May 3, 2021

METACO TALKS

Walking the talk on digital assets w/ Benjamin DUVE

METACO TALKS with Benjamin Duve, Head of Digital Assets and Custody at Commerzbank. He runs the highly successful Custody and DMA product, with its client service focused model and great reception in the market. Being involved in many securities related proof-of-concepts and live trades dating back to 2017 he is a thought leader and sought after panelist in the field. He represents the bank in various industry working groups.
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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 is Benjamin Duve, Head of Digital Assets and Custody at Commerzbank. He runs the highly successful Custody and DMA product, with its client service focused model and great reception in the market. Being involved in many securities related proof-of-concepts and live trades dating back to 2017 he is a thought leader and sought after panelist in the field. He represents the bank in various industry working groups.

 
Disclaimer: This is not investment advice.

Play video recording | Walking the talk on digital assets w/ Benjamin DUVE

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Seamus: [00:00:00] Welcome to METACO Talks. I’m Seamus Donoghue, the VP of Strategic Alliances at METACO. METACO Talks was a bi-weekly event, and now given the lineup of speakers and with what’s happening in the market, we’ve decided to shift this to a weekly event. It’s a discussion of topical issues and thought leadership related to cryptocurrency and digital assets. It’s a live stream conversation. It’s meant to be interactive, so please comment and ask questions on the chat. 

The recording after this call can be found on our website. It will able be available on YouTube, Apple Podcasts, and Spotify. Please subscribe and leave a review; that would be great.

Today’s topic is “Without the rose-tinted glasses, injecting some realism into the token economy discussion”. To discuss this, I’m very happy to have our guest today, Katharina Gehra, the CEO and co-founder of Immutable Insight. Welcome.

Katharina: [00:00:59] Thank you very much for having on the show. I’m looking forward to the discussion.

Seamus: [00:01:03] Great to have you. So why don’t we kick off? I looked at your career path and how you’re in this crypto space, I think to a degree what you’ve done is really a validation of institutionalization of this space. I’d love to just hear a bit about your background and what Immutable Insight is all about.

Katharina: [00:01:19] Sure. I think the first part of my career can be described as a very classical, probably from a crypto space, old school career path. A prestigious university, top tier consultancy, big bank, private equity – the steps that you take. But eventually, I looked at the blockchain potential and I’ve decided that for the later and second part of my career, that’d be the better place to be. Three years ago, I decided to leave the big institutions and embark on the journey to the future.

Seamus: [00:01:54] That journey of the future is Immutable Insight now, right? What does that do?

Katharina: [00:01:59] The whole idea of Immutable Insight three years ago started on the idea that I had a physicist, who’s now my co-founder and a very dear friend, pitch me three algorithms that allow us to evaluate blockchain data in real time and extract just more information and more value out of this information. Back then, I thought if only half of what he’s trying to tell me here is true, then this really is one of the greatest tools for the new technology to build a business upon.

We’ve decided to start a company, and we started first in the whole forensic and anti-money laundering and compliance space; and then gradually made our way to trading, sold our signals at first then decided they were too good to be sold; and eventually also started industrial analytics as a third segment of our business. Industrial analytics in short is blockchain potential without crypto. Actual, real life business applications that have nothing to do with either Bitcoin or Ethereum as, but with a distributed ledger technology.

What is the token economy?

Seamus: [00:03:04] Interesting. One of my next questions was to ask you, there’s a quote on your website where you talk investment in blockchain application insights on the blockchain based on complex physics, innovative scientific methods. I think that early partnership answers some of that. What insights would you normally derive, that eventually led to you to start consuming your own signals and want to fund?

Katharina: [00:03:25] I think one of our signature analyses is to derive to an actual growth indicator and the dynamic of that growth from the different tokens, but also the blockchains as such. I think in a space where price really is something that is very prone to hypes, and very prone to also pump and dumps, and very prone to an Elon Musk tweet, I think there’s one truth and one truth only, and that’s the chain. To us what matters is how and how often people (or wallets, to be more precise) use it.

There’s an actual value hypothesis behind everything that we do also in the asset management spaces. We believe in the token economy eventually, but it will only be there and get there if we start using it and using it as an infrastructure in pretty much every part of our life. This is where our focus is. Most of the hypes and the spikes are something that we watch with a big smile on our face. We somewhat acknowledge that it also helps us in our fundraise and our public awareness, but in the end we believe that the hypes will go away, but the blockchain and the rollout and the adoption are the important underlying factors for the future growth.

Seamus: [00:04:55] Part of the adoption, is it a network theory evaluation, or is it just a combination of that with usage?

Katharina: [00:05:02] When you translate our results of the analysis into a price model, then that’s exactly what we do. But I think good the question is – and that’s the innovative part of it – is: what is growth and what drives growth and how can you predict growth better? It’s everything about that pattern. It’s all about the question: when does it start to be better or same growth path as the internet has at some point?

 The whole glass bowl, when is retail adoption – all these questions is something where we just take a fresh look and found a new way of approaching it.

Seamus: [00:05:44] If we look practically, Bitcoin and Ethereum, where would you put those in terms of the cycle of adoption you’re describing?

Katharina: [00:05:52] Most of our analyses find that Ethereum from a path as the trajectory in terms of growth and usability is the leading blockchain right now. But there are other blockchains that obviously have fundamental growth parameters, that given they start on a lower base, are in its relative dynamic also interesting. But just the absolute number of users and transactions is already something right now where Ethereum is probably ahead of the curve.

I’m not saying that I think or that we see Ethereum as being the one. It’s certainly in a very good competitive position, but it’s an extremely dynamic industry. I think we all know that as soon as you think you’re certain of something, you’re proven to be wrong. For us, the whole real time approach also means we’re extremely adaptive and just try to focus strictly on the numbers and what we see.

Seamus: [00:06:48] Do you parametrize these in a way of the use case? For example, what’s being built on Ethereum is quite a bit different than what people would describe as the store value for Bitcoin. Pristine collateral, as someone like Raul Paul calls it.

 Katharina: [00:07:03] To us, the whole idea of the ultimate value isn’t a narrative, it’s a question of actual measurable transactions. It’s a little bit like a faith thing, where you can believe in whatever you want. I’m a truly liberal person. I just really like to stick with science, and I just really like to stick with what we can measure and therefore then build a rigorous and reliable model around.

Seamus: [00:07:37] Sounds like a consistent approach. We spoke earlier, you mentioned that you have one fund, you recently launched a second fund. What is the investment thesis of this? Is this what you’ve described, you apply this to the universe of cryptos, or is it a token, or is there a narrower remit?

 Katharina: [00:07:56] No. There’s a quite broad angle. That’s also one of our unique selling propositions. We called the fund ‘blockchain fund’ for a reason. We didn’t call it a ‘bit’ or ‘coin’ or ‘eth’ or ‘DLT’. I think the whole idea is also because it’s a fund that has a tenure of 10 years, that we believe that the token economy will be the underlying fundamental value driver. Roughly half of our portfolio we do token applications, and the other half then are a bit more of the bigger native coins that you would be seeing.

But this shifting the portfolio in itself of course has also risk parameters and liquidity parameters that go into consideration. But the key point is: where’s the growth? It’s a little bit like investing in the NASDAQ in the later part of the ‘90s, you get an exposure to token economy. We’re a real-time value investor, we aren’t a quandary strategy as people most often think, and we also don’t do AI with a deterministic model. We don’t look for patterns, we don’t look for arbitrage, we don’t look for trends, we don’t look for momentum. 

For us, as I said before, it’s a scientific exercise that then is applied with professional risk management in order to execute a trade.  But in the end, the whole token economy and blockchain adoption as the underlying big theme.

Seamus: [00:09:24] This is not common that you have a value approach in what’s effectively an exponential growth sector. You’ve mentioned a couple of times a reference to eventually, when the token economy becomes what it is promised to be. How would you describe what the token economy is now versus where you think it’s going? You’ve had an analogy there that it’s comparable to invest in NASDAQ in 1990s; is that a similar framework that you would apply to crypto?

 Katharina: [00:09:56] It’s seminar, but I think it’s a little bit nuanced. First of all, I think that tokens are like emails. In the beginning they’re a bit awkward, and it took my mom a while to know what the strange app was for, but eventually she figured it out and she uses it on a daily basis as so many others, including myself.

I think tokens is a little bit like we now have a framework. It’s similar, like, there’s something like a webpage, there’s an HTML thing and you can do something with it. It’s almost like a blank canvas. What can you do with it? What does the global competitive scene come up with great ideas and what will users think? Will they like it? Will they not like it? What’s going to be on the forefront?

I think that’s where we are. We have a conceptually new framework, and now the big question is what people come up with as an idea to monetize that, to drive that, to create engagement. I think that’s really where we are. That’s what’s so intriguing, because I’m inherently curious and I love to adopt and try new things. I’m passionate about just the endless opportunities that can be created. But we’re not there yet. We’re not even at a stage where people have understood how big that potential is.

That’s exactly most of the times the missing part. Token economy is not just going to be a thing. It’s an evolving thing, and we see rapid speed at some and still big skepticism in others. That’s the area of the corridor that we need to navigate at this point. We also need to make sure that maybe we learn from what we’ve seen on the internet in the mobile adoption, to ask some fundamental questions first this time, and maybe have a window of opportunity now to set an agenda and create governance structures and others like that to implement the value.

It’s a tricky part of that trajectory where we are. We’re just very outspoken, heavy advocates of ‘Let’s try to think first this time until it’s there, and then we’ll have big tech and try to work with them after the fact’.  

 

What are the hurdles to making it a reality? (legal, regulatory, skills)

Seamus: [00:12:16] The comment of when it’s there, it strikes me as interesting situation the blank canvas analogy and how that meets regulatory initiatives or regulatory response. How do you view the whole regulatory landscape is going to evolve, facing this still early blank canvas?

Katharina: [00:12:42] Wow, you really put me on the spot here! That is probably the trickiest question to answer at this point in time.  We’ll take this around and I’ll just pretend to be the leader of the world for whatever country, state, or global, and let’s just be idealistic and naive for once, okay? Can you bear with me for that?

To me, the big question is: how do we combine the way of life and our values with a technology that once it sets a standard, it’s probably the most effective also in terms of policymaking and policy creation? Because if the user growth is what we think it will be, and if it adopts, we’ll be able to make changes that in the current institutions we’d never dream of doing.

I’m often quoted for saying it’s a little bit like somebody has translated the Bible and all of the sudden people are understanding what they’re actually being taught and told to do. If you look at the Declaration of Independence and you think of people that went through enlightenment and tried to shut off that narrative of the Catholic Church, and now they’re there, and they’re like, “Wow, what are we doing now that we’ve enabled them in this way?”

I wouldn’t shy away from claiming that we’re at a point in time that if we had a new enlightenment phase, we probably would reconsider lots of the institutions that we’ve done and maybe be able to also upgrade them to a level of efficiency and effectiveness that would both save us costs and resources and maybe one or two political games. But of course, we’re not there. We’re still in the real world. That I think is a better left to a different place to discuss.

 

Where is Europe vs the Rest of the World?

Seamus: [00:14:37] Fair enough. Why don’t we take this back from the philosophical to more, let’s say, the practical? You’ve also been involved in from inside the regulated space – a supervisory board for a bank. How do you see that they are looking at this space now? If they’re looking at it, how do they come to that point? How is the regulatory space, in your experience, speaking to Germany and Austria, where’s that going from? From the participant’s perspective, not from the regulator’s.

Katharina: [00:15:13] Now you’ve taken me from the future back to the reality. The bank, I’m advising there, it’s the oldest Bavarian bank. It’s got a 250 years traditional, privately owned still. Very independent in its stance, which I appreciate because we do try to step aside and think about the whole landscape also from a little bit more of a bird’s eye view.

What we see here is that the regulatory landscape, particularly in German banking (I don’t know if that really applies across Europe, but particularly in Germany) it’s been one of: let me think what the regulator say and then I do what I think matches whatever the framework is. It needs to be a bit more balanced again. Where do you see the market and where do you see the client need? Where’s your ambition? Where do you see opportunities for your business? Let’s try to get that and then align with the regulator in how we do that in a way that works for both.

That’s what we’re trying to push for at the bank. We’ve just hired a completely new executive team. We’ve turned the strategy one 180. We’ve completely tried to also incorporate the whole idea of how clients will be served in the future, but how technology can play a part in that. Not in the FinTech space, I think that narrative has been overstretched for too long now. We’re at a point where we can give more smart answers than what we may have seen over the last three, four, five years. I think that’s the way with that.

But I also learn, of course, I consider myself more of a bridge builder. I’m trying to come from the most traditional Bavarian bank there is, to cutting edge and driving the space and trying to set an agenda in a whole new dynamic industry. But we need both. We need to have a dialogue and we need people that fully understand and appreciate how regulatory works and what you need to do and what the rules of the games. But then you need to be able to push, to adapt, and to find new answers, because you can’t expect the regulator to find an answer for your business. That’s on us; we’re the ones to drive it. We can’t ignore it, and we can’t be ignorant to the fact that we do live in an institutionalized regulated industry most of the times when we do asset management. It’s on us to come up with new ideas and find solutions that work.

Seamus: [00:17:50] Absolutely. I think the banking sector is waiting for the regulators to tell them what to do. Hopefully, that’s not the case, because I look at basically what’s happening. With Coinbase in the US, it has had a very regulated approach to the digital asset space or token space. Their listing at plus or minus 70 billion in a $2 trillion industry, I think is a wake-up call to the space. Although other firms that have been skeptical, and the European banking sector has really struggled since the global credit crisis in 2008, the European economy is typically the bank’s role here is balance sheet lending and that’s really been pretty anemic. US is much more about the capital markets side of the business.

I’ve seen two approaches in European banks around DLT creating efficiencies. But if your underlying business is missing this whole token economy, is efficiency what you’re after or do they need to embrace eventually being a bridge into the DeFi space? That’s decentralized finance. How do you think their firms are thinking about this?

 Katharina: [00:18:58] Back in 2008 and 2009 when the crisis hit, I was at the heart of the storm. I was at Commerce Bank; the bank that needed the most capitalization, who got 20% equity stake from the German government. To me, crisis is a very real thing. It socialized me very early in my career.

I think in the two years that I stayed after that, I came to the conclusion that I don’t think that universal banks in Europe will be a profitable business for a long time; and they haven’t been, and they won’t be. If you look at the current profitability levels, you have return on equity ratios that are barely above 2. With a handful of exceptions, and there it’s not really driven by the banking business as such, more smart investments on venture sides as well. You do have a certain structural profitability level. The IT costs, every euro you’re making, roughly 60 to 70% of that are IT costs. Most of that is to run the bank, not change the bank. Structurally they’re illiquid. They’re not insolvent, but they’re illiquid. There is no free cash flow to invest, and you have structural burdens and legacy IT systems that effectively almost no bank has managed to upgrade and bring to a level of efficiency that would even allow you to act from a position of strength or make also commercial decisions to grow. We have a lot of walking dead banks in Europe, and that is a big problem.

Two years ago, at the biggest German finance conference, I was on a panel and I was quoted that the blockchain technology could either be the last savior or the end of the journey for a lot of European banks, and I got smashed. There was an outrage. Everybody thought that that was inacceptable and a horrific thing to say.

Now for 10 years, you’ve had management who was thinking cost management restructuring, cost management restructuring, cost management restructuring. The whole idea of a growth narrative, of a changing narrative, of a commercially strong narrative – that’s a management group that hasn’t learned that skill. They’ve learned to restructure and manage regulatory requirements and implementing those, and managing a tight budget. There’s also really a lack of creativity and spark and edge and commercial drive. That’s something that I think is underlying the whole idea that I don’t really have a lot of hope for European banks.

There’s maybe BNP, maybe ING, maybe a Santander, maybe on the wild side a UBS, not sure, but I really do think that we also see talent drain. We see that not just in terms of grown scale, but also when you look at the overall employer branding scores and everything, banks are just not really a career option anymore.

 

Where are we on the technology cycle vs the hype cycle?

Seamus: [00:22:24] It’s very insightful. We had a similar set of experiences when I was at Barkley to same period. I remember during the credit crisis, trying to calculate our exposure to Lehman on a Sunday, basically before the whole thing came tumbling down and we went through a similar experience. I think that view is something that very much aligned with.

How do you see that versus other regions? Let’s say North America versus Asia? Is that a gap though? What’s your view on this?

Katharina: [00:22:53] It’s not a gap. If you look at the overall structural profitability levels, you have an Asian banking scene obviously driven by the growth as well and driven by consumer spending. But do you have well above 10, 12% in terms of profitability. If you look at the Middle East, and obviously that’s always a bit skewed because the treasury can be quite skewed in those countries, but you do also see anywhere between 10, 12, maybe sometimes even a 50% range of profitability levels.

The US, they’ve gone through the cycle. They did what they needed to do. As you said, they’ve put a different commercial focus back to capital markets. JP Morgan, as the stellar example, has risen from the ashes and turned itself into not only a profitable leader, but also somebody who’s accepting and willing to invest into the change. Of course, we’ll always have elite banks like Goldman. They’ll create their own market. There will always be a market for quality. Not forever, but they’ll have a different niche for some time.

If you look at the international league tables; if you look at a DSP in Singapore, if you look at the top five commercial banks in China, it’s an abyss. They’re aiming to be a global power and they’re getting close to their aim. I think now when you look at the digital Yuan, the cost efficiencies that the blockchain service network will give Chinese banks to expand on a global level, they’re full-on attack on Swift.

If you just think of the big eight banks that do most of the international correspondence banking now, take half of their transaction banking fees away. Look at their balance sheet and see what that’ll do to their profitability levels, to the leverage ratios. You’ll find that the Chinese attack, so to speak well, will just move the forces towards it. If you look at the profit pools of HSBC, 80% of the profit is done in Asia with a third of the turnover.

Seamus: [00:25:17] We often cite similar stats around banks globally. The same numbers in Europe, 40% of earnings come from payments, that transaction side of the business – which is under significant attack from fintechs, from payment companies. PayPal is getting to the space, with stable coins. You mentioned the DSF with the Chinese project, I think it was over the last point. Is the model or the response to that a Western version, or is it a more of a public-private partnership like you are seeing stable coins? Tokenized dollar, tokenized Euro?

Katharina: [00:25:51] On the stable coin issue in particular, I think that European regulators were really driven too much by fear and not too much by the position of strength. Trying to take ‘we forbid stable coins’ approach with the ‘me car’ regulation is most of the times the weakest, and eventually the most suicidal approach to take. You cannot forbid the internet. You cannot forbid blockchain technology. You won’t stop adoption. In the end, on a global perspective, we’re 350-400 million out of a roughly 8 billion people group. We’re not in a position to make the calls. We’re in a position to hope that we can get a piece of the future pie.

I do think there were not well advised to take the ‘me car’ approach. I think stable coins will find their way. The use case is too compelling. Adoption is already way too strong, and you can’t turn back time and they won’t be.

Seamus: [00:27:03] Great insights. Reminds me of when Facebook or DM came out; exactly as you described, the fear was the big driver, and we can see where we are. I’ve got one last question here, which from the first question from the audience: when do you expect to see a first cross border Yuan transaction?

 Katharina: [00:27:22] Let me just maybe read it up again to make sure I’ve understood it.

Now we need to define between a non-Chinese person, because there have been cross border transactions already. So, it’s the question: when will non-Chinese accept it as a more convenient way to pay?

When looking around, even pre-COVID, when I was walking around downtown, high street Munich, Maximilian, TASA, you could pay with WeChat in every store. What we checked, the business case is simple. Digital Yuan will not charge you cross border transaction fees, and Swift does. It’s a mobile application and the client won’t notice. For the client it doesn’t make a difference, but for the business running it it’s paying transaction costs or not paying transaction costs.

Seamus: [00:28:21] Pretty simple decision. Katharina, I think we’re out of time, unfortunately. I think we could talk for quite a while; it’s been an interesting conversation. I appreciate you coming on today.  Thanks for joining us.

Katharina: [00:28:31] Thank you and thank you for such a broad coverage of almost the whole space in such a short time. It was intriguing. Thank you for having me.

Seamus: [00:28:40] Sorry to put you on the spot with the big philosophical question at one point there.

Katharina: [00:28:43] I loved the challenge. I loved the challenge, straight on.

Seamus: [00:28:48] Great. Well, thanks for joining.

I said we’re moving now to a weekly schedule. Next week we have Benjamin Duve, who’s the head of custodian digital assets at Commerce Bank. Look forward to seeing you then. Thanks for joining us. Goodbye.

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