[00:00:27] Seamus: Welcome to the first episode of METACO Talks for 2022. We start the year with a guest who is a pioneer in blockchain in Philippines. Catherine Casas, Head of Blockchain Center of Excellence and FVP at UnionBank Philippines.
Cathy spent the last 20 years at the forefront of innovation at UnionBank, covering areas like market risk, treasury, fixed income derivatives trading, and blockchain. UnionBank Philippines has recently made news announcing further commitment to giving Philippines secure and informed access to crypto and digital assets. We’re thrilled to learn more today about that vision and the vision behind the move. Cathy, it’s a pleasure to welcome you to METACO Talks.
[00:01:03] Catherine: Yeah, likewise Seamus. It’s a pleasure to be here as well, and an honor to be on your first episode for the year.
[00:01:10] Seamus: Thanks for joining. We often hear the criticism of crypto, that the use cases are just speculative. But I think you’ve guys put paint to that fact; that you actually have specific use cases. Three years ago you launched the Philippine’s first stable coin, PHX. What is it and what was behind? It would be great to hear more about it.
[00:01:30] Catherine: The idea of PHX stems from two things. First of all, it was our desire to not just heed, but to respond to the call of pushing for financial inclusion. The fact that not everyone has access to financial products or the right financial products for their needs has always been one of the pressing issues here in the Philippines, and probably in most of the developing markets. Getting ahead on makes a lot of sense given that it has a big potential to enact change that leads to a more sustainable economy and society, which of course ultimately benefits every Filipino, every business, every bank at the end of the day.
We knew that in a country like the Philippines, with more than 7,100 islands, it’s a bit difficult and not to mention costly, for these banks like us to reach everyone in each of these islands. I think probably everyone knows this by now, that digital is really key to this. But the only way for it to work in a way that is sustainable is to be digital from end to end. It’s front to back. It has to be fully automated, it has to be seamless. Most importantly, which I guess a lot of the digital projects have availed to do, is that it should be consummated real-time. It means the transaction is final and cannot be disputed. That’s end to end.
Here, blockchain technology has been a key enabler given that it supports this particular use case. We’ve seen how Bitcoin enabled and the blockchain technology can be transferred to anyone and anywhere in the world, and it gets confirmed in just 10 minutes. We took this aspect as inspiration.
When the bank designed one of its first project, which the bank has done in partnership with Consensus, we call it I2I, which stands for island to island, institution to institution, or individual to individual. Think of it as a blockchain based retail payment solution that allowed us to connect more than a hundred rural community banks across the Philippines with each other, and connecting them into the mainstream financial network using blockchain technology at its core.
We’ve enabled these small rural banks who already know and understand the community, instead of us putting benches there. They bring a more personal and home grown touch, whose service their market’s needs, but who are themselves underserved. We’ve given them the ability to perform more services at a faster speed and at a lower price point, to serve customers that we can logistically reach through this platform.
From this project, we saw a lot of potential in terms of having a more interoperable blockchain based currency that could be used even outside the i2i. The thinking was that, if you are able to drive value for a rural bank community and their customer, how much more can you help the community if you had the means to expand this reach beyond these rural banks? PHX was one.
Second was, launching our own stable coin has been part of our digital transformation strategy, or what we used to call a digitized or parish mission. We embarked on a digital transformation journey years ago ahead of our peers, fully embracing what the word digital represents. For us, as I’ve mentioned earlier, it was embracing it to our core. It’s front to back. While we take pride and all of our digital products that they’ve enabled to be the current infrastructure, we also leapt into new technologies. We continue to do this. We continue to immerse ourselves and actively take part in designing and building the infrastructure of the feature, where we see production as now being more foundational, so PHX along with their other blockchain projects as part of that strategy, essentially to prepare for the future of finance where one possible state for us is one that is token based and where digital identities and stable clients are said to be the main building blocks of.
[00:05:27] Seamus: Fascinating, clearly solving a real real-world problem. How has been the reaction of the customers? What’s been the response from the competitors in the market?
[00:05:36] Catherine: When we launched this product as a pilot execution, it was very experiment. Our target market wasn’t our existing customers. It was mostly, number one, the unbanked. Second, it was the customers of the future. We put a lot of fashion into it because we were guided by the purpose of what we were trying to do it. It helps the country, and at the same time it helps us future proof our bank and our employees, ourselves basically.
As expected for majority of our customers, it was something new to them. They were mostly curious about what it is and what it’s for. However, it came out as a surprise, that there were quite the handful who actually already knew it; how it’s supposed to work and were asking how they can purchase them – which we never would have known if we didn’t launch this. It only goes to show that probably the world the we’re preparing for seems to be getting closer or even already here.
In terms of our competitors, I don’t think I have much to say about them. Ever since we started our digital transformation journey, we started to focus more on our customers and our mission, and we learned that at some point everyone will be our partner instead of a competitor. With all the challenges that we’re facing right now and all the changes, we realized that these are challenges that not one institution can handle. Not one institution can solve them.
[00:06:59] Seamus: It’s an inspired approach and very appropriate in this new peer to peer world. Also I understand you were very instrumental in UnionBank’s launch of the Bitcoin ATM. What’s been the impact of that so far?
[00:07:11] Catherine: I’ve always been very proud of this project, not only because I was the one that led that project, but because of the things that it has done for the bank as well as for the customers and ourselves, our employees.
During that time, we found out that our customers are already starting to dabble in cryptocurrency Bitcoins much earlier than most of us in the bank. But a lot of them are not really fully aware of what it is, how it works, and what their risks are. At the same time, we noticed that bank employees were also prepared to address customer’s queries about the topic. But we knew that some of our customers are knowledgeable in basic financial services in crypto exchanges that offered cryptocurrency initially. With the switch starting to happen because of their curiosity for transacting crypto, we also realized that if and when the world turned upside down and everyone wanted to just do crypto, the bank doesn’t have the skills or the process in place to operate these kinds of services for our customers, let alone process virtual currency related transactions.
The main objective of that project did not include potentially revenues, to be honest. It was for the bank to learn and hedge against potential disruption. I always liken it to buying a call option to the future. It was surprising though that we were able to generate some revenue. The numbers are relatively small to the banks and the bank’s income. It is dwarfed by the bank’s income. But this product was self-sustaining. But more significantly the bank was upskilling and retooling. That’s happened in the bank as a result of it. From branch through operations, through accounting, legal, task, risk, et cetera, because you worked in squads then. It became an opportunity for everyone to learn new things and be better equipped with the skills of the future. This paved the way for quicker implementation of other relevant digital projects, such as what I’ve mentioned earlier, the stable digital coin PHX and other blockchain based payment projects. We have all the support that we needed already in the bank to be able to launch that faster. Key learnings and developments for blockchain are attributed to the development and quicker implementation of these projects.
From a commercial angle and a business angle – I’m picking bank here because this is one of my favorite projects – we also increased levies and interest coming from not only from the retail side, but corporations, foreign banks, fintechs and tech companies that want to collaborate and do business with a bank. Mentioning that UBP is going to be a leader in digital, that we even have our own Bitcoin EPM in the initial conversations. The queries are not really for crypto, but standard banking products to support their own digital journey. We became part of their own digital journey as well: we get the invitations for us to be key speakers in their learning programs, which they also arrange for their employees. We’ve got them to know our customers better in the process, and this cemented our bond with them and our lead in the financial market in terms of our digital agenda.
We feel that this one small bitcoin EPM is true innovation for the banking industry. As someone running that project, it really involved breaking barriers, creating tension to deliver something that changes the game, that results through eventually meaningful progress. It took a change in our operating system and adopting a new way, creating an environment of ‘why not’ instead of ‘why’, which is very different years back. It is more open to learning new skills. This is not that traditional product. It is definitely one that is too controversial, especially for a bank and a regulated institution. But we’ve be doing it because we believe in the purpose of the project.
The typical use case then are people who send low value cash funds to their relatives abroad, who have just recently moved and don’t have a bank account there yet, and needed initial support for initial living expenses from their loved ones here, or to convert small cash limit they have received abroad from efficient payments.
We’ve been called a crypto-friendly bank because of. But the truth is, the focus then of the back wasn’t actually crypto, it was really our customers. These cases have always been about serving people, improving lives, both for our customers as well as our employees.
[00:11:37] Seamus: Wow. That’s interesting. You’ve done a great job of putting this customer centric view. It is pretty powerful. Interested what you described with the PHX, it was really about solving 7,100 islands and how you get to a branch or how you support that many branches. You’ve solved a particular problem with the banking there.
We have also seen Philippines broadly is one of the leaders in terms of adoption of cryptocurrencies. What’s driving that adoption in the retail space, and in cryptocurrency specifically, and other digital assets?
[00:12:07] Catherine: The Philippine’s first venture into Bitcoin was primarily to explore it as a transfer of value. This makes perfect sense when one considers that one of the pillars of our economy is our Filipino brothers working abroad as overseas workers and Filipinos working for foreign companies in the business process outsourcing industry. Remittances still comprise an enormous amount of our annual economic flow.
Despite the pandemic, but this comes with the fees as usual, Bitcoin has held an immediate appeal for Filipinos because of its ability to provide an alternative way of remitting money. These aspects allowed Filipino developers and entrepreneurs to invest in a future where they could offer a service that cuts down on the costs of these payments by incorporating that into their maintenance process, hence the proliferation of crypto exchanges.
Another important use case is that it provided Filipinos with a way to experience investing without having to shout out a large amount, because its innate property or ability of crypto to be offered in fractions of units. They had that experience of being able to invest and see what happens to your money after. The pandemic has also been a game-changer. I might be stating the obvious here for everyone, but this has accelerated the use of cryptocurrency. The introduction of, for example, pay-to-earn, has recently become one of the biggest stories of adoption of blockchain technology here in the Philippines. Institutions are starting to see this as well from their own customers, and how they are becoming now more crypto literate, or market curious. At some point, similar to how the Facebooks and the Instagrams have changed customer expectations, the same customers will now start to demand the same seamlessness, the same frictionless kind of service provided by the cryptocurrency industry across different products.
At the same time, they would need to help their customers navigate this and enjoy this in a much safer way This now brings back renewed interest of institutions and the momentum to explore digital assets. hat institutional version of cryptocurrency. That’s how we see it now.
[14:52:12] Seamus: Interesting. How do you think, given the range of different types of investments there are now in cryptos, how do you think this new investment class of clients’ portfolio will look? Will they still look at traditional assets, like equities or bonds, or is this a future we’re looking at, that everything’s crypto assets?
[15:18:08] Catherine: I still believe that even if consumer behavior continues to evolve from here, portfolio theory will still hold. It’s always going to be a function of risk return relative to your overall portfolio. If we’re talking about crypto assets, cryptocurrencies such as Bitcoin, Ether, my view is that as long as the volatility remains at the higher end of the spectrum, portfolio allocation would still be relatively small.
However, unlike before, I think it will now become more a staple in everyone’s investment portfolio. It could be just a small amount, but it’s always going to be there as it provides significant diversification benefits.
Now what’s interesting though is in the area of digital asset, which could cover not just cryptocurrency, but blockchain based traditional bonds and equities using Blockchain technology. This is an entirely different story, because it could be bigger depending on how technology in the capital market space would evolve.
[16:22:23] Seamus: Given all the exciting innovation you’ve done; I have to ask about the Blockchain Center of Excellence. I’d love to hear more about what that is, how it’s grown over time and what your plans are going forward.
[16:34:32] Catherine: The bank’s digital transformation is actually less about tech, but more about people. Part of the plan was to provide an opportunity for people inside the bank to learn. One of the key pillars, we said our people should learn this was blockchain. The Blockchain Center of Excellence, this was a dedicated unit in the bank. It was formed to further research blockchain research and experimentation, and to drive and promote blockchain use cases across the bank.
Initially during the first years we conducted blockchain one-on-ones, giving people an opportunity not just to learn but to also ask questions. That included also launching game changing POCs and pilots across multiple use cases. But going back to mindset, the culture of openness and collaboration when learning about blockchain was crucial, and pushing the teams to look beyond what blockchain is on the surface. For years since its establishment, the Blockchain Center of Excellence now sits under a group called Blockchain and API Business Group. It is a business group now, as the bank slowly transitions from pilots and POCs to commercialization.
Now the focus has shifted towards a more sustainable business model to be able to deliver what we’ve learned; these financials solutions that cater to new customer needs and the demand for new experiences and products.
[17:59:20] Seamus: How does that fit into the bank’s broader innovation strategy?
[18:03:05] Catherine: As I mentioned earlier, it was our hedge to the future. It was a natural evolution in our digital transformation journey, that essentially allowed us to build not just the capabilities, but the skills of the future. It competes our digital to the core promise. As I’ve mentioned, innovating end to end. We are seeing the benefit of doing this early, as we saw that it gave birth to a number of groundbreaking innovations that allowed us to bring more value to our customers and further our tech of Filipinos advocacy.
[18:42:08] Seamus: When I look at the pace of innovation you guys are driving in the space of particularly crypto and digital assets, it’s obviously light speed compared to many other jurisdictions or banks. What’s the reaction and the support you get from the regulators in Philippines?
[18:57:45] Catherine: As you’ve mentioned regulations play a vital role in the lifecycle of any new or emerging technology. I can say that the regulators really value innovation and its role in financial inclusion. I believe that our regulatory framework as well as all the other countries, is still at an early stage and it’s still evolving as technology and our customers evolve in it. But I admire the resolve of our regulators here in terms of its role in promoting financial inclusion and pushing for the Sustainable Development Goals agenda. It’s not easy to regulate the crypto industry, for example, because of its innate characteristics. It’s totally different from how we have set up the financial system basically. But you see the effort and their openness to support innovation in this space, especially for use cases that advance inclusive prosperity and the growth of the economy, provided that the consumers’ right to protection remain safeguarded.
For the BSP, our central bank, while they have policies that allow for this, they also provide warning advisories in cryptocurrency to ensure that consumers are aware of the risks that come with it. They have also very stringent rules and policies for those that want to offer this service.
[20:18:03] Seamus: To cover a slightly different angle, we’ve talked about the technology specifically, given all these implementations you’ve done, what are the technical considerations and challenges when it comes to operate digital assets? We’ve just said you operate in a highly regulated environment for the consumer protections, etc.
[20:36:24] Catherine: Here the biggest consideration is whether you even have the skills to evaluate or operate this new technology in the first place, and the framework at which this technology can be deployed. It’s not limited to your internal policies, but the regulations and regulatory environment that you can operate in.
In terms of the biggest challenge, it’s that everything is not just new to you, but it’s sometimes also crunch addicting, as mentioned earlier, to how things had been established and ran for decades. An example would be for a bank, to offer their clients the ability to do self-custody, of their investments, which contradicts our long standing assumption that customers go to the banks or brokers, because the bank or brokers act as their custodian typically, and that no one would ever think of doing it themselves in the first place. But that’s not the story now.
As long as you maintain the same assumptions, it will be very difficult to think about technological considerations and operations of digital assets. The longer you hold to these assumptions, the slower you learn and the less open you become to learning it. Usually, the more difficult part is really getting to that point of deciding whether or not you should operate digital assets in the first place. But once you’re past that it becomes easier, because if the resolve is there, you’ll realize that you have very talented people in the organization who just happen to learn fast and adapt fast across functions, and that you are now also more open to working with partners for capabilities that you don’t have.
[22:15:24] Seamus: Well, at that point I was going to ask the partner question. How do you prioritize building things internally versus partnering in the market? What are the key aspects in choosing partners?
[22:26:15] Catherine: It is case to case for us. It is essentially crypto tech evaluation and the bank. It’s similar to how we evaluate tech in general, or partners in general. It goes through an independent and rigorous process, that includes evaluating whether to build in-house, to buy or partner, or to do a combination of all three, because sometimes it’s possible depending on how complex it is.
In-house solutions are compared to external solutions, and evaluated in terms of a set of criteria that covers commercial, time to market, risks, reputation in the industry, among others.
[23:08:37] Seamus: I don’t normally have a sales plug, but I have to ask, given that UBP recently announced a partnership with METACO, and IBM ran our platform, how does that fit into your strategy?
[23:21:42] Catherine: Both METACO and IBM are strong names in the industry. This is crucial for our strategy of building the bank’s capabilities and in preparation for the future of banking. We’re in the business of trust, and it’s very important that we trust the partners that we work with. Institutional, great vetted partners are at top of the list. Typically, we will want long standing relationships. We’ve had one with IBM and we’re looking to have one with METACO as well.
[23:57:12] Seamus: Excellent. What are the use cases you’re looking at for crypto custody and trade? I understand this kind of a starting point?
[24:03:47] Catherine: Well, my only answer would be whatever our customers need, both present and the future. As we have learned, especially after the pandemic, anything if possible. Nothing is fixed. One day it could be tokenization, the next day it could be something else. Everything could change, hence our continued focus on the customers and a great deal of effort in terms of finding out what’s happening out there, even beyond this space that we traditionally operate in. We continuously try to identify and build the capabilities to service them.
[24:35:22] Seamus: I’d be curious to ask, because DeFi is something that we look at as potentially reinventing the bank and score stack. I understand the client question, but how do you look at that from a technical perspective, the whole DeFi evolution in the market?
[24:50:13] Catherine: I think it’s very relevant. It’s actually first principles thinking. If you have the technology to have that available and the customers want that kind of experience, I think everyone should look at it and look into it. We’re not used to having a decentralized governance. We’re not used to having decentralized systems, but at some point if we look deeper into it, you’d see a lot of benefits. What benefits us benefits as the customers as well. There are ways in which banks can participate in the decentralized space, but that will take time because it’s more than a private institution decision. It’s a function of political and regulatory framework. But it isn’t very interesting space, and we have our eyes set on it.
[25:49:10] Seamus: Well, clearly, everybody should be watching this space, because you’re breaking new ground in the banking space globally. Cathy, it has been super exciting to have you on here as our first guest for 2022. Thanks for your time today. Do you have anything else you want to like to comment on before we wrap up?
[26:05:25] Catherine: Well, thank you Seamus, and thank you METACO as well. To our guests, thank you for your time. We are always excited to represent UnionBank of the Philippines and our Blockchain Center of Excellence. We’re happy also to share our stories of transformation. I’m hoping that it inspires more collaboration towards finding solutions to improve our lives, not just in the aspect of banking or financial services, but beyond.
To the audience that are interested to know more about blockchain and how this story has evolved in the Philippines, my boss Henny, and a good and former colleague Nathan, and I have written a book. If you want, it’s available in Amazon and Kindle as well. It’s called Opening the Archipelago: The Blockchain Story in The Philippines. If you want to know more about the story of UnionBank, it’s all there.
[26:58:45] Seamus: I wasn’t aware of that. I’ll check that up myself. Great, Cathy. Thanks for joining us today. Thanks everybody for joining METACO Talk. Join us again in a couple of weeks for our next installment. Until then, have a great time. Thanks for joining. Bye.