Flipping the Script: Traditional Banking for Web3 Companies

Transcript

And once again huge thanks uh to the Swiss National Bank them being uh supporters, speakers and contributors to our conferences um all around in the past years as well as this time and we're very proud obviously to have the Swiss National Bank on our side. Um next up we'll have we'll be flipping the script. um traditional banking for web three companies. So we kind of try to take an angle from the left, an angle from the right and now it's the time for traditional banking for web three companies. On stage you'll have from Merki Bowman Milco Hensel. You'll have from Inkor Bank Kater Richards. Next up you'll have from Aurelio Milos Stokage.

and from Amina Bank, Pavl Jakovv. And last but not least, moderating will be the founder of the Web 3 Banking Symposium and board member of the Crypto Valley Association, Ilia Walov. Please welcome on stage. Put your hands together. You need to come on stage, right? All right. And please take seat in the order of uh of the pictures to make it easier for the audience. Right. Luckily, we don't need slides.

Okay good. Okay, so traditionally let's start start from quick round of introductions. So KT please. Um, good morning everyone. Uh, lovely to see everyone here. This is a pretty exciting panel because there's uh conflicts and challenges on this topic. And I hope that we'll be able to clear some of them up and enlighten you a little bit about what banking looks like and what's good looks like for both sides of um the world that we're trying to bridge. So I've been in crypto since 2017 and I've had the uh the great luck to work in different size institutions from private banks to crypto hedge fund to large um US banks and now I'm at

Incor where we're a bank for bank. So it's a fintech transaction bank. We serve a very special niche. Uh and uh it's great to be on this panel to be able to share some of the learnings that uh I've gathered over the years. Um hey everybody, my name is Pavle. I'm I'm with them in a bank and I think I need to put in a little disclaimer that whatever I say is actually you know we're uh we're in Switzerland so we're able to talk about certain things and we only serve uh professional and institutional clients. My legal colleague Veronica is in the audience so I have to be very careful in terms of what I say. Uh but also a big thank you to the organizers um Ilia incredible

organization. Um wonderful attendance. Thank you everybody for coming making it at 8:00 in the morning to Lugano. We're blessed with uh with the sun and also Robert who was just before us what an incredible innovation um that the Swiss National Bank is is is is creating. So for me as somebody who is incredibly deep in the innovation space and for those of you who know me you know privately and professionally uh you know that I've been in crypto for a long time. I'm, you know, a DeFi afficionado, so to I don't want to use any other words that are commonly used in the industry, but uh and and it's it's it's an incredible pleasure and honor to work with Amina and just seeing how the bank

is developing um the way that it's handling innovation, where it's finding kind of new avenues and and figuring out what what is the real um kind of place for a digital assets uh first bank as things are evolving, as we're seeing, you more and more uh challenges come up. I'm sure everybody have seen you know the Revolute uh launching something pretty interesting but uh yeah a bit of a long winded introduction but thank you I'll pass on to my colleagues.

Hi there my name is Milos Stockage. Uh first I also would like to thank Ilia for giving all of us the platform and this event. I think last year was awesome for me kind of a turning uh point in the whole space. The entire conversation around regulation, how to uh make crypto understand banks better, but also banks understand crypto better for me. Those were was really the key key event last year and very happy to be here. As sort of the newcomer, I guess most people don't know really or haven't heard much about it. Uh we are fintech.

We have a FINMA fintech license, meaning we are a fully independent uh payment institution. We don't have a partner bank. We keep client funds at uh SMB and we're not trying to be the next meto product like Revolute. uh our USP and what we bring to the table is around the topic compliance and we have automated uh a lot of complex uh comp um compliance tasks which enables us to onboard uh target segment which has some character characteristics be it geography exposure or UBO structures or industry and one of the key vertical we

have is the web 3 uh industry which typically triggers enhanced due diligence. We'll speak later about it and that's where we position ourselves sort of DNA is certainly in the revolute type of neo bank but for a I would say more complex and premium segment and maybe we'll have opportunity to speak about what makes these guys more complex and how it can be handled. Thank you. Sure. Thank you. Milish. Yeah, my name is Mik Hensel. I work for Mackie Bowman Swiss Private Bank. Um I think I'm I'm the most traditional representative the most of the oldest company here in on the panel. We founded 1932 and six years

ago we started to go into this crypto world not totally knowing what we should expect but it was a fun and adventurous um voyage I have to say. and I helped to um to develop the strategy, help to um implement it and now I'm I'm part of the team that manages and and services clients in on the corporate side but also on private client side. Yeah, thank you. So the quick intro from my side um I have actually two roles in addition to my uh crypto valley association position. So of course I'm managing our company Hodler which is fintech company which is um CASP or BASP you can call it in different ways. So

and uh I'm also serving as an ambassador of Canon 4 in Switzerland. So I remember it was not uneasy to get our first bank accounts uh like six seven uh years ago because we are cryptonative company. It was not an easy to get uh into banking relationships. And speaking about uh this continental work uh quite often we have some continental meetings and almost every single meeting start with with a problem like Canon has some KPIs to get new business coming to the country coming to the region and the problem is that even not for blockchain companies even not for crypto companies it's not an easy to get an account and there is a big contradiction like country has some KPIs to get more

businesses but banks are not providing new businesses with accounts. So this is the problem and let's maybe dive deep and discuss it in more details. So KT um what is the difference uh between traditional business and web3 blockchain business if there is a difference in terms of banking relationships? there's uh quite a significant difference uh because blockchain and DT um basically bring in a new risks I mean and there are unique risks uh that have to be taken care of and that also leads to more uh regulation and so that sort of we can break that down into sort of three different areas where there are differences and the first one is going

to be due diligence and u you mentioned that just before there is enhance due diligence because of these risks. uh and one has to then also from a regulatory standpoint uh follow the DT act and particularly I think it's important to understand from a bank's perspective uh in general banks are obligated to follow a particular some frameworks to allow them to be in the game to have their license and they sort of revolve around the um what's called CBD And basically that's a code of conduct uh on on running the business and for due diligence. And uh there's

there's also AMLA which is the AML sort of anti-money laundering act because as a bank we are required to ensure we understand where money is coming from and know our clients and this helps preserve um you know high equity in in the financial industry. So those are sort of some some key some key areas and the third one is risk management. Uh you know banks they have to preserve their capital and their reputation and when we're working with companies in the webc 3 space we're basically you know taking on their processes and their clients. So we absorb them and so banks need to understand the risks and web3 companies

really need to explain how the money works or how the money moves um what their businesses uh and who their counterparties are to get comfortable and and that's where you mentioned you know we might have great DT laws uh but that doesn't mean that each bank feels comfortable because they may not have the knowledge and they may have different risk appetites because they have to fundamentally understand how the business works in order to open up an account and help their clients move money. Yeah, thank you. Thank you. And uh Mila, question to you is a traditional bank. So what are like key requirements for web3 companies uh requirements to get on boarded a traditional bank? And basically what we

need is is transparency and openness from our clients that they share all information that we require that as as as Katie just said share with this with us. And u where we really get hesitant is when when uh when a potential client tells us that's not part of your business. You I don't have to share this. Um this is not of necessary by legal requirements. And then um this is this is this raised a red flag on our side because we offer our good name our our accounts um to to this company and we expect cooperation u with them and of course I I also understand that the the fundamentals of of digital assets is privacy and independence of banks etc.

But if you want to work with with a traditional bank, you have to overcome this and say, "Okay, I have to play along the game and I have to cooperate otherwise it doesn't it doesn't work." But to be honest, most of our of of our clients are very cooperative and and very helpful and open and and supportive. Um so we hardly have any really discussion hard discussions on that. Yeah. Um banking relationship is not like a monolith, right? So banking services is quite different. So we can even uh go into different layers like capital payment accounts, operational accounts and accounts for end users of blockchain companies. So could we please just dive a bit deeper into every single

layer here? So Milish maybe question to you about uh capital payment accounts. How easy is to get a capital payment accounts for a newly born web three company? What are like key things to to show to the bank? Um well it's actually not a rocket science. It's so in Switzerland for the ones who are maybe from abroad when if you want a limited company or a public limited company you need game or a you need like a capital payment account that you show to the commercial register and the it can be either fintech like us or a bank that issues this paper that you show to the commercial register. So that is for web3 companies already this can be a roadblock because most bank don't even touch if if in the company p um purpose

there is like anything like crypto DT or any of the key terms they'll say go somewhere else um so then they hit our pipeline and the due diligence for the capital payment account is fairly light because you want to keep it short and sweet because most companies don't have any risk and you don't want to put the burden on all of This imposes some risk actually for the founder and that's why I would like because it's a quite common that uh web 3 founders they get the capital payment account and then surprise surprise they will not get the operational account. So if you're small team, you don't have millions of funding, you're suddenly in the situation where 100k are stuck in a

blocked account and you cannot move anywhere because you will not find any bank opening you an operational account and that is something to be aware of that due diligence for capital payment account for most if not for all institutions is a separate due diligence. you will then uh look uh at a much more enhanced due diligence for the operational account because blocked account is less risky. You cannot do much. You pay in the money, it's in there and it's it will be released later to operational council. Yeah. So let's dive deeper into operential operational accounts. Milco, what are like your day-to-day processes with serving uh operational accounts to web three companies? Um just in in order to to

transfer this from for instance a capital payment account into a corporate operating account we really need to enhance due diligence. We need to understand the the flow of funds. We need to understand the structure of the company. Where does the money come from um to found to grow the company? Are there investors expected? If yes, where do they come from? Who checks the investors? Where does their money come from? Um then also if this is all fine and we got all the details the paperwork for for identifying people and and companies we uh we work very closely with the client to see what the the flow of funds will be where what money comes in where does it come from what purpose is it used for and and where does it go

to basically um that's these are the main main challenges often for new start companies it is difficult for them to tell oh I don't know how many transactions I have and I'm not sure if I win clients more easily in Switzerland or in in Germany or in Italy. Um, and so this is of course a a vague thing and and we have we are experienced enough to to understand that it is guesswork in the beginning. If you start a new company, you can't know the future but um we also track it against the the business plan that they have. Does it materialize? And we are always happy if a client comes to us and say look this didn't work out. We have to change it.

Can we still use the account for different purpose? And usually it is it's it's okay. But if if all of sudden transaction patterns change and you have payments coming in from no whatever country then then it's little surprises are not very nice for us. We like to be informed advance. Yeah. Thank you. Thank you. And uh Katie you you mentioned um that uh in core is a bank for banks and I believe bank for fintex right. So you provide uh also your clients with accounts for end users right? So you already said that it's important to understand the entire business model but uh are there any other tips to companies who are looking for enduser accounts?

Well, we service banks uh financial intermediaries uh and and corporates that uh have history. And I think that's the problem. You want a bank account. Um, banks like to have folks that come in with experience and track record and so it's the chicken and egg question. Unless you know you you've been in the business for a long time and maybe not cryptoreated and then decide to do the business, you still have a good track record. So track record is key. Now for us uh we like to work with banks or entities that are FINMA regulated or in their own country regulated. So regulated entities or if um you are a financial intermediary that you're part

of an SRO so a self-regulated organization again this gives comfort because you know that the counterparty that you have is regulated and audited on a regular basis and are required to um adhere to good AML and KYC uh processes. So key for us again is you know know your client. Um what because we offer payments and correspondent banking it's important for us to understand our clients clients again knowing where the money flows to because as a correspondent bank to do international transfers with the banks that we work with well banks anywhere in

the world uh they need to ensure again that AML and KYC is done and that we can identify the beneficial owner. So it might feel uncomfortable for some web3 companies but or or fintexs but the more that you can understand your business and your clients and the more comfort you give uh and and as Milco said at the beginning it's very hard to know where your business is going to come from when you get going because web 3 is global uh and you have to understand those jurisdictions and there's monitoring and banks have to monitor where those cash flows are going which adds additional complexity when uh it's going to different jurisdictions where may not

have uh the the toughest compliance. So it it again it's all about risk management. Yeah. So end user accounts are not for kids, right? Okay. So Pavl Amina is a crypto bank, right? Cryptonative bank and I believe it's not just about accounts any kind of it's also about different kind of services like staking, custody, lending. So could you please give us a bit more ideas of what kind of services bank cryptonative bank can provide to to its users? Again, I think you know referring to the initial disclaimer um sure the you know the way that we see this everything for us starts with um custody right so we have two products over there the uh deep deep cold

everything is segregated and then um the hot wallet infrastructure and then on top of that you effectively have a staking module right we currently have six different uh protocols in which our clients are able to stake into um we're offering you know pretty um I'd say industry standard um rates on that and then when it comes to um some of the other services it's obviously trading so any any money flow between digital assets and fiat is available within the bank um you know any type of uh um yeah lending demand that we have as well is is is another interesting um product

that we have and And we're obviously expanding um our vision in terms of okay can we provide uh professional node operating services as well. Are we able to support the up andcoming or existing protocols um as a serious digital custodian and and institutional staker or staking service provider so to say. Um yeah and we're also pretty excited about our latest service uh for the web three startups which I'm sure we're going to touch upon. And I'm also pretty excited to see that we're pretty much within the benchmark when it comes to the due diligence and seeing how if you look at it from the example of um a regular crypto company, right? So often

times there's a there's a very complex structure. There's a also funding um which has undergone like a an ICO type raise. So all of that raises questions within the due diligence. Where did the money come from? Were the investors KYCed properly? Did you do it within the jurisdiction that actually has necessary regulatory uh framework? So all of that needs to be considered and you know once I would assume you know you you go through that you know and open up the operating account then we really truly get to know you as a client and we somewhat feel comfortable with with having the business. But yeah again for as a domain expert we've been doing this

for the past seven eight years and we also do this uh with some of our peers in the banking industry. So we also help them decipher uh some of the more difficult cases. Thank you. Interesting. So unfortunately uh dollar is still main currency for crypto right if we all go to coin market cap we see that all cryptocurrencies are linked dollar. And here's a problem right uh Katie you already uh uh mentioned corresponding bank account um services so and I believe that dollar remains very tricky service right so could you please maybe give us some insights on what is happening with correspondent

banking in dollars um I think let's touch on two topics just the general uh aspects to yes dollar payments and and and correspondent banking because most people aren't thinking thinking about what that really means and then we can dive into some of the intricacies about web 3, you know, and wanting to move money, you know, for for web 3 companies on with US dollars. So, there's a lot of request um we get also for US dollar rails. Um so, what is correspondent banking? Um and and what are some of the issues around that? I think one of them again is each bank regardless of if it's anything related to Bitcoin um or or

cryptocurrencies, we'll come to that second is you're you're moving value, you're moving the US dollar around the planet and and you're moving it in different jurisdictions and each jurisdiction can have different levels of compliance standards. So problem number one, um different jurisdictions, you know, uh could be more high-risisk and that's a problem number two because banks can decide if you want to send money to a higher risk jurisdiction and so for web three companies they have to keep that in mind or anybody's company has to keep that in mind. Uh the other thing is operational um in some cases depending on where you're transferring your money to you cross different financial

intermediaries. So many hands in the mix. It takes time and we all know that banks are limited. They're not open 24/7. So you also have the compound of different time zones and uh only so many hours in the banking day. So it's not straight through and it's not 247. So time is the also an issue. And then when we start to overlay some of the things about um working with uh DeFi and crypto uh companies there again we've already discussed it has innate new risks and banks don't like risks um and want to hedge themselves. So they can pick and choose you know who they want to you

know move money around for and where. And in addition, you also have the um interoperability by web 3 setups. They use, you know, blockchain that doesn't necessarily talk to um traditional payment rails. Uh and then there's the cost factor one. It it's not just a press of a button. We're not moving USDT. It's not DVP. It's not just there at the minute. Um there's also there's the transaction fees. there's the fees for Swift um and then there could be FX on top of that. So it's it's costly to move dollars around the planet but we have to unfortunately right it's

it's a necessary evil and so again uh it's transparency in your business and it's also choose your jurisdictions carefully you know thank you. So we have just three minutes left. Um during our preparations for the conference we had a very interesting discussion with CTO of Lugano. So and our colleagues from Lugano said that we definitely should invite fintech company to that panel to join traditional banks because quoting from city of Lugano fintexs are like a young generation of bankers who are challenging traditional banks right so Milish question to you what's the difference and what's the limitation uh to speaking about working with with

fintex compared to banks okay good now I know how I deserve to seat here and I'll say Thank you to uh Pao. Um to make it super simplistic, already 10 years ago, what was fintech? They picked out, you had universal banks that did things the traditional way. Um manual workflows, you push PDFs and forms, you go to the branch. And the challengers, they said, "Okay, let's piece pick one piece of this spectrum. Be it trading, be it just, you know, normal current account.

Let's make it intuitive. let's standardize, let's automate, let people use it themselves so they don't need somebody who sits at the desk and helps them out. Um, I think that was 10 years ago and now uh I think traditional banks become more digital, more fintech and the fintexs become more complex. They broaden their offering. It's if you ask me not intuitive in all cases now when you have 50 buttons to push um and um I think we all spread across this topic but uh raio being more on the fintech side we also try to uh automate many topics that we discuss right now. So on one hand yeah crypto is different but the core principle is the same. Who is

the owner of your business? What is the source of your funds? How do you plan to make money tomorrow? And usually you would go there and speak to a very qualified 10 15 year uh work experience banker who knows which questions to ask and you need to know much more about web 3 to ask the right questions and we um automated big chunk of this work. So basically nobody here I don't know how many are business owners but not a single one of you would get the same onboarding atio with more than 4,000 questions and it will trigger maybe 30 40 50 questions based on your industry.

If you're in real estate it triggers 20 real estate questions. Do you buy property? Do you rent it? Do you take cash deposit? If you're in crypto it will ask topics like yeah do you was there an ICO or is there a token generating event? Is it a payment token, utility token? And the words that were used today a lot was like trust history and we as a newcomer of course that's nice but uh not all customers have that. So we tr in Germany say trust is good control is better. So we capture structured data. So we ask you what is your token, what's your business model, which countries do you interact with and then we'll tailor the monitoring to each customer. or transaction monitoring for

client A that interacts with the US or you know countries even in the global south if it makes sense it's plausible we say this is fine then we're confident to onboard them because their monitoring system will um uh notice so in short automation it should be faster but limitation is it's a bit more rigid because you guys can then you know you can really tailor make your uh process and also your offering is much broader. If you need lending products or very complex financial instruments, then a fintech is probably not the right place to go. It sounds like there is no much difference. Uh Milco, would you like to maybe add a few words? Is there difference compared to traditional bank?

Um basically we are as as uh as min said we are little bit more flexible on reacting directly on on the reply and if a client says I don't know it or I don't I don't don't have this at hand at the moment I have to check it um then we can make an impromptu solution for that for for time being and I think um in on the technological side you get get to to a difficult area when you have very complex structures you have um clients that have three four layers of of of holding companies and and in including trust and seven seven different jurisdictions then this is really also a challenge for us and and to our compliance but still we can can handle it and do it in a manual way um but um

basically it all boils down boils down to to what what we said and we would love to if if we had a pre-screening like that um automated our clients still have to fill in questionnaires and and send it back to us but uh the questions So basically probably go in the very same direction. Yeah. Cool. So unfortunately we're run out of time. So just very briefly uh what would be the next step uh for relationships between blockchain companies and banks? Just question to uh to all of us. So KT just um I think if if we dial forward uh we also talked about it this morning. Um the oh it's still the morning earlier this morning um I think we're going to live in a

hybrid world when it comes to like we have now you're going to have classic banks fintech banks like an incor we're going to have uh digital banks like uh and you know everyone on the panel here we have a there's a clientele for us uh and I I think the key is do your shopping find the right bank for you that has the services that cater to your particular business model. We see a lot of um you know convergence hybrid way as as Katie mentioned. Um there's a lot of interesting things happening um with some of our friends at Matalabs and the stuff that they do in the ZK sync ecosystem trying to bring a

lot of the banking infrastructure actually onchain through you know private uh subnets and you know at the same time we're also seeing the incredible advancements of what you know Mastercard is doing with crypto credentials that's just phenomenal. Um I I sat through a presentation soon today and I was just like you've just destroyed all the all the bridges and all the oracles. You don't need that anymore. So I I I see this as a convergence and uh in in the end it's all assets. Um it's just the technology that is different. So yeah, thank you.

Try to be quick. I think there's one soft more soft dimension. It is what I see actually since the last symposium. clients that come to us in the meeting. It used to be like a diehard crypto guy founder does I don't want to tell you anything. Today he sits there with a compliance officer or AML officer who speaks kind of our language. On the other hand we try to speak their language. So it's the soft thing the understanding and the more let's say hard uh convergence is that we on our side try to build product for them. They say we want to keep segregated customer funds on your account. Give us virtual eyebands. Give us a good API. So thinking grows together in terms of uh software and the solutions that we build

but also in a more common understanding of why we ask the questions and why it's important to understand them. Again no more kids coming right from our perspective um I think we have we have two things um to add. One is um we want to we listen much more to to our new clients than to the old ones because they are the future and they will shape banking in a different direction um than most traditional banks believe. Um we will be reduced to a kind of service provider that is there if the client wants to and it's not us that that explain the client what he has to what what he needs. And on the other side um to be very frankly traditional banks are

not there to solve um startup problems. We are not the distribution arms of of um potential uh fund distributors and and things like that. Um we are just here to serve our clients. We don't we we are not a sales platform for for web three startups. Thank you. So we don't have time for questions but we will have I think a lot of opportunities during day today. Uh we'll have a so we all stay here till the end right. So feel free to ask questions in the flexible format during the day. So guys thank you and big thank you to the panelists. Thank you. Thank you very much.