clearing system and basically everyone will issue their stable coin? Um, and with that thought in mind, I think it's time for banks um, to start looking into these options. Um, and as Damian said, think about what are the use cases um, for a

stable coin. And we believe from Swiss stable coin perspective, we believe there's a lot of use cases you can uh serve with a stable coin particularly as a bank for your individual customers but also for your um commercial customers where you can bring value to them by giving them a new um technology and the new payment means. It comes with its risks of course as you said but I think at the moment um the there's a lot of reluctance to even look into that and that's that's not what Switzerland and their bank should do I think at the moment.

Good, good valuable advice. Casia, I think I will also add her what uh what Damian and uh Christian now said really I think the business case is really important what you want to achieve because I keep thinking I think it keeps me busy for last three hours because I talked with somebody from another bank here and this gentleman told me actually there is no business case in Switzerland to issue a stable coin. So it's probably a discussion for another panel. But I really keep thinking what also you just said about comparing credit cards and so forth and so on. And on one hand I understand the point of the other gentlemen actually what we want to achieve. We will have to stable coin. We

cannot actually offer them on European market without complying with the registration. On the other hand, we need to be there because if you're not there then you don't exist and then it will be UCDCs and only others on the world. And I'm not quite sure whether we all at the moment really want to support certain currency with a certain administration located somewhere behind big water. That's my political statement. Sorry. There you have it, ladies and gentlemen. Stable coins currently represent about 1% as our colleague said in the other panel of total volume of US dollars in circulation um in the market and growing. So the question is will Switzerland um sit by and watch as it uh

continues to grow and uh stable coins are issued in other jurisdictions outside of regulatory reach or will the regulators um create the environment to foster the issuance of stable coins in Switzerland? What are the business cases? What are the challenges? Let's see how it develops. Join us next year for the same panel and we'll see where we went. Thank you. [Applause]