Laying the foundations for Finance 3.0

Adrien: [00:00:09] Welcome the 16th episode of Metaco Talks, our series of live conversations with the people making and shaping the future of digital assets. Our guest for this week’s show is Alfonso Gomez, who is the CEO of BBVA Switzerland. Alfonso has worked across the world in many capacities for BBVA, including running the global private banking business from New York and running the UK business from London. Alfonso is a big proponent of digital assets, and he recently spearheaded the launch of a crypto trading and custody service at BBVA.

In this episode, we’re going to be talking about the possibilities of finance 2.0, and discussing whether large and progressive banks like BBVA are well positioned to take advantage of it. Remember, before we start, if you ever miss an episode of Metaco Talks, you can listen back on Spotify, Apple Podcast, or wherever you find your podcasts. Enjoy the show!

Welcome Alfonzo. I will start with a little question about your background. You must be one of the only tier one bank CEOs out there that has been involved and curious and proactively looking at cryptocurrencies and digital assets for a long time. Can you tell us a bit about your background and how you got involved in these markets?

 

Alfonso: Thank you for having me in this Metaco Talk. I’m happy to join this event. Regarding my interest in this newer space, in crypto space, I have been running the business in the finance 1.0 (I will call it so – the traditional assets, the traditional financial market) for more than 27 years.

Since you know exactly how this traditional markets works. This is something that I can face in the corporate banking side, in the investment market side, in the global trade finance and banking since 2009 when Bitcoin start, I have to admit it, I didn’t believe in this new blockchain technology.

 

Adrien: Nobody did.

 

Alfonso Nobody did. I have to say, some of the people who were working really close to me were very good visionaries at that time. They said, “Hey, you have to take into account this because it’s going to be big.” I said, “You know what, I don’t really trust it.”

I think it was in 2010. 2011 I moved from Madrid to New York. New York is quite a big hub, and there are many talented people talking about this new crypto space. I would say I was slightly more interested to understand where was the new bot of this new crypto space. But the big milestone in my mind was coming from two factors.

The first one was my team here in Switzerland. I have a great team. They are always trying to figure out the next step, what’s going on in the financial industry – they love to be out of the comfort zone. These are not the typical bankers that are quite comfortable in the financial 1.0 industry, in the business as usual that we are running. They would psyche me up a little bit, and say, “Hey, you think about Bitcoin?” From 2009 to 2018 there are many years and there’s still something that is ongoing, and it’s becoming more and more interesting.

I decided to go to Singularity University to take the executive program, with many different goals. One of them was to understand exactly the major trends in this newer space regarding technology, regarding the dollar space.

The second one was being really focused on the blockchain technology. When I understood that how blockchain technology works, I came back. I talked with part of my team here in Switzerland, and we decided to start dipping in new space, which I think is amazing. I think it’s wonderful. This space will bring huge opportunities for everybody. That’s my view.

How transformative can the digital asset market be in general and for finance specifically?

Adrien: [00:05:07] Thank you, Alfonso. You speak about cryptocurrencies and you had this training, but last time we spoke you were enthusiastic about things that go way beyond cryptocurrencies – things like a peer to peer trading, about the decentralized finance ecosystem in general. How transformative do you think this ecosystem as a whole can be for finance? Not just cryptocurrencies, which we will probably discuss further in the next element of our discussion, but what about digital assets and blockchain technology and decentralized finance as a whole? How transformative is it?

 

Alfonso: Obviously it’s my personal view, and I can be wrong, but I think we have to be able to combine 1.0 that I mentioned in your previous question, with this newer space, 2.0.

I don’t think that if you are dealing in the new crypto space you will have to put one in the traditional market. But I would like to share with you a philosophy or concept. In the last 100 years, the financial markets work; you have the capital (equity), and from the capital you transfer to stocks or shares – however you want to call them. It has been in the financial industry in the last, let’s say 100 years. You are dealing in the financial markets and you decide to become a capitalist and buy IBM shares, you go to stock market and buy IBM. Very happy, right? You are part of the company.

It was the big movement in the industry, and it will be in the next years also. But we have to be able to understand that this traditional market is introducing new technologies which could procure to move from the capital to the assets. The traditional market moves from the capital to the shares, the new space move from the assets to the tokens. This is the big movement.

In this movement there are a couple of details that are critical. The first one is: how big are the assets for the wealth management side that are not bankable? 300 trillion. It’s big! If you analyze the evolution of the web, the history of the web, I will emphasize three biggest states in the history of the internet. The first one was the information economy. You had Yahoo or these different apps, and you can find information, Wikipedia, all these kinds of new apps, which is fine. The second stage, I think, is the platform economy with Facebook, all these social networks, which is the current time that we are living now. Nobody has any doubt that the digital or the social networks are becoming more and more important. The third one, which I think we are about to start, is the token economy.

With a token economy, we have to be able to understand that it’s a single asset. In the world, you can digitalize. If you can digitalize, you can create liquidity. If you can create liquidity, you can change a big portion of the financial sector.

The name of the game is, from my point of view, to understand where we are coming, 1.0, where we are going, 2.0, and how in this particular timing we are able to combine both worlds. That’s my view.

Regarding DeFi, no doubt. This is a decentralization economy just because the blockchain technology allows to do it. There are many opportunities in the lending side and the investment side. There are many protocols that are going on in this kind of format.

 

Adrien: [00:10:38] That’s very interesting. One thing I can observe is that industries generally don’t like big changes, because it forces them into rethinking things they’ve done for years, many years, sometimes, and that worked well. Where they are very well established, potentially have an oligopolistic position in the market, and suddenly you have this new token economy that comes and it forces a lot of institutions in the market to think what will their positioning be once this possibly becomes a new standard.

I assume in your context, you have been thinking about this for quite a long time, because you were one of the early banks to go in this market and prepare the launch, and launch a service related to digital assets. How long has it taken to think about this opportunity, create a concrete use case and business case, and actually implement it? When did you start thinking about this?

 

Alfonso: Obviously it takes time. I will have to say, in BBVA Group will have a very nice motto. I love this kind of leitmotif. In BBVA, or mission is to bring the age of opportunity to everyone. That’s the path that we follow in BBVA Switzerland, to bring the age of opportunities to everyone, creating opportunities to our customers. At the end of the day, the most important thing that you have in a bank are customers. Without customers, you will have assets under management. That’s very obvious right there. The second most important asset you have in the bank is your people, the talent.

When we decided to start with this, it was more than two years ago. I would say that there are many things that you need to align, but thank God, our top management are open-minded people. They are not in the comfort zone either. They are willing to understand exactly what’s going on in the new space. I bless these people, because I think this is the name of the game. In life, never stop learning. You need to keep on going, learning new activities, new opportunities, and you need to be in the same track. You need to understand exactly what are the new opportunities. I think it’s mandatory.

Let me tell you a quote that I really like. Everybody has two likes; the second one starts when we realize that we will only have one. It’s critical. I think that’s the name of the game. I don’t really understand when you are a big incumbent bank, which is the case of BBVA; if we see the potential opportunities we need to approach, we need to understand, and we need to realize the value for our customers, which are the most important assets in the bank, and as a consequence for our shareholders.

Two years, but basically because all the internal control areas that – there are many people around compliance, legal, lease departments, all the control areas – have been aligned from the beginning. Taking into account very seriously how they have to manage on the same path with the same goal, which is a plus.

How well placed are incumbent banks are to make this transition between Finance 1.0 and Finance 2.0?

Adrien: [00:14:41] With the last 12 months and central banks printing a lot of money and a lot of potential inflation arriving which is not measurable in every asset class today, but may at some point materialize, do you think that this one of the main criterions that cryptocurrencies are attractive today? What do you think are the missing elements or missing pieces that could make cryptocurrencies and digital assets even more adopted? Is it precisely the fact that banks are not yet fully supportive of it that is a friction or do you think it’s something else?

 

Alfonso: I think we were in the correct path. I’m talking about incumbent banks, that’s my professional view. I think we are in the trend to move from the evolution to the revolution. Evolution to revolution. There is a big friction today between this 1.0 and 2.0 markets. If you are trying to dip in this newer space, 2.0, you see that there’s a market that has never stopped. I would say it’s a more efficient market because they have proper technology. It is what it is. This is a fact, this is not an opinion. 24 hours, seven days a week.

Some people say this is really tidy, and Saturday and Sunday morning seeing how crypto markets are going down or going up. I don’t care, I think volatility is the name of the game. It’s pretty obvious that this market today is quite small, if you compare how big is the market for traditional assets and how more is this newer space?

This my view, since we move from the traditional assets to this new crypto space, we will see lower levels of volatility. It’s a question of adoption. I don’t have any doubt about this. Once again, it’s my opinion, but the incumbent banks getting into this new space, I think the friction will reduce dramatically in the next few years. There are many things that we need to change.  We need to put in place the correct tools, the correct protocols, the correct matrix, in order to guarantee that everything works. But no doubt, we will be able to do it.

What effect will large banks moving into the space have on the market for digital assets?

Adrien: [00:17:50] What you’re saying is that with banks adopting cryptocurrencies and digital assets, the demand for those is going to increase, I assume both retail and institutional. And by having more demand, the market will also stabilize and be less, I would say, immature in its behavior.

 

Alfonso: Yeah. In my view, and maybe this is a little bit controversial, but I think for incumbent banks it’s easier to move forward in this new financial space than for new digital banks.

Let me explain exactly why. I know it’s a little bit controversial, but I don’t care.  I like sometimes being controversial. Just giving my opinion. Traditional banks, we know exactly what’s going on in the 1.0. Very precise. 160 years for my group. We know exactly how to manage these markets. We have the critical points for a bank, as I mentioned before. We have the assets and the people, the talent. Education is key. We didn’t talk about this, but during this period of time here in Switzerland, my people are getting into this newer space. They are willing to learn. They are happy to take different courses. They know exactly what’s going on in the DeFi space. This is great. Since we are taking these newer space from 1.0, and we already have customers and we already know how to manage relation with customers and how to manage relation with regulators, which are absolutely critical in this case (in the case of Switzerland, because Switzerland is a great ecosystem), I think we have a big advantage.

I don’t think we are in a huge debate about that 1.0 is going to disappear and 2.0 will be the new financial industry. I don’t think that is the discussion. I think 1.0 will be in the long run. That’s pretty obvious. The name of the game is how incumbent banks are able to combine both value proposals in the same portfolio in the investment to the most important asset in the bank, who are the customers.

Does Switzerland have competitive advantages when it comes to operating crypto businesses?

Adrien: [00:20:44] Absolutely. It makes so much sense. You speak about Switzerland being potentially special in this context. I see we have a question from one of our attendees, I’m reading it here. The question is: is BBVA Switzerland an innovation incubator within the BBVA Group? Having this question in mind, what can you say about BBVA Switzerland, and more generally about the Swiss market for digital assets? Do you think there is something special here? Why hasn’t it been launched?

 

Alfonso: BBVA is a very innovative bank. There are many people in our headquarters that are rocket scientists regarding innovation. It is what it is. These are many people that are really high standard people. But the name of the game is to take advantage of the ecosystem, as I mentioned before. We are a small bank in relation with the rest of the banks in BBVA Group, and this is a very good country with a very solid framework, and we know exactly how to manage this.

Trying to answer the question, regarding crypto we have great people in the headquarters that have a deep knowledge in the blockchain technology. Obviously we work as a team.  BBVA Switzerland is a small bank; we still have our business in the wealth management side. We are taking knowledge and we are in a learning curve and trying to understand how we have to manage these newer space, particularly in the world of Bitcoin, Ethereum, or these different protocols that are going to change the 2.0 financial industry. We will put our knowledge on the hands of our colleagues in the group in order to spread out this experience.

 

Adrien: That makes a lot of sense. What strategy have you taken with this integration of cryptocurrencies? Have you isolated a team that is working on this completely siloed, no integration with what you do today on the traditional business? Or have you taken a more inclusive approach where both from the people point of view, but also from a technology point of view, you’re trying to merge the new world with the old world? What is your vision, and what have you done at BBVA?

 

Alfonso: Our vision is that we cannot use different platforms.  It will be a big mistake, because this is precisely the competitive advantage – being a traditional bank and how to combine the traditional business with this new digital space.

Trying to be very precise with answer, no. we have a one provider regarding the platform. We need to have different providers for the custody and all these things are absolutely critical for these new digital assets. But yes, focus on one provider in the technology side. Regarding the management of the team, I think it is critical to put everybody in the same ship. Everybody has to be aligned. I don’t think it’s possible to develop such a difficult project if you are not convinced 100% that all members of your management team are on the same page. It can be controversial, it can be a big loss of energy.

I have to say, I have great people. People who are, as I mentioned before, willing to assume new challenges, willing to be out of their comfort zone, willing to learn, willing to understand exactly what the opportunities are. This is black or white. There are many green areas that we need to figure out how to manage, and we have to be very careful as well. But I would say that everybody is in the same chapter, and even more importantly in the same line.

 

Adrien: Absolutely. Are you saying, Alfonso, that I shall be able to take my mobile phone, BBVA app, and I have my Swiss francs or euros, maybe my portfolio of equities and stocks, and I have Bitcoin next to it? Is that the principle?

 

Alfonso: Yes. There’s another option. When this kind of new protocols of blockchain are getting bigger, today the market cap of Bitcoin is 700 billion, federal is 300 billion – it’s too big to ignore, right? We are focused on these protocol as I said before, and we will deal with this crypto asset.

I’d rather talk about crypto asset than cryptocurrencies. I don’t like the concept of cryptocurrencies, because I think it’s quite controversial. We already have currencies. We have fiat currencies. I do believe in the concept of crypto assets, because I think it’s more clean, it’s something that you can explain much better, and you can create value through the blockchain technology and with these new protocols like DeFi or Uniswap. But with the concept of assets, not with the concept of currency. That’s my approach.

Does Bitcoin have a chance of being a better store of value than gold in the future?

Adrien: [00:27:00] Understood. Alfonso, we have two more minutes. I would like to ask a little more personal question: a little bit provocative, but do you think that Bitcoin has a chance of being a better store of value than gold in the future?

 

Alfonso: No clue. There’s no discussion about some characteristics about Bitcoin. We can try to find out exactly what is the answer, but the fact of the matter is, if you compare Bitcoin with gold, I don’t know how much is the value of gold today, maybe something 10 trillion, and the value of Bitcoin is 700 billion. Let’s see what’s going to happen with Bitcoin in the future. I don’t know. But as I said before, it is too big to be ignored.

There are five characteristics that I think are critical if you are trying to analyze how solid it can be as a reserve of value. The first one, you need to have something with a quote in the market. That’s pretty obvious. Bitcoin has a quote in the market, in the real market, in the crypto market. Second one, it can to be divisible. There’s no discussion. Third one, important, storage. You have to find a place to store your crypto, in this case Bitcoin, and throw the wallets. You can do it, that’s pretty obvious. Another one: there is not any reserve of value.  Efficient. You cannot transfer. From my point of view, this is maybe one of the most important topics: how easy is it to transfer gold versus to transfer Bitcoin?

Let me tell you something. I can transfer Bitcoin with one finger in the app, whatever place all around the war.  Somebody said Bitcoin takes time. Oh my God! The decentralization, very robust system. No discussion about this. Bitcoin started in 2009, we’re in 2021. The key question is: how many fails has blockchain technology closed to Bitcoin in the last years? the answer is zero. It’s a very robust system that you can transfer. The last point, which I think is the most important one, even more important than transfer, is the limit. Regarding Bitcoin, we have 21 million swaps.  There’s not more. My question is, do you know exactly how big the reserves of gold are? We know that there is a limit, that’s why gold was a great reserve. It’s being a great reserve today. I don’t have a clue about how it’s going to evolve in the future, but I have to say that the characteristics of Bitcoin are quite solid.

 

Adrien: I think it’s fair to say that you’re bullish on Bitcoin and that you see it as being a potential.

 

Alfonso: I’m not bullish on Bitcoin. I’m just saying that I think it’s a robust system. Adrien, this is a question of adoption. If the gradual adoption is getting bigger and bigger, that’s the name of the game. Always was. What is the reason that gold was so important, by the way, with a big growth of the economy in the world? Because the patron to the goal was significant and the consensus of the market was to the gold. It’s just a question of consensus. That’s why I prefer to call Bitcoin a crypto asset and not a cryptocurrency. If finally, it’s a reserve of value, I cannot understand why somebody would talk about Bitcoin as a cryptocurrency just for managing the working capital of the company. It doesn’t make any sense.

 

Adrien: Absolutely. Alfonso, thank you very much for your time.  I think it was a fascinating discussion. I’m so sad that we only had a half an hour. I think we will have to invite you. If you can find additional time in the future, we’d be happy to invite you a second time. Thank you for this opportunity.

I would like to share with all of the people that are in the discussion that next week we will have a special episode where Seamus Donahue will interview multiple employees of Metaco in order to share our view of where the market is going in terms of a digital asset infrastructure. We’re happy to have you in and to share the insider information we have on what is happening currently, what are the biggest challenges, and what we think are the right solutions for this very fast-moving markets. I look forward to the next episodes.

Thank you again, Alfonso. Speak to you next week.

 

Alfonso: Thank you, Adrien, for having me here. Thank you.