EN | Institutional Crypto in Brazil: Defensive Move or Generational Opportunity? | MERGE São Paulo

All right. So, moving on here to our next panel. We're going to be asking another key question of the day here, which is to what extent digital assets in Brazil and Latin America are becoming are a a generational opportunity, our defensive posturing. To what extent are these assets a core component of the business plans and the road maps of a financial institutions moving forward? And to to discuss this, we've got representatives from two of Brazil's largest banks.

We have Jaime Shikaki of Santander Brasil. So, please come up to the stage, Jaime. We have Courtney. You all know Courtney, right? I don't need to introduce Courtney.

He's He's unforgettable. Uh so, welcome, Courtney. Uh head of digital assets at Banco Bradesco. And moderating this conversation, we have Stein from uh the Crypto Finance Group. So, thank you so much.

I'm going to turn it over to you, Stein. Thank you. Thanks for having me. Um I will lead this panel today um around whether crypto is a strategic move from an institutional or a defensive move, right? Um to open this um traditional banks get challenged, of course, by crypto-native platforms when it comes to crypto.

And um of course, the last years, they weren't really able to move and do anything about that because the most important thing for large institutions like Bradesco, but also Santander, is regulatory certainty and um so, mitigating legal risks. Otherwise, nothing moves. And this is also to some extent why they're trusted institutions. And that's that's a that's the right way. But of course, um those challenger banks um are eating into the market share.

We see that especially in Europe, where traditional banks lose investments, lose assets to those new platforms because clients, if they want to invest in the crypto, they will, right? Um so, the pressure rises and and those are huge numbers, actually, that we saw over the years. Um And actually, now it's a it's it's quite exciting time in Europe. We got Mika live, banks piling up, um calling us day by day um to to to get on boarded, to get their offering live. Brazil now introduced um their regulatory framework, quite interesting.

And there is some movement um as well. So, what I want to explore today a bit um is asking you directly um Courtney, is it more a defensive move, Bradesco moving into crypto? Is Bradesco moving into crypto? Or do you see it really a strategic advantage of the asset class per se? Um thank you very much for the invitation for the conference.

A great question. Everyone knows Bradesco in Brazil. We are a very conservative bank. But um that said, it's not a defensive move. It's one of the most aggressive moves in the history of the bank.

It's on the agenda of the CEO. And we were just waiting some clarity from the regulatory space. Why? Um okay, it's risk appetite from the banks. Um prior last year, we have no clarity.

And it was a kind of a coincidence of factors. One, Mika uh start working in Europe in January. And out of the blue, we have a United States 180° since December. And that was a kind of a call uh for okay, now is the time. But uh prior to that, it's on the agenda of Marcelo Noronha, who is changing the bank um making a huge turnaround.

Everyone knows that. I I think it's one of the most impressive turnaround in banking history. And we already had a a mission to build a full digital assets area in the bank. What we need last year was, okay, we have no top line because Brazilian market is not so easy to quantify. Uh we have some numbers around how much money is going away for international players.

And we have some use cases around what we call virtual assets, Bitcoin, Ethereum, and things like that. And another uh business case around what we call digital assets or real-world assets. And in the between, we have some cost efficiencies we can take away in the market. So, those three factors were the decision. We have open investment to do that.

Uh right now, uh we are full operating uh machine with custody and intermediation just like the other banks. But we are working in a kind of a low profile until the middle of the year. The middle of the year, we are going to start launching the projects. Uh just like everyone in the market, they're going to have brokerage, they're going to have uh funds. We already have two funds running in the market.

We are going to have uh our treasury fully operating with uh liquidity providers here and outside. And we intend to have uh the biggest custody service in Brazil. We just hired Fireblocks. We are the biggest custodian in traditional market just because we are conservatives. And we are building a huge strategy around institutional custody.

And that's going to be our core kind of our product for the next 2 years. Uh also, we are together with other banks waiting a new legislation around stablecoins. And we intend to be one of the biggest um um mint of stablecoin. Right now, uh it's easy to do, but there's no clarity. Not in the law, not from the central bank.

And these are the things we are waiting uh with also. And last, we are starting doing a collaborative movements. We are now me, Santander, Itau, and other banks working in a network, which is quite similar to Canton Network. Uh it's in Ambima. Ambima is our uh um Finra in Brazil.

It's a syndicate for the capital market players. And we are trying to do the same network here to build uh standards around products, tokenized products specifically, securities. And more than that, to have just one network for the entire industry, so we pools. We have the whole market in just one entire liquid area. So, that's the what the plans of Bradesco.

Wow, big plans. I think we covered all my questions already. Jaime, what about Banco Santander? Any plans?

Yes. What's the strategy?

I kind of understand why some people argue that the banks have a defensive move offering crypto to retail customers. Uh it's reasonable to assume that uh banking executives have seen some flow of capital from their customers to crypto platforms, right? Uh it could be sometimes not material, could be sometimes not constant over time, but the signals of the outflow was there. Um I've heard recently that a European bank disclosed $600 million of outflow over 3 years from them to to crypto uh players, crypto platforms. But what was interesting that the same bank said that 6 months after they launched their own operation, major part of the capital came back.

That that's an insight here that uh yes, some banking customers already decided to invest in crypto, but they maybe prefer to do that in the institutions they already trust, right? And I think this trend uh applies to Brazil as well. If you look at Ambima last research that Courtney mentioned Ambima, uh about 11% of Brazilian investors already invest in crypto assets, compared to 8% in equities. So, it's not a niche asset class anymore, right? It's really part of our investment landscape in Brazil.

And uh in Santander, we have been already uh offering crypto to our customers. The group at global level, we have it in Germany, we have it in Spain, we have it in Brazil for a limited group of customers. And we are planning to roll out massively very soon. Very nice. So, things are moving.

Now, some claim that the institutions are moving much slower than the neo banks, the challengers. Also do, of course, they it's their only business. They don't have legacy IT systems. They are a bit more flexible. Um Do you think that the USP of trust that you certainly have, and as you said, customers bring the assets back, obviously because the counterparty risk is is is lower.

I- I- Is that going to make up for being a bit slower? Yes, I think trust is a a key element for our offer, but it should not be only this, right? There is a lot of user experience element and actually the economics we offer. So, yes, we can leverage trust, but we cannot be uh limited to that. Now, what we see is that those um crypto-native platforms start also eating into the traditional banking business by offering 24/7 um trading in in equities, in shares, right?

Tokenized shares in Europe, we we we have Kraken live with that. Um this is something that of course revolutionize a bit the the the traditional markets. And if if if you talk today to a 20-year-old and try to explain him that he sells a stock today and has to wait T+1 or T+2 and still until he can reinvest that money, um he he he's struggling with that, right? So, I think uh we see also a push transforming in in in those platforms eating more in the traditional space. Are there any plans that you're looking into that as well?

Do you feel that? So, I'm sorry. It's really difficult to hear the back here. I really didn't get the question. Talk to the microphone.

It's It's really hard to hear from Okay. So, let me rephrase. So, the crypto-native platforms are also offering now trading in traditional assets. Ah, okay. Right?

Like stock. Um you can buy a Nestlé or you can buy a Petrobras share or or or whatever. Um and that of course puts pressure onto banks as well because

Absolutely. that share can be traded on a Saturday and a Sunday. Of course with a spread, but the customer doesn't really see that. So, is that something where you believe that will have an influence on how we are seeing the market in the near future? So, yes.

Customer relationship is a challenge because once the customer uh experience another platform with crypto, it may consider that platform for other assets as well. So, I think we should improve not only the crypto offer, but all the regular traditional assets as well. Yes, there is a very important competitive pressure that we need to address. Would you agree? Um yes, and there is a curiosity.

Uh Brazil has Pix instant payments 24/7. So, the crypto industry in Brazil has benefit uh benefited with the fact that we can trade currency 24/7, but not the equities. And uh there is another point. Brazil is a very peculiar uh place in the world because our equity instruments being all all all of the securities, they are traded just in B3. And because of that, we have all the products market to market every day.

And uh we don't have dark pools. Um and we don't have uncontrollable or off-the-books assets. So, probably when we have clearance from our SEC like CVM, we are going to implement that very fast. The clearing in the second uh exchange here in Brazil. And the tokenized aspect of the thing has another issue.

Today, our brokers, they liquidate on B3. An exchange in crypto exchange liquidates everything inside of them. So, we can bring part of this liquidation including business from the B3 to the new venues, what is the the PSEVs or Vasps in Brazil. So, uh we are waiting lots of change for the next 2 years on on this aspect also. Great.

Um let me come to the next question. So, institutional investors care um a one thing above all. Trust. Right? And when it comes to um custody relationships, do you believe that at the end of the day, um your banking houses um will do the custody for the institutional markets or will the institutions like large hedge funds, asset managers turn to crypto-native platforms?

And why do you think so? I believe both uh will happen. I don't think there is only one way for the market to evolve. I think we are on a early stages. I would say that the winner model uh is too early to say what will be.

I I think it's too early, but we have some trends. First of all, um I'm a crypto-native, by the way. I'm a strange animal because for the my friends in bank, I'm the crypto crazy. For my friends in crypto, I'm an old fat guy from banking. So, I almost get screwed.

But the point is, we never have self-custody in crypto. You always custodians on the venues. You always custodians of Binance, FTX, Coinbase, and things like that. After FTX, this two became true. So, no one thinks, "Oh, I'm going to do self-custody."

Second point, we are third world. So, self-custody here is a personal risk. We don't want to take this risk. And the third, um by the way, banks are still some trustable institutions despite everything. So, it's more practical and more feasible and more secure you have your assets, any kind of assets, within the banks.

What we don't have uh we don't had was the clarity of the rules from the regulators. We still have some issues to solve around uh the Basel rules. Uh it's too tough for the banks. But now we have clarity of rules. And by the way, the the players, the technological players, evolved very fast in the last 3 years.

So, we have the tools. We have the the way of working by the law. And we have professionals. So, I think in the next 5 years, we're going to have uh to see a continuation of the trend. Uh we are not going to do self-custody, but we're going to believe in venues.

And those venues are going to be in the financial services. And by the way, by now in Brazil, everything's financial service. You cannot have a crypto venue without having a a central bank license. Now, Brazil is the first mover in LatAm when it comes to regulatory clarity or I would say with the largest regulatory framework, right? Is that the first step of becoming the crypto hub in Latin America?

Again, it depends. Latin America is a very wide region. Brazil is around 55, 60, depending on the level of the market. But uh I think for formal institutions, yes. Uh in meantime, for tokenized tokenized securities, which are formal instruments, I do believe also we can have the leadership.

But also, we have very poor countries where uh uh what we call gray market or not institutionalized market is still as important. Central America, some countries with politicians and things like that. Um so, on the formal market for foreign partners like Europe, Asia, and US, uh probably we are going to be the hub. Uh also, we have a problem with taxes. And our neighbors in Uruguay and Paraguay can do some aggressive movies in terms of incorporating there.

But operationally, risk, um insurance of the products, and and of course, as Jaime was saying, the trust of the system, Brazil is the leader. And if we look 5 years down the road, Jaime, um where do you see the market here in LatAm, here in Brazil? Not only about crypto, but it broader on the blockchain. Will blockchain technology per se revolutionize financial services as we know it today from a back office perspective, from a product perspective? Yes, yes.

I believe there is a huge opportunity here to leverage uh tokenization blockchain to improve financial services. Uh for example, we in Brazil are already exploring this in production, not in proof of concept, but we do have projects in production. We recently launched a secondary marketplace for consorcio product. For those who are not aware, consorcio is like a collectively financing model. Right?

It's widely used in Brazil. For example, when you purchase cars or real estate, there are 11, 12 million people uh using this product and about a hundred billion dollars of outstanding assets on consorcio. But historically, there was limited uh transparency and limited liquidity, right? So, what we did in that project was we introduced uh registry of on-chain the registry of a group of consorcio uh quotas that are um uh acceptable by institutional investors. And since we launched this platform with Nuclear, that is our partner, 6 months ago, we onboarded 20 institutional investors.

And we realized uh several auctions on the last months. So, numbers are really encouraging. The platform is growing uh day by day. And uh it's In this case, it was a very good evidence that transparency drives liquidity, right? And the other thing is uh another interesting lesson is that when you go for innovation with blockchain and tokenization, you may scale faster if you integrate the Web3 technology with Web2 user interface uh the banking grade controls we already have, the legacy systems we already have.

So, with this case, we are very optimistic about uh potential opportunities. Thank you. And maybe um to as a last question to you, Courtney, if we look forward, will banks remain the center of financial or do we see challengers like the Coinbases and other companies coming up and taking over parts of the financial industry that we know today. Um first of all, Coinbase is becoming a bank. So, my joke is everything is going to be a bank.

So, the the answer is self-answered. The banks always will be the banks because we need uh the regulators need one act to joke. It's another digest since the the the Venice Doges that print money by themselves. Uh we need someone watching the watch over and they're watching the watch over watch over watch over. That's it.

We we spent kind of a 200 years trying to to build a system where we have control security. We still don't have it. So, I think we're going to have a rearrangement of layers, specifically the players that got a lot of capital in the beginning of crypto. But in the end, we are going to be all regulated banks. Uh the second point is uh we issue had a question about this independent asset class called it crypto assets.

Uh we still have the same doubt. But they were kind of a phagocyte phagocyted by the the system. We have ETFs on crypto on trillions. The fastest ETFs were from Bitcoin. We have uh the treasury companies from Bitcoin, just like MicroStrategy.

Uh we have someone of them here in Brazil, also. This new asset class is building new uh economics and financial classes. These may change the banking business. The second point is banking business is always local. Crypto business is always global.

That's the change. I think in the next 5 years, all the banks are going to be global banks. And and that has serious changes, serious challenge, and serious consequence for the system at all. We don't know how to be global banks. We are local banks.

And that that's going to be a huge change for everyone. So, we will stay in that sandwich of having very innovative smaller companies that um make things more efficient, but on the other way lacking regulation, obviously, because tech changes. And by that, also traditional financial institutions that rely on those legal frameworks and regulatory frameworks, which prevents them to move into that space, right? I mean, if I look at DeFi, I got a lot of clients that ask me, "Okay, can we move into DeFi?" But if you look at it, um you very quickly um get to the boundaries of FATF rules, KYC, and so forth, right?

So, it will take it it take a long time. Let let me put you in another way. Uh I don't think it's the faster versus the slower, the smaller versus the bigger, uh the innovators versus the dumb old fat guys. I I think it was there is a window of creating a new market. And always was about money and market.

It was never about technology. Never. Never ever ever. The Lamborghinis are there just to prove that. What we see is together with that, we have zillions of scams.

Great people lost the entire economies, and some people lost their lives. We got tired of the scams. That's it. So, we're not talking about innovation faster or slower. We're talking about the scams.

Uh and there is another thing that I keep talking to my techy friends. There is an expression, other people's money. You can have innovation when you're providing a digital service for something. Uh but when you're dealing with other people's money, savings, it's not a good deal to have so much freedom. We are living that in Brazil for other issues related to fraud and crime.

Uh we live that in crypto with FTX and other issues. Now, what we're going to have innovation with governance. And that probably is going to make innovation even faster, even secured, and even more broader adopted. And Brazil is one of the biggest examples of that in the world. We are the only system where accountings close every single day and send online to the central bank next day.

We don't have banks kind of a broken here. Uh okay, we have one with some flowers and some frogs, but that's another joke. But so, without that, our system is absolutely efficient. We have zero problems in 2008 because all the instruments are marked to the market and sent to the central bank. We are going to have that in crypto all around the world by one way or another way.

If you are successful in Brazil or in Europe, you have a strong operational and governance framework. And that you can sell to everyone around the world. You can say, "Oh, I'm not FTX." Why? Because I'm secure, governed, I have strict rules, and I respect your money.

That's the first in the crypto space. So, I think crypto in the next 5 years is far away from being a niche anymore. It's going to be mainstream, and the speed of new products and new solutions, including the fire that you said, is going to be astonishing. We have DeFi in Brazil, um not regulated because there's no law, but uh formally compliance with our effects rules using DeFi. We already have that in Brazil.

Why? Because if you don't do that, someone say, "Okay, you're doing something better. I'm going to put you in the jail." There's the the the control of the policy enforcement already. And since Europe led with Mika, we're going to give the example with our framework legislative legislative framework, which means the laws, the infrastructure legislative framework from the central bank and from the CVM.

With that, they is just copy. Just like people is doing now with Pix here in India. Ladies and gentlemen, thank you very much. Thank you for those valuable insights, Courtney and Jaime. Thank you very much.