On-DEMAND WEBINAR

The Digital Asset Playbook for Banks & Financial Institutions

How to start and scale a digital asset business model

📅 Webinar Recording from Thursday, 19 May 2022 

Access recording of this lively webinar organized by METACO, exploring the market opportunity for banks and financial institutions to expand into crypto and digital assets, as well as the biggest challenges they face and how to turn those into long lasting competitive advantages.

Learn from BBVA Switzerland about its success story behind their recent winning of Celent’s Model Wealth Manager 2022 Award, for enabling HNWIs and the Mass Affluent to trade and store crypto assets, an initiative underpinned by METACO Harmonize, fully integrated into its core banking system.

Agenda

  1. The Digital Asset Market Opportunity 

  2. Getting the basics of Digital Asset Custody right

  3. Making it real: Combining Digital Assets and traditional assets into a unified offering 

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Speakers

Catherine Guay-Chénard

Subject Matter Expert

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Catherine is a seasoned crypto & financial innovation expert, with a strong ability to bridge strategy with execution. Previous to joining METACO, Catherine was Blockchain & Digital Assets Lead at National Bank of Canada.

José Antonio Colomer

Head of Blockchain and Digital Offering

Having worked for BBVA Switzerland for more than 15 years, José Antonio currently leads blockchain, digital asset and banking platform activities at the bank. He is a Chartered Alternative Investment Analyst (CAIA).

Seamus Donoghue

VP Strategic Alliances

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Seamus brings extensive expertise from building and managing trading operations with JP Morgan, Deutsche Bank, Barclays and BoA Merrill Lynch. He is a keynote speaker on topics such as market structure, regulations and digital asset technology.

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Build and launch your digital asset business model

Full transcript

*Disclaimer: The accuracy of this transcript is not guaranteed. This is not investment advice. This is not investment advice, and any opinions expressed here are the sole opinions of the individuals, not of the institutions they represent.

[00:00:05] Catherine: Hi, everyone. Welcome to this METACO webinar. We’ll start in about two minutes; waiting for all the guests to join.

In this webinar, we’ll be covering digital assets playbook for banks and financial institution. We’ll be assessing ways in which banks can practically build and scale digital asset business models. We’ll start with talking a little bit about the digital market opportunities, with myself Catherine Guay-Chenard, subject matter expert at METACO. Then Seamus Donoghue, our VP of Strategic Alliance will dive into the strategic considerations of custody and why getting custody right is really critical in building a long-lasting business in this space. Last but not the least, we’ll have Jose Antonio from BBVA, who will talk about how they successfully launched an industry award offering to the market, being in fact one of the first Tier 1 bank institution moving into this space.

Let’s dive right in and lay the ground of where digital assets are at today. Digital assets have emerged mainly from what we called the financial digital asset, and we’re not increasingly hearing about nonfinancial digital assets. What makes for most of the digital assets and crypto market cap today is still the original cryptocurrencies such as Bitcoin and Ethereum, and stable coins, which have emerged from the need to trade those marginal cryptocurrencies. Stable coins are more recently backed by Fiat currencies or pegged via an algorithm to Fiat currencies. This is still an experiment as we’ve seen in the last two weeks in the news, but it is definitely now a really big part of the cryptocurrency space.

We’ve also seen the government working on creating and starting to offer central bank digital currency. That has also really helped in making this space more legitimized. There’s a tokenization of different commodities and securities, and potentially even the tokenization of the entire global financial market. That is one of the reason why banks are investing in building their digital asset know-how at the moment.

Since 2020, a multiple large bank like BBVA announced their interest in crypto. We’ve seen a domino effect of a general trust and interest towards the entire crypto ecosystem. Beyond the negative image portrayed in the news today, we’re still at a nearly 500% growth in market gap in the last year. DeFi has started taking its space with over 250 billion word of crypto being either lent or staked via DeFi protocols.

One of the most fascinating markets, a growing market that has taken place recently, is the NFT space, that has left many of us puzzled yet impressed by what’s happening. Besides somewhat ridiculous zombies and apes that we see here, NFT technology is also opening the doors to tokenize all sorts of intellectual properties that were never bankable before. That’s interesting because these monkeys are testing the technologies that will expand the total value of a global economy flow.

That being said, what is the real opportunity for banks?

Well, on one side, the use case is a lot clearer and appealing than it used to be. Indeed, the profit margin of a digital asset custody and brokerage, is four to six times higher than traditional assets. If we look at yield farming in DeFi, the level of returns is incomparably higher than what can be generated in the traditional markets. That is definitely interesting and attractive to end users.

On the other side, as much as the blockchain ethos space is really peer to peer, as this market expands and consumers from all sides start to adopt this technology, we’re assuming that customers are going to be looking for ways to store digital assets with trusted custodians. Banks are perfectly positioned for that; built around trust. They’ve been keeping a trillion of assets for their customers, and it would just be a natural extension to be able to safe-keep digital assets.

I want to put an emphasis on trust. As you know, digital assets are represented on the blockchain and associated in the blockchain to a public key, which is similar to a public address. If you want to move your digital assets, you need to have a corresponding private key, similar to a key to a mailbox if we want to put it very simply. That means that if you lose your key, you lose your asset. It also means that if someone keeps your assets for you, they hold the keys to your digital assets. It also means that they either transfer or keep these assets. This is important because the insurance coverage for crypto custodians at the moment is fairly low. Any custodian that says they have insurance will have some insurance that will cover a very small fraction of their total holdings. In case of crisis or bankruptcy, to my knowledge at the moment there is no crypto native custodian that could make sure that their client’s assets are of the company’s balance sheet and truly safe from a business fall. This is where banks are uniquely positioned to provide the real insurance to offer custodian services, if that’s built on the right infrastructure.

Beside trust and the established network that banks have, they also have an incredible advantage with the large client base that they have, where they can simply cross sell and don’t need to spend much in new customers acquisition. Of course also the regulations, that are still very challenging for many. Especially when we’re looking into scaling, large digital asset businesses are very much present today. But banks also have a very good understanding of the regulatory landscape and strong relationships that are really necessary to embrace the regulation needed to be compliant in this space.

As we’ve seen, this space has evolved in two different phases. First with crypto native fintechs, who adopted the ethos of move fast and break things. That’s been great, without them we would not be here today. Now we’re seeing more and more the market getting regulated. There’s also a much better understanding of the technology and its ramification. That’s why we’re seeing banks leading the way in setting new standards in terms of security and compliance. I’ll zoom into this a little bit. If we look before 2020, we’ve seen more cap market creator build up to 3 trillion at its speed in value in this market, by focusing on pushing the limits of innovation, testing, and at times breaking the market overall. The security aspect of custody assets at this stage was often good enough to get to market and experiment. The focus here was flexibility and agility. Regulators were watching or sometimes even it is prohibited in some countries, but overall lacked the knowledge to properly regulate and intervene.

The distinction we see with this second wave of market players, that we call definers, is that it is in their efforts. These are generally top tier banks moving into space since 2020, and they prioritize compliance and security. They still need to flexibility and agility to adapt to this very quickly evolving space, but it can compromise that to what is the core of their business.

While the tier one banks are leading the way currently and building the most robust digital asset infrastructure, the consensus is that the trust they bring and the complexity of the use case they will create will expand the market to tokenized assets of 24 trillion in the near term future. That’s also being projected by the World Economic Forum. That’s what we’re really into in right now. Ultimately, top tier banks see the market opportunity as a huge one. Eventually the entire capital market could be moving on chain for all kinds of assets. As the blueprint gets redefined, mid-market banks and any financial and nonfinancial institution will be able to manage and offer digital assets seamlessly. All of this will eventually create for a market value of 350 trillion or even more in the longer term.

Behind this, there is also a significant paradigm shift happening as DeFi continues to grow and become more reliable. Consumers are not constrained anymore to use financial institution as their gateway to the financial system. In fact, consumers are already able to interact with this new worldwide financial market almost entirely without banks. Yes, that means that banks may lose some of their business to DeFi in the short term, but there is a bigger long-term opportunity to make up for that. Consumers will most likely want to avoid the risk of keeping their digital assets on their own at home or with institution that they may not know deeply, and will look for secure, trusted, and licensed custodian that can seamlessly connect to the broad universe of DeFi apps that they will use anyways. That’s why we’re seeing top tier banks investing for the most robust digital asset custody service possible.

On this, I will let Seamus expand in on the strategic ways to look at custody.

[00:11:48] Seamus: I’ll just swap over screenings here. Thanks very much for that introduction, Catherine. I think that the main point is that largest institutions are building this space. The stages that Catherine has outlined, we’ve been in a very exciting pace of innovation up to now the last the last 10 years. That pace of innovation has been blistering, to say the least. I think it’s very hard even being involved in the space directly to keep up with everything going on, but what’s clear is that that pace will continue. I think for financial industry, it’s essential that they embrace it because it’s an exciting future. But I think the key question is, where do you start?

If your eye is on the $3 trillion market opportunity, which is not too long ago, it’s about the market size Apple, it is not that exciting. But I think now we’re seeing as the largest institutions come their eyes are on that longer term opportunity, that eventually all assets will sit on chain. The digital native digital asset space will continue to grow, and we’ll have new innovation, new asset classes we hadn’t thought of. The NFTs is a good example of that, and that will continue to expand in different use cases. But equally capital markets as we know them will eventually move on chain. That’s not just our view. That’s the view of some of our largest clients. Some of our most conservative clients are still of the view that they may be uncomfortable with Bitcoin, but they do eventually believe all assets will be managed in this way.

Getting custody right for this next stage is essential. It’s no longer an MVP experiment. Most of the fintechs in this space can help you with that starting point. But the point is, once you start custody is the central foundation for your business, and it’s essential you get that right from the start, because it really delivers all the optionality for how you start from a simple use case and scale to what might come. Financial organizations, banks operate multiple jurisdictions, they have different types of businesses, different regulators, often different client types, managing all that gets increasingly complex. Effectively, success brings complexity and you need to be able to grow with that seamlessly in a compliant way.

Let’s get back to the simple question, where do you start? What we’ve seen – and we’ll hear from Jose Antonio later – very commonly most clients start with a simple proposition of cryptocurrency on-ramps, off-ramps. As Catherine said, although it’s a peer to peer technology, you can manage all this yourself, you already trust the bank to manage the rest of your assets. This is a product extension. If you can trade your equities, your ETFs, it’s very natural then to also trade your cryptocurrencies, particularly as you move away from having a few thousand dollars to most of the portfolio in this space.

The starting point is cryptocurrency on-ramps, off-ramps. The one advantage of starting here as well as it gives the firm, the operations team, the compliance team, et cetera, the ability to start learning. This can start in a very measured way. It can be a walled garden where clients are not able to send in or send out crypto, and then eventually you can open it up. You can add other multiple; you can start with a simple, limited number of currencies than then eventually add more. As you can build very slowly and effectively. have a journey of learning internally to understand all the aspects that come with managing this new asset class and the new technology stack that’s required for it.

But eventually what we’re talking about is delivering a foundation that you can start adding other services, be that trading, be the payments, we hear a lot of talk these days about loyalty, loyalty solutions. Of course, every firm has their eye on that tokenized security business. It’s been the next big thing next year for the last five years, but eventually it will come. I think that’s where we get that 350 trillion opportunity.

As Catherine outlined, there is an opportunity as we look towards Web 3, that a lot of this finance will be embedded into protocols. The banks foundation will be providing a custody service to their clients, providing compliance, and connecting their clients to the protocols that in many ways can replace what the bank does currently. The bank to a large degree – and this is not going to happen today, maybe not tomorrow, but this is where we view eventually we’re going – the role of intermediation that banks have done, which leverages very expensive balance sheet and entails capital costs, can in many ways for most of these services be replaced by DeFi protocols, whether it’s trading, borrowing, lending, et cetera. Even advisory and fund management, these can be in DeFi protocols and the bank itself can be the custodian. It can provide the compliance guardrails, and they can connect their clients to this space. This will be a re-engineering of the business model to probably less of a balance sheet, less of intermediation, to more of a fee-based model. But in the end it could be a much larger addressable market because this can be embedded into everything.

That’s the picture of the longer long-term view. We probably should organize a whole webinar just in that view, because I think given two slides is not deep enough. The main point is you could be engaging, as you do with MetaMask and these are the things, coin-based now as they announced the past couple of days, you will be the bridge for your clients into this new DeFi world.

But let’s get back to the starting point. I think when you want to start, it’s important also not to chase every shiny object. You should be focused on the prize, which is starting with a cryptocurrency on-ramps, off-ramps. One of the issues custodians face when they try to evaluate how to start, particularly given the phases the market’s been in, where you’ve had these fintechs who will come and pitch you about what seemed to be trade-offs, there’s a lot of solutions in the market that have a great UI, UX. They seem very flexible, agile integrating new protocols, new DeFi services. But don’t ask them about security. Security seems to be almost secondary. It’s considered lip service. In the end, as regulated institutions you’re facing a dilemma. What are the trade-offs? Can I go for something more flexible? Because the space is iterating quickly. I am a regulated entity. Regulators are increasingly focused on this asset class, and we can expect more scrutiny given what happened with TARA last week. You need to operate in a secure and compliant way. Post 2008 crisis, banks are very wary about operating in the regulatory gray zone. They want to be compliant, want to stay in the right side of the whites rather than operate in the gray. This seems to be a dilemma they face, and it seems to be that these are, let’s say binary trade-offs. This is the perception.

Let’s discuss perception and reality. It seems to be the fintechs will pitch that the best solutions, the only solutions are you should consume this as a SAS. We have the latest all softwares technology, connected environments, this is all you need, you need to be agile. To make it easy to manage things like this, the vendor themselves will get involved in your signing process, will manage your policies. This is an interesting trade-off because there’s a truism in the crypto market; not your keys, not your crypto. Well, if someone else is signing, that’s already one step towards not your keys.

It’s a compromise that’s fine for an experimental stage, but if you are thinking about moving your client’s assets into this space, you have fiduciary responsibility for those assets. Externalizing signing, externalizing the policies for how those keys are used, which are critical processes, becomes very significant compromise.

Then you’ve got the other end of the spectrum, where let’s give up a little bit of agility because we’re regulated and let’s go for uber secure basically. Well, that’s all well and good. it is very secure, and it’s probably very good for this first stage for the first use case of cryptocurrency custody, but again these assets have been financialized. I think to the point that the FinTech space has, you need to be agile. We’ve seen some solutions that are built; they’re great for things like Bitcoin. Maybe they add another currency, but they’re not able to scale beyond that. The controls are significant, they’re very safe, but the future here, everything being tokenized means you need to interact with these things in real time. You need to be flexible. You can’t give up fully that flexibility and agility.

Our view very much is the source of competitive advantage in the future for all that enter the space is to operate with no trade-offs. You need to have the ability to have high agility, flexibility, and (not “or”) to be highly secure and compliant. If you get past today’s use case, it’s important that when you start this that you don’t just think about the MVP. I think one of the things that you need to do is plan for success. I think you’ll hear the story about success from BBVA later on, that you cannot replatform once you start. Your clients will not want you to shut down and build a new. You need to have a solution that can scale to the next use cases and the next opportunities, come what may. It’s an important that you’d operate in no trade-offs. This is one way to talk about what complexity is. You may start with a custody, a hot wallet, and we see most banks giving you starting typically with a zero asset base. You can start with a connected wallet. You may want to start with MPC, you may start with HSM. Day two, you have a certain level of assets in your infrastructure. I think hot wallets are vulnerable because they’re connected. Despite whatever the promises by any vendor, it is a connected environment. It is technology, there is a risk of compromise. Typically, you’d probably want to add a cold wall, which means an environment that’s fully disconnected from all long-term storage and just manage internet liquidity, like the current account for your clients in hot and keep most of the assets in cold.

That already introduces an element that is very difficult for many firms to manage. They’re not often built for cold, they’re only built for hot and it’s only one use case there. You may want an HSM that is truly cold, rather than a cold that means one of the shards of an MPC keystore in air-gapped on a phone, which is not really an institutional solution. This already introduced some complexity as you add more custody.

Then banks typically will add different business lines. It may start in a basic custody to high net worth. You may want to service the consumer bank; you may want to service different parts of the organization. Banks often have different business lines, each of those have different client types. Those client types may need different policies and the businesses may operate with different policies as well. Then each may have different regulators, which may have very prescriptive worries that you have to handle them. You have more and more complexity around the policy layer.

Then you take that and look at regional expansion at different jurisdictions, different data requirements, different accounting frameworks, and maybe some jurisdictions where you don’t even have a license so you need to rely on a sub custodian. Some jurisdictions have very prescriptive rules that your custody may need to be fully adaptable, 98%. Very different than potentially North America, for example, or Europe, where it’s less prescriptive. You need an infrastructure that scales to all these different eventualities and use cases. Again, you start in one jurisdiction, simple, everybody can do that. But what’s important is you plan for success.

As Catherine said, despite the pullback we’ve seen of late, and I think it’s important to put that in context that it’s not just crypto pulling back, it’s all risk assets, and banks are still building because they view the transformational opportunity longer-term. not about $3 trillion but the 350 trillion, you will have the eventuality where you have complexity.

That’s where METACO comes in. We focused from the start in solving those global Tier 1 banking problems, that will start from a simple use case, but they understand the future transformation opportunity. They understand the security compliance and regulation need to be combined with innovation, flexibility. All of this needs to operate at massive scale, availability and reliability. That’s where we started. We started as an on-prem company in solving the tier one problems, and now we’ve democratized that and deliver that as a service to the rest of the market for those can’t afford the full solution, but want the same solution that can scale into any eventuality; to be able to consume that on-prem, in the cloud, as a hybrid model, seamlessly scale.

We can work very quickly with our clients or rather we work very closely with our clients to get clients fast to market. Our technology can be deployed and within a day. We can work get you run through an MVP with a very short timeframe to evaluate your business use case, to get you comfortable with the processes. That same MVP can then be launched productively to start scaling up. The idea here is there’s no particular limits on security. On scalability, we can support billions of addresses. You’re not going to hit a wall there. We can do this importantly, I think it’s a critical point when you’re looking at, is the scalability of that security and what exactly that governance and security means. This is delivered by METACO with what we call No Single Point of Failure. What you view when you look in the market, everybody has governance. This is probably one of the key criteria, is beyond the flexibility of custody, the type of storage and the way you consume it, is ensuring that there’s no central point of failure in your infrastructure. You don’t want to have an administrator with a root and mint key that can compromise the system. METACO is unique in the market in that we deliver not just all of the different flavors of custody, but this governance layer on top with no single point of failure to manage your whole digital stack, and to grow through those multiple use cases, the complexity of different, different client types, different jurisdictions, all seamlessly, all with intense security.

One of the parts of our agenda here was also to talk about our partner, their journey in this space, so they can relay their experience and their success, and maybe some of the challenges they faced. I will introduce BBVA. We do have Jose Antonio Colomer here from BBVA, who’s the head of Blockchain and Digital Offering. We’re proud to say that our partner did win the Celent 2022 Model Wealth Manager Award for project platform. They are, as Catherine pointed out, the first Tier 1 bank in Europe to launch a solution for crypto assets. From here, I will hand this over to Jose Antonio.

[00:26:08] Jose Antonio: Thank you. Thank you for having me, Seamus. It’s a pleasure to be here. We’re really proud to have received this award from Celent. You had some questions for me today.

[00:26:32] Seamus: I did indeed. Do you want to share your screen or should I continue to share mine?

[00:26:36] Jose Antonio: Whichever you prefer.

[00:26:38] Seamus: Okay, why don’t we kick off things? One of the questions we had given your experience, how does BBVA Switzerland look at the digital asset market opportunity? When did the bank first get interested in the space?

[00:26:53] Jose Antonio: In terms of opportunity, I think you need to look at it from different perspectives. For the market size, some people would say that crypto is still a very small market. I’m not sure about that, because just a few months ago the market size was 3 trillion, which if you compare it with the SMP it’s pretty small. If you compare it with gold, that’s about a fourth of that. But if you look at, for example I have some numbers with me, if you look at Bitcoin, Bitcoin today even after the market downturn is 550 billion. If you compare it with the market cap of Visa or the market gap of JP Morgan, Visa is at 438, JPMorgan is at 350.

If you look at Bitcoin, you could argue that in terms of market cap, it will be in the top 10 of the biggest companies in the world. I’m not so sure that the market is that small. But whether you believe that that’s smaller or large, one thing that needs to be taken into consideration is that we’re still at a very early stage. I think in terms of the state of the ecosystem, we’re in a place similar to where the internet was in the 1990s. Then you need to look at adoption. Today we have over 200 million users in crypto, which is about what we had in the internet in 1999 or so. Today the internet has 4.6 billion users. What does that mean for crypto for what we can have in a few years, and also what does it mean in terms of where the market cap of crypto can be in 10, 15 years? If you believe in this narrative, the opportunity is huge.

Then you also need to look at use cases. The crypto use cases, when you look at them you see that crypto has a potential for disruption in a magnitude similar to, in my personal belief, the internet did. If you look at the internet companies, you have Amazon, you have Netflix, you have Facebook – they have changed entire industries. They have changed the way we shop, the way we watch movies, the way we interact with other people. I think crypto, the new use cases within crypto with the metaverse, with NFTs and so on, I think they have the potential to disrupt in a very similar way, to be honest.

What did that mean for BBVA? Well, we started looking at the space in 2018. It was after the 2017 bull market. We were in the so-called crypto winter. We started looking at it and we started seeing this opportunity that I was talking about. For us, the most important thing was okay, we need to get. But it wasn’t so much about being the first, but it was about making sure that when our clients demanded, we’re ready to give them the security that they need in order to participate in this space.

[00:30:35] Catherine: Thanks for that. Let’s look into the offering itself. How has it evolved since it was first offered to the market, and who can currently access the BBVA Switzerland crypto service?

[00:30:51] Jose Antonio: We first lunched the service in February 2021. First it was a friends and family base. The service included buying and selling Bitcoin and also transferring between wallets of the same beneficiary. Then finally in July we went live with our private banking clients. In November we also added Ether to the mix. Until now the service has been a mobile only service. From next Monday actually we’re including it also on the web banking; we are really excited for that.

In terms of which clients can access the service, we have our traditional private banking clients. We also have our New Gen clients. Here maybe I need to make a parenthesis. New Gen is the new business line that we launched back in September. It targets younger audience through our private banking clients. The idea here is that you have young professionals that are keen to technology and that are interested in the technologies that they think are going to shape the world. They like to invest, although they’re not investing professionals. What they want is they want to be able to have the tools at their disposal that a private banking client would have, but they like to do things themselves. The good thing about that is that they can access the private banking tools. The only thing that they need to open an account is 10,000 CHF, which I think breaks the barriers of entry towards Swiss banking.

[00:32:58] Catherine: Yeah. There’s definitely an interesting openness of this happening right now. What do you see next? How do you see beyond cryptocurrency and custody trading in that offering?

[00:33:12] Jose Antonio: Good question. The first thing is going to be to educate our clients. I think that’s very important. We’re running a series of webinars with all the clients that are interested in learning more about the space and learning about the technology, and learning about cryptos investment. As far as what comes next in the offering. we’ll see. We might look into adding more particles, but for now we’re learning and we’re going to continue to learn. The market will determine what we will be next. Whether it’s DeFi, whether it’s yield farming through staking or through lending or whatever, I think the market will determine where we go next.

What I can tell you for sure is that for us direction is way more important than speed. We’re sure that we’re moving in the right direction.

[00:34:24] Seamus: Jose, that sounds great. It sounds also like it’s been very easy, but I’m sure there’s been many challenges in creating the service and bringing this to market. Do you want to touch on those a bit?

[00:34:34] Jose Antonio: Yeah, for sure. As far as the challenges, I would say one was getting everyone on the same page; from different perspectives from compliance, from legal, from risk, people in the head office, and getting them to understand what we were trying to do. Here the key was honestly education. I think the way you solve this is education. Education is key as in many things in life.

But the biggest challenge I would say was technological, definitely. It was from understanding how to manage the keys, understanding how to manage the wallets, but most importantly the fact that we had to embed our crypto service into the core banking system and into the front platforms. Also it’s a different technology. Financial institutions are not used to operate that way. The question was, how do we instruct this? Do we settle every trade? What do we do? Fortunately we were able to solve that.

Surprisingly or not, working with the regulator was a pleasant experience. We’re very lucky to have FINMA. I always say Swiss people are very smart. I think we have a regulator that understands that putting a legal framework in place that makes things easy for the companies, that that’s good for the country’s economy. If you put a favorable framework in place, that’s going to attract more capital. That’s going to be good for your companies, and in the end that’s going to be good for your people.

[00:36:58] Seamus: Great insights on what you need to learn during the journey, given this new asset class and new processes. I’m glad to hear FINMA was a supportive partner in that journey. As we looked at the slide that Catherine showed earlier, it’s becoming a pretty competitive market. How does BBVA stand out? What are your unique value points and what types of customers do you offer?

[00:37:23] Jose Antonio: I think our added value to me is very clear. One is trust and security, and the other one is convenience.

In terms of trust and security, actually you can see it on the slide we have here. Number one, we’re part of the BBVA Group. BBVA is a large financial institution with 165 years of history. We are present in more than 25 countries, and we have 82 million customers. Having the safety of being within the group BBVA, I think that’s something that our customers value a lot.

In terms of BBVA in Switzerland, we’re a FINMA regulated. We use no sub custodians, which means your cryptos are with us. That means they’re on their Swiss jurisdiction, which I think is also something that our customers value a lot. Being a FINMA regulated institution, we also providing our clients with the best execution. I would like to comment on this. A lot of people think best execution is only providing a better price. But I think it’s way more than that. Best execution means being able to provide liquidity at any point in time. For crypto that’s especially important, because if you’ve used exchanges you will know that liquidity in times of extreme volatility can be an issue. It means being able to lower the operational risk, being able to lower the execution risks, and being able to execute everything fast. Last but not least, it also means providing transparency. Transparency in terms of costs, our clients know exactly what they’re going to be charged, and whatnot. I think that’s also very important.

Also the fact that we have segregated wallets, and that means two things. One, that each client has his own wallet. The second one is that the cryptos are not in the bank’s books. We do not manage our book, so that reduces a lot of the counterparty risk for the client.

Another point where we add value is that we offer two different types of wallets. One, you have the traditional hot wallet, which is your typical online wallet that you can trade with and you can buy and sell and transfer. The validation is done through a second authentication factor, so you basically need a password and it would either be an SMS or a code. Then we have our warm wallet. This is still an online wallet, but the difference is that any operation, any transaction requires the innervation of the bank. That’s why with this type of wallet, we don’t allow to do any trading. The only thing that we allow is to move from the hot wallet to the warm and then from the warm to the hot.

Last but not least, there’s a convenience. Here it’s honestly a huge selling point of ours. If you show the next slide. It’s the fact that our clients have everything in one place. That means that they have a seamless experience in terms of, if you look at the screen this is a client position, you have cash, you have fixed income, you have equities and then you have crypto. You don’t even need to go to – I’m not going to say different apps, but actually not even different screens in order to understand, how much do I have in crypto, how much do I have in the different assets? Also when you download there are the statements and also your tax statements.

I don’t know if you’ve ever had to file your tax statement while having crypto in in certain exchanges. It’s a nightmare. We provide our clients with all the information that they need so that they don’t have to worry about that. For them, it’s just another asset. I think that’s something that they value tremendously.

[00:42:12] Seamus: I love that approach. I’m living that nightmare of multiple exchange accounts and traditional accounts somewhere else.

[00:42:19] Jose Antonio: I’ve gone through it myself, so I know what it is.

[00:42:24] Seamus: You’ve done a lot of things to differentiate yourself. How do you measure success?

[00:42:30] Jose Antonio: You mentioned different ways. One way, we have different number of internal metrics. I could name a few: you have like assets under management, number of clients with crypto, et cetera. While not being able to provide you with specific numbers, what I can tell you is that despite the recent market downturn since the beginning of the year, the number of cryptos under custody that we have has also doubled in CHF terms.

[00:43:05] Seamus: That’s impressive.

[00:43:09] Jose Antonio: We’re really happy about that. That also tells us not only that we’re doing things right, but also that client demand is increasing. Going back to the first question, the opportunity is there. It’s up to everyone whether they want to take it or not.

The other way that you measure success is through third-party evaluation. In that sense we’re really happy to have received the Celent Model Wealth Manager award for being the first Tier 1 European bank to offer crypto custody services to its clients. We’re really happy.

[00:43:57] Seamus: It’s a great story, Jose. We should probably go to some questions. There’s quite a few questions built up from the audience. Do you want to take some of those, Catherine?

[00:44:03] Catherine: Yeah, exactly. I was going to say. One of the question was asking about adoption level, but you covered that. It’s interesting to see it and I think a good positive reinforcement for all of this. Maybe related to that, some of the questions asked were around, we’ve seen the market being cut in half right now, if you think that generally banks will get cold feet about this or put their projects on?

[00:44:20] Jose Antonio: Good question. I cannot speak for other banks, but when it comes to BBVA I can tell that that’s definitely not the case. As I said, we see a lot of similarities between the state of the ecosystem for crypto today and the early stages of the internet. As with any new technology, you’re going to have your ups and downs, and some players are going to disappear. We saw what happened with TARA a few days ago. But it doesn’t mean that the technology as a whole and the market as a whole is not going in the right direction. You showed some numbers as well. The fundamentals are stronger than ever.

[00:45:22] Seamus: Yeah, I would add most banks we talked to started building in 2018, and that was a very inhospitable period for crypto. As most people might remember that was crypto winner. Banks still had already gotten a taste of what transformational opportunity this was we’re building that, and then coming to market probably two years later. I think the same thing, as much as the opportunity it might be in the $1.3 trillion market cap now, a lot of them have made strategic commitments that that’s a much larger opportunity and just the ground floor and very early in the journey basically.

[00:45:58] Jose Antonio: Absolutely.

[00:45:59] Catherine: Maybe we can go into some more technical question. I’ve got so many questions now, thanks for pitching in everyone. I’s nice to have interaction. Technical questions, and that’s a tricky question because I just said that most insurance are not good, but are digital assets insured in case of theft? If not, how do you go about it?

[00:46:27] Jose Antonio: Sorry, can you repeat the question?

[00:46:29] Catherine: If the digital assets that you have on their custody are covered by any insurance in case of theft?

[00:46:40] Jose Antonio: No, not as far as I know.

[00:46:44] Catherine: But at the same time, you probably have the guarantees of the bank behind, that can reassure your customers that if there’s theft on your part they will not be left without anything in some ways.

[00:47:00] Jose Antonio: Okay. I think I know where the question is going. Absolutely, BBVA in case anything happened would. We always say the clients are our most important asset. In the case that something like that happens, we would do the necessary to make sure that our clients are covered.

[00:47:32] Seamus: I think in the end insurance market is a lot of smoke and mirrors as well. It’s clearly good to have insurance, but in the end when you look at some of the larger custodians and you look at what the insurance coverage is, they’re only covered for a very small fragment fraction of their assets under AUM. The market is still very nascent, insurance premiums is still extremely high. Indeed, our infrastructure is insurable, but I think from a bank this is really one of the differentiations that they have the balance sheet behind the business as well, as opposed to a FinTech which is slightly capitalized and that their only hope if something goes wrong is insurance. I think this is one of the significant advantages banks have in this space.

[00:48:12] Catherine: Definitely. It goes back to talking about the infrastructure and just making sure that the processes and the infrastructure you have behind is solid, because that’s really all you have. Some people were asking if you charge for custody service or if that’s part of the pack of the offering on its own.

[00:48:32] Jose Antonio: Good question. For our private banking clients we do offer a custody fee. We do charge a custody fee. But for our New Gen clients, the custody of crypto assets is free.

[00:49:45] Seamus: If I could jump in for a second, the question I’m particularly interested in, there’s a question around adoption. Given how you’ve rolled this out in so many different markets, Latin America, developing countries, have you seen different levels of adoption based on the country, or probably the maturity of the financial markets in those various countries compared to some of the developed countries?

[00:49:10] Jose Antonio: I would say so. Yes.

[00:49:20] Seamus: Latin America versus Switzerland, for example.

[00:49:24] Jose Antonio: Yes, I think so. People in Switzerland are very keen to technology. Switzerland in general is a country where people are very technology driven. But that is Switzerland. I would say, compared to the rest of the developed markets, we’ve seen a lot of productivity in the emerging markets.

[00:49:51] Catherine: One of the other questions that I think you covered a little bit, but one of the big challenge for banks is the internal response. Someone is asking, what was the reaction of BBVA internal control to propose an unregulated asset to customers? If you want to talk about that?

[00:50:12] Jose Antonio: Honestly, I said it all comes to education. It all came down to them understanding the asset. Once you understand it, you realize that what they need to do from an AML perspective and whatnot, it’s not so different to what they need to do with Fiat.

[00:50:38] Catherine: Sure.

[00:50:42] Jose Antonio: Crypto does have an advantage and it’s easier to track than Fiat.

[00:50:50] Catherine: I think it’s probably the most important part of that. Luckily there’s been a lot of different companies and tools out there, and even law enforcement entities have started adopting these tools as well and it’s becoming more and more known. It’s probably one of the things that’s helped. I You moved in really early. I think nowadays people are understanding more and more that these assets are more traceable than any other assets. Well, maybe not any other, but than fiat.

[00:51:18] Jose Antonio: I find it funny when I read some article that says, 5 billion in Bitcoin was used for money laundering last year. But I’m like, but how much was used in cash?

[00:51:37] Seamus: That’s the question.

[00:51:40] Jose Antonio: People do not know. How much even in US dollars, how much US dollars are moved around the world.

[00:51:51] Seamus: Then leveraging the correspondent banking network to do that as well. Speaking about moving currency around and particularly in the context of last week, there’s an interesting question here. Do you see any market opportunity to stable coins as part of the offering?

[00:52:05] Jose Antonio: Yeah, sure. Why not? Why wouldn’t that be part of the market opportunity? I can understand where the question comes from considering what happened last week, but as I said, I think we’re still at a very early stage. How many failures did we see in terms of internet companies in the 1990s? When the dot com bubble exploded, many companies went bankrupt. But the ones that survived, look at Amazon for example, or Google.

[00:52:47] Seamus: Absolutely. I think these algorithmic coins are probably the CDOs of 2022. It’s tarnished what is actually is a very established asset class now with the fully backed stable coins. Indeed, I view there’s probably a very bright future there for many applications.

[00:53:05] Jose Antonio: I have no doubt in my mind that stable coins are here to say, honestly.

[00:53:15] Seamus: I see another question on DeFi. How can regulated institutions figure out which digital assets or DeFi pools are safe to offer or connect to? Is that something you guys have already looked at or explored?

[00:53:25] Jose Antonio: Sorry, come again.

[00:53:28] Seamus: There’s a question around DeFi and the liquidity pools. How can a regulated institution figure out which digital assets or which DeFi pools are safe to offer or connect to?

[00:53:38] Jose Antonio: That’s not something that we have been looking into yet.

[00:53:47] Seamus: Will you have some sort of due diligence around coins in that sense?

[00:53:52] Jose Antonio: Yes, totally. Our job right now is to continue to learn, to continue to study the space. We will be looking into adding more protocols, but we need to feel comfortable with them. We need to understand them, and that’s what we’re doing.

[00:54:14] Seamus: I think that’s it for the questions. Do we have any other questions, Catherine?

[00:54:21] Catherine: I think we’ve covered most of it, or if we didn’t touch it directly it was addressed. There’s a question on, when are you going to launch the service in Spain or other European jurisdictions? If that’s something you want to touch upon, then the last question.

[00:54:38] Jose Antonio: What’s important is that our service is given from Switzerland, but that doesn’t mean that if you live in Spain you cannot open an account with us. If you want to, you’re more than welcome to do it. In fact, most of the clients of BBVA in Switzerland are not in Switzerland.

[00:55:04] Seamus: Interesting. We’re coming to the end of things here. Do you have any final comments you’d like to wrap up with?

[00:55:11] Jose Antonio: No, just continue with this. I just want to say that BBVA is a global bank, which means we look at the business globally, if that makes sense.

[00:55:32] Catherine: I was just going to say thank you, and wrap this up as we’re getting to the hour of this webinar. I want to thank you, Jose Antonio for joining us today and for hosting this with Seamus and I.

[00:55:47] Jose Antonio: Thank you, Catherine. Thank you, Seamus. It’s been a true pleasure.

[00:55:49] Seamus: Likewise. Thank you everybody for joining us. I think this will be one of many webinars to see in the future, and it’s fantastic to have Jose Antonio here for the first one. Thanks again, and thanks everybody for joining today.

[00:56:02] Jose Antonio: Thank you.

Thank you for your interest.

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