Digital Securities: The Future of Capital Markets | European Blockchain Convention 9

[Music] so good morning everyone um my name is Victor I will be moderating this panel today we will be talking digital Securities Capital markets and tokenization uh let's do a quick round of intro so I suggest we start with scoty this first rightly okay so I'm cot de mon I work at Banco Santander I'm leading the Crypt and blockchain Center of Excellence for the whole group um since uh 2018 and I'm recently also CTO Global CTO for the for the group thank you let's continue with Michael I'm Michael Cyrus I'm working for Deca Bank I'm responsible uh for short-term trading at Deca Bank I think uh we were among the first to create uh Securities lending uh on a blockchain uh and we issued and structured a couple of digital Securities and uh deab Bank also created a startup swet uh to focus on the development of a settlement structure uh based on blockchain for digital Securities Claus yeah my name is Claus and thanks for having me I'm working for d z bank and the transaction banking Department I'm currently busy with um following ECB with the digital Euro project and trying to build the commercial bank money token and Arno hi everyone delighted to be there so I'm AR Chief digital officer at Cassis Cassis being the custodial arm of uh credit arol for invest Institutional Investor uh we are now really deeply involved into tokenized asset topics so I'm really happy to share our views today so let's get in tokenization I'm going to say a quick definition but I think everyone knows it because everyone will talk about it over the next two days digital representation of uh ownership or an asset basically could be Equity depth that's what we will be talking about as a starting point uh what I'd like to hear is more about the point of view of banks as we have four Banks here uh on the future of digital Securities how is it seen inter internally are you seeing it as a potential future or as a certain future and the underlying question is do you see this so far more as a tactical play or are you going really with a strategic point of view and let's start with Arno and Cassis yeah thank you Victor so um it's pretty clear on our side that it's not tactical it's clearly a strategic move and uh we deeply believe that there will be a shift from traditional Finance to tokenized one of course it will take time and it will happen in one or two years but we clearly see now something happening if I just takeen a few example when we are talking about toiz financial instrument you can talk about the bonds the equity the phone shares and so on and so forth uh having a look at what happening on the bonds Market there are many experimentation live uh more or less every bank is already having some tokenized bonds it's uh it's a little bit less true uh if we talk about equities and we see also some important project on the on the fund share side we've got just two them some really known platform like eess in France F DLT in Luxembourg and so on and so forth so I really think it's a strategic move but there are probably some remaining hurdles the the first one be if we talk about bonds or equities for instance the lack of a secondary Market maybe probably pilot regime will help us to progress on that side but at the moment there is no secondary market and we see that managing everything OTC it's really it's really um not enough so it's not working the way it should be working the second one is regulation itself because you know us as a bank we're still really afraid about regulation should we do this are we allowed to do that we're not so sure so we we made huge progresses for instance with in France with um the San statute digital asset service provider on the European level with maika we've got the pilot regime I think we'll get back on this little bit little bit later on the in the discussion but it's still a really important part but we still missing clear messages saying you are allowed to and you won't be punished for this and finally uh maybe I would say the last the last point is that we probably put the focus too much on the tech and not enough on the business side meaning that at the moment at least in Europe what we can see that we have very efficient Marketplace system so why should the investor move from the traditional to the tokenized financial in instrument and that's probably uh and something that would be interesting to discuss further but we should probably focus on how to reconcile both World bringing the added value of tokenized financial instruments like no reconciliation instant settlement reporting shared at the set time withone with a traditional way to uh invest uh or to redeem so that's all on my side thanks let's continue CL nothing to add really we Absolut anything to add on this topic I think that we all agree that it's a strategic move for all of us that we recognize the transformative Evolution that this is going to bring to the current Silo platforms infrastructure um that we have in that sense we can see that most of the large financial institutions and central banks are already understanding the implications that tokenization is going to have when all assets are going to be digital programmable um objects and in that sense in that sense at Santander we've been uh working on on this since 2016 and and we have achieved significant experience on tokenization both of Securities with our digital Bond program where we've already participated in in three insurances on the on the blockchain of bonds and also important the tokenization of cash and in that sense we are funding members of finality and I I'm proud to say that in the coming weeks we will probably have the digital pound already in production backed by Reserves at the um Bank of England yeah I think I would underline uh it is strategic at Deca um it's the first time ever that the DECA bank has created a startup uh um in this space um and we also so um having one of the larger investment budgets um into this area so we certainly do think that this is a strategic um Market initiative that said we have been doing this now I think we started somewhere in 2016 or 2017 and uh we also find that um it's not just enough um to be investing uh into this area to be an investor in digital assets to be an issuer in digital assets to be a Deo bank for digital assets and fulfill all these roles all by ourselves what we actually need is an ecosystem yeah and setting up this ecosystem is uh of course you need a lot of different partners and everybody at the moment is doing whatever he likes nobody's really linking into anybody else and this is also why we find it incredibly difficult uh to establish this um this ecosystem uh uh in the market yeah so so we are doing it yeah but and we have a couple of Partners uh but it's certainly taking much longer and it's not the kind of Blockbuster development that everybody would love to see uh so I think we found out that it's a it's a relatively steep slope uh and it's uh it cost a lot of money actually yeah it does um let's continue so we see that basically it looks like a certain future and I'm going to quote Larry think the co of Black Rock the next generation of capital markets at least from his View is are digital Securities now when you talk digital Securities there are different asset class you have Equity you have depth you have Structured Products you will have funds you will have other products where do you see the biggest opportunities and why and let's continue with Michael well I think uh this was more or less 20 years ago uh my boss said at the conference we should be in a position to collateralize the chairs on which you're sitting and everybody thought this was a crazy idea but in essence the idea was just to be able to transfer ownership for any sort of asset so it was not so much difficult or different uh to to what people are doing today then came 2007 and 2008 and everything went uh was flushed down the toilet uh um probably with the exception of the shares on which you sitting uh so the topic is not really new it has always been there yeah so um I think the question is more like um where do you find the opportunity if you do a digital security or if you do a token now if you do a barabond or if you do it in a registered form actually that's not just a legal repper it's not important you can do all these kind of things today in numerous platforms many of them being operated uh by the verses uh so where is actually an opportunity and this is actually where we had some focus on uh number one there is an opportunity uh in all kind of assets which at the moment are not digital that said then you're immediately talking about the illiquid part of the asset curve yeah so you're talking about registered Bond you're talking about some kind of covered exposures yeah so the issue sizes can vary between 5 to 20 million and then people would already say okay that is an interesting asset yes it is but if you take an issue like k w they issue something like 3 billion in one Bond yeah so so that's number one so you can actually um uh start to bring assets on the blockchain which currently have no digital ecosystem and then there's another opportunity because many of our Capital markets are extremely vertical yeah so you have the big players the big Banks and they are operating pretty much like the backbone of the capital markets industry this is where you have the large custodians this is where you have the settlement engines this is where you have the big exchanges now blockchain at least in our view now offers an opportunity to bring these uh business models down and be more decentralized be more democratic and be more horizontal and we actually did a couple of these transactions with our savings a couple of years ago we always had the same relationship the savings need to refinance themselves uh and then they issue bonds and the bonds are being bought by three or five big banks in the public sector yeah now actually uh balance sheet has become a scarse resource liquidity has become a scar resource and the same goes for Capital and we actually found that this is a good idea to bring this business down so that savings can do that among themselves yeah because we have a couple of surplus savings and we have a couple of deficit savings they don't need the big players to absorb the slack and to the do the Surplus man management they can do it among themselves and this is actually where we found some traction yeah and uh at least the goal for next year is that we have 20 to 50 savings probably on the blockchain to do this kind of business so that is new yeah but this is where we probably need to focus on where do you add value where do you do something uh completely different than to where the market is as of today maybe if I can just add something that has been introduced by K and that is Major is the cash leg because we keep on talking about Securities leg but we're still missing the cash legs until we use table coin as you mention but at least from a French perspective it not it's not so well perceived by Central Bank and the traditional system at the moment they have the major thing which is delivery versus payment so you're not sending the money without having the Securities and this is something fundamental if we want to uh to be successful on the blockchain system for tokenized financial instruments so we're still expecting the Central Bank digital currency so that will be a something at least really expected from us but we should we should think as much as we've thought about the Securities leg for the cash leg I just wanted to mention this so that's that's a very good transition um so we have Securities we have the cash leg which is critical now we are a bit on the other side as tus as digital infrastructure provider and we saw a lot of demand when it comes to tokenization especially tokenized deposits which is one of these element um how do you explain such a demand at least from a bank point of view even if sometimes they don't always talk about it you have the GP Morgan coin you have the C coin and you have many other projects uh how do you explain such yes such a growing demand well I think it's pretty simple when it comes to tokiz products our customers our corporate customers are asking for for a proper method to pay on private blockchains and there is no proper method right now in my opinion and that's why we are trying to solve this problem I mean in Germany we came up with the commercial bank money token idea when we started this there was no term like the tokenized deposits we started back in 2019 we couldn't even talk about it we didn't have the terms to talk about propably yeah and um this is on the on the other side this is the very basic of what a bank is doing a bank is collecting deposits and giving out loans creating money by the way umus and this is our very basic business model so I mean there is some interest and it's it's getting more interested the idea and I think this is the future of the commercial bank money that we just upgrade the technology we are not trying to build a new cryptocurrency we are not trying to build a new stable coin we are trying to offer Commercial Bank money on the LTS readily available because the economy is running on Commercial Bank money you may like Commercial Bank money or you don't like it I don't know but you are using it yeah even in just if you just take the Euro Zone there are 10 trillion Euro Commercial Bank money around this is what keeps the economy going yeah this is what keeps your fridge filled this is what pays your rent I mean I like pixel art of apes and such yeah but this doesn't help really as an economy so we are trying to set this up go yeah so I think the first thing for for the audience is why we need digital money right so we need digital money in my opinion for three reasons first because we are talking about tokenizing assets and we have to pay for those assets so we need also a digital cash leg so we can obtain that delivery versus payment so there's no sense in having only one leg digital and the other on the traditional rails second ly we need a a new form of money that can interact with the smart contracts because there will be many processes run in a smart contracts that need to trigger payments and the third thing is because it can um provide a lot of innovation in new businesses like H micro payments or pay per use models right so we need digital Mo Money and that's clear what alternatives do we have we have stable coins that present several risks as we all know like for example it's difficult to keep the the stabilization mechanism and we already seen some situations where they lost the the peg right we've got Central Bank digital currencies which are right now projects experiments so it's going to take its time and the alternative that we are discussing here it's tokenizing Commercial Bank money and I think that it has a lot of advant advantages over the two previous options first because we can keep the two tier system that we have right now that money can be lent if there's a reduction in Commercial Bank money going to stable coins or Central Bank digital currencies that can impact our ability of the banks to lend money to people that need it right and um on the other hand um Commercial Bank money tokens can be more flexible that Central Bank digital currencies and we can move faster the private sector than than the public sector so that's why I think that we are all uh so uh happy or so enthusiastic in the banks about this um alternative any other so transitioning a bit um we talked the Strategic move we talked the use cases let's Deep dive a bit further into the actual technology Choice okay so c as a CTO basically what are your key consideration when you choose basically when you that will drive actually your technology Choice when digitizing Securities yeah so on the tech side I have to say that we are in a very early stage still and there's a lot of debate around three main choices the first choice is the type of network that you use and um the the traditional um institutions have been always bit scared or have found public networks um risky from a reputational point of view from um a compliance point of view uh and that's why many of the early projects like you mentioned the JP Morgan coin have been um developed using private networks but we have to acknowledge that public networks are evolving rapidly and we see for example in ethereum that they have changed from proof of work to proof of stake solving the ESG problem that they had and I'm sure that they will keep on evolving to to have um better transaction throughput as well that it's one of the things that that in the financial industry we are worried um about so we see that there are many many projects moving to private networks there are some experiments in public networks as well and and some are looking for what they call a universal Ledger like a universal Ledger for the traditional Financial um industry projects like the regulated liability Network already ongoing in the US in Switzerland in the UK as well but as you see there's like no consensus of the type of network that would be the best and what it's clear that there will be many Networks different types um that will coexist and we will need interoperability mechanism to transfer assets and data from one network to another probably there's going to be one network for cbdcs commercial bank money another one for Securities and they will need to talk to to each other and there are already Pilots for example on connecting xql ax with finality that it was successful we did it some months um ago so that's on the network um choice there's another on the protocol choice and I see a lot of agreement in the industry of using um ethereum compatible protocols because for two reasons one is the interoperability because it's interesting to be interoperable also with the public ethereum network um and and secondly because there's a big Community behind that it's going to keep the Innovation moving forward and then the third choice that you have to do is the type of a standard that you use if you use an ERC 20 token ERC um 1,400 there's again no consensus on that and we've seen in the pilot regime that there are many projects that are presenting different types of standards they they all have some criteria some conditions to meet a compliance require requirements of Securities but again there's not a winner um and I see that there's some needs on the technology side um that are still um pending and and they are very important one is that we tend to think that technology blockchain technology it's plug and play and it's not you need to adapt to reengineer your processes your governance it's not just issuing the bond on the blockchain you need to reengineer all the things that are around that second one is that we need interoperability which is obvious as already mentioned that there will many uh types of n networks coexisting we need privacy um public networks information is public we all know in our H sector we we need confidentiality of the identity of the user and of the data of the transactions and that links to Identity for this getting um Massa option to tokenize at scale we need a digital identity that Maps your real identity where your with your digital um one and there are so many other things about scalability transaction through put user experience so that's why I say that we are at that early stage yeah I think I I I tend to agree yeah um of course and what you just described was uh the process of setting up this Ultra complex ecos system that we actually have in capital markets yeah and this is uh one of the reasons why when we for instance started we started actually um with a private and uh with a private blockchain uh because there was no way that we will be able to do all the kind of things you just described uh on a public blockchain or on many public blockchain in a regulatory compliant format yeah and the point is and we had numerous instances also in the German Market uh where we had a couple of banks uh which which tried to to advance their agenda relatively quickly and then they came up with uh assets and structures uh for their clients and then the barin our local regulator stepped in and said who who who wait I don't understand exactly what you're doing here is this really compliant and then actually the whole thing stopped and and what you have to know is that of course if you if you get a couple of transactions wrong in capital markets uh um these guys usually come down to you personally yeah this is not just like the bank gets a slap on the wrist actually it is who did this yeah I did a trans i i i a department and we doing thousands of transactions we had one transaction time where we generated 5,000 transactions we got eight wrong our Auditors saw that they went straight to the board yeah and they initial reaction was we have to fire the guys who did this uh so and this is a it's a it's a huge Obstacle of course on this sort of regulation for all kind of innovation and this is why you have to do it incrementally yeah so and and one way to do this of course is to do it in a private uh uh private environment where you know all the participants and where you can write up all the legal documents and what we also found out when we did our business is that in many instances we had more legal docu doents being written and exchanged on a f machine between the counterparties and not less when we do um uh digital issuance and transfer of ownership and all these kind of things yeah so well if you want to do this in a regulatory compliant format and that is a difficulty yeah so it's it's not about everybody is able to to construct a protocol that you are able to transfer some some asset value and transfer ownership you can do that but can you do that in a regulatory compliant way that is a big question and the problem is nobody knows all these kind of regulations because there is no phone number for Mr regulator you can phone up yeah in Germany alone you have two or three different Regulators to whom you have to speak and they are also not exchanging their views yeah and the situation of course is much worse uh in in all of Europe building on regulation as we talk about it we have like uh you have maika you have pilot regime you have ewg Act to registra you have blockchain act 123 in Luxembourg you have the Swiss DLT blockchain law recognizing leer based Securities in the end are you seeing them as business enabler or more barrier today uh let's start with cl well they are definitely an enabler I mean Michael was so nice to share some uh memories with us about what happens when you do something wrong when you're not compliant so compliance is AB abely needed for bank it's the basis of our business in a bank nothing happens if it's not compliant normally if something happens it's a problem it's really a problem so it it's good to have good compliance MAA is okay uh in Germany have the we have the electronic Securities act which start of things really going we can apply for licenses for getting crypto customy licenses and so on banks are doing this and this is a foundation I mean this is really Foundation of our business and there see compliance as an absolute enabler if it's a good compliance sometimes you get compliance which is not workable really I mean I had for example em em or something like that methid it this was not nice yeah but this what what we talking about maika security electronic work paper this is good compliance and this is definitely an enabler in my opinion maybe in terms of of Regulation what's important to have in mind is that when we talk about MAA it doesn't cover the tokenized finial instrument it covers the crypto cryptocurrency utility token probably are not nfts but it's only a part of the big family tokiz financial instrument that they're already covered more or less by miid and all the all the regulation we have to be compliance with at the moment so uh I think that pilot regime is really important because it's it will be helpful to create a secondary Market but it's also really um when you participate to those products interesting to see it because all the current actors in traditional Finance are getting really stressed by all those new regulation and we we're all wondering who's going to be on the menu or who's going to be looking at the menu so every one of us is having a clear view the whole value chain starting and thinking of how I could get up or down in the value in the value chain and that will be the the most interesting part of a notably a pilot regime uh from my perspective uh I think I I I I never buy this kind of idea that regulation is an enabler uh uh regulation is a bouncer in front of a disco of an empty disco uh who regulates the entrance uh you have to ask him and you have to wait uh so then one day he proba will let you in and then you can dance on the floor you would be able to get into this floor without it but that's not the world we living yeah the problem is yeah you have a lot of bouncers on the European landscape yeah yeah and you have to satisfy all of their demands to go into the Disco and start dancing there's no no way around them no no sorry I totally disagree on this point Sorry I have to say something to this regulation is a source of trust why are why are trusting people Banks and this is because it's regulated entities if you have a look at the paper exam for example at the regulated liability network is is a very basic idea behind it um in this paper um Tony said that um for example Commercial Bank money and central bank money is not so different because it's both issued by regulated entities and that's it regulation is the very source of trust consumers can have into Banks and so it's it's a business enabl for us and um that's it so I really like the example of the Disco because just like in the Disco you're absolutely right the the pass you're going to enter the Disco it depends who you're coming with is I'm sorry if you're a man and you're having 10 beautiful ladies with you you're going to come quick in the Disco be sure about it so in the in the tokenized Securities business that's exactly the same thing you have to prove the regulator you're working with the right companies that you're having the right process so I think it's important now that we I'm not going to continue with the analogy um but one question that I have say is why things are not moving faster so basically it's like we were here probably a year ago things are accelerating clearly but it still moves quite slowly so what should happen if we want at some point seeing these new digital Securities and tokenized securities taking over what we call the traditional Market how do you see it or what would be this accelerator yeah so I mean this is very very complex if you compare to the internet the adoption of the internet was very quick right in in some years because it was something new for all of us in this case we are talking about changing the engine of an aircraft while is flying H 30,000 ft so we have to change old infrastructure will we continue operating on the traditional one and making it compatible with the with the old one at the same time so that's why I think um it's going to take its time there's some studies that say that at least five years because it's not only that we need legal and Regulatory Clarity I already mentioned a lot of requirements that we've got from the um from the tech side H not only talking about about tech I mean we need a digital identity as well for this to scale we need the cash leg to be in place so there's many H pieces of the puzzle that we need this to get massive adoption um and as I was saying at the beginning at the same time that the aircraft is flying you're changing the the engine so what has to happen all these requirements that we mentioned but um as we see in the T business this is is slowly but then all of a sudden it all happens right so we have to be prepared and I think that's what all the large financial institutions are are doing getting ready and creating optionality for that for the moment when it comes yeah and I think um also the market incumbents they do not sleep right I mean at the beginning uh probably uh they were quite ignorant about what was happening in the D5 place now they have looked looked into that and and they're also reacting yeah so if I take a look at do bur yeah um they actually have a centralized Ledger completely digital they already issued something like 600 Securities uh in the same time we had in Germany something like 55 Securities and Germany is already probably one of the bigger markets uh and uh probably a couple of additional Securities in the registered bond market yeah um and we also saw that uh to to a certain extent was what the ECB is doing at least in some of the versions uh of cbdc that they're creating that actually has not much to do any longer with the idea of decentralized cash that that Bitcoin probably uh at some stage uh brought to the table and and I think actually at the moment they also like well we don't need a blockchain for that because of course you can do this in all kind of things yeah so um markets incumbents um are um are also evolving uh and uh and hence um I think this is still an uh an open race yeah so it's it's not one 100% clear cut that the that the future will be uh blockchain I think it's 100% clear it will be digital but the exact form yeah U is probably from my perspective not 100% clear a world to conclude well I I think what's just missing is a lot of assets I mean we have about 8 trillion assets on a capital market and um I think it's it's nice to say okay this is more ratic and blah blah blah blah blah to be honest it's about cost cutting yeah um we tried some processes with different asset classes at the zbank and we find out if you put um Securities or interest rate swaps on a DLT it's more cost effective it's this is really okay and and and you want to have this but if you don't have deep order books and you don't get good prices at the market the cost saving doesn't count I mean it's okay if you save let's say you save $300 of 500 on the processing of a certain deal this is okay and you do a few thousand deals a year you really want this money you you want this cost cutting problem is when you're having a 100 million deal or a billion deal and you don't get the exact same prices the price of the spread between bit and ask is just a bit bigger than on a traditional platform nobody's interested in the cost it just doesn't pay off so it can be relatively quick when some big players say okay we are putting our assets on a blockchain or or on a digital Ledger or on a DT because it's all about the Ledger not the blockchain in my opinion it's all about the Leer if if a big player says we are putting our assets on a digital on a distributed leer and it can get become really quick standard okay so as a guardian of time I can close right now to conclude the word of to what we see today so the infrastructure and the building blocks are getting together the future looks promising and quite certain based on what we discussed and now let's continue and I hope thank you everyone for joining and uh I hope you will have a nice event thank you everyone thank you thanks a lot thank