[00:03:09] The business opportunity behind institutional grade custody for cryptocurrencies and digital assets
[00:13:28] Innovating at high speed while having the benefits of having a Tier 1 institution behind
[00:17:13] The digital asset partner ecosystem – fragmentation, cooperation and orchestrating the value chain
[00:22:50] Enabling institutions to access the DeFi market
Seamus: [00:00:09] Welcome to Metaco Talks. I’m Seamus Donoghue, the VP of Strategic Alliances at Metaco. If this is your first time joining Metaco Talks, it’s a biweekly podcast where we invite thought leaders from the digital asset space to join and discuss their operations, current events, and opportunities in an exponential future.
Today’s a unique episode as we’re broadcasting live from The Network Forum. The Network Form is the preeminent event for the network management custody in post-trade community. I’m proud to say, our guest today is Max de Guillebon, who is the CEO of Zodia. He’s someone that started out as a branch manager of a bank, rose to the ranks in cash management and transaction banking, the venture arm of a bank, and is now the CEO of one of the leading digital asset companies. It’d be great, Max, if you could spend a few minutes to introduce yourself and your journey to digital assets and the high level the ambitions.
Max: Well, first of all, thanks for having me. Great to be part of the Metaco Talks and the TNF forum at the same time.
I have a very conventional background. People in the crypto community would probably call it boring. As you rightly pointed out, my time in banking has been largely in commercial bank across various countries. Started in Ireland, transaction banking product in the Middle East, Singapore, Vietnam. In Vietnam, to be fair, I discovered innovation, and that’s something that I kept after, sticking to start a charter probably for now 15 years.
Just so that I anticipate a little bit of question on how did Zodia come to play, I had the privilege of looking after the banks channel: online banking platforms, SWIFT, et cetera; and blockchain. To be fairly, it was new and nobody really knew where to park it. People thought that was just another channel that the bank would interact with ITS client or partners. From blockchain question started to come to crypto. I’ll talk a little bit later, I’m sure there’ll be a question on how do we do that in a large financial institution. But essentially it was natural progression, not planed at all. I’m not a cryptology person, I’m not a technology person either, although I became one. But yes, that’s really my background.
We set up Zodia, I think we incorporated the entity in the UK in January 2020. We are about to go live, having ticked all the boxed internally: regulatory and so forth. Zodia really positioned itself as being a truly institutional grade custody platform. We are very clear on the institutional grade. We are generally a custodian built by custodian, for custodians and for investors; and very clear on the fact that look at institutions –large institutions, founds, global custodian banks, et cetera. We bring really the custody element of it, we don’t try to do everything. We’re very focused on custody only.
That’s a little bit about myself and a bit about Zodia as well and the genesis of it.
Seamus: [00:03:09] Thanks for the background. I think the fact you are from the traditional space is very interesting. Given with The Network Forum today, probably many of the audience is very much the same. It’d be interesting to see how you frame the opportunity in cryptocurrencies.
Max: To be honest, we didn’t. Let me qualify this, because it’s very important. It’s extremely important, especially for people who come from a regulated financial institution background.
We didn’t start with a use case. We didn’t start in exploring revenue opportunity. We generally started to look at crypto assets because clients were asking what the bank’s view was, and the bank didn’t have a view. Instead of starting with the opportunity, we positioned a document internally to say: these are the risks, here’s what crypto assets all about, these are the things we need to watch out for. By the way, there are potentially opportunities in a few areas; we looked at retail. Not just me specifically, but it was the group.
Generally speaking, we started looking at the risk side of things and education, and then we’re comfortable enough with managing these risks so that we could look at the opportunity side of things. To be fair, there was also an element of in the process, getting the group, especially Bill Winters (the group CEO) very comfortable with the fact that digital assets were here to stay. That obviously was the backbone of the project, because that’s what keeps you going. There was a general understanding that it was yet to stay. But the approach we’ve taken was very much risk first, opportunity or reward second; as opposed to trying to jump on the crypto bandwagon.
Seamus: Those steps, whenever we speak to traditional legacy firms that move in this space, that evolution is very similar. Understand the risks, understand the asset class and the size. What were the challenges when you got over those hurdles, like this asset classes here and the understand the regulatory risks? What were the challenges building the business case? You had client demand you said, so that’s obviously your starting point.
Max: [00:05:19] We didn’t have client demand, actually, we had a client inquiry at the very beginning. Keep in mind, we started this in early 2018. That was the crypto winter. There was very little client demand.
Seamus: Indeed, still looking at the time.
Max: There was very little client demand, which is why we could generally progress through a risk assessment. It was never meant to be a business. It was never meant to be something the bank was going to offer. That just happened through a lot of steps that we went through.
If you look at the big challenges, the biggest one was getting the organization comfortable that crypto assets were here to stay, and the fact that it’s an investment. It was a bet at the time. It was difficult for it to be justifiable business case, to be totally honest. It is now, but three or four years ago, it was a lot more difficult.
Once you get this, fundamentally speaking, what is very difficult to do is taking the standard and the framework of a regulated financial institution. That includes technology standards. That includes regulatory standards. That include compliance and financial crime standards. That includes all of these standards, as well as the role of a custodian. You look at UK CAS rules as an example, and transposing this into the crypto asset world. Custody may sound the same if everybody calls it custody. It’s fundamentally different, not necessarily in the principle – because they follow the same asset safekeeping principles – but the way you implement those principles, you essentially bring them to life and put them into production. That will continue to be the greatest challenge.
The other piece which we are discovering now as well, is the fact that it’s great to have a custody solution, but now that the ecosystem has evolved a little bit clients are asking for other services. They want banking services, they want leverage, they want liquidity. Essentially now, as a regulatory financial institution facing world of sometimes it’s regulated, most likely not regulated counterparts, the whole risk management framework you need to put in place to get comfortable with additional services with short partners that didn’t exist five years ago, is something that is probably the upcoming barrier to entry now that people have started to master and set technology and key management.
Seamus: I think you’ve been part of the journey. There were no standards in 2018 and regulators up the curve was also part of that journey, I imagine. There seems to be a lot more accumulated knowledge on the regulatory side than there was then.
From what I know of your operations, you’ve launched with, let’s say safekeeping or crypto assets to start with. We hear a lot of buzz about tokenization? Is that part of the plan as well? What does tokenization even mean to you? I’d be very curious to hear it. There’s big stories, but what is the reality?
Max: What is tokenization in the first place? There is a variety of things. But if you think about tokenization, being able to, let’s say create a small contract that represents assets, and moving them, storing them, trading them, facilitating the safekeeping of these tokens; then I think the technology is the same. What changes is the nature of the underlying token, which is the regulatory environment, how this is being treated by the regulator in terms of licenses. But also we’ve seen in terms of capital treatment to perform services around these tokens.
Technically speaking, yes, the infrastructure is there. But we haven’t really seen a lot of demand for tokenization per se. There’s a lot of excitement. I’m not sure there is a use case which makes commercial sense right now.
Seamus: Might there be a use case? The initial use case, is it going to be in the security space when there is a use case? Is it going to be in the security space, is it going to be things like NFTs, or is it going to be in the payments space, for example a diem-type initiative?
Max: It’s a good question. Again, based on the clients we have, which is really the institutional segment, we’re unlikely to see any pioneering tokens. A lot more around stable coins, some of the unregulated assets potentially.
One thing which is very important to keep in mind is, whoever wants to talk about tokenization, I think needs to master crypto first. The ecosystem is the same. It’s going to be the same railway, the same infrastructure, the same market-makers, the same liquidity pools, the same infrastructure when they talk about the sequence. It’s going to be very difficult to create something on the side. It would have to ride on the same cryptocurrency network that is being built today. Whenever that happens, being part of that crypto ecosystem today, will be very well positioned to just enable an additional token.
Seamus: [00:10:31] One of our taglines that we often use is: built for the crypto state for the tokenization. It’s almost like, if you have the crypto infrastructure, it’s a free option, the rest. You’ve been building and building the tokenization first as you’re waiting. Not sure what you’re waiting for exactly, what’s the catalyst.
Max: I think for now it is still crypto. If you look at the market cap, it’s crypto easy use case.
Seamus: I’d love to talk about, as you described, the comparisons of the FinTech natives and the unregulated space. But before we get to that, you’ve got a unique structure you’ve set things up as a separate entity. It’d be interesting to know what’s driven that. When we talk to firms, it seems to be two models, basically. There’s that or there’s the single point of entry for clients, for let’s say traditional assets, and crypto, and there’s that model where you combine it with the existing business. What’s driven how you’ve set up?
Max: There was some very practical consideration to setting it up as a separate entity. Then there’s one which is probably a little bit more nuanced and a little bit less evidenced. If you think about setting up a crypto business or digital asset business, location is key. When we set up Zodia, we wanted a very highly reputable regulator. The FCA was the right one. But keeping in mind that started chattered operations in Tunisia, Africa, and the Middle East. Of course. It doesn’t approach in Europe, doesn’t operate in the US as a commercial business. There was no way for us to ride on an existing license. That’s consideration number one.
Two, as you rightly pointed out, the licenses required are different from banking license in most cases. In the UK it is. You still need to go through a vast purchase ration, which is different from the banking license. Sometimes it’s very different on what you can leverage.
Three, I think the technology is fundamentally different. I think because of cyber risk, you want to isolate your tech stack from a group. The technology, nobody uses HSM to secure their API keys today or these kinds of things. Needed to anyway build it from scratch.
The fourth one, which is potentially not as obvious but critical, is attracting talent, attracting people. The best engineers today are not necessarily naturally going to technology organization within banks. They’re a little bit more attracted to fintechs, to the shiny technology, and crypto happens to be one of them. It’s very important for us to also make sure we have the right environments for attracting the best talents.
Setting something dedicated to crypto assets helps us to meet those four key consideration, which I’ve just mentioned.
Seamus: [00:13:28] The strategy you’ve taken also enables you to be a very agile brand connected to a large organization. I’d be interested to know, given you set up the structure, how do you work with STB? Also given that it was announced that Northern Trust is part of Zodia, how are you all fit together and operate together?
Max: You need to look at crypto assets as an enabler. For people who are familiar with custody, crypto is nothing but a new emerging market. What you do when you have a new emerging market, you need a local provider that connects to the ecosystem, but understands the regulation of that market, to navigate on your behalf.
But your clients don’t just operate in crypto. Our clients don’t just operate in crypto. Crypto is probably, I don’t know, between 0.001, and maybe 30-40% of their portfolio. The connectivity to traditional finance is absolutely essential. The connectivity to Fiat, the connectivity to SWIFT, the connectivity to global custodian, the connectivity to FX, the connectivity to leverage and lending and all of these services. That is not something, as I mentioned earlier, that we will provide, because we are very focused on custody.
The relationship with either Standard Chartered or Northern Trust, but with other global custodian that we are engaging with is just an enabler to enable a new market so that they can offer that within their global offering to their clients and integrate that with all of the services that I mentioned earlier. There’s no competition. It’s actually a great way of expanding the business. The emerging market example is probably the best one we can find it.
Seamus: [00:15:21] I haven’t heard that before but that makes a lot of sense, the way you’ve explained it. Given this journey you’ve had and the lessons learned, the audience and The Network Forum is probably looking at this asset class, if they’re not already engaged, wondering how to do it. Is there advice you would offer to other firms, large firms that want to get into this, and how to do it?
Max: I can only look at it from what we had to go through. Consider risk before reward, and I mentioned that earlier, it’s fundamental. Nobody will ever look at the reward side of the crypto assets. Making sure that’s well understood is key.
I have to say that sometimes these ideas come from innovation teams, but you need to rally the rest of the organization to make it happen. Federating everybody around the project and making people comfortable is by far where I think a lot of the challenges happen. I didn’t want to use the word delay, but it takes time. In regulated entities it takes a lot of times. If you’re a crypto native firm and you’re unregulated, it’s a lot easier.
The third one is education. There is a lot of misrepresentation of crypto, the risk underpinning crypto, and the tools that are there to mitigate these risks. Sometimes people will get very surprised that some of the tools are way more sophisticated than what you can find in traditional finance. Education to your organization, your partners, your shareholders, your clients – and they probably work hand-in-hand – I would think this is the right way.
Seamus: [00:17:13] I think those are very practical insights. Let me change tack a little bit. You mentioned you see yourself as an enabler. In this space, let’s say solution you build is part of that enablement. You’ve clearly built, as you say, new technology compared to what the old stack that supports traditional assets is, or even any infrastructure in a bank. How do you approach the usual build by partner, in the crypto ecosystem as you see it?
Max: To be honest, we wanted to buy it. We were very keen to get an off-the-shelf solution, and we thought it would be easy. The reality is, because of our approach to look at custody first, we didn’t really find any solution that covered our requirements. I think also reflecting on if this was the right decision, because to provide asset safekeeping, you need to own your engineering, your design. I’m not saying own each part of the technology, but you need to own the end-to-end security. You need to make sure that it’s built in a way that can integrate with a lot of the side tools: the screening tool, the transaction monitoring tools, the compliance tool, the onboarding tool, et cetera, which typically sits completely outside of custody in the offering that we see today in the market.
Very important for us to own the design, very important for us to bring technology, because we’re not experts. We don’t build HSMs, so we need to be realistic as to what we’re good at, but also bring the right technology to fit into that tech design. The reason why we invested in METACO – again in full disclosure, but that was public information, I think a year ago or something like that – it was the fact that part of the METACO technology was very good for us, very useful in what we were trying to build.
The other piece is we don’t really know where the market is going to go. We don’t really know where the regulation is going to go. It’s very difficult to buy something which is off-the-shelf and rely on somebody else to make the changes you would need to do as a custodian, to either satisfy your clients, your roadmap, or your regulators. If you get an off-the-shelf solution, you’re stuck. If you build it in a modular fashion and own the design and the stitching and the stack, it’s a lot easier to replace components.
I usually take the example of a car, which I think is really what it is. You get an engine and you get a chassis, but then if you’d like to change the side mirror, you change the side mirror, and you can buy fancy leather seats from somebody who does fancy leather seats. But the design of the car, you do the design of the car. This has been really our approach. I would really question people who go on white label solutions right off the shelf, or the other way around – the ability for a single company to build it from scratch and to add.
Seamus: [00:20:24] I think we’ve seen a similar evolution. If we were pitching our product back in 2018, we would have said we have an end-to-end product. But the reality is, as you said, the market dynamics are iterating and evolve so quickly that I don’t think anybody in the market does.
We talk often about orchestration and flexibility. You’ve mentioned it already, but not to belabor the point because I think it is critical for people to understand that, how important is this flexibility and optionality on the future to you?
Max: Maybe the best way of looking at it is to choose an example, which is very close to our heart and that we’ve been very vocal about implementing; the travel rule. Travel rule was a recommendation by the FATF in August 2019. What the travel rule says is, when you have custodial wallets you need to exchange beneficiary and remitters information between those two custodial wallets. The fact that we own the tech stack means that we have the agility to implement that relatively quickly, and we’re already live on travel rule. We see that a lot of our counterparts, with whom we try to connect with, are saying: we’re not rely on a provider who doesn’t have that feature, so I cannot connect with you.
The reality is travel rule is now a law in a couple of countries. It’s law in the US, Switzerland, Hong Kong, Singapore. Unless you have that agility where you have the core components, but you can plug in other features, just because you don’t know what the roadmap is going to be (it could be futures, it could be regulatory changes), I think that helped us a lot in being very quick in responding to that requirement of implementing a travel rule solution and doing it at a relatively short implementation, limited cost and resources, and being live in the market as probably one of the earlier custodian to have done that. Very important to keep that agility. You have no idea what is coming your way. I don’t think anyone should be stuck in a box for that; not for crypto.
Seamus: [00:22:50] Those are great examples. We had pushed this as a key USP; being flexible, have the agility to orchestrate whether it’s, as you say, the travel rule or different key backends or the new services you may build, staking, prime brokerage, et cetera. You need end-to-end security and flexibility around plugging these.
We’re getting close to the end. Maybe speaking about let’s say other services, we hear a lot, because we’ve talked to both crypto native and traditional firms and it’d be great to hear coming from the traditional space, about DeFi. How much interest is DeFi on your side?
Max: Very little. We don’t see that from our clients. Again, maybe it’s a fact of who our clients are. Very little interest. Where we are seeing interest right now, I’d say there’s probably three large areas. One is access to liquidity and creating that ecosystem – connecting the custodian to other services. We’ve participated with TPI Cap to try to create these kinds of ecosystem and pool of liquidity. There was a press announcement made yesterday on their spot trading venue.
That is going to be very important. You build the custody, but now clients expect a network. They expect the ancillary services: global reporting, connectivity, lending, prime services, margin trading. To be fair, a lot of what we see is trying to get crypto assets much closer to traditional finance than trying to bring traditional finance into the crypto world – which is fascinating. Maybe I’ll have threat letters from crypto purist if I keep on saying these things, but that’s definitely for institutional clients what we’re witnessing.
The third one, which is emerging but I think is important, is the ESG agenda. I wouldn’t say it’s necessarily on the back of Elon Musk’s various tweets, but generally speaking it’s something that the industry is taking relatively seriously. Because it’s new, it has the flexibility to engineer it more on the east side than the SG, by the way. But in a green fashion and forcing some green standard maybe more easily than for others.
For us, it’s way more C5 than DeFi at the moment; and green DeFi if we can.
Seamus: [00:25:19] Hopefully a lot of the developments we’ve seen moving mining out of are trying to help address some of that ESG element.
Before we go, I’d like to touch on one last thing. You touched on your institutional clients. I’d like to know, what type of clients are you targeting? Given your comments around enabling this space, what do you view as your USP’s versus let’s say digital native firms in this space?
Max: In terms of clients, we position ourselves as being a qualified custodian. We’re not an infrastructure player, we are a qualified custodian. Anyone who needs to save Gulf Claude’s assets would have a need for a qualified custodian. Banks, asset managers, issuers, firms, are typically private banks, typically the financial institution or organization we speak to.
We’re also working relatively closely with global custodians. I mentioned the emerging markets; we are custodian for emerging markets, so how do we enable access to that emerging market through global custody?
In terms of how we’re somewhat different, you would have seen from my background, we’re not crypto native. We really came with custody, and we applied custody to crypto assets; as opposed to a crypto native firm that would have gone through the technology and then to custody, or trying to understand what custody is. Hopefully being a subsidiary of regulatory FIs, we bring trust, which was fundamentally lacking in the crypto world. By trust, it’s anything from governance to your legal agreements to your risk management platform. The example in South Africa where two brothers just left with 2.5 million, it’s still happening.
I think the third one, which is going to be more and more real, is the fact that we work with traditional finance, not against them. We are really trying to promote the integration of crypto assets and traditional finance, because that’s the only way it’s going to work. There may be a portion of the ecosystem that will go completely unregulated and wants to compete and do something fundamentally different, but again, back around our history and what our clients are asking us to do, is to make sure these two worlds are connected as opposed to completely opposed to one another. That’s, I guess, an approach we haven’t seen that much in the crypto space.
Seamus: Super interesting, Max. I think that’ll resonate with the audience here at Network Forum particularly. Thanks for joining. Worthwhile asking, how could people get in touch with you if they want to learn more?
Max: Well, more than happy to connect via LinkedIn. There is a contact form on our website, www.zodia.io. Otherwise, I’m here as well to take any questions if people have any. We’ve very keen to entertain any conversation.
Seamus: Thanks, Max. It’s been a pleasure, I’ve learned a lot. We’ll see you soon. Thanks everybody for joining METACO Talks today. I think we’ll be back on our regular format in two weeks’ time, I hope to see you then. Thank you.
Max: Thanks for having me. See you!