[00:00:14] Adrien: Welcome to the 30th episode of METACO Talks. Today, we’re speaking with Jean-Marc Stenger, Chief Executive Officer at FORGE, a subsidiary of Société Générale Group focused on bridging capital markets with digital assets.
Jean-Marc, you are in industry now for over 20 years, I believe. You started at Société Générale in 2000s, where you carved out to carry it in the corporate and investment banking arm, before joining as part of the founding team, the Lyxor Asset Management entity, which was managing at the time roughly 137 billion. You were a founding member at the time and you specialize in the company until you reached the Chief Investment Officer position. But surprisingly, or maybe not surprisingly, you ended up moving to a small internal startup at Société Générale, specialized in digital assets, in 2019, and this is the FORGE entity.
Jean, it’s a pleasure to welcome you to this discussion. Thank you for joining. My first question, and I have a long list here, is how did you make this decision and why would you move from such an important role in an important entity in Société Générale, into something which at the time, at the least from what I’ve heard, was still perceived by a lot of bankers as a bit of a scam or something, which would never bridge out?
[00:01:38] Jean-Marc: Thank you to METACO for having me today. It’s a real pleasure. Hello to everyone attending this webinar. It’s true, I’ve been involved with Lyxor Asset Management and Société Générale for many years before that. At the time I left Lyxor, I was already active in the investment field and in this position for more than 10 years, probably even closer to 15 years. It was a long time to me, and I was anyway considering the next move.
The point is that at this very precise moment, I already had – and that was also the case for a few years before that – numerous discussions with some of my investors. Private banks or financial institutions were coming to us to develop investment strategies on crypto assets, on cryptocurrencies. This was really the moment I started to dig into these subjects. I’m a very curious person. I get into the subject, trying to understand what were the potential way of cryptocurrencies, and blockchain more generally, and what what’s new that’s attached to that. I very quickly realized that this had the potential to completely transform the way capital market could be operated tomorrow.
I saw that trying that within the framework of the Société Générale Group, which is a group where there is a culture of entrepreneurship and innovation, it’s strongly in the DNA of the Société Générale Group, it was probably a good try. I gave myself six months. That’s the timeframe we needed to do our very first security token issuance. At the time it was a covered bond we did. I’m still there now, and it’s a bit more than six months now. It’s nearly four years. I’m happy to continue this adventure.
[00:03:52] Adrien: This is a really interesting migration, I would say, from a very traditional business to a very entrepreneurial venture. The question I have before I get into what you’re really doing there and what are the pillars that you have technologically speaking, or in terms of market opportunity, just a quick question regarding cryptocurrencies. When you started at FORGE, did you consider or even try pushing a use case more related to cryptocurrencies? Or did you see the opportunity immediately with tokenization in the capital markets?
[00:04:29] Jean-Marc: Very clearly, the focus at the time and it’s still the case, is on securities. Since SG-FORGE, we are within the framework of the Société Générale Group, it is really involved for its core business in capital market activities and securities.
We thought that remaining in this field, which was probably the area where the group had the most to bring at first before trying to diversify itself into other activities or other assets, cryptocurrencies, we thought that was the most natural way for us to engage into that, but also an area where we see the potential for transformation as the highest and also where the strategic nature for a group such as Société Générale to be involved in this field. The way capital markets and securities could evolve tomorrow with blockchain is also the most important. It was an alignment which we decided to focus on and to be there, as we speak.
[00:05:40] Adrien: How difficult was it to sell this story to Société Générale? At METACO, we are facing banks all day long, and for some of them, it took two or three years to get an alignment internally around something related to blockchain. Was it easier for you? Maybe you had the right contacts or the right levers to pull? How did it go?
[00:06:00] Jean-Marc: To be honest, that’s a question which is often raised to me. I think there is no single answer. It’s a mix of different things. I could name first myself, like the other team members with whom we started this, we are all coming from the business. We were all involved in market operations, security services and different kinds of businesses, but core businesses of the bank. Even if we had most of the time also a personal interest into cryptocurrency, or even personal trading experience in cryptocurrency, our job at the time was really on the, on the front side in capital market activity.
We are coming with a client’s interest in mind and financial questions in mind, not approaching the subject through the technology, and definitely not falling in love with the technology in itself.
[00:07:05] Adrien: There’s no problem falling in love with the technology.
[00:07:08] Jean-Marc: No, problem at all. It could even happen afterward. That’s maybe number one. Number two, again I think it relates to also the culture of the group. We had almost from the very first day access to the top management of the bank, at CEO level, where we had the opportunity to explain what was at stake, what we understood from the technology, where we could see a strategic interest for the bank going there. Having a few hours of the time of the top management to be able to explain that is of immense benefit in that phase. It allowed us to get some understanding and to go beyond the traditional stories you could find in newspaper at the time, for at least those six months I was referring to, to try and demonstrate that we could deliver something of interest for the bank, beyond the slides consultants, which were floating to everyone at the time.
Then there’s the personal network each of us had within the bank, which facilitated and are still facilitating some market operations that we are doing today.
[00:08:32] Adrien: One thing we observe also sometimes, when a new initiative which is so ambitious emerges within a large corporation, in particular within a large bank, is that even if you have management supports it is very hard to have the agility that you need as a startup within the monster to strive and to move at the right pace.
How did you manage to do it? Did you open an office in a garage and you had a lot of red bull cans, and you work by yourself with techies and no contact with the mother company? Or did you manage to keep contact with the bank, leveraged the pros that they could bring, but in a way push back what could potentially slow you down?
[00:09:12] Jean-Marc: First and foremost, and this was very true from the very beginning but still today, we only set a very short term and concrete objectives to ourselves, things we explained to the management. It made them each time baby steps, but very concrete ones, and very execution oriented, to make sure that we do not construct a big catheter with long developments which never happened, but also gives a lot of opportunities for different people everywhere to unplug what you are doing. Short term, very concrete deliverables. Then operating in an environment which is maybe not as rigid as the rest of the more matrix operations, recognizing the lever of the bank, the experiment or nature of what we were doing at first, and then setting the right framework with the right risk limits with the right boundaries in what we were allowed to do or not, and expanding these limits with time as you convince through what we have delivered, is probably a good way to progress.
This led us two years ago to creating a dedicated subsidiary of the bank, Société Générale – FORGE, to host this type of initiative in a more controlled and regulated environment, because the Société Générale – FORGE did apply for some licenses to the French regulator to be able to operate crypto services in that field. But we’ll talk to that later. In a way, it makes everyone comfortable, clients but also the bank and the regulator when we are proposing to the market security transactions purely and only on a digital asset registered on public blockchains.
[00:11:20] Adrien: We are going to jump into the specific capabilities and features that you are building, the ones that you already provide. Can you tell us exactly what it is about? At the same time, answer the question of whether your ultimate secret goal is to cannibalize the current custody business of the bank.
[00:11:38] Jean-Marc: At Société Générale – FORGE we are operating three type of services. On the primary market, we help issuers to issue securities as native digital assets, predominantly on public blockchain. It’s a structuring and issuance service we provide to these clients. It’s mainly financial institutions or cooperates, as we speak.
The second pillar for us are what we call liquidity solutions. It’s more of secondary market solutions to transfer these securities with the same standard as we know in traditional markets between different investors, but also refinancing solutions and repost solutions, collateral management solutions for these digital assets.
Pillar number three is a crypto custody, which is also an enabler for the first two pillars. I should stress, because we often have the question, the mandate we have as we speak is to avoid strictly in the field of security token. We do not provide those services for cryptocurrencies, and notably when it comes to crypto custody.
The second part of your question about cannibalizing some businesses, that’s clearly also a question, but the stance the SG group has and that applies across all our businesses is, as much as we can to be on the innovation front and leading innovation in capital market, generally. If at some point we have businesses and some operations, we do as of today and there are certain formats, traditional custody for the subject which is discussed here, and tomorrow we see opportunities in doing that another way through crypto custody, we prefer to embrace those evolutions and to possibly lead that rather than to wait and to suffer any external constraint for that.
We are conscious that there might be divergence at some point. But as of today, we are partnering with our colleagues within the security services field, security services is any way things we have to rely on to offer our tax reporting, for instance, to our clients when it comes to their digital assets. It is more collaborating and trying to adapt our security services, and for our security service to be able to offer crypto custody services to our clients rather than organizing internal competition between two entities of the SG group.
[00:14:33] Adrien: It’s perfectly reasonable. You’ve mentioned before that you have decided to target public blockchains. This is quite daring. I would say that many banks have not made these steps just yet. But you’ve moved one step further, which is to work with decentralized finance, to at least experiment. I don’t know if it is productive or in experiments, you would share this with us, but are you alone on the market doing it? How did you manage to get this working both technically and from a governance point of view?
[00:15:02] Jean-Marc: On the first part, working on public blockchain, this relates most to a very strong conviction we had with the initial team with whom I started this journey, which was again digging into a blockchain from an intellectual perspective. At first, I think it was an eye-opener at some point, with this conviction that the revolution in capital market could only come with public blockchain technology. Often we do this parallel between internet and intranet, public blockchain being the internet and private blockchain being a network like another but more like the intranet communication space. New businesses, new business models, and the internet revolution came with the internet. I strongly believe this will be exactly the same for blockchain technology.
Coming back to my initial story about the very first days of a Société Générale – FORGE, the deal we had with the top management of the bank for the first six months was to go as far as we could in terms of technology and regulation, and working backward to capture the maximum benefit that could be achieved using blockchain technology to get real KPIs, to know if all these stories and all these transformations would be worse going through. The first pilot transaction we did with the covered bond, issued in 2018, proved to be a success and comforted us in this conviction. Later on, last year, when we decided to study, apply and develop some refinancing and collateral management solution for digital assets, leveraging developments or solutions which are available in the crypto industry through DeFi solution, appear very interesting and very promising to us in terms of the benefits it could bring both to the bank and its clients for collateral management, refinancing and so on.
We are agnostic to the technology and this solution, we are just looking at this as bankers and keeping in mind what interests our clients, speaking a lot with our clients as well, either on the issuer side or the investor side. If all this can be managed and developed in full compliance with regulation and internal rules which are apply to us, bringing clear value addition to the client or the bank, we remain agnostic and are happy to make these kinds of moves.
[00:18:10] Adrien: Can I ask you to be a bit more specific about how DeFi is helping you in this transaction? What is it doing? Is it just using a basic smart contract, or is there real business value out of it? What does it bring, concretely?
[00:18:26] Jean-Marc: I can answer by giving a few reference points when it comes to, for instance, collateral management. If you take a traditional security, which has to flow through various intermediaries and being handled in a central depository at some point, when you have a financing which is secured with such a security as collateral, and you want to adjust the collateral level based on some market stress test and changing values and changes in risk management parameters, you have a full chain of operations to conduct. Sometime you have some legal doc to adjust. At the end of the day you have operating teams, different middle offices, sometimes in between three institutions: collateral management agent, the lender, and the borrower. They have to adjust themselves on the same parameter, to at the end of the day move one security from one account to another and make sure that the level of collateral remains appropriate in front of the amount you would ever lend.
If I take the example of the OSH token, the covered bond, the very first one we issued in 2018, that is operations we did within Société Générale – FORGE very regrettably. It takes everything as just described; it takes between three days to one week to adjust the level of collateral. Even under normal market conditions, or as you can imagine under stressed market condition, let’s say four days in average to move or to adjust the collateral is a really long time. All the inefficiencies, plus under really stressed market condition, probably some risks that what you would have written in a paper somewhere in the contract is not effectively implemented through the chain. If you create a digital security which sits on the blockchain, full digital, and you wrap the security into a second layer of smart contract, which would entail or embed the terms of the collateral agreement, and you give enough autonomy to this second layer of smart contract to execute itself because this is in itself a contract signed in between the borrower and the lender, you can have self-execution of the collateral adjustment, the margin code.
Levels in which we are with the DeFi solutions we are experimenting today at SG FORGE, mean that this collateral adjustment could occur nearly every 30 minutes. You move from four days to 30-minute collateral adjustment. What does it mean for the client? Because of these inefficiencies, because of this delay in adjusting the collateral, all market transactions today are structured with what we call the Nova characterization. You post more than what is strictly needed for the transaction, to absorb as a buffer this delay and potential stress test. You will not be able to operate. This translates in more collateral being frozen for the same amount of financing. If you move that on chain, you reduce by your very significant amount this overcollateralization, which means for the client more money for the same level of collateral.
I can dig further. There are many other benefits in terms of risk parameters and even financial terms. More money for a better price for the client. That’s typically what we are trying to achieve with these type of solutions, again, keeping full compliance with the regulations and the risk rules we have in the banking industry.
[00:22:33] Adrien: This is really impressive. Do you see other aspects where DeFi may help in the future? Maybe not today, maybe which would require a compliance or regulatory clarity, but do you see other forms of smart contract interactions which could benefit what you’re building today?
[00:22:50] Jean-Marc: Clearly. We all know this is a long journey, but we’re starting to see it among financial institutions. I think the level of maturity has really increased over the last two months, two years among financial institutions, banks are in this field. Yes, clearly we can see many other benefits. I could name a for instance, market making liquidity solutions, clearing netting. Those are operations which are necessary to financial markets, and which need to be performed in a very efficient and secure way to ensure the security and the integrity of the market transactions, but also just the service to client, which are sometime still quite inefficient in the way they are performed today. For some of them, they are very expensive and very long.
If everyone moves, some market participants move to this type of solution, we can definitely achieve great things for clients and for the banking industry as a whole.
[00:24:01] Adrien: Makes perfect sense. Can you tell us a bit more about how you are training also to standardize the market from a technology point of view? I know you have, for instance defined these CAST frameworks, ESG framework. Can I position this question in the context of the many initiatives that are popping up on the market also by small startups, which are trying to get to emerge in this field? How do you see that you are going to be able to define a framework which is going to be used also outside of Société Générale – FORGE?
[00:24:33] Jean-Marc: First, I should have mentioned that in the journey we are making it Société Générale and Société Générale – FORGE, since the beginning, the very first day, we are only working on the basis of real market transactions. No POC, no technical pilots or things like that. Only true market transactions, because you need to really intricate legal client demand, financial structuring, and technology. If you miss one of these sediments, you may miss something big in the middle. Only a real market transaction, and of increasing complexity.
Going through that journey, it appeared to us very quickly that we needed a common language to talk with our clients, with the issuers, with the journey managers who are involved in such transactions. If I take the example of the European Investment Bank digital bond issuance we performed last year, we helped the EIB to issue 100 million Euro unsecured bond on the public Ethereum network. This transaction has been settled using CBDC, a central bank digital currency, that Banque de France issued also on the Ethereum public network for one day. It was an intraday trade.
When you perform such a transaction, you need to speak the same language between the journey managers. Goldman Sachs, Banque Santander security token and Société Générale were involved for placing this bond to clients. Clients here were mostly asset managers, European asset managers. These asset managers needed to be able to digest the security token into their existing IT systems, because no one wants to spend 1 million euros to do IT developments client by client to be able to integrate in their own IT system a new token coming to the market. You need a common standard; you need a common language.
That’s all the story behind CAST, which stands for Compliant Architecture for Security Tokens. It’s an operating standard. It’s not that much a technical standout, but it’s a common language. It’s business rules which are needed for financial institutions and their clients, and sometimes also the regulatory, just to know or to perform a transaction on the primary market, on the secondary market, on any market transaction, based on blockchain technology.
You cannot just do a copy-paste of the rule books we have within each bank to perform a transaction. When you go to the blockchain, going to DLT at the end of the day is to make things quicker, cheaper, simpler, and sometime to shortcut some operations we have, sometimes to remove some operators we have in the traditional market infrastructure. You cannot just do a copy-paste transaction.
People tend to fault it, but when you sit on the trading floor, when you sit in a structuring team, whatever the bank, everyone knows without explaining how a transaction works. You start by step one, then you go to step two, and so on. When you go to blockchain, it’s not exactly the same. Beyond technical standards, beyond data format which need to be agreed, you also need these new kinds of rule books to perform a transaction. That’s what we put with time, transaction after transaction into CAST. It is an open source framework, open source standard. Everyone can use it.
We are already seeing many other financial institutions using this framework, because it needs to be shared. No one has an interest to keep it private. Everyone has an interest to make it as broad as possible and to enrich it with time. Once you have an enrichment, and that’s very common in the crypto industry but not that much in the financial industry, there are clearly benefits of sharing these best practices across the board.
[00:29:02] Adrien: Is this framework very France specific, or is it a jurisdiction independent? Would it apply in North America, for instance, or only in Europe? How would you qualify it in terms of universality?
[00:29:13] Jean-Marc: It’s really mainly business rules. It’s agnostic to the technology first. It applies whatever the blockchain you are you’re considering. But it’s also agnostic to the regulatory framework under which you are operating, which is also a key element, because building blockchain transactions and CAST, one of the main reason why clients are coming to this technology without making a too long discretion is because blockchains do also offer them a truly global market infrastructure. The ability to access global liquidity pools, to place or to sell a financial instrument anywhere in the world, and on the other one we are one, investors from everywhere to invest in that. All this to say that it’s a necessary global market infrastructure, so it needs to be applicable from everywhere in the world, whatever the jurisdiction. We know every country will probably have its own interpretation, its own rules when it comes to legal frameworks, distribution constraints, and so on and so forth.
But the financial industry needs to remain global and interoperable from everywhere in the world. That’s why we built this framework this way.
[00:30:44] Adrien: Excellent. One thing I wonder; I don’t know if it’s a tough question but I will try it. You mentioned that you use today Ethereum as a public blockchain, and as may some of the participants in this call may know, when you execute a transaction on the Ethereum on blockchain you have to pay fees. These fees are cryptocurrencies, denominated. It’s ether. I’ve faced a few banks that were annoyed because they wanted to be able to operate tokens and tokenize not being exposed at all to cryptocurrencies. How are you dealing with this? Are you externalizing, or are you allowed to touch cryptocurrencies for these smaller amounts? What is the strategy?
[00:31:25] Jean-Marc: I’m very aware of these difficulties. As we are concerned, we indeed own Ethereum and we pay a gas fee with that. We went through lengthy discussions with the regulator and our own risk management teams to understand and to decide how we would do that. But the way we approached the question was to make sure we are using crypto on which we have full traceability, to make sure they were clean enough. But in my view, that’s a first way to address that. I think sensibility of regulators and risk managers on that will be less stringent going forward.
But as we speak, we do that. We also make sure with broadcasting the transactions on the blockchain, that we have the appropriate or at least the transparency enough in the way the block is mined, and which mine does that, and so on and so forth. Also, for some transactions which are very sensitive to this criteria, we are using another blockchain where you can control the environment a bit better. But for all these questions, and I could name some models, each time we have found appropriate solutions to address the concerns either from the regulators or the law firms which have been appointed by our clients to check these operations, or own risks constraints that we had.
But this is all part of what you have to build to be able to operate security transactions on public blockchain. You need to deal with gas. You have to make sure the network is handling your security the right way. But you also have to make sure you have a proper continuity plan in place, in case of a fork in your security. You need to make sure that your KYC and AML criteria are met at any time for such token, including on the secondary market when you issue a security as a native security on the blockchain, as we do. It’s sold from one investor to another. The security tokens we are creating at Société Générale are true security tokens in the sense that we do not copy-paste the security we would have issued on the traditional market infrastructure onto the blockchain. With the services we are offering to our clients, once the security has been issued on the public blockchain, this is the only security which exists, and it’s the full security and the entire security to grab the benefits of full digitalization. This means you have to ensure that KYC, AML is fully enforceable, but you will also have to ensure that potential sanction and embargo procedures are fully enforceable on public blockchain, and so on and so forth.
That’s where you start digging into a more complex questions that you need to tackle one by one to offer this type of services to your clients.
[00:34:56] Adrien: You mentioned before Banque de France and the ECB. How do you see CBDC today? Is it something which will become a reality? Do you think it may materialize as a private form of stable coin like we see with USDC or Tether issued by private companies? How do you think it can impact your operations and potentially improve on some of the inefficiencies that you’re facing today?
[00:35:21] Jean-Marc: As you know, many central banks are engaged through concrete developments, or at least experiment on the CBDC question.
First, we see a very strong need from the market and our clients for such a CBDC, very clearly. There’s also a lot of international competition on that front, on currencies. There’s also the competition coming from the private sector. You mentioned stable coin on that front. For the dynamic we are seeing, and as you may know as well we are ourselves involved for quite some time now in CBDC experiments with some central banks. You named Banque de France, but there others as well. We are witnessing this trend, and we’re also witnessing increased level of maturity these central banks are gaining in the field. All the experiments are moving from the one to another, exploring different fields each time.
I strongly believe that we will have a CBDC one day, sooner rather than later. Definitely sooner than most of the people may think. The ECB, for instance, already made multiple times announcement that they will start the first digital Euro prototype as early as next year, with the goal potentially to deliver a true digital Euro by 2025. It’s pretty short term when you think about it, especially when you consider the impact it could have on the financial market, but also on cross border payments, on retail payments. Again, the needs are there; either for what we call wholesale CBDC, meaning CBDC which will apply for large cash transactions especially within the banking sector; but also for retail CBDC, small payments are clearly needed there as well.
Quite confident that this will occur, and that we will see very innovative developments coming in the few years ahead of us on that front.
[00:37:40] Adrien: A last question for you. As you probably see on the markets, several banks are today trying to build or succeeding in building tokenization infrastructure and crypto infrastructure. Do you see them as competition, or is there more a collaboration angle to it where potentially multiple banks can reach the same standard then leverage the client that they already have? Would you be open to collaborate with other banks doing something relatively similar?
[00:38:04] Jean-Marc: Clearly today we are in a co-opetition mode, I would say. I mentioned the EIB (European Investment Bank) transaction before. That was clearly the case. We need to collaborate among banks first, because the banking industry and financial sector is all about interoperability. Tomorrow, a security that we issued from a client with Société Générale – FORGE will need to be probably custodied into another bank’s custody service. We need interoperability. For that, there is no better way than working together on real projects. Then at some point when there will be a more maturity, competition will come again.
My only guess there that we’ll probably see less players on a global basis at this scale, than what we have today. Already today, even without speaking about blockchain and DLTs and so on, there is already a very strong need and sometime incentive from some regulators for more banking consolidation on a global basis. We already see that today. I think blockchain and DLT creating a truly global financial market, either for security or cash, will accelerate this need or this trend for consolidations.
[00:39:38] Adrien: Thank you very much for this discussion. It’s fascinating. I hope we have a chance to follow up on this maybe on METACO Talks.
Thank you also all for attending. I hope you enjoyed this session, and that you will join us over the next episodes in a couple of weeks. Have a great week!
[00:39:52] Jean-Marc: Thank you. Bye-bye.