To win on the long-term, banks must renovate in winter
Recording and transcript from live event live event on 25th of April 2023 | 16.00 CET | 10.00 ET. For this episode of Metaco Talks, we were joined by Richard Rosenthal, Principal in Deloitte & Touche LLP’s Advisory practice, where he specifically leads Deloitte’s Business & Entity Transformation integrated services and also Deloitte’s Digital Assets Banking Regulatory practice.
– Digital Asset & Transformation projects in banking;
– U.S. regulatory developments, and potential effects across the globe;
– Opportunities and challenges: for large banks, mid-market and neobanks.
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Richard Rosenthal is a Principal in Deloitte & Touche LLP’s Advisory Practice, where he specifically leads Deloitte’s Business & Entity Transformation integrated services and also Deloitte’s Digital Assets Banking Regulatory practice. As part of this role, Richard oversees many complex and transformative projects, assisting banking, digital asset and fintech clients in setting up new entities, enabling M&A activity, launching digital asset products, and helping them address a broad range of regulatory and risk areas to enter and meet expectations of the U.S. banking system.
Seamus has extensive domain expertise in investment banking, wealth management, commodities and crypto markets that spans market structure, regulations and technology. He spent 20 years building and managing trading operations across all the global financial centres with JP Morgan, Deutsche Bank, Barclays and Bank of America Merrill Lynch.
*Disclaimer: The accuracy of this transcript is not guaranteed. This is not investment advice, and any opinions expressed here are the sole opinions of the individuals, not of the institutions they represent.
[00:00:11] Seamus: Welcome to the 37th episode of Metaco Talks. Today we’re joined by Richard Rosenthal, Principal in Deloitte’s Advisory Practice, where he leads Deloitte’s business and entity transformation integrated services, and also Deloitte’s Digital Assets, Banking, Regulatory Practice. As part of his role, Richard oversees many complex and transformative projects, supporting banking, digital assets and FinTech clients to set up new entities, enabling M&A activity, launching digital asset products, and addressing a broad range of regulatory and risk areas to enter and meet expectations of the US banking system.
Richard, welcome to Metaco Talks.
[00:00:47] Richard: Thank you for having us. I really appreciate it, Seamus.
[00:00:50] Seamus: It’s great having you here. It’s certainly well timed given the topics we’re going to dive into. Why don’t we get right into it? Richard, you’ve been at Deloitte for roughly 15 years now, you’ve helped create banks and payment companies scale, transform, and merge and sell those same companies. When, how and why did you become interested in blockchain and digital assets? A bit of your journey in this space.
[00:01:14] Richard: Thank you. There’s probably a bit of a personal and professional angle to this. By doing a lot of the new licensing and helping institutions figure out what charter, who they want to be when they grow up, it became very apparent that there were a lot of product offerings that were looking at using digital assets. Whether it’s in payments or there was buy, hold, sell use cases, typical banking clients were starting to come to me and say, “Hey, I’m thinking about doing this. I want to tokenize cash, I want to do X, Y, and Z. What does it take?”
We have a system that’s very complex in the US, where New York DFS has a BitLicense regime, which is probably the most explicit on what you need to do to engage in digital assets. But a lot of these companies had a lot of questions on, so if I do this, what does this mean? How do I deal with my typical banking license, my capital markets activity?
I thought there was a need to help our clients figure out what expectations, what practices and capabilities did they need to have? Frankly, I also was really personally interested in the space. Fundamentally it was financial services being re-platformed, where we are on a paradigm shift here.
Both led me to dig deep and formalize a bit of a practice around it. The firm, Deloitte has been in this space for over 10 plus years, whether it’s auditing, providing tax advice, consulting services. There’s a natural business unit and strategy within the firm, and I built on that and have really focused building that out. Clients can come and say, “I want to do this. What does it take?” We’re borrowing from traditional financial services playbooks, but we’re also trying to help clients navigate in increasingly both complex, but, it’s gotten a little bit tougher to do some of these things, that I’m sure we’ll talk about today.
[00:03:12] Seamus: Well, that’s a good introduction. Why don’t we step back? Because obviously there’s a lot of issues today as you just mentioned, but why don’t we step back to early 2022 before the FTX, before the other failures in the market, before potentially some of the crypto related failures we’ve seen. What were the banks doing then? What kinds of digital asset and transformation projects were you involved with? What use cases? What were the business cases and what were driving those projects back in early 2022?
[00:03:40] Richard: It seems, and I know we’ve had a lot of discussions together over the years, it seems like a different world. I was just reflecting back on it. There was a lot of enthusiasm, there was a lot of momentum. There was a fear of missing out. There was a real question of, if you didn’t have a strategy, were you going to be left behind fundamentally? The simple use case of moving money, why do I need to pay a wire? Can we move it using blockchain rails and save money and have instant settlement? Just that basic use case. Can we tokenize equities and fixed income products, that allow us to settle with more efficiency than the system today?
I felt like we were in a new wave. If maybe the previous wave was 2017 or 2016, where there was a lot of energy enthusiasm, we were in that period. What reflected that was an executive order from the Biden administration, which had the whole of government saying, “Hey, we need to really look at the promise of digital assets and blockchain technology.” The tone was really positive. If I look at the range of players that were looking at engaging, it was not just your, let’s call it more innovative financial institutions, but it was the traditional ones; that you would say, wow, they’re really investing a team, they’re taking time, they’re working through it.
Now, we also had a landscape where we didn’t have a lot of clarity from a regulatory perspective of what was permissible or what wasn’t permissible. We had also a landscape where non-bank were probably leading the pack in terms of innovation and they were launching a lot of the products that we’re talking about the buy, hold, sell, the custody products, the tokenized cash product. In general, I think the more regulated institutions were maybe a little bit behind, but trying to engage. They were developing their strategies. I don’t know if you feel the same, but it felt like it was a really exciting dynamic. We were seeing a lot of interesting projects where, help me figure out who I want to be when I grow up.
[00:06:01] Seamus: I think very much. I remember some discussions early 2022 with one of the largest banks, concerned about losing deposit base, particularly with all the staking yields elsewhere. Now that has changed. Money’s fleeing that sector all the way back.
[00:06:17] Richard: I think you’re spot on. I’m glad you brought that up. It was a potentially also defensive strategy to say there’s going to be certain businesses that expect 24/7 settlement, or I need to offer a buy, hold, sell product because my clients are asking for it and I may lose assets under management or I may lose deposits. I think you’re absolutely right. It was a, Hey, are we going to be able to compete?
[00:06:42] Seamus: Yep. It’s like a perfect storm, as you said, of building some defensive moats or at least responding defensively and the fear of missing out, what are we going to be in this space? Perfect environment for both our firms actually in that space.
But you mentioned the lack of clarity on the regulatory side. How would you describe the US regulatory situation today? Are things clearer? Maybe a bit rhetorical, but are things clearer now?
[00:07:09] Richard: We’re having more of a US-centric conversation. I think in some jurisdictions things have gotten clearer. I think the MiCa Bill has gotten through a lot of the European legislative process in the US. We had hopes coming from that backdrop of maybe having some legislation or rulemaking that was clearer.
I think we’ve had from each of the regulators, and we have something like five banking regulators, 50 state regulators, we have the SEC, the CFTC – we have a complexity here that makes it challenging. We’ve had some guidance that says, here are things that you can do and can’t do. From the banking regulators I think we’ve seen some clarification. Like you might remember, they had some guidance on stablecoin and custody products.
Banking institutions are custodians, so we’ve heard some guidance to say, they can be custodians and there’s some things that they can do. That’s on the good side.
But then we’ve had a lot of enforcement actions, and we haven’t had much rulemaking on major questions like, what’s a security, what’s the jurisdiction of regulators things like Ethereum, Bitcoin? What are the rules for an exchange? What are the rules for a stablecoin? When can I issue or not issue? What are risk management capabilities I need if I want to be a digital asset custodian?
It’s not like we have broken through that morass and we’ve got that thing that regulators are comfortable with and not, we don’t have that systemically. In some cases we have some potentially conflicting or hard to wrap your head around guidance. I think we’ve talked about SAB 121, which would force some institutions to hold custody client assets on balance sheet, which would then have capital impacts for banks.
We’ve probably not gotten much more clarity in some, if I just summed up the whole picture. Through enforcement actions and through some of this guidance, we can start piecing together a puzzle of what looks to be things that are going to be permissible or not, but it’s not the most straightforward answer. Congress and others would feel we haven’t necessarily provided a framework of sorts. There are bills we can talk about that are still floating around Congress to potentially help address some of this, but we’re not probably in a better place, maybe a slightly worse place to be frank.
[00:09:44] Seamus: It is interesting. You mentioned you started by bifurcating in the US versus everywhere else. What we have seen, at least on our side from a client perspective, post let’s say FTX, if I use that as a big benchmark, is actually a flight to quality from those, let’s say banks that involved digital assets, crypto, etc., they’ve seen more and more assets move towards them given they’re safe, they’re regulated, they’re well-known, they have balance sheet in the end.
What is the situation in the US? Is that lack of clarity and the concern about the asset class? Has it changed the way banks are looking at investing in this space? Or how are their plans in the face of this ambiguity and the increasing regulatory concerns?
[00:10:24] Richard: You’ve seen some large bank CEOs very publicly say, “We still believe the technology is really going to provide meaningful benefits.” There’s been some papers and things debating, what’s truly the utility? I think you would probably agree with this, that digital assets and distributed ledger technology are really good at things. It’s not everything. There are other technologies that if you look at an end-to-end process that you would deploy. But there are real benefits in reducing and trusting information, in reducing the number of people that have to validate information, digitizing assets that don’t have a lot of liquidity. There’s a lot of real utility.
I think you’ve seen some people in large banks say, “Yeah, here’s the use cases, here’s the benefits, here’s why we still believe in it: I think for those institutions, regardless of it’s not necessarily maybe the best regulatory climate, maybe they view it as an opportunity as well, because they can actually catch up to maybe non-banks were a little bit ahead of them in development.
But maybe a trusted pair of hands is what’s needed also to engage in some of these use cases. I don’t think people are saying, we’re not going to invest in teams in looking at strategies into platforms and products. I think they recognize there’s a short-term challenge in launching some of these things that it’s hard to put the pedal to the metal. But I think you’re looking at these US-based institutions still exploring, defining, building muscle memory. I do think if they’re global and they operate in 10 or 20 countries or 100 countries, they might be looking at countries like Singapore or Brazil or Israel or the UK and Europe, to maybe pilot some of those products. Or maybe they launch pilot strategy changes. If they’ve got a legislative regulatory framework in place, I think recently we saw a European bank launch a stablecoin or something in Europe.
I think you’re going to see that, if that makes sense.
[00:12:33] Seamus: Absolutely. As you said, we’ve already seen that. SocGen recently launched that stablecoin in Europe. But you mentioned the five regulators, OCC being one of the big ones in the US, what are their motivations here? What are their main concerns when they look at the space? There are banks, as you said, innovating outside the US, the European bank you mentioned doing a stablecoin. To what degree then does these concerns limit an American bank, which is a global bank, doing the same thing elsewhere? Aren’t they still subject to the same regulatory reporting or approval, maybe in place from the US regulators?
[00:13:11] Richard: I think one of the fair challenges, which I have some sympathy for, and I would ask the same thing, is what really use case and strategy are you trying to solve? What value are you adding to your customer base? Are you doing something that’s going to save them money? Are you offering them a product that there’s no liquidity in?
Are you doing something that is just going to be, let’s go back to our first comment, the FOMO (Fear Of Missing Out). It’s never good to chase something without actually really having a business strategy. I think the first thing the regulator’s asking is, does it really make sense? Can you tell me, prove to me, classic business planning, that this is a real market that has utility? I think once you get from that point, I think they’re then saying, show me you’ve actually done your homework. The diligence on vendors, the diligence on the risks. You can’t just take a third-party risk management policy or an approach to diligence and just apply it to digital assets and blockchain technology.
As you and I know, depending on what blockchain you’re interacting with, depending on the smart contract infrastructure, depending on the key management and the cryptography of the custodian, all of that changes the analysis. They’re looking for companies to say, show me the homework, show me the diligence in the unique novel way. If you can’t answer those first two questions, they’re going to start saying, are you wasting time? Are you just chasing something that you’re not good at? Do you have the right people and capability to do that?
In the recent market events that we saw with SVB, another probably not helpful if taken together, if you look at some of the recent bank failures, they’ll also say, because it’s really not a digital asset product, but a lot of these banking organizations were banking crypto, and digital asset companies. The liquidity, those deposits, that same first debate we had, those deposits that you gained, was that hot money? Were those really sustainable?
What they don’t want to see is you launch a product, and then all of a sudden the core safety and the core mission of a bank of protecting customer money is now at risk. If somehow you jeopardize that fundamental reason you’re on this planet, I think they were really taken aback by some of that.
You have to step through some of those questions, demonstrate the thoughtfulness, the answers. In some cases, I think the hope is that you’ll get some of those products and businesses over the line. Likely in the near term it’s challenging. But going back to the other question you asked, if I’m a global organization and I have a banking subsidiary, I’m a non-US institution. I’m a foreign bank operating in the US, I have a bank in the US and I have a bank in Europe, the consolidated regulator isn’t the Fed or the OCC, it’s the European regulator. That legal entity in Europe, they might have a little bit of an advantage in launching something in Europe, where a US domiciled institution that’s regulated by the Fed at the consolidated level, to your point, I think your instincts are right to say new product launches, new product approvals, there’s still a dynamic where the US regulator leans on the European regulator and there’s a primary supervision that the European regulator has. But we basically have an uneven playing field, which is I think what your question’s getting to. That depending on your setup, depending on what entities you are and countries you’re in, you might have a different capability to launch some of these products.
[00:16:43] Seamus: I like the quite sympathetic and I think it’s quite optimistic to look to frame the motivations behind the US regulators around idea that it’s not specifically looking at asset class, but it’s looking at how asset class has been introduced into the banking system.
Too often we’ve heard it’s handled almost like a science project, outside the normal vendor risk management, outside their normal risk processes. As we’ve seen with some of these banks outside, the basic asset liability, or if they had any asset liability, liquidity risk management processes. Clearly that isn’t a digital asset thing. Those are traditional risk management approaches that weren’t actually applied.
I think it’s quite optimistic to think if the banks do think about this in a holistic way across all their risk parameters, then the regulators could be supportive. That would be a nice long-term way to look at this space, and much safer space for all of us then.
[00:17:36] Richard: And I think that’s the work we have to do as an industry group, is really take the risk and control self-assessment processes, the vendor risk management processes, and think about how they should be applied.
It is an asset class of sorts, but it has to be integrated. Still in that example we went through, it’s a client being onboarded that you’re banking. You’re still doing a lot of the typical onboarding risk management processes that you need to, you still need to do asset liability management. You still need to do all those things. That has nothing to do with digital assets or the unique elements of crypto. I think you’re spot on with that.
[00:18:21] Seamus: Great point. As you mentioned, this is essentially creating an unlevel playing field. To what degree do you think the US regulators are maybe reaching out to offshore regulators to influence them so there isn’t a competitive disadvantage, let’s say?
[00:18:35] Richard: It’s interesting. There are some global bodies like the BIS, BCBS, where global regulators sit on forums and committees and try to come up with top of the house principles and standards that should be cascaded to other countries and regulators: CPA, ISCO, the securities infrastructure body also puts out principles. We actually did see some momentum where they started to come up at the BIS I believe put out a framework on classification of digital assets and maybe some capital impacts of those things. The US bank and regulators sit on that.
In some respects, I think the battleground there is those bodies. Now, that’s not mandatory. A country could still decide to opt in or implement some of that. But that intellectual process of coming up with what are the risks, what are the controls, how is capital get risk weighted, I think is where a lot of the influences is happening. I think regulators do have other bilateral forums where they’re sharing ideas. There’s also the AML, the FATF, there’s a whole body there. I think you’re seeing a lot of that happen.
One other point to make is when you’re dealing with US persons, which I think the US regulators like to remind people of, then the perimeter extends. You could be domiciled wherever you want, but there are certain obligations that controls AML expectations when you’re engaging with a with US persons, even licensing implications. I think that’s a stick that the US regulators also have. Even if you decided to re-domicile, are there other impacts and considerations there too?
They also, as you know, show up to a lot of conferences and events, Seamus. I think they try in those platforms to try to put out their expectations and speeches and things. I think they also have these innovation offices where you can come talk to them. But it feels like a little bit like whack-a-mole.
[00:20:59] Seamus: Great points. Going back to your point that the regulators want to see better risk practices put out, effectively the main motivation is likely to get better risk practices put in place. If we look at the US in specific, how well do you think the US banks are navigating this new need or maybe didn’t recognize that was quite as significant as it was? And will it just be at the largest US banks that’ll be allowed to service digital assets? What about the bid market? We’ve seen some of the community regulators get bit more cautious as well. Can new digital asset banks actually be created as well in this space from scratch?
[00:21:38] Richard: One of the more active spaces in the US is credit unions. The NCA is a regulator that has responsibility for credit unions, and credit unions have a mission to serve their community, some binding mission that you can offer banking products.
The credit union space has been, there was a recent FDIC study in terms of the number of banks that were engaging or had interest in engaging in digital assets, I think the number was one 130 in the US or something like 5,000 banks. Those are both directional numbers. But there are banks that are actually offering products or engaging in the space in the US. If you look at the credit union space, there’s actually probably a pretty high proportionality there. Why is that the case? Well, they had put out some guidance and had been generally more receptive to some of the benefits of distributed ledger technology, and were allowing banks with the proper controls and things, to engage. I would just put that out there.
Again, it comes back to that federal banking regulator comment. It depends on who your regulator is, what your charter is, what your relationship is. It is very bilateral. If I make an analogy, in the US we have a process for M&A and licensing, when you set up a new bank or you do a merger, there’s an application, there’s a business plan and there is a statutory process you go through. Let’s also compare that to the New York DFS. They have a bit license and a process that you apply to. For a bank that is trying to do something, there is not that defined glide path. It’s kind of like, it depends.
What’s happening? If I were advising clients or we were working through things together, and we have law firm partners that do this as well, is you’re borrowing from that licensing playbook to say, this is typically what a business plan includes. Given there is a level of nervousness and trepidation about these products, let’s really lay out the business plan. Let’s lay out the proforma, the revenues, the expenses, how we’re going to manage the product. Let’s lay out our value prop. Then let’s lay out risk management and compliance and controls practices. Let’s treat this as a new business line. Maybe not a full entity. I think that approach has worked a lot better for institutions, allowing the regulators to really sink their teeth into the fullthroated end-to-end business model. That would include how am I updating my policies, what new people am I hiring, what training am I doing, what vendors like Metaco that I’m using that actually have expertise and capability in this space?
I think that end-to-end view, then coming and answering the question, this is really aligned to our strategy and this is fundamentally what we want to do, that’s all happening bilaterally. That’s all happening in back and forth conversations. There’s not a playbook. There’s not an explicit checklist to go through.
That’s the work that we’re engaged in. That’s the work banking organizations that feel very strongly about still having a capability set in here are navigating.
[00:25:08] Seamus: Fascinating. Are those bilateral discussions still ongoing? Are the banks still building in the space despite all these headwinds we’ve talked about?
[00:25:16] Richard: Yes, but I think you also have to keep in mind they’re very cognizant of the recent liquidity and market event that we’re going through. Depending on the bank’s balance sheet strength and positioning coming out of these recent market events, I think they’re also facing this near-term pressure of reassuring their customer base that deposits are safe and the bank is strong. Regulators are asking questions on things like interest rate, risk management, liquidity management. These recent market events have forced them to make sure the core banking franchise is solid.
But there are strategic initiatives. Some are saying this is an opportunity, maybe we can make an acquisition, maybe we can keep building this product capability. I think some see it as an opportunity. In fact both the crypto failures and the market events have maybe bought some time for some, at least in the US. Europe and APAC and others are not slowing down. Every day I think both of us see pilot and product launches and things that are going on. But at least within the US sphere, there might be an opportunity to play some catch up.
[00:26:36] Seamus: That definitely seems to be very real. I remember many discussions with US banks that just couldn’t hire teams, people. Basic human resources were a basic constraint on growth in this space. But that has eased up a bit, so that’s good.
Banks and DLT teams are still building digital asset capabilities, maybe less with the public fanfare. But where are they focusing? As you said, the landscape’s changed a bit given the concerns about liquidity, et cetera. Has that impacted the different type of use cases they’re looking at?
[00:27:08] Richard: I think it’s been a pretty material shift. There was a real focus, back when we first started talking about that enthusiasm period where the buy, hold, sell, crypto capability was a little bit more front and centre. This was the whole defensive thing, were people taking money out of their brokerage accounts and bank accounts and moving it to exchanges, and buying crypto, including stablecoins? You needed a defensive offering there, which is part of the conversation we had.
But in that time period, there were others that were still looking at broader settlements, whether it’s repo, reverse repo, moving money, tokenizing cash, moving money between banks. There was still that going on, but that was happening in the backdrop. That’s flipped. I think front and centre it’s been about what can we digitize and tokenize that’s going to create more efficiency for moving value, whether that’s mortgages, mortgage servicing rights, fixed income products, deposits in cash. I still think there’s some focus on, do stablecoin play a role in this ecosystem? Is that a payment utility that we need to look at?
To me it’s shifted more towards, is custody going to be a commoditized capability that everybody needs to have? Because if everything’s digitized, who’s holding those assets, and what are the ecosystems and use cases for taking those individual products and trying to create value? Each of those products has a different set of challenges, or things you have to work through. With mortgages, the challenges are different than fixed income and equities products.
I think that’s the work that’s going on right now. Some of it’s happening in consortiums, some of it are banks working with a couple banks and saying, let’s do this. But what’s interesting is digital asset custody seems to be a core infrastructure capability that’s going to be needed on this trajectory that we’re talking about. That is why I think we’re both seeing a lot of conversations around that.
The other thing I would say, my personal view is that maybe, at least in the US we would’ve seen stablecoins move up. There’s a lot of work to be done on Central Bank digital currencies and digital dollars and all this stuff. Was there room for stablecoins to grow in that void? One of the bills in Congress in the US was a stablecoin bill that would clarify who could issue stablecoins, including non-bank. Imagine if you had some legislative clarity on stablecoins, and a regulation that said this is what you need to do? You would probably see a lot of financial institutions launch those.
I would’ve told you, Seamus, that we would’ve saw that be pretty prominent, the cross-border payment capability. You could really see benefits in the financial system potentially for people, if we had a trusted stablecoin issuance framework, a regulator beyond just what exists today. But we’re still waiting for that. I don’t know if your take is similar to what you’re seeing, but I think things have flipped. A lot more focus on digital assets, custody capabilities, tokenization of things; versus the buy, hold, sell core crypto capability set.
[00:31:14] Seamus: 100% percent aligned. We used to have a refrain that the opportunity a firm could monetize today was that buy, hold cryptocurrency on ramp, off ramps, basically because it was there, clients in demand. Then effectively the tokenization opportunity was for free because the same underlying technology could be used to tokenize when it was a thing. Now it’s basically built for tokenization. When crypto’s allowed again, you get that for free later on. It’s the optionality in that space. It’s flipped around a little bit. The difficulty, of course, is tokenization is not just about technology. It’s a team sport. You need secondary markets, you need liquidity for these things. Stablecoin seem to be the easiest place probably to start.
What’s your view given some of the legislations in place, how the stablecoin space will evolve? What we have right now is very much a stablecoin backed by deposits, and there’s a lot of talk from the banks around tokenized deposits. Is there a view on how those two things will intersect, if at all?
[00:32:16] Richard: Yeah, there’s projects and initiatives like RLN. There’s work going underway in the US to try to look at, how could tokenize cash work, how could wholesale large dollar movements work amongst banks? That is still in the exploration and innovation mode. But there is some momentum building there.
One of the things your comment or question leads me down a path of is, there’s not really a clear explanation or view in the US on, what does the payment system offer today? The Fed is introducing something called FedNow, and people talk about Zelle. What payment capabilities exist domestically in the US, and where will we be in a year? The Fed just released FAQs on FedNow versus their work on Central Bank digital currencies, because I think there was some confusion, which is I think a good takeaway for some folks.
But FedNow doesn’t solve everything. It still doesn’t deal with the cross-border large value transfer. There’s some things that you couldn’t necessarily do with FedNow, but it really does move the US payment system in a direction of more real-time payments.
Stablecoins, as you know, without a wholesale central bank digital currency or some digital dollar or tokenized cash, offer the benefits of using blockchain rails to move money. We’re seeing a lot of retail customers with their exchange wallets send money home to other countries cross border, and also use it for DeFi and trading and collateral and whatever they’re using it for. Those market caps have ebbed and flowed. But largely some corridors of money movement today we’re using wires, you haven’t completely disintermediated the existing payment rails. You see in some corridors, Mexico and US where you’re seeing actually some of the remittances start to use stablecoin rails.
My personal view is it’s going to take some time on digital cash. There was an initiative in the US, eight banks got together to try to do something with tokenized cash. That has not progressed. you’re either left in this place of private permissioned movement of cash in a closed loop ecosystem, stablecoin which are more happening on a retail basis outside of the bank purview, and the exploration of central bank digital currencies. There’s this void. If we had a stablecoin bill, coming back to your question, full circle, and we said non-bank and banks can issue them, my personal view is we would’ve seen some competition to the big issuers today, of some more traditional financial services, household names issuing stablecoin, largely backed by dollars, largely mirroring the New York Department of Financial Services views on what really can back a coin. That’s mostly going to be cash and high quality government treasuries, things like that. We would’ve probably seen them in people’s wallets.
If you look at the three bills floating around, there was the stablecoin bill got reposted by the house financial services. Maxine Waters and the Democrats basically recently said, times have shifted, things have changed, we need to re-look at that bill. They have proposed some changes; that literally happened I think yesterday. It is still I would say the best chance of getting something that would then force some regulatory clarity.
The other point to make here is, the reason probably regulators and legislators feel so strongly is in the recent market events we actually saw, because the dollars backed by the stablecoin, they are at banks. If those banks fail or under pressure, you could have a run on a stablecoin that creates a systemic risk event in the US. Some people are talking about that and I think the institutions without the banking system did a fairly good job of managing through those events. But those are dollars, those are people’s monies. Those are retail customers holding on to what they believe is backed by a dollar. I believe there’s still a need to get some clarity on who should issue, and what are the controls. It goes back to our first comment, regulatory clarity. Each of these products and services need that framework.
[00:37:34] Seamus: It’s a great point. As you said, without the clarity a consumer doesn’t even know what risk they face. People talked in stable coins, there was issue risk. But it turns out, as you said, who’s the custodian probably matters even more as we saw recently. I think this is definitely the killer app to get the rest of the tokenization space moving. We do need some tokenized form of, at least a settlement lake. This is the key to unlock the rest.
Leaving aside some of the regulatory and liquidity discussions, what are some of the other challenges you see that banks are facing when they try to move into the space, and how do they navigate those technology-wise, cultural, et cetera?
[00:38:13] Richard: There’s probably two that I would point out. One is, sometimes you see this, this is a technology searching for a problem. When you get down to the business value prop, you get down to discussion and you look at pros and cons and benefits and costs, and you start modelling out what are the expenses to launch this product and what are the benefits I’m getting, whether that’s reduction of payment fees or a customer intangible benefit, or it improves the value of the relationship, whatever it is – once you get down that path and you start doing pilots, if that front business case wasn’t strong enough or you didn’t have organizational alignment, I’ve seen some people lose momentum and stall on that product journey. Whether it was market events or regulatory events or a change in leadership, they’ve lost the commitment to that muscle memory to that initiative. Because it takes probably some upfront investment of time and energy. Not just cost, but you’re spending mental capacity thinking about how you want to do that.
What I’m saying is, is it the best use of the technology? I think you’ve got to feel really strongly about that, and you’ve got to have some data. I think we’re getting, with all the pilots that have gone on and some public, some have failed, some have been successful. You hear some negative, you hear some positive. Like, distributed ledgers really good at tracking supply chain, can it be successful in an exchange settlement capacity? Does it have enough throughput? What’s really the benefit in tokenized cash?
I think the industry’s gotten better about really being focused and demonstrating that, yes, we’re going to walk before we run, we’re really going to have a clear view on benefits. That’s one.
Two is, sometimes it takes an ecosystem. It’s not just you doing the project, you might need the end to end, whether it’s the investors, whatever market you’re in there’s multiple sides of that product. Sometimes people want to deal in traditional financial services, or we have traditional processes, like in mortgages, the way we do titles, the way we store mortgages information. Government agencies that like to see information a certain way. I see a lot of focus on crafting these solutions in context of not trying to create too much friction for adoption. How do you really see the benefits of some of this? You have to almost create these ecosystems where there’s enough people participating so there’s enough liquidity. Who’s creating those ecosystems? Who’s creating that work? A lot of institutions have taken leadership roles in trying to do that, and that’s where you see these groups forming up.
That’s the other challenge. Maybe sometimes also it’s not just reg, but legal, bankruptcy, settlement laws. Sometimes we need these things to also be aligned or reflect bankruptcy law, we see a lot about settlement finality. You see a lot of white papers and focus on how some of this needs to shift as well. It’s honestly a little bit less about the technology and capability and more about how this works in traditional financial services, and how we get adoption. I don’t know if you share the same take.
[00:41:58] Seamus: Totally. I think you’ve nailed some key points. As you said, blockchain’s a team sport. For this to work, it’s not just one firm doing this on their own, otherwise you just use a database. Clearly the ambiguity around things bankruptcy, remote, are so fundamental. When everything was bottom left to the upper right, nobody cared. But now these things matter. They always mattered, but people just didn’t pay attention.
We’ve spoken a lot about banks. But in introduction your practice isn’t just banks. You’re working on setting up entities with FinTech, digital native space, you enable M&A, enable to launch new digital asset products. What are you seeing outside of banks? How’s this tough regulatory environment, we’ve talked about how it affects banks, how does it affect the rest of the market? Or are there opportunities there?
[00:42:45] Richard: It comes back to that first point we talked about, which is depending on the entity and how you’re regulated, changes what you can do and how much freedom you have.
If you’re a broker dealer, the broker dealer regulators haven’t really updated their views on capital and segregation of assets. But if you’re a payments company and you’re a money transmitter, and you’re not a broker dealer, you’re not a bank, and maybe you operate with a trust entity which is designed to custody assets or you have a money transmission payments company, you’ve had probably more freedom. You’re not in the banking regulatory framework, you’re in the state money transmission framework. You’re generally using your money transmission license, which has AML requirements. Then you have the New York DFS, which has been the regulator that’s put the most explicit guidance out there. You need to get a bit license if you’re engaged in virtual assets.
This conversation we’re having, you’re working through a regulator that believes it has the tools to care for the risks associated with digital assets, so you’re doing more. You might have a stablecoin project sitting on your shelf. You might have a custody capability that you want to get done, and you still might need to engage with the banking regulators because the trust entity requires in some cases if you’re a national trust, you need OCC approval. But probably, you’ve got a little bit of an edge right now. You’re also having to keep in mind that the SEC and others are looking at activity, regardless of where it takes place. You’re constantly looking at these different regulators and what they’re putting out there, but it’s probably been a space where you’ve been able to get more done. We see that a lot of the big stablecoin issuers, a lot of the big crypto custodians, digital asset custodians, they’re not banks, they are operating in the state trust and money transmission space to offer those products. That’s where a lot of the innovation and product development’s happening.
They’re still up against an increasingly more enforcement minded regulator.
[00:45:15] Seamus: Richard, unfortunately we’re coming up to time. I think we could continue going down many different avenues in this discussion. But listen, it’s been great discussing things with you. Just to wrap things up, what’s next for you, for Deloitte, your practice? How can you help banks with everything that has been discussed? How can Deloitte help bank with banks?
[00:45:35] Richard: As you are, we’re playing the long and medium term game here, where we have a global practice, a dedicated blockchain and digital assets practice, and we are investing heavily in helping clients figure out how to engage with digital assets. That includes with regulators, with banks, and that hasn’t changed. What’s next is we’re going to continue working through these issues, defining the playbooks, helping clients launch these products. Very much akin to the Bank’s CEO’s comments, we believe there’s utility and a role for blockchain and digital assets and our practice is going to help clients do that. I hope to be part of the conversation on what are those capabilities, what does good look like? I know you’re doing the same, so I appreciate your leadership as well.
[00:46:22] Seamus: Richard, it’s been super having you on. I really appreciate you sharing your insights and incredible knowledge in this space. Thanks for joining today.
[00:46:29] Richard: Take care. I wish you a great day.
[00:46:31] Seamus: Great, thanks Richard. To our guests, thanks again for joining and do follow our website. As always, we’ll upload the recording after this and this transcript of the conversation to www.metaco.com, and also available in all your favourite podcast channels.
In the meantime, please let us know if you have any feedback in this episode on the general format of the show or what speakers do you want to see featured here. We’d love to hear feedback. Thanks again for joining. See you next time.