February 5, 2021

METACO TALKS

Enabling the Crypto Opportunity for Banks w/ Francisco FERNANDEZ

METACO TALKS with Francisco Fernandez, Founder of Avaloq, covering the crypto opportunity for banks. Francisco is a visionary entrepreneur who’s dedicated his career to the finance sector IT. He sees his goal as disrupting familiar business models, reshaping the relationships between banks and their clients and making financial institutions more efficient, secure and transparent.
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Welcome to METACO TALKS – Live conversations with the people operating at the frontier of crypto innovation: entrepreneurs, bankers, investors, fund administrators, traders, analysts and other crypto and digital asset market participants. Our objective is to help the broader ecosystem navigate this complex environment and unlock the market opportunity.

This podcast is hosted by METACO – the leading provider of security-critical infrastructure enabling financial institutions to enter the digital asset ecosystem.

Our guest for this episode is Francisco Fernandez, founder of Avaloq and member of its Board of Directors. Francisco is a visionary entrepreneur who’s dedicated his career to the finance sector IT. He sees his goal as disrupting familiar business models, reshaping the relationships between banks and their clients and making financial institutions more efficient, secure and transparent.

Among other topics, we discussed:

  • Achieving entrepreneurial success
  • Avaloq’s role in enabling FIs to capitalize on the crypto opportunity
  • The interplay of traditional finance and DeFi
  • Where digital assets go from here
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Full transcript

Adrien Treccani: Good morning, everyone. Thank you for joining Metaco TALKS, our series of live conversations with the people shaping and making the future of digital assets. Just a note before we start to say that the next episode of Metaco TALKS will be on the 19th of February at 3:00 PM (CET) with Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence.

Today, we have a special one-hour edition as compared to the traditional 30 minutes edition, with a special guest. We welcome Francisco Fernandez, who is the founder and former chairman of Avaloq, a Swiss FinTech company that was sold at the end of last year for over 2 billion.

Francisco, welcome to the show. I remember five years ago when we first met, I think it was at a startup event and we started discussing, and you told me that although you were in the jury of multiple startups, trying to pitch their future dream companies, you still consider yourself being an entrepreneur and made Avaloq a startup. Do you still think that’s, it is the case? Was is it really the case or were you somehow exaggerating out of openness to the startups you were evaluating?

Francisco Fernandez: [00:01:24] Thank you very much, Adrien. Indeed, I try as good as I can, even getting older to stay fresh and young in the mindset. I love to collaborate and work, uh, with young talents. Then I also must say that besides Avaloq, I’ve invested and co-founded almost a dozen of other companies in different maturity stages. Some of them are bloody startups as well, you know, being a year old or so. I know how it feels to run a 3000 people company, as well as a startup starting with three to five people. So it’s still my daily business to be in both worlds at the same time.

Adrien Treccani: [00:02:16] That’s fascinating. And also, needless to say that you were one of the first, software banking company to get interested in cryptocurrencies. I suppose that given the challenge, that it is still today in 2021, to speak with banks about cryptos, which still have this perception of being the money for criminals or the dark web.
How is it that you saw this coming five, six years ago, if not more? And can you tell us a few words about how you push this to Avaloq and to your potential other investments?

Francisco Fernandez: [00:02:50] You know, the nice thing it is that I read about similar concepts already 30 years ago when I was studying. So, it’s not actually as brand new as we might think, you know, when Satoshi Nakamoto, whoever that is, came up 10 years ago with that new blockchain idea. It sounded already familiar to me this type of decentralized network type of databases, if you want to say so, or ledgers. So, I remembered that and when I download the Satoshi Nakamoto paper I said “Oh, wow, this is really a fantastic concept.” And with my long background in finance, I immediately also, you know, went into the philosophically topic of “what actually is money? what is the currency?” That fascinated me so much that I wanted to get acquainted with these technologies, but even more, it triggered my brain to say, “what could you do with it?”

Because actually it’s a base technology. The first use case of blockchain was the cryptocurrencies, but I immediately started to think about other applications of what you can do with these blockchain systems, decentralized governance, taking away probably some powers of centralized institutions and make it a fair market driven system.

I immediately had ideas of how to use that technology in many folds. When I look at the world, I must say I see three major pillars of how the technology can be used. One is gaining efficiency in settling, moving, storing value. So, it’s an efficiency play. The other thing is kind of certificating [00:05:00] things, certificates, or you can also call it contracts that are, approved, secure. The third thing is looking at the world’s wealth, with 400 trillion wealth that exists on the planet. Almost half of it is what I call unbankable assets, talking about to a certain extent real estate, which is the largest asset class in the world, but also art, classic cars, diamonds, IP rights, music rights, and other types of assets or values that escape actually the regulated banking system.

And I think blockchain and digital assets are an opportunity to take the other half of the planet, we’re talking about the 200 trillion opportunity, and make them efficient bankable assets with a price, transparency, a liquidity, and the democratization of the access to these types of assets, which is not the case today. These types of assets, because they tend to be expensive, and not fractionized, not tokenized, they tend to be accessible only to the rich or to large institutions. And it’s also a democratization effect, you can gain through tokenizing these types of asset classes. So, this is what was going through my mind through the last couple of years. As an entrepreneur, if you can think it, you can do it. So, then I go to action and try to bring my contribution to it and try to realize some of these ideas and make it happen and make it reality.

Adrien Treccani: [00:06:52] Francisco, what do you think are the frictions today? Because you speak about this 400 trillion market that could be tokenized in the future, but maybe one of the first thing that could be tokenized was Avaloq a few years ago. And if I had wanted to invest in your company, I would have to have a name of a large private equity funds, you know, like the ones that invested in Avaloq.
So why did you think about tokenizing, Avaloq? What would have been the fictions? Do you think we are about to solve this friction so that this dream can become a reality?

Francisco Fernandez: [00:07:20] Indeed I did think of it, but the size of Avaloq, you know, being an over 2 billion asset, the markets are not mature for that type of size to be tokenized. We have seen in early days, the ICOs have a little bit burned the reputation of these markets of these tokenizations, because it was a means to finance an idea, a premature or very early idea. Many investors in tokens have lost money because it was too premature to take them public through ICOs instead of IPOs.

What I’m doing now is taking the real assets that are undoubtable there, and that can be valued, to tokenize them, making a fraction of it and try to start creating the liquidity which is missing in these markets. I mean, Bitcoin is the only, let’s say tokenized asset, to slowly having 800 billion out there, gets the liquidity that is necessary to have a fair price for an underlying asset. So the size of Avaloq was already too big to take the risk to try to ICO it, but eventually, it’s a matter of time until the second more mature ICO wave will kick in and be able to also take larger assets public.

Adrien Treccani: [00:08:58] That’s interesting. And you know, you’re speaking about liquidity. We have actually a question about liquidity. Do you think that we need banks or how do we create liquidity in this market? Is it an ecosystem play? Is it a bank that need to move? Can we actually, if I may ask you a provocative question, do we actually need banks at all in this new ecosystem of digital assets? Or can we think about a future where banks become irrelevant?

Francisco Fernandez: [00:09:25] I come back to the statement of Bill Gates that said once that “banking is essential, banks are not.” I think, to have banking services is a need. Financial markets are mature markets and I think there’s a need to regulate those markets one or the other way.

Therefore, I think that banks will play a role, but what role they play depends on how they embrace these [00:10:00] technologies, in what direction the regulation is moving. It’s a trust business. If you want to invest or put somewhere $3,000, you might give it to Revolut. If you want to invest $300 million, you probably don’t give it to Revolut. So, you want to have trusted institution, you know, that’s are heavily, strictly regulated. Therefore, banks have still the role. Having said that the whole industry is under big change and potentially also disruption. Some institutions might make their way, some might not survive it. So, let’s see what happens. And if you look at DeFi, this decentralized finance, the question is how the ecosystem of banking or finance will look like in a centralized way where much more players can disseminate or desegregate the value chain, not putting an end-to-end value chain in one big dinosaur, which tend to be inflexible governance structures. They tend to be slow and in a decentralized world, in the internet era the architecture of the financial ecosystem might look quite different in 10 years.

Adrien Treccani: [00:11:29] You speak about regulations and your point is that the regulation is needed to provide some trust as I understand. Now, it is kind of antithetic to the decentralized finance, which is that you actually don’t need regulators because regulators provide some inherent level of centralization. By definition the regulator is centralized, it’s generally for a specific country or a specific jurisdiction.
Do you think that we could see a future where this kind of regulation itself is also decentralized and embedded in some form of smart contract or decentralized interaction? Where in fact, it’s the security that you get from the regulator and the government today, you may get it out of technology itself without having to trust the central as party.

Francisco Fernandez: [00:12:16] It’s funny that you say regulation is centralized. You could also say regulation is very decentralized because if I look at Europe today, we try to centralize the governance of Europe in the European Union, you see the Brexit and you see the struggles. Regulation is actually very national because it’s about protecting your people and I don’t think that French regulation or French government or French policy cares too much about how to regulate the German bank, etc. So, you’ll have some tendencies to try to centralize, but there are forces because, you know, in Europe you have different languages, different cultures per country and you see actually a decentralization because a nationalization is the decentralization of governance. While saying that in decentralized finance with smart contracts, what the internet actually wants is a worldwide global regulation. So even if we are thinking about blockchain being a decentralized ledger, actually it’s the opposite, it’s a centralized ledger by having one blockchain governing the whole planet, independent of geography. Actually, if you look at to what you have today, every traditional bank has its own ledger within the bank on premise, while blockchains try to centralize that onto one system. So actually, I see blockchain as centralized and not decentralized in that context. Of course, the governance is decentralized by saying you have thousands or millions of nodes, but it’s one system.

Adrien Treccani: [00:14:11] You centralize information on a decentralized platform, that’s an interesting concept.

Francisco Fernandez: [00:14:19] Absolutely. This is what it’s all about. So of course, as IT people are software guys, you would like to see a world with one currency with one worldwide ledger, potentially this ledger technology incorporated into the internet infrastructure because the internet decentralized is one place, but it doesn’t belong to anybody. So, it’s decentralized governance. A decentralized platform, but actually a centralized central concept for the world. This is what we are dreaming of, but it’s a long journey to get there. But I would, I would like to make a bet and saying that in 10 to 15 [00:15:00] years, storage of value, transferring of value in a secure way should be part of the planet infrastructure, like the internet.

Adrien Treccani: [00:15:08] Absolutely. What do you think is the impact for existing system, existing currencies, Dollar, Swiss Franc, Euro? Do you think that these new technologies and the values initiatives about stable coins and tokenization may disrupt the way we work with payments? And would I be annoying if I give you an example? Would I be able to buy your car paying with a part of a Picasso painting? You know, I would pay you with a Picasso painting, which is tokenized to buy your car. Will I be able to do that in the future?

Francisco Fernandez: [00:15:36] I think both things will coexist. I don’t think that with technology, we will go back to a barter system where you say, you’ll give me a Picasso, I give you a Ferrari or something like that.

I think to have a representation of value and abstract representation of value, which is the currency, will still exist. Will the currencies be national currencies? Probably yes, because the governances of these currencies are national and, as I said, policymakers of a nation don’t care too much about what’s outside their nation. They need to protect their citizens, so governing their own currency is protecting their citizens from any type of financial system disruptions. So, what I’m seeing today is that many policymakers, as well as central bankers, are trying to embrace the technology and come up with CBDC, so central bank controlled coins. They will coexist with something like Bitcoin, which is more of a representation of like gold, which is not nationally regulated, or like cash because policy makers try to gain control over all the citizens controlling all your cash flows. So, policy makers would like to get rid of cash because cash is less transparent and, you know, politicians want to control the citizens. I think, this is one the raison d’être to exist for Bitcoin. You can still enjoy some privacy, of what you do with your money, with cash light type of digital assets. Having said that, we will have to find solutions on how to prevent criminal misuse of these currencies, money laundering and other things, but the planet will find solutions to that.

Adrien Treccani: [00:18:01] Absolutely. If I come back to the original dogma of Bitcoin, it was created to decentralize finance, to provide an alternative means of payment, an alternative store of value, and potentially to disrupt the banking industry saying “Well, we don’t need you. We can replace you.” What I see today, and this is the question I would like to ask you, is that the more cryptocurrencies are adopted by regulated intermediaries, let’s say banks or custodians or any kind of a regulated financial institutions on the markets. The more they are adopted, the more cryptos and Bitcoin become subject to heavy regulations, tracing, private rules, protocols that control where the money is coming from, where the money is going.
Ultimately, I see a future where there could be two classes of Bitcoin. The Bitcoin is, which are not whitelisted because they have lived outside of the banking sector and potentially, they will be traded at a discount. And the Bitcoins, which have been whitelisted, you’ve done your KYC, it’s dealt with large banks on the system, which have marked the right market value, but potentially are less useful because you can’t use them outside of the regular environments. Do you see such a binary future or is there potentially some sort of a spectrum of possibilities or something smoother between these two options?

Francisco Fernandez: [00:19:18] I don’t know. I don’t have a crystal ball unfortunately, Adrien. But again, it’s a relatively new technology, it’s only 10 years old and we are still finding the right applications to it and the right regulations to it. It could well be that you have a coin that works very much like gold, which is anonymous, which has its use cases and other regulated types of currency to use as a means of payment that are accepted by governments and law systems and policy makers. So, it could well be that you have both.

Coming [00:20:00] back to your barter system, indeed it’s not that unlikely that you have also use cases like these. Let me give you an example. I’m an investor and co-founder in Innoterra, which is producing 500 tons of food, sustainably produced healthy food with an extremely decentralized or fragmented rural architecture in India, having 200 million farmer families. Originally, we were about to set up an NPFC, which is kind of a non-bank financial institution and give micro loans to these farmers. Now, because the banking license is delayed, I came up with a different idea: why don’t we buy a hundred thousand cows, a hundred thousand cows with the right fodder, the right vaccines, the right insurance and give you a cow package. You operate it and you pay me with milk. Instead of giving the farmer alone and, acting financially, I can do it with real assets, exchanging real assets. I give you a cow, you give me milk. I can tokenize the milk and start trading the milk as produce, but I can also refinance on the thousand cows by tokenizing cows and bring an 8% interest rate cow token in the Western world where the interest rates are low. I give you a cow token with 4% interest rates, and that can finance the herd. I paid in milk, I tokenize the milk and sell the milk again in on another blockchain. So, it’s actually exchanging cow tokens against milk tokens almost. So, it’s fantastic how many different use cases you can implement with these new technologies.

Adrien Treccani: [00:22:04] I’ll tell you what Francisco, I’m not sure our auditors would have expected that speaking about tokenization and FinTech, speaking about cows and farming. That’s a fantastic link. We have a couple of questions here, I’m just going to read one of them. A question comes from Ben: “Avaloq is aware example of a market leading European technology company. How does Francisco feel about the European tech ecosystem? Are we starting to catch up with the US and China?”

Francisco Fernandez: [00:22:33] It’s good that you, compare US with Europe and not with Switzerland, because you know, you have to look at the size. Again, the architecture and the culture of US is completely different than Europe. You have a different harmonized system, language, culture in the US while this is not at all the case in Europe. In every country you have a different language, you have different ethnia, different histories, it’s another type of architecture. Having said that, it all starts with education, and I think the best European universities, like the ETH Zürich, the EPFL in Lausanne, the big UK universities like Oxford, Cambridge and the likes or the Max Planck Institute in Germany, they don’t have to hide behind the renowned universities in the US. So, we have a fantastic education system here.

Now, when you speak about currencies or banking, of course, the whole regulatory framework is much more fragmented here in Europe. “L’Europe n’existe pas” how the French say, so this is an obstacle to overcome, but we have creative engineers in innovation rankings. Switzerland always ranks amongst one, two, three. We have the creativity and the engineering power.

What is worse in Europe is the culture of taking risks, financial risks. In the Silicon Valley, you are not a good entrepreneur if you did not fail at least once and stand up again and continue. Doing businesses in Europe, if you fail once, nobody will give you any more money. So, that type of VC culture and risk capital is much more mature in the US, but it’s slowly swapping [00:25:00] over to Europe because capital can travel very easily nowadays. And the internet can also transport knowledge and awareness about new ideas and companies across the globe. So I think, I’m bullish that we will also learn how to deal with startups. To become an entrepreneur today is much easier then when I started Avaloq, 30 years ago. I had to visit 65 banks and investors to get 200,000 francs. I can get these today in a minute as a young entrepreneur. So, I think things are moving in the right direction.

Francisco Fernandez: [00:25:39] One second, I’m in the home office and there are cleaning ladies here. I would suggest that we make a short break and I move into another room. Is that possible?

Adrien Treccani: [00:25:50] Let’s have a two-minute break.

Francisco Fernandez: [00:25:53] Thank you.

Adrien Treccani: [00:25:57] We can use this opportunity for questions. So do not hesitate to write more questions in the QA section or on the message. I will go through them when Francisco comes back or at the end of the session. I see already that we have a series of questions about the different countries for instance, I’m reading the question of Alfonso about “how important it is going to be the role of the incubator banks in this new space due to the current circumstances in the general political space and credit risk counterparts?” I think, from Cisco’s opinion, this will be very much relevant.

I would like us to cover some aspects of the demands because cryptocurrencies have been under, I would say, rising demand on the retail over the last 5 to 10 years, with periods of ups and downs, but the demand on the banking side has remained volatile, I would say. Some banks have been early in this game, some banks have been following, some banks have been just observing and call themselves smart followers.

I would like to ask Francisco, what is his perception about how fast this market could suddenly move? Do we see an acceleration with the market price in the last three to four months? Do we think that it’s all driven by the regulators? What are the frictions today or potentially banks just don’t see an interest in getting involved in that market and could be eaten by other companies like Coinbase or the other large crypto native firms getting active in these markets? I would like to cover that specific point. Francisco, are you back?

Francisco Fernandez: [00:27:47] I’m back.

Adrien Treccani: [00:27:50] At the risk of a boring our auditors, I will repeat somehow what I was mentioning. We have a series of questions on demand for cryptocurrencies and how is the demand shifting over time? What I mentioned is that we’ve seen continuous growth of retail demand for Bitcoin, Ethereum and the various hundreds of cryptocurrencies out there, but the demand from banking has been slow and volatile, I would argue. There’ve been early adopters, there’ve been followers or banks that qualified themselves as being smart followers. Do you see demand growing now? And if not, do you think that it’s going to be a slow adoption or there could be some events that actually triggers a mass adoption in banking, whether it’s regulatory or something else?

Francisco Fernandez: [00:28:40] You’re absolutely right. Banks are, in general, relatively slow adopters of technology. First of all, because the regulation has to go with it and banks are not allowed to do things that are not regulated, and great innovations are, per definition, not regulated because the regulators did not see it coming or did not foresee it. I mean, look at the large innovations when they invented the car. They came up with a red flag act. So, the regulator forced the person to run in front of the car with a red flag warning that the car is coming, and this regulation, this red flag gap stayed there for 30 years. So, when they invented the music downloads, this was a company called Napster. I was an early investor in Napster. It was declared illegal later on, Apple took the idea up, legalized it and disrupted the music industry.

Now something similar is happening in the crypto space. It’s new, so the world has to get used to it and it has to find the regulations, it has to understand how to deal with it, and then eventually you have the adoption [00:30:00] coming. Of course, we as technologists always think this is too slow, but that’s the time it takes to adopt a new technology first, by finding what I call killer applications, good use cases, and then the world learning how to deal with that in mass markets. So, we’re getting there. And let me give you an example. I think two years ago, I read the statement from Jamie Dimon, the boss of JP Morgan and he said “I will fire everybody that touches cryptos”. And today they have an expert center, they issue their own coins. So they made their minds up drastically.

Also, if I look at Switzerland, out of the 160 banks we serve, there are already five to six banks that are seriously engaging in this space. We have been implemented crypto capabilities and they plan to be able to serve their customers with these new asset classes. So, you will always find early adopters that jump on the train, then eventually you have the followers and at the end you have the laggards. Regulation is one thing that slows it down. The other thing that slows it down is that large institutions take much more time in making decisions. This is a fundamental decision, you know, to self-disrupt yourself to a certain extent, to completely change the way you settle, and you store assets. These are heavy decisions and heavy decisions tend to be slow in large organizations also because they are listed and everything, which is not immediately contributing to the EBITDA of the next two quarters and tends to be deprioritized.

Having said that again, as more people adopt it as a higher the pressure gets to jump on the train before the train, you know, leaves the station and is uncatchable anymore.

Adrien Treccani: [00:32:17] How much would you say that, reading a question that we have in the list, interconnectivity with the legacy platforms and legacy payment systems, the existing infrastructure, is relevant today for adoption? You’re behind Avaloq, arguably one of the leaders of the previous generation, before digital assets and decentralization. In the last five years you have caught up and you’ve been one of the first to move into cryptos and distributed ledgers. Do you think that it is essential today for banks to adopt these new technologies, that it is as smooth as possible, and essentially they behave almost the same way as traditional assets?

Francisco Fernandez: [00:33:00] You know what, my bet or my take is that I try to look, always try to look at things from the consumer, from the market point of view. So not thinking inside out, but outside in. If I put myself not with the hat of the founder of Avaloq or a bank, but as an investor in consumer, I just don’t want to miss the train. I mean, if you see ETH having made a 27’000% performance in the past five years, this is just an opportunity I don’t want to miss. And if you believe in these technologies, you want to participate in the game. Now, my wish was I can call my bank and say, please buy me some ETH, some Bitcoins and some cow tokens and their answer is “we can’t do it”. So, I said, if I, as a consumer, have that wish and I’m not being served properly, I put the other hat on, as the founder of Avaloq “Can I enable my banks I serve to help them to serve me better as a consumer?” And this is exactly the bet I did.

So, I engage with experts on the crypto markets, like Metaco, and say “Could you help us that, you know, you guys grew up with blockchain and with these technologies and bring some knowledge across, into Avaloq? And could we make the Avaloq traditional banking system cope with these digital assets so that the banker doesn’t see much of a difference between digital assets and FIAT assets?” Because the [00:35:00] whole rest of dealing with assets, the banks are expert in how to monitor risk, how to do portfolio management, how to select the underlying assets behind the token. How do we bring things to market? I mean, an IPO is not that different to an ICO. If you want so 90% of the expertise is in the bank and just because they liked the last 10% of technology expertise, you should not reinvent the whole thing, but say “Can we leverage the 90% knowledge of the banks at the technology piece of it and enable the banks to deal with digitalized assets, alongside with FIAT assets?” Because I think there will be a co-existence for 10-15 years of both type of assets, traditional assets and FIAT assets, and that’s what I decided to do, we started to do help the banks embrace this, to be able to serve their customers better.

Adrien Treccani: [00:36:05] And clearly for these technologies to be adopted, you need to have them in a way that they feel exactly the same as what you have today, potentially with more features, but without having to learn about the underlying protocol. I’ll put it this way, today when you send an email, whether this email is sent using TCP IP or UDP IP, it’s irrelevant, it just works and that’s what matters. The same is true for cryptocurrencies and digital tokens I would say. We have this question here about India. I know you have some investments and activities in India, so I think this is an interesting point. “With a recent proposal for crypto ban in India, with the upper house of Indian parliaments neglecting it as of now, do you think with the introduction of digital Indian rupee, crypto will get more traction in India?”

Francisco Fernandez: [00:36:54] It’s actually stunning to me that India was the first country of that size with 1.3 billion people that was able to roll out digital identities with our system. Rolling out digital identities linked to an account for 1.3 billion people, but at the same time saying, “We don’t touch cryptos.” So, on one hand they are leapfrogging generations of passporting and are able to roll that out at lightspeed and then neglecting another interesting technology. This is for me not consistent, but I think things are changing. I read of course the ban that is, let’s say one or two years old, and in the last six months, I see that loosening up slowly. I would not be surprised if India does the same as Jamie Dimon, completely turn around and say, “You know what? I go from forbidding to pushing and championing it.” I think India would be absolutely fantastic. I mean, they have such a large software and IT industry, and they have a government that is able to roll out digital identity to 1.3 billion people while we are discussing that in Switzerland, in the Western world since years or decades and don’t manage. I would not be surprised if India would make a U-turn and do that because India, per se, especially if you look at rural India, it’s a decentralized architecture, it’s a blockchain type of architecture. If you can interconnect them through the internet and make payments through a digital rupee, it would be a killing out there.

Adrien Treccani: [00:38:59] Wow. It would it be a killing for banks too, because you know, the big question with CBDC is always, you create a direct connection or direct relation between the central bank and the people in the same way that cash does. The main difference between cash and your bank account is that cash is a direct claim for purchasing power that you have against the central bank. Today, if you want something digital, you go to your commercial bank partner or your provider, but then it’s no longer the central bank. You have this capability for banks to provide you services. As soon as the central bank creates a CBDC and puts it you in your hands, potentially you would say, “Well, why would I need banks? I can now pay, you can now store value, I don’t need these banks.” So, do you think it would be a killing also for the banking industry?

Francisco Fernandez: [00:39:49] No, because that brings us back to the question “Are banks needed, or actually, what is the bank?”

I think some storing value and transferring [00:40:00] value from A to B doesn’t create value per se. So, this could be part of the infrastructure, nobody has said that payments should be a banking task forever. This could go away to central banks or even to infrastructure provider, because I would say this could even be not the bank activity anymore. Just remind yourself of the credit card industry. If you want to buy something and you want to pay later, these short-term loans between transacting and paying was originally also a task that was performed by banks, but these completely moved away out of banks to new industry players called credit card institutes, like Visa, MasterCard, American Express. The same thing could happen to the payments world. Who says that the bank is there to do payments? So, if I could wish what my bank should do for me is not necessarily payments, because payment is just the base of storing and transferring without adding much value. The real value-added services from a bank are those helping me to allocate my money and put my money at work. This is a heavy consulting and expertise task that I still see at banks or bank like institutions, but are payments an important bank task? I would say no, or not in the future, it could be infrastructure and central banks giving that service. It’s also a nice example that in Switzerland, many years ago, suddenly the Swiss post was the largest, probably still is the largest payment provider in Switzerland. And the post is not the bank. It doesn’t have a banking license at all.

Adrien Treccani: [00:42:01] That is true. That is true. We had a discussion with a bank today. Speaking about crypto already feels to be at the forefront of innovation. Going to tokenization is even one step further, you’re even beyond the forefront of innovation. Now, there is this huge padding change happening with decentralized finance or DeFi. We actually have a series of questions on this topic, in the chat. DeFi goes way beyond finance. It’s called DeFi, but in fact it’s not DeFi, it’s more decentralized contractual relations in general. One that I’m extremely enthusiastic about and excited about is the decentralization of companies. If you think about it, a company is nothing more than a series of contracts. You have shareholders that can vote to elect board members, board members that can vote to elect executive board members, executive that can potentially touch a bit of the budget of the company. All those things are nothing more than bunches of contracts and social norms and laws, which can be encoded into a smart contract. We already see today many instances of this. There are incredibly successful distributed autonomous organizations on Ethereum, where you would say, “Wow, I’m here facing a bit of a multi-billion-dollar company, but this company is in no commercial register at all. It’s not registered in Switzerland or nowhere.” What  do you think about the decentralization of much more than finance, actually going into any kind of contractual relationship?

Francisco Fernandez: [00:43:42] So I think the whole DeFi or smart contracts, is another dimension on the blockchain and I think it will take even more time. Let’s digest first, the entry before we go to the main meal and before we go to the dessert, I think the concepts are really fantastic and overwhelming. If you think of smart contracts and for the decentralization, I think that internet has the potential to create big things in a decentralized architecture. Look at Wikipedia, I mean it’s the largest encyclopedia and it has wiped out  Encyclopedia Britannica and all the others with an extreme decentralized model.

But we are human beings and human beings tends to create families and herds and states. We are social animals, that made us survive because one single person is weak, a family is [00:45:00] stronger, a country is even stronger. So, we create conglomerates, we try to make clubs, we try to make companies, we try to make states and it’s always to be in a group with a larger cohesion, with the common goals and common dreams. That will always exist because together you can move more than alone. Now internet, and we are experiencing this right now, Adrien, that we are talking together as if we would sit in the same room. We have a bond and the connection, even if we are miles away from each other. So, the internet and technology has made that possible to have this cohesion in groups, socialized together with a shared common goal to achieve things. And I think these smart contracts has to enable still to have virtual companies because these are groups sharing the same dream, the same vision, the same goal, even if the people are decentralized sitting somewhere. We have spoken, outspoken or not outspoken, written or unwritten contract, if you want sell. The internet can with technology support these bonds, which are very important. I would not say that companies will disappear, but you can start collaborating and contracting together, building groups together and virtual companies or virtual governance bodies going after the same goal, the same purpose together with the usage of technology.

Adrien Treccani: [00:46:57] Speaking about building companies. You are a serial entrepreneur, it’s not just Avaloq, you reminded us that you founded multiple companies. What are the key learnings from Avaloq and the other success stories you went through or potentially failures that you went through? What could you give as an inspirational advice to tech founders or CEOs that are trying to create something today?

Francisco Fernandez: [00:47:24] So what I just said, the bonding between people to create greater things is finding a common goal, finding a common dream, finding a purpose. A hundred years ago, what brought people together is the building. You have a large building, and it says IBM or whatever, or Novartis on top of it and you went to a building. When you said I go to my office or I go to my company, you meant the building. The building might disappear. Right now, I’m working for 12 companies sharing my time and my brain amongst 10 companies. So, that it’s not about the buildings anymore, but what I like is to be associated with the 12 purposes of these companies. This is what brings us together. I mean, you and me, we want to enable the banks to democratize 200 trillion unbanked asset classes, make them accessible to normal people. We want to make the banking system even more efficient than today. This is what binds us together. To have a clear purpose is the first thing that has to be right, to bond and align people’s forces. If you don’t clarify that one might pull one direction, the other might pull in the other direction and annihilate forces. If the goal is clear, the first homework is done. You have a shared dream, a shared objective.

The other thing is, just don’t forget the human factor. I learned that not in the first two years when you sit in the room with seven people and hings like culture, you know, being human came naturally.

If you do that with 3000 people, you suddenly have to make tacit knowledge, explicit knowledge. It’s the same with strategy. The first couple of years, the strategy was developed in my belly and everybody knew about it. When you work with 200 people, you want to buy in, you want an understanding for the strategy. You have to write it down, you have to speak about it. You have to make it visible and [00:50:00] able to experience it. The same is with culture. In the family nobody writes it down, in a company you have to write down, you have to make it explicit that you can give an additional angle for people to bound and have a rule set which is stronger than writing thousand rules. The culture is clear, this can make thousands of rules obsolete, and you know, where there is a rule, there is somebody who can break it. So, culture is a very, very important topic. And I must say, you cannot start early enough to talk about culture. Culture is, what type of people do you want to have in your company? How do you move on to collaborate with each other? What is important to you and what not, and to what are the behaviors you want to see and to foster? What are behaviors you dislike and you don’t want to see, because this will give an additional identity into the company. People that don’t fit will be exposed before you can even fire them and it will be an attractor to people that fit into the company. So, culture and purpose are two very important things.

Then of course, today I look at the company, as I look at the complex piece of software, it’s about having the right architecture and engineering. You have to engineer your company and this is besides purpose, culture and people. The organizational structure, organizational development is important. As the thing grows, the architecture has to be constantly adaptive. So, I cannot take the organizational structure of Novartis and put it on little Metaco, you would die. On the other hand, with the Metaco structure, you would never be able to run Novartis. So, you see, as the company matures and gets bigger, you have to find the right architecture for it in terms of governance, company structure, collaboration, processes, etc. Don’t forget the engineering aspect of a company. As an engineer, we are actually good at finding architectures. So, use the same skills to architect your company as you use to architect your software.

Adrien Treccani: [00:52:29] Is it only about architecture in your company or is the private life also important? You speak about the buying of your employees and colleagues, I guess the buying of your wife and your children potentially is also relevant. So how would you say your private life influenced or helped or potentially made it harder for you to be successful in that field?

Francisco Fernandez: [00:52:47] Again, there you have similar patterns, you have a different purpose. Living your family life then living a business life in a company X, Y, or Z, it’s about purpose, it’s about structures, it’s about communication, it’s about bonding. There are similar patterns, companies like a small organization, with whatever three to five people actually it’s like to start up, but as a family member, you also see that you have to manage this as well. And family is actually nice because it shows that there are forms of governance that are not necessarily hierarchical. This is what we are learning also in the corporate lives today that the control and command type of leadership style is becoming obsolete. To be a leader is to be a servant. I like the the word of servant leadership. So, if you work for me or if I’m your boss, actually, you don’t work for me, I work for you. I must organize and set the field that you, as an expert that might know more than me in your area, that you can perform and the company gets the maximum out of you. That does not mean that I tell you what to do, how to do it, whatever most of these, you know even better. The same is in the family, everybody has its role and perform, and we have to orchestrate collaboration much more than a hierarchical leadership style seat.

So, that’s nice to see these parallels that, running a family is not a command and control thing and we are now even in larger organizations, finding out new leadership styles. Now my biggest problem is that a day has only 24 hours [00:55:00] and I cannot add the night to it. So, you’ll have, of course, to balance and to make a portfolio allocation. As you are used to make portfolio management for you money, you should make portfolio management for your most valuable asset, which is your time. So how do you allocate your time to these different things or different passions you have? How much time do I allocate in sport, family, music or your hobbies and your business life? Find the balance. For me, balance has never meant that I work less because for me, work is life and life is work as an entrepreneur, you cannot stop your brain. When your brain is working, you cannot distinguish between business, family, leisure, and life. It all comes together and that’s probably the best place to be that, you know, you enjoy every moment of your life. No matter what you’re doing, sports, you have some quality time with the children, or you have some quality time with your colleagues, sharing the same dream to improve something on this planet.

Adrien Treccani: [00:56:18] Cisco. Thank you very much. I think it was a great experience. I’m very happy to know more about it. That’s also the case for our audience. I would like to say just before we stop that the next episodes of Metaco Talks will be on.February 19th at 3 PM CET with Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence. So please, register and we’ll be happy to have another episode after this great discussion with Francisco Fernandez.

Thank you again.

Francisco Fernandez: [00:56:48] Thank you guys, also for listening and for your patience. I wish everybody a nice weekend and see you soon. Thank you.

 

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