The Bank's Digital Money Dilemmas: Tokenized Deposits, Stablecoins, and Other Considerations

Transcript

to invite on stage Eva Lawrence from Figment, Peter Kupli from the Turk Cantonalbank, Fritz Jost from Signum Bank, last but definitely not least, Ricardo Doniga from Banca Sella. Please join me on stage. Wow. Here we go. And the seating is as per on screen. Yeah, exactly. I think Eva.

You want me to move up? Yes, sure. Yeah, just you know. Right. Nice show of your athletic ability there jumping on the stage. I appreciated that. Hello everyone. It's a pleasure to be here in Zurich today and I'm very excited for this panel and to be joined by these esteemed guests. I have been told that that Peter and Fritz have a a reputation perhaps of speaking together on panels, so I'm not even sure if I'm needed today. I think they could probably just carry on without me.

But I hopefully will add some value. So today we're going to talk about the banks and digital money dilemmas, tokenized deposits, stablecoins and more. So without further ado, I would like to introduce each of our panelists. Peter from ZKB, Zurich Cantonalbank, the head of digital asset solutions there. ZKB is a 150-year-old institution with a state guarantee and some might say conservative reputation. So Peter, my first question to you is what is the case internally for entering the digital asset business? And what has the journey actually looked like from

your first B2C, B2B crypto offerings through to settling digital bonds against wholesale CBDCs? Yes, good morning to everybody. Thank you for having me here, Eva. Indeed, ZKB is quite old, traditional and very conservative. But on the other hand, we are triple A rated and we are the second safest bank in the world. Before you ask, Eva, the safest bank in the world is a smaller bank in Germany.

I don't know why everybody always always ask about it. Um, nobody cares about this German small German bank. We are the second safest bank in the world. That's the message. But I I need to work on my sales pitch again. I think so, maybe. But yeah, going back to the to the point, um, our journey into digital assets has not been a walk in the park. But we have to differentiate. Um, ZKB believes in a new technology um, and see the potential. For example, as you mentioned, we settled we we issued the first digital bond and settled against wholesale CBDC as

part of the project Helvetia phase three. Um, we see huge potential in the fund industry because the settlement process is there are still like in the '80s or '90s. Our concerns are more against crypto. main reason is reputation risk. Right. Nevertheless, we've been offering crypto services to our B2C and B2B clients for more than 1 and 1/2 year. Our motivation was the demand from our customer, especially from the B2B side.

So we were approached by several banks which asked us for providing them with an infrastructure because they have also a strong demand from from their clients. Um, that's the reason why we offer crypto trading and custody for our clients and that's for now more than 1 and 1/2 year. So would you say you've seen that that tipping point in in terms of crypto and crypto adoption or do you think we're still on the on the cusp? Uh, we see it it is extremely market driven, you know. If we have Bitcoin price over 100K, then I get a lot of phone calls from other banks as well because they say, "Now we we want to offer it. Let's talk." And 4 weeks later they say if

they I I call them back and say, "Let us talk now." They say and the Bitcoin is in within going down to 80,000. So they say, "Now it's it's going lower on our prioritization." So that's a little bit the point. It's really driven by the market and less by inner motivation. And let's jump over to Fritz. So Fritz Jost from Signum Bank, thank you for joining us. Fritz is the chief B2B officer at Signum. Uh, Fritz Signum describes itself as more of a tech company with a banking license than a traditional bank.

And in 6 years it has grown from zero clients to 5.5 billion in assets under custody serving over 25 different clients. You've argued that crypto, not tokenized deposits, is the first big wave for banks entering digital assets. Can you share a little bit more on on why this is the case? Yes, thank you very much. Also thank you for having me. Number one, banks move when they get disrupted. So they realize that number one, that maybe there's a risk of the fiat world moving onto the blockchain.

They also see money walking out across the street to providers who actually do service clients who want to invest in crypto. And probably thirdly, they also see that that's very difficult to connect to the next gen. Next gen through that my colleague is going to highlight how they have really been activating the next gen. We see it also from our banks. They are completely oblivious when you talk about US Treasuries or even equity, but they are very connected when you talk about crypto. So we've seen that from these next gen generations more than ZKB, you mentioned 40%. We see sometimes

banks up to 60% of investors in crypto are for these banks first-time investors in investment products. So banks realize that for these reasons they need to be future ready. Future ready, all these use cases have one common infrastructure and therefore we see them looking at the road map, not only the first destination of going buy, hold and sell crypto, but really map out the entire journey and we can really see at least from our side of the market that the train has left the station.

Discussion is not so much about the why anymore, it's much more about why not. So the banks are focused on future-proofing their their road map and their product road map. Absolutely. And I can take maybe examples of commercial banks, also PostFinance. They have PostFinance, they have more than 1 billion payment transactions a year. They looked at this a couple of years ago and said, "Look, if fiat is moving onto the blockchain, we will be completely disrupted." And so see it other banks as well. So the it's it's it's the time is of essence and therefore we're going to talk about

this probably later, buy versus sell. It is important that you're future ready and you can actually engage in those use cases. Thank you, Fritz. And now to our third panelist, Ricardo Doniga from Banca Sella. Ricardo heads up DLT and digital asset products at the bank. Ricardo, Banca Sella decided to enter the stablecoin space not by issuing a stablecoin directly, but through a consortium. Walk through that decision. How did the bank get to to that approach?

And was there a particular regulatory path that led you there? And what does it tell other banks who are maybe contemplating the same issue? What should they learn from your strategy? Sure. Good morning to everyone and thank you for listening to me. So there is a funny story about that. We first start by trying to issue our stablecoin. So we started working like 4 years ago where we founded the DLT competence center. We done our first project together with Italian regulator under the new Mika framework to issue a stablecoin in a so-called test environment. We done all the path to train internally our our people, to build a team, to

build a technology. We end up issuing a test stablecoin on Algorand. Then we get the approval from from the Italian regulator meaning that they see the project, they made some question. We try also to educate each other around the new Mika framework. Then we end up asking ourselves, what could be the business on that? And we quickly realized that for a bank, especially a bank like Banca Sella, which have a huge, I would say, share in payment market in Italy, but still a regional coverage, really doesn't make sense to issue a stablecoin by our own. And so we done all the discussion with the

consortium. We end up joining Kivalis. And we believe that the main point on issuing a stablecoin, especially a new one, is the distribution channel, as you as you might imagine, we will face competition from USD native stable coin which huge market share. So, having strong distribution channel is one of the key to go a stable coin. Together with the consortium and kibali says we we are building this distribution network meaning that we a lot of bank are joining are joining us and I believe this is the key challenge for for for our project.

If I have to to talk to a new to a new bank that want to issue a stable coin, I would advise of course to focusing on what could be distribution channel, the business model around that, which use case. I'm strongly convinced that bank have a big opportunity still in the stable coin market cause we could bring to the market new client that are don't really know what crypto are. I'm talking especially about Southern Europe and Italy. And for this reason, if you find a good leverage between having a good use case, strong distribution channel, maybe a stable coin in Euro which is something new in the market that we we already have while we don't have offer by a

bank. I believe there is a good opportunity to build a new a new competitor to USD stable coin. Thank you. Now, Fritz, you touched on it already. Partnership in this industry is so important especially for the banks. Something we're focused very much on at Figment. How can we meet the needs of our large institutional banking partners? When a bank and or institution like each of your respective firms decides it wants to offer digital asset products, the first question is generally whether to build infrastructure in house or or partner or go out and buy.

Whether it be through an acquisition or a partnership with another firm. Given the technical complexity of custody, compliance, settlement, how should each European bank think about that choice? Where have you seen it go right and and where have you seen it go wrong? Do you want to to kick us off on that one, Fritz? Yeah, I think it that from the more than 25 banks which have partnered with Signum, only one decided to build. And it actually took them several years to market. And what I was strong recommendation really is map out the journey because the journey is the destination. Don't just look at the

first mile or milestone which may be buy, hold and sell crypto. Look at what is the business case, go to staking, transfer ins, transfer outs. Look at maybe the lending side. So, once you have mapped out, you know what infrastructure you need and also what partner you may need to actually be the partner of choice on the journey. And the you know, time to market as we have mentioned before, it is essential because as we see the outflow of many banks and they say, "Look, we need to stop it."

And therefore, build is the right decision at least at the beginning because you can actually be live up and running in less than 60 days depending on complexity. And that means that you can send out a lighthouse signal to your clients. We open for business and actually really engage in those use cases and be ready in case, you know, be it the fiat which goes more and more onto the blockchain that you are future ready. But also, it doesn't mean that you are bound to actually continue on that journey because the modular offering allows our partners at least to in-source when they have validated use

case and when they maybe see the necessity to in-source certain services. For example, global banks with an investment banking division, they want to in-source at the latest stage trading. So, they will in-source this. The same maybe for the custody solution or they may want to build a second custody solution just as a fallback because if payments are ongoing onto the blockchain, then maybe they definitely need more than one custody solution and then they can in-source it. So, in summary, it really is the journey is destination. Buy to start, but it doesn't exclude include to build at a later stage.

May I add something? >> Please do. Now, I fully agree with Fritz. I think for small and mid banks at the moment, it doesn't make sense to spend a lot of money to build up their own infrastructure as long as they have partners like Signum and ZKB which support them and make their onboarding much easier. At the moment, what I see is that many banks are discussing the next strategy period until 2030 and they ask me they want to add cryptos into their strategy. And I always say don't be so focused on cryptos because what Signum and and ZKB are offering is the access to public blockchains. I think if you think about the next 5 years, what you need as a bank is access

to public blockchains because that's much more than cryptos. And it's exactly what I think what should be in the strategy for more or less all banks over the next 5 years. Okay, great. I'm glad you didn't just say private blockchains there though. That's good. Ricardo. Yeah, one more thing around that. I believe that as a bank, the first choice you need to take when you enter this world is either on doing custody on your own or to leverage on external provider. I believe that that decision is crucial also in term of business. It depend about your business and what kind of market you want to take because doing the custody inside the bank could offer

also value added to the client meaning that as a bank, you can provide much more security than external provider. But on the other side, it's something that to be really available for the client need to be done really really good because, you know, offering custody is a different job that what we are used to do with classic money and bank money. It require all the new technology stack. So, you need to be sure that you want to do that path to offer a really strong custody.

Otherwise, it's probably better to go with the external provider. I believe that they can speed up the the market the go-to-market strategy. But on the other side, I would also consider to retain some part of the secret or the key inside the bank to give more assurance to the to our client. I see especially in Italy or in Europe or a lot of bank doing trading payment service just going with external provider which is something good. It could help to speed up the market value. But as a bank, I would consider also the value of offering custody to our client cause security

it has been proved in the last 3 years is one of the core topic around this world and is the basic infrastructure to build everything on top of that. So, speed to market is key but balancing it against security and and compliance. Fritz, you look like you wanted to add something there. Did you have something It's maybe just to share one other thought is going back to the notion of the journey is the destination. Do not underestimate the logistics which takes particularly in amending your org reg because most banks, at least in Switzerland, looking at the existing org reg, they can actually just inform FINMA. But the moment they go into staking, transfers

and the likes, they have to change the org reg. They have to go to FINMA and that can take a very long time. We have partner banks who have been waiting for more than half a year and still working on the application. So, time is of the essence and if you do can plan this, do it because every one of our banks is not just even though they may be live with buy, hold and sell, all of them are working on releasing new services. But as said, it takes a lot of administrative effort and the attention of FINMA to give this priority. Yeah, it's a good point. It's a good point.

There's a common a common assumption that tokenized deposits are the natural safer entry point for banks. More familiar, more more regulated, less controversial than crypto. But the volume and adoption of data suggests otherwise. I would like to ask you all, do you consider crypto to be the first wave or tokenized deposits? Where do tokenized deposits and stable coins actually fit into the digital asset journey once a a bank begins to move forward?

I think it's quite difficult to bring this all all these topics together because the the purpose for cryptos for from our customers is totally different one. What they are doing is they buy Bitcoin, they want to impress their friends that they have Bitcoin and then they wait till the Bitcoin is 1 million and they want to sell it. That's their strategy. So, cryptos is really from my point of view, um just for investments as a new additional asset class.

And uh Tokenized deposits and stablecoin now is a totally different story. And in Switzerland, we are really early uh at the beginning in this story. We not not yet have an uh um regulatory framework for stablecoins. That's on the way. Uh so, and what we see in our bank is that at this early stage, we do not have any demand from our customer, neither for tokenized deposits nor for stablecoins. What we're doing is we are we prepare ourselves um because we can imagine that uh at some point in the future that will be a demand uh for the well-known use cases like cross-border payments, settlements on

chain, and so on. Um but at the moment, I think we in Switzerland in Switzerland we are really on a very early stage. And what about you, Franz? Where are you seeing any demand for for stablecoins and tokenized deposits? Or what comes first in the customer journey when banks are reaching out to to Sygnum? Well, uh I would not say it's a Shakespearean question to be or not to be in tokenization, but it's uh more, you know, how do I allocate scarce resources? Uh at Sygnum I mentioned it before, we're a tech company with a banking license. We started more than 6 years ago on tokenization.

Big dreams, big hopes. Obviously too early, as we know now. Uh we've been tokenizing non-bankable assets to make them bankable, be it art, collectible, uh wine, real estate. And we even generated we we created the digital Swiss franc to really be living up to the spirit of this to be atomically settling on the blockchain. So, we've had that for more than 6 years, and it's not that we are not active. We've done a lot. But it's certainly not to say that it justifies the existence of Sygnum financially. At the moment, we're certainly very busy in the areas of uh tokenizing VCs because life cycle management is much more efficient on the

blockchain. And we heard it also before, money market uh deposits, tokenized money market deposits deposits. Uh we certainly see a big trend, but it's still very fragmented. So, don't make a business out of it unless you have long breath. Uh but yes, absolutely, if you have scarce resources, make the allocation, but do not ignore tokenization. And what about from your perspective, Ricardo? I think you service a slightly different sector of the market. Does it Does it offer a different view on on on where stablecoins and tokenized deposits appear in their journey? So, regarding the tokenized deposit, I agree with the fellow panelist, it is not kind of

product that our client are asking for. Also, because I believe that tokenized deposit are could be seen like an instrument to streamline payment use case that are already live. So, I believe that tokenized deposit could be used for between banks to streamline, for example, international payment uh delivery versus payment use case. But on the other hand, we are not seeing growing developing of this use case, this kind of product because is still uh a bank product that need to be uh need to circulate in closed loop between banks, and this make more difficult to to create the right channel, the right framework to create deposit token that can circulate. And also, another topic that this kind of

instrument are still depending on uh central uh bank money settlement. So, you can use, for example, deposit token to pay cross-border between two banks, uh but still you will will then need the central money uh bank to settle uh the to reach the finality of payment, and then you end up using probably uh again legacy system or connections to Fedwire or Target2. So, there is a potentiality for deposit token, but probably still too early to find the right framework. While on stablecoin, my opinion is a different story. It's a product that is already live since a lot of year. We do have client that are asking us to provide on ramp and off

ramp to use stablecoin for payment. Uh We are seeing uh small medium enterprise and even retail client using stablecoin for doing remittance or international payment. So, I believe that the market is more mature to start offering something, and that's why we joined Kiva as course. And uh in general, I see a future where these two kind of instrument can uh live together with different use case probably. Uh especially again when it comes to doing international payment uh or cash leg to tokenization uh money market found web three application.

Now, let's talk about wholesale CBDCs for a moment. Um SIX Digital Exchange settled transactions against the Swiss National Bank's wholesale CBDC through the Helvetia III project, I believe. Um I'd like to ask you all what you believe the central bank's role is in in wholesale CBDCs. Um the central bank money in a tokenized financial system, what what should we expect there? Is CBDCs uh a complement to tokenized uh commercial bank money, or is this a competitive relationship further down the line?

Uh finally complementary and not competitive. Um what we have seen at the Helvetia project phase three, um first of all, that it worked quite well. So, neither technically nor operational any challenges. So, it's quite easy to implement that implement. What we've also seen is that the huge media attention at the time. It was enormous. It was really a big success in case of uh marketing. Um I would say for for daily business, it it's really it doesn't cover this problem of the missing cash leg on the It is a complementary, and I think it could be help, and we see that I guess in in project Agora, and that it could

work quite well together with uh tokenized deposit, for example. But uh it will not cover, especially not in Switzerland, as we only um talk about the wholesale CBDC. So, it will not cover all of the challenges where we have um with the with the cash leg on chain. I think um we are now in in in project Helvetia pilot, that's the following project of phase after phase three. And what we see now is that we are struggle a little bit with the use cases. So, what we are looking for is new use cases for the usage of this wholesale CBDC.

Wholesale CBDC is a good thing, but we what we have to look for is where is the perfect fit into the industry in this in digital industry where we can use um the wholesale CBDC on its best way. And maybe just to add on this, yes, uh it does make headlines, but it doesn't pay the bills. But uh I really feel that uh we need as ecosystem players to innovate and to be future ready. Uh even though it's not here yet, but we need to be ready when it comes. Uh with Sygnum, we have uh also done together with UBS, PostFinance, and the Banker's Association uh pilot uh on um deposits,

tokenized deposits, uh because for us it was important to be at least future ready on two things. Number one, to be clear on being able to do the interbank transfers of uh deposit tokens. And number two, technical aspect is normally the easier one, uh but also the legal framework to establish that that it's actually uh done. So, that does mean that we need to tool around to be ready when and if the demand comes, and not then try to catch up.

Yeah, last quick remark on that. Uh in Europe, probably uh digital euro both wholesale and retail will be one of the major means of payment. I'm pretty sure about that. But we need to consider that at this moment, people are already changing uh the way they're using money, and this will continue in the future. We already have clients using for example, stablecoin or crypto, and they are also trying to and starting to interact with DeFi, and I believe this part of the economy will grow in the next year, and I believe that we need to give also an answer to our client that are interacting with this protocol, that are using this use case, that are sending money, for example,

internationally with stablecoin. And as a bank, uh we should be ready also to offer that kind of service together with CBDC and maybe deposit token to be one-stop shop for all the uh payments need for our client. Thank you. Now, we don't have long left, but I'd like to take a couple of minutes to talk to you all about the future. Um if the digital bank money, uh whether that's stablecoins, tokenized deposits, wholesale CBDC, continues to evolve over the next 3 to 5 years, where do we end up?

And what is the next step on the that journey that genuinely excites each of you? Whether it's tokenized money market funds, programmable payments, or something else entirely. Who would like to go first? I can go first if you want. So Uh Uh so we we talk about future up until now so I can talk about sci-fi so real far future. Uh I believe that one of the most interesting topic is uh agentive payment on blockchain. I believe that blockchain could be a common layer for all the company, all the banks that want to interact with agentive payment. Uh I cannot imagine having these agent

interact with with the the normal core system. It would be probably too much segregated and not transparent enough. And uh I believe in the next 10 years probably we will see a lot of the transaction, especially machine-to-machine transaction going on on blockchain with the with the stablecoin. Who wants to go next? Um I would say I trust to tokenize a traditional asset is not effective. Um what we need we need tokenize money and that we can use the benefits from the blockchain, from the programmability of the of the assets and and the tokenize money.

Um that makes sense for me. What we need is uh we need use cases to prove that. The problem is a little bit to establish these use cases. Um keyword mass adoption, we need the banks. And if you want to have the banks on board, it must be able to monetize these use cases. Because the time of POC is over. Um really all these use cases have to be monetized. I think that's a little bit the challenge where we have right now and hopefully we find a way how to monetize these these various use cases where we talk about. Uh by the way, same challenge is with AI at the moment as

well. It sounds great but then to to shift into uh that you get um a benefit from it, financial benefit as bank is quite difficult. And I think we are at the same point and I'm a little bit scared that we that really we should push forward that as soon as possible we see these benefits also in a financial way for banks, then you get the banks on board, not only for cryptos but also for tokenize assets and then with this mass adoption uh we will push the industry forward and that's that's my hope that we'll find these use cases which can be monetized.

I just love the disruptive nature of blockchain and either banks are going to have a seat at the table or they're going to be on the menu. And really the blockchain in terms of addressing those you know, points of single point of failures. It's not just in financial industry, it's the the settlement process, exchanges, all of this is also the authority to take it back to the individuum versus depending on those single point of deliveries. Uh particularly my background is OTC derivatives and we know that the settlement of derivatives is hugely complex and we had many crisis because of that single point of failure. If it's

on the blockchain, if it goes on the blockchain, we'll have a much better sleep. Thank you. We've covered a lot today in a short amount of time. We've talked about future-proofing uh your product roadmap. We've talked about buy versus build, uh crypto first then tokenization, everything in between. Um I don't know for for any of you at the back you uh you might not be able to see Peter's socks which actually say all is pretty. Now the markets in crypto are not that pretty but I think that we can agree um with the three great banks that we have on the stage here today, digital money in which a form uh the future looks bright for that at least.

Thank you all so much and thank you.