Welcome to METACO TALKS – Live conversations with the people operating at the frontier of crypto innovation: entrepreneurs, bankers, investors, fund administrators, traders, analysts and other crypto and digital asset market participants. Our objective is to help the broader ecosystem navigate this complex environment and unlock the market opportunity.
This podcast is hosted by METACO – the leading provider of security-critical infrastructure enabling financial institutions to enter the digital asset ecosystem.
Our guest is Benjamin Duve, Head of Digital Assets and Custody at Commerzbank. He runs the highly successful Custody and DMA product, with its client service focused model and great reception in the market. Being involved in many securities related proof-of-concepts and live trades dating back to 2017 he is a thought leader and sought after panelist in the field. He represents the bank in various industry working groups.
Play video recording | Walking the talk on digital assets w/ Benjamin DUVE
Craig: [00:00:09] Welcome to Metaco Talks. My name is Craig Perrin, I’m the VP of Sales at Metaco. This is our weekly topical discussion session, focused on cryptocurrencies, digital assets – key topics that are going on across the marketplace. As usual, the session will be recorded and available for future release on the usual channels.
This morning, great pleasure in introducing Benjamin Duve from Head of Digital Assets and Custody at Commerzbank. Ben, good morning!
Ben: [00:00:51] Hey, Craig. Thanks for having me. Thanks for the invite. I’m looking forward to the discussion today.
Craig: [00:0:56] Fantastic. Great to have you here. Ben, let’s jump in. We’ve got about 30 minutes, lots and lots to talk about given the fact that the market continues to move at a phenomenal pace, daily change, daily announcements coming out. You yourself have been very visible in terms of your thought leadership and your views on particularly the digital asset landscape, but also in terms of promoting that change across the marketplace.
I’d love to get into your views, particularly from a Commerzbank perspective. If you can just open us up with, what does digital assets mean for an institution like a Commerzbank at this current moment in time?
Digital assets are transformational
Ben: [00:01:48] For us, it’s really the future. I think it’s very straightforward. You’re a former industry colleague, you know the size of the industry and what we’re talking about when we talk about crypto or digital assets right now, which is still a small part of a huge securities industry. I think what’s very important is this is transformational.
The way we handle digital assets, I personally believe and I think it’s a strong view also within the bank, will be the way we handle all of our assets. We will move traditional assets into that new digital world. What you do now is you lay the foundation: you look at assets. You can now already transform, shape the ecosystem, but then really build the future within your organization. I think one thing is important, digital assets are different. I think that’s the challenge and the transformation also.
Certain assets, and if you look at certain ways of how you pay for those assets; cash, also very likely in some kind of DLT setup. Then you look at other components of your organization; look at trade finance, for example, where we all suddenly have DLT components. Everything is related to wallets, to keys and so on. One of the challenges I think for all organizations are, those are different silos.
Cash, assets and trade usually are not as closely related, but suddenly in this new digital environment they come together. It’s one of the challenges in digital assets overall. A lot of things are new there and a lot of things have sought of and sought through for large organizations to adopt those.
Craig: [00:03:42] A lot of banks, as you and I would know, manage transaction banking businesses. That include trade finance, cash, security services. Quite clearly, from what you’re saying, all of those areas are going to be impacted in some shape or form. Do you think that the financial community, the institutions that we both are connected to, do you think that element of change in terms of digital assets is still underestimated? Or do you think now it’s starting to be understood?
Ben: [00:04:10] Well, I think it’s twofold. There is this ‘oh, let’s jump into the quick crypto revenue stream as quickly as possible’, but then everybody realizes that that’s a little bit difficult to trust too quickly and that it might not be the business case on its own merit.
Years ago, I never would have thought Bitcoin would make it to the regular banking world, even though I’m quite interested in the future, just because of certain regulatory topics and so on. But client demand created a situation for regulators to jump in and say: if the clients are buying it anyways, it doesn’t matter if I allow it or not. Maybe I wanted to give them access in a more regulated and safe way.
That’s why suddenly Bitcoin is an option for banks. But then if you look at it from that perspective, it’s a great option because it’s a mature asset, which is digital, which is one of the most difficult ones also from an AML, KYC, public blockchain perspective. Very tricky to handle and manage. That’s why we have a lot of discussions with Metaco and then other providers, because that’s a true challenge. How do we make that safe for us, but also for our clients?
But that’s a great start because it’s already a mature asset, which you can integrate and work with and lay the basis I think for digital assets overall. You need to start somewhere, I think operationalizing and going back to the organizational challenges. Operationalizing is the true challenge because there are a lot of people, as you know, in a bank who have a say and have an important role to look at very specific aspects of AML, KYC, cybersecurity, and all of those different topics. Before you operationalize, it’s nice to have a workshop and generally discuss topics, but it’s different when somebody has to sign that they’re comfortable with you doing it. That’s really what this whole topic is about, and having Bitcoin and other cryptocurrencies as a gateway opportunity is something all banks should look at.
Everybody’s evaluating if and how they want to enter that space. I think it’s a great opportunity to start that change within an organization, even if you come to the conclusion that Bitcoin isn’t for you. If you seriously went through all the steps, at least you know, other digital assets might not have the same risk profile, maybe I can work with those.
The challenge for large institutions
Craig: [00:05:52] You mentioned a number of really interesting topics there, particularly, for me in terms of underlying client demand. The underlying client demand typically makes banks reflect on the direction that they’re taking. Ultimately they have sophisticated clients; those clients look to expand the asset classes that they’re holding today and offering to their clients.
How much of that underlying client demand is going to set the agenda within a bank like Commerzbank?
Ben: [00:07:27] I think it’s twofold. I think it truly does set the agenda. But what people underestimate when I have these discussions – you are an industry veteran, so you know what I’m talking about – if I talk to people coming more from the cryptocurrencies DeFi world, they underestimate for us there’s a lot we would like to offer. But there are two things we have to look at. Is it compliant and within the rules and risk parameters we as a bank can look into and then offer a product to a client? And very importantly, is it regulatory compliant?
I think the biggest step here as you see that adoption in different countries, is how forward-looking is your regulator, how forward-looking is your legislation to allow you to look into the topic in a safe and meaningful manner? Yes, client demand is important; you wouldn’t build it if there is not none. But really in this space, it’s about how far does your regulator allow you to go to handle it in a meaningful and safe manner and regulatory compliant?
That’s a little bit different to many other topics in the past. You develop the product you try to get the regulator to understand the product, show where it’s sitting within the current regulatory framework. Then you get the product across, and maybe there needs to be adjustments later on because the regulator made some changes, found out some things that work, don’t work, fine. But here it’s completely different. You have an asset which exists, and you have to somehow change regulation to make it fit the current banking environment. That’s a very different aspect.
Client demand is great, but you need the regulator and the rules around it to allow you to engage in that as asset class.
Craig: [00:09:25] It’s not surprising that discussing financial market developments, that the regulator comes back to us pretty quickly. It doesn’t matter what asset class we’re talking about, the regulator plays a fundamental role.
I you look at central bank adoption, if you look at regulatory support and adoption of the asset class of digital assets, and obviously within your region (within Germany), do you see favorable support? From my perspective, I’m looking at client opportunity globally. I’m seeing what’s coming out of Asia, what’s coming out of the US? Switzerland and Germany in particular are very interesting for us at the moment. Do you see a region where the regulatory and central bank adoption is linked in the pack and driving at pace, and other regions could look to that particular central bank as almost leading the line?
Ben: [00:10:28] You mentioned the two markets, Switzerland and Germany. For Switzerland, I think they were very early, very fast. That’s why we have a Crypto Valley and those famous new little hotspots. There’s one major difference; it’s not within the unified market for financial services. That’s very important. If you then switch over and say you want to look at regulated European markets, I think Germany is very far ahead with a very favorable and knowledgeable regulator. We really have seen that in our discussions with BaFin. Also, as legislators, we can really see that, for years, they have accompanied developments with Commerzbank very early on. But there’s the KfW, Deutsche Borse Group. There are a lot of major players in Germany we have engaged in and others have engaged in, who four years already do a lot of use cases. BaFin always said to take a look, to understand, to discuss with us.
Now, they have a profile how know-how to push out very forward-looking regulations, sometimes even leading the pack. Here and there we saw suggestions, we were really surprised. That was forward-looking, even further than that we would have believed as a bank was easily possible.
I think Germany has two aspects there: a very good BaFin as a regulator, very forward-looking; and we have the legislature who understands the potential of blockchain overall, because I think it could be transformative to many other industries. That’s where it really kicks in, where you have your supplier on a blockchain, you have your cash on a blockchain somehow, or a payment rails connected to a blockchain, you have your assets on a blockchain – everything is on the blockchain and you can digitally interact, you can use AI and so on. That really creates a strong momentum, and the legislator really understood that.
Bundesbank is also very forward-looking if you look at the last test. Commerzbank also participated on the DLT based trigger solution where we integrate old rails. I’m not allowed to say all, but the way we always did stuff in target to a digital technology and connect that to asset change, I think that’s a very smart way to marry the two worlds and maybe have a quick fix solution. I mean, the different things we’re looking in, Commerzbank is also part of the fidelity consortium. We are also interested to see that development, which is by the way now very much moving forward in the UK.
I think if you look at the continental European context, we have a lot of favorable conditions in Germany. Not leaving aside that, for example France, the central bank of France is also looking at central bank money and pushing use cases and topics there. Also we have this European electronic securities law, where we can issue bonds on a DLT, register them somewhere if they are a traditional security or registered them more or less ourselves, if we get a crypto security. But that would mean you can handle traditional bonds, funds and others on a DLT going forward. I hope the law passes soon, and it will be in 2022. That’s very, forward-looking.
From the regulator for crypto, with the BaFin license, from the legislature with regard to electronic securities, and from our Bundesbank, which is of course one participant in the overall system but very innovative and looking at how they can support the entire industry and to move up the industry towards digital assets and trying to find solution or two to introduce into the system.
Doing (not just saying) as route to organizational change
Craig: [00:14:50] Coming back to Commerzbank, if we think about the strategy for change that you’ve got to go through in your organization to take that organization on a journey, if we look at how your organization is structured today in the traditional asset space, where you are holding assets for your clients in global markets and your reliance on working alongside a sub custody network that underpins that capability that you can offer to your clients, how are you going to advocate for that change in a large organization? How’s that strategy going to need to build consensus internally, given the many, many years of infrastructure that’s embedded and built and successful? How are you going to drive that change given the fact that the market is demanding the change, the underlying client appetite is there, the regulator support is there, and now you’ve got to look at your infrastructure, the sub custody network that supports you so well, and drive that change for you? How’s that project going to work?
Ben: [00:15:55] I think the challenge is quite big. We all know there’s resistance to change, the way we did sink in the past, and so on. What I found is very helpful and is always my advice for other organizations that really gave us an additional kicker, is top management support. We can now see that with our CEO, giving out a very public statement that we’re in a venture together with Deutsche Borse, that he wants to actively shape the digital asset ecosystem. That’s a very strong statement, which translates to the market, but also translates internally.
Also, when I look at it in the last one or two years, we had certain leadership changes besides the CEO. You can see that with most new managers coming in, almost all of them, either they’re now very positive towards digital assets or they have always been but now get support on a broader level, on the board level, executive management level –on all sides in the investment bank or capital markets as we call it these days. But very strong support from the beginning. That translates better into the organization.
I think the one challenge we always have, and we are addressing it in a very simple way: if you engage certain areas there will be 10, 20 people who have a say, and if you explain something very new each time to each person, and they all have a new question and a new problem, which you might have discussed already earlier, that’s a topic. What we tend to do now is to ask the top manager, who has support and is very positive towards certain topics, to name people in this area who are the go-to person for digital assets or for crypto topics. They have a management mandate to sit in on meetings, translate and direct management access for quick decision making. I think that’s one of the very important topics we come across.
Then, we have a technology invested in the traditional assets. I think the second bit after you address how to move the organization forward is how or where to build and put that digital asset. Do you do it in parallel? Do you go into the traditional world, how to translate it?
To be honest, we haven’t finalized our discussions there, because it’s quite tricky. Either you want to be very quick and then you just plug it into the old rails; meaning you adopt all the topics you have with a little fractionalized system environment (many system, different stacks you’re running), or it’s an approach where you can have a more streamlined, centralized digital assets, but also other digital components bits when you look at cash, when you look at trade. Can you have that a little bit more centralized in the end or in the long run be able to switch out 5-10 years down the road the traditional part, and switch to a more digital system behind it? It’s the marrying the core banking system to the new digital world which is truly the challenge.
Craig: [00:17:16] Is that going to be the case? Is it one of the major challenges, untying the legacy capital markets infrastructure that’s been in place for X number of year? Is that going to be married in, or are you going to be able to join that together? Or is it a case of bringing in new infrastructure into the organization and retiring some of those legacy platforms?
Ben: [00:19:44] The problem is very straightforward. If you look at the percentage of our business that digital assets are and will be maybe in the next 1-3 years, it’s limited, however you want to put it. Maybe that’s not the statement everybody wants to give right now, but if we are honest, if you look at the percentage it’s not that big. It will never replace in the short run the current systems.
But on the other hand, you don’t want to build a new siloed system for each different application. You don’t want crypto, digital assets, and some cash components and trade all to be so segregated that you run into the same problems you have now with all these little islands solutions for special topics, which are very expensive to run, and sometimes lose their business justification when a business cycle is over. That’s a little bit of the tricky situation.
What we are looking at is truly trying to build something which grows, while keeping in mind it might shrink the traditional bit. That’s basically the way my current thinking is to approach it. But there are a lot of architecture, IT guys and others who might have a different opinion here and there, and that’s the discussion to be had. That’s operationalizing something. That’s the true challenge. It’s not talking about: I want to have this; it’s about how do you make it happen and how to future proof it. You don’t want to make an investment now and then it’s obsolete a few years down the road, because you can’t use it because you put it in a place or connected it to a dead end system which will be switched off, and then you have to start anew somewhere else.
I think that’s the challenge we have.
New revenue opportunities/ the future
Craig: [00:21:34] You talk about infrastructure, you talk about links. If we look at how in the traditional assets space, the connections between multiple banks come together to provide a sub custody network that facilitates client asset movements across global markets, how do you see the sub custody and global custody connection in the digital assets space? Do you see that existing? Do you see that as an option to potentially support global clients holding assets within your infrastructure? Or do you see the sub custody piece moving to one side and not being relevant?
Ben: [00:22:14] I think that’s the problem of the whole digital asset space. That future is not 100% clear. It really is who enters that space and how it will devolve in the shorter mid-term. One thing I know for sure is, I will have to connect different DLT blockchain solutions to service, and hold the assets my clients want to have. That’s one thing I know for sure. I have to connect my clients to the solutions, maybe Bitcoin but also others, where there’s client demand. It could be new traditional assets or new rails where my clients have demand. That’s what we do know.
We have a sub custody network where we provide safekeeping in markets, where our clients demand safekeeping. that’s very straightforward, and I think the same thing will happen in the digital asset space. The interesting bit is, will you be the one and be part of organizing those underlying DLT securities chains, and who has which role in that? Because a bank, if you look at it from a logical point of view, could move downstream or upstream. You could do everything for the client, but you could also move more in the CSD or into the sub custody space.
Imagine if we would stick in the current world we have today, and each country (it would not be really beneficial) has their own CSD running their own local chain, have their own solution for the country. But it’s standardized, and there’s an industry standard to interact with those. Why do you need sub custody? Because then suddenly it could become just a very standardized digital connection to a place, and you have a AI driven digital connectivity piece to that chain, which manages your sub custody. That could be one of the solutions. Hopefully not the one, but it could be one of the solutions.
There could be other solutions. If you look at Europe, if you look at the Pilot Regime, it seems to be a strong trend to decentralize a little bit. That could be a game-changer because it could create one capital market in Europe, for example, or it could create global digital assets chains where different countries connect. Maybe an i-CSD version with more global players and more global connectivity, but decentralized.
I think there are many different opportunities at play. The most important thing is, if you’re one of the players in that chain (if you’re a custodian, if you’re sub custodian, if you’re a client-facing bank – that’s very important, if you’re not really in the custody game, but you hold assets for your clients), but also if you’re CSD, there are huge amounts of opportunities. You could be the one either disintermediated or you could be the one disintermediating. I think one thing is very clear: however, the scenario plays out there will be certain players who miss out. In the past, it has always been if you don’t participate and don’t play, you’re probably not the one being asked to join later on. That’s a very unlikely scenario.
Craig: [00:25:36] I hear you and I wholeheartedly support that. I don’t think there a choice anymore in terms of will this happen or not. Without a doubt, given the level of adoption that’s coming across multiple banks across global regions, it’s clearly now an evolving market, which Majority of the banks are realizing they have to have a project or a feasibility study, and many do.
There’s a couple of questions, Ben, just coming through the screen here, some of which you’ve touched on briefly. People are interested in terms of how difficult it is to introduce innovation in such a giant bank. Is it something where you are sort of single voice. But as you mentioned briefly, the CEO within your organization having that backing from the top is useful. But do you see now consensus being achieved in Commerzbank, that innovation is something which has to be adopted?
Ben: [00:26:42] To be honest, we always had that. We were very lucky that we had an incubator who really looked into DLT topics. Already, in 2017 I think were the first use cases we did. That’s how I came across the topic. I think that’s a very good learning for many organizations. You need management support, but you need people who have an understanding, who will execute. You create them by really engaging. We did that for many years. We had a lot of use cases, we did a lot of tryouts and POCs, and now we’re doing our first MVPs with digital assets, but also with trade, also with cash.
By that you create people in all different departments in an organization, who are interested and who would like to join. Once they join, they create a know-how, which they did later have to contribute once it goes forward.
I always tell the story: how did I get to this space? I got to the space because we did a lot of use cases involving custody where you need traditional custody; now we’re interested in the digital asset world. I could join, participate and shape the POCs we did in the past from a custody point of view. By that, generating an input from the business side, participating in and helping with the POCs, but also generating know-how – which I can now use to engage and shape the bank. I think that’s the way you do it.
You have this grassroots movement of people who are interested in the topic and you give them an opportunity and the platform to really join, but also get industry know-how. It’s different from reading something on the internet, where it sometimes lacks the depth you need as a financial institution. Engaged topics. You have this grassroots movement and management awareness and support to drive change. Those are the two important things, and then it already automatically generates it.
As we all know, everywhere people really like the topic crypto. There are a lot of people who like the topic digital assets, a lot of people like digital transformation. If you give those people a platform and an opportunity to join in, that’s great. That’s where you create the grassroots movement within an organization, and with management support you might be able to convince one or the other in the middle who might not be as open to change here and there.
But to be honest, I haven’t met anyone who is just against change. I think it’s more about education and getting people to understand where you want to go and to demystify certain topics. That’s also a problem we encounter quite a lot. I think you guys and other vendors we have talked to with regard to chain analysis in the Bitcoin space already do a very good job at helping us educate our executives about security, about how the future could grow from a technology point of view, about risks involved, and being very open and transparent about it.
I think that’s the way to go forward and that’s how you drive that change. But you need people who want change as a grassroots movement, and you need top management support to enable that change. As I said before, having people in individual areas be the go-to person for a topic. I’m the head of digital assets for the capital markets area, so all the asset parts are my topic. But we have people who now have been named for compliance, for legal, we have a DLT lab of course, which really is a delivery organization that you guys engage in, who also help us deliver our visions.
That’s important and that helps. Those three components make change much more likely, and what helped us to be one of the ones leading the pack. It’s a different thing when you announce stuff and just start, or when you actually build something in the background and announce when you’re done. The latter is the Commerzbank approach.
Craig: [00:31:20] Great insight into the challenges, but also the opportunity. We are over on time. We could end with just a conversation between you and I, which I’m more than happy to do. Just before we close, from your perspective, it’s important that the financial community, the banks of all nature of size and shape come together in terms of adoption. Is there a message from you in terms of your view to the community, that really are still sitting and watching?
I get a sense that there’s resistance to be a fast mover inside of a lot of organizations. Often a time for the launch of products, institutions could be keen to get to market with a product and to be ahead of the game, to be a top of the lead table. But that does appear with this particular product to be a resistance to be too early, and a resistance to go first. Any view on banks that have focused clearly in house or feasibility, rather than launch?
Ben: [00:32:19] You don’t have to be the first, but you have to be ready to switch it on the moment you feel comfortable, because the lead time is much larger than in other topics. There’s a lot to look at. If you just look a little bit at feasibility here and there but you don’t have people sign up and put their name: I am comfortable from a risk perspective, I’m comfortable from a AML, KYC perspective, I am comfortable from a security tech perspective. If you don’t have those people aligned, you’re not ready.
I think the message is even if you’re not the one who first wants to offer it in the marketplace, you have to start developing it: talking about crypto, digital assets; to be able to switch it on because the lead time is quite a bit longer than in everything else we have seen because it’s quite different. Also from a technology perspective, it’s quite different.
Even if you, as an organization, are hesitant to directly offer it, build it. You can still decide: we don’t use, for example, cryptocurrencies, but we would skip that and go to these digital assets in then the next step. But you have everything built up. As I said before, you have the people you need to educate anyways, you have the stakeholder buy-in, and then you’re just a board decision away from launching or not launching. I think that’s very important to keep in mind. If you’re left behind and if you don’t acquire those skills, you would surely be not the one shaping the ecosystem. It’s a digital market, we have all seen what happens in digital markets, looking at the large players around internet these days.
Craig: [00:34:04] We are over time, we could go on. It’s been an absolute pleasure. Great to connect again. I appreciate your insight. Keep pushing for the change, and I look forward to talking to you again. Thanks very much.
Ben: [00:35:25] Thanks Craig. Thanks Metaco for the invite, and always happy to talk.
Craig: [00:36:21] Next week on Metaco Talks we have Peter Hoffman, CEO of Custodigit. Until then, this will be posted on the usual sites, and we’ll talk to you again at the next session. Thanks all, appreciate it.
Ben: [00:36:28] Thank you. Bye.