The Digital Asset Opportunity for Banks and FIs in APAC
The 'How to' guide for entering the market
Webinar Recording from 21 June 2022
Webinar Recording from 21 June 2022
Watch the recording of a METACO webinar, organized together with Synpulse, exploring the digital asset market dynamics in APAC, the opportunity this asset class presents to banks and financial institutions, and the operating models available to get started.
*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.
[00:00:10] Richard: Afternoon everyone. Welcome to this METACO Synpulse joint webinar. This afternoon we’re going to be covering the digital asset opportunity for banks and financial institutions in the APAC region, and looking at ways in which you can practically build and scale digital asset business models.
I’ll be kicking off, my name is Richard Swainston. I am the Market Director for APAC for METACO. Now I’ll give an overview of the current market opportunity, look at some of the foundational requirements such as custody and how this unlocks the opportunities, then we’ll also see further longer term strategies. I’ll then hand over to Adrien Barquissau from Synpulse, who’s a director. He’s going to present a how-to guide to entering the market. This takes a bit of a step back from pure technology aspect and looking at an area where often the bulk of the effort goes, this is around operating models and business facilitation, what those operating models can look like.
We’ll have Max Ruf, who’s one of our business solution consultants. Max is going to take a bit of a deeper dive on the foundations that I touch on, and provide an overview of how the METACO solution is the tier-one for institutional digital asset custody and orchestration. At the close, we’ll open up for a Q&A with the time that remains.
Before we go into the main topic of the webinar, something that’s perhaps a little bit poignant at this moment, bubbles and their subsequent busts are predominantly considered to be negative phenomena. They’re often described as financially wasteful, economically inefficient, and perhaps even socially destructive. But people tend to forget two things. Not all bubbles are necessarily wealth and value destroying events. They’re often essential or an essential stage in the development of transformative technologies. The formation of certain bubbles can often be understood as an important process in innovation in various domains. Despite what we’ve perhaps seen in the last couple of weeks, these events are often underestimated in terms of what the positive long term effects can bring, which conveniently takes us into where we are today and a look at the digital asset space as it is.
Digital assets have emerged mainly from what we call financial digital assets. We’re increasingly now hearing about non financial digital assets as well. However, currently most of the current product crypto market capitalization is still with the original players, the Bitcoin, the Ethereum. Stablecoins have emerged from a need from traders. Perhaps as we’ve obviously seen within the last few weeks, stablecoins are still, let’s say, in a bit of an experimental phase. We’ve also seen governments that are working on creating or starting to offer things like central bank digital currencies. Then we move towards the tokenization of different commodities, different securities, and potentially longer term the entire global financial market.
This is one of the reasons why banks and FIs are investing in building their internal one digital knowhow and knowledge, but also their infrastructure. Since 2020, these larger financial institutions have started to express their interest in crypto and digital assets. We’ve started to see this domino effect of a general growing interest throughout the entire ecosystem. DeFi started taking its place with lending, staking through the various protocols that are available. In the last 12 months, we’ve obviously an explosion in the NFT market as well.
Well, let’s dial really down to why we’re here. What’s the real opportunity for banks and financial institutions? One side of the business case is probably a lot clearer and appealing than it used to be. Things like the profit margin on digital asset, custody and brokerage is four to six times higher than in the traditional asset space. If we look at areas like yield farming and DeFi, these levels of returns are incomparably higher to what can be earned in today’s high yielding savings accounts in traditional finance, which make these highly attractive markets for the end consumer.
Now whilst the ethos of blockchain is very much peer to peer, as this market expands customers going to look for ways of storing our assets with a trusted custodian. Banks and FIs are perfectly positioned for that. They’re already built around trust. They’ve been safekeeping trillions of assets for their customers, and it’s their natural extension to also be able to keep digital assets safe on behalf of their customers. To emphasize on this trust element, digital assets are represented on a blockchain and associate to public keys. If you want to move those assets, you need to have the corresponding private keys as well. To put it quite simply, what it means is if you lose your keys, you lose your assets. It also means that if someone’s keeping your assets for you, they hold the keys and they could also irreversibly transfer or keep the assets.
This is important because insurance coverage for things like crypto custodians is still fairly low. It’s still quite an immature market. If a custodian says that they have insurance, it’s usually for a very small fraction of their total holding. In the case of a crisis or bankruptcy, to my knowledge at the moment there’s no native crypto custodian that could truly make sure all clients’ assets are off the company’s balance sheets and truly safe from fallout. Banks are uniquely positioned to respond to this. They’ve got the reassurance that if it’s built correctly and on the right infrastructure, they’re trusted. They’ve got established networks already and an incredible advantage that they’re able to tap into a large existing client base. While let’s say regulations are still being developed in a bit of a challenge, to scale the growth of digital asset custody business, banks again already have the know how to navigate this regulatory landscape, and already have strong relationships to help them embrace the necessary regulation and compliance that we think is eventually going to come with this space.
If we just take a bit of a snapshot, the space has evolved in two phases; first with the crypto donators in the FinTech who adopted the ethos of move fast and break things, and now what we’re seeing is as the market starts to get more regulated, there’s a general better understanding of the technology and its ramifications. Banks are really leading the way in leveling up the standard in terms of security and compliance.
There is a market shift. If we look at what we class as a first wave of market creators, before 2020 we saw these market creators build up to a market size of about 3 trillion in market cap. What their real focus was on was pushing the limit of innovation, and as I mentioned earlier, testing things and at times, breaking things with simple use cases, focus on fast revenues and we’ll deal with the problems later. The security aspect of custody at this stage was often, well it’s good enough, it gave them quick access to market and they were able to experiment. The key focus was flexibility and agility.
Then as we moved into the second wave of what we would class as market definers, there was a key distinction. This was in the effort and the priorities. These were generally top tier banks moving into this space since 2020, and they prioritized compliance and security. They still needed to be flexible and have agility to adapt to obviously quickly evolving space, but they really couldn’t compromise what’s at the core of their business.
As we move into this final stage, the following majority, ultimately this is the top tier banks. They see this market opportunity as being a huge one. It’s the idea that eventually the entire capital market could be moving on chain for all kinds of asset classes. As this blueprint starts to get redefined, mid-market banks and any kind of financial and non-financial institution are going to be able to manage and offer digital assets seamlessly. When you combine all of this, this is what creates this potential market value around about 350 trillion, on potentially more longer term.
But behind this paradigm shift, as DeFi continues to grow and becomes more reliable, consumers are not constrained anymore to use financial institutions as a gateway to this financial system or this wider financial system. Consumers are already able to interact with the new world without banks. Yes, short term banks may lose some of their business to DeFi, but there’s a bigger longer term opportunity to make up for that. Consumers will most likely still want to avoid the risk of keeping digital assets themselves. They will look for secure, trusted, licensed custodians that can seamlessly connect them to this broader universe of DeFi and the apps that they’re going to use. We’ll get into a little bit more detail on this as we progress through.
Just to take a bit of a snapshot of APAC and the increasing demand for digital assets here, I’m not going to go through all of the stats on this, I just wanted to pull out a couple of key examples and key areas. If we look at somewhere like Indonesia, it’s got according to the stats, world’s fourth largest population. An estimated 65% of the population is unbanked. Digital assets in crypto have become an important market for the development of blockchain there. There’s this financial paradigm shift that’s driven by this blockchain and the crypto assets. An interesting stat is that the first half of 2021, more than 6.5 million people traded crypto in Indonesia. This is almost three times as many people as the 2.2 million who traded equities. In monetary terms, that’s 25 billion versus 4.4 billion over the same period. We then look at somewhere like the Philippines, which is another interesting use case of how the APAC market’s really quite diverse and it’s a lot of user driven growth. Yield games broke out with Axie Infinity, I’m sure everyone’s heard of it, became a bit of a global hit. There’s now something like 1500 NFT game guilds alone, just based in the Philippines. this play to earn business models provided really meaningful income to users, and effectively helped to alleviate some of the economic pressures that have been caused by the pandemic.
The question I was saying comes back to, where do we start? Digital assets are in high demand, adoptions are on the rise, we’re seeing that larger institutions are building within this space and the pace of innovation over the last 10 years has been absolutely incredible. It’s clear that this is going to continue. It’s essential that the financial industry embrace it. But to the point of the webinar, the key question or primary question is, where do you start?
If you’re looking at this as a 3 trillion market opportunity, that’s not overly exciting. But what we’re seeing is that the largest institutions have their eye on the longer term bigger prize of this potentially untapped 350 trillion, a world in which all assets are on chain. The space is going to continue to grow. There’s going to be new innovation, new asset classes that we haven’t even thought of yet, and even the likes of NFTs are probably going to expand into vastly different use cases.
The key thing is that the focus isn’t necessarily on Bitcoin or Ethereum, but believing that eventually all assets, as I said, will be managed on chain. Getting this right for the next evolution of financial services is absolutely essential. We’re moving past this MVP experiment; most fintechs in the space can help you with a starting point, the point is once you start custody it is an essential foundational piece. My colleague Max will go into some more details on this later. It’s imperative to get this piece right from the start and provide a launchpad to deliver all of the optionality, and how you’re starting from a simple use case, and then being able to scale to whatever the future may hold.
Financial organizations, banks, they often operate across multiple jurisdictions, different business types, different business lines. They might have different regulators, client types, and it becomes increasingly more complex to manage all of this. What we’ve actually seen is that a lot of organizations have become a victim of their own success. But this success brings complexity. You need to be able to grow in a seamless and compliant. Most do start with this proposition that we see here, cryptocurrency on ramps, off ramps. As I mentioned earlier, although it’s peer tope technology and you can manage it all yourself, banks and FIs have this unique position. You have almost embedded trust. You already manage our assets. This is simply a product extension. If you can trade equities in ETFs, then it’s very natural to assume that you’d be able to trade your crypto too, especially as you move away from having a few thousand dollars to, as of last week, perhaps quite larger portfolios.
But one advantage of starting here is that it gives the business the compliance, the operation teams, the ability to start learning. This can start in a very measured way, even perhaps a wall garden. Clients are able to send crypto out, send it in, and then you can open things up. You start with a limited number of currencies, then you add more in, you build slowly, and you have this internal journey of learning to understand all of the aspects that come with managing this newer asset class, new technology stack, and what’s required to do that.
What this creates is, we’re talking about delivering a foundation which can then start to add in these other services. Trading, payments, then we get to this bigger longer term goal, this bigger picture of tokenized securities business, which could be worth upwards of 350 trillion. Then as we move laterally to that as well, we start to look towards web 3 and decentralized finance, this type of finance is going to be embedded in protocols. The banks can provide this foundation. They can provide the custody to their clients, the compliance that’s needed, and then connect their client to these protocols, that in many ways replace some of the services that a bank already does.
As we look towards this web 3 world, this strategic opportunity presents itself. To a large degree, the banks and the FIs become a gateway, they become a connector. The role of intermediation that they’ve done for a number of years, most of these services can actually be replaced by DeFi and DeFi protocols. Whether it’s trading, borrowing, lending, even advisory, and perhaps even fund management, these can be in DeFi protocols. The bank itself, or the FI can then be the custodian, provide the compliance guiderails, and connect their clients to the ecosystem.
It will be slight reengineering of the business model. Perhaps less of a balance sheet exercise and more of a fee based model. But by the end, there’s a much larger addressable market and this can be embedded into absolutely everything. This is the picture of the longer term view.
But to go back to the main point, eventually what you can be doing is you can be engaging as you do with a meta mask or a Coinbase wallet, and you as the bank or the FI will be the bridge, the gateway for your clients to access this new world.
We come full circle back to, well, that’s great, but how do we do this? I’m now going to hand over to Adrien from Synpulse, to take you through what some of this can look like from a business perspective. Adrien, I’ll hand over to you.
[00:17:44] Adrien: Thank you very much. Hey everyone. I’d like to start thanking again METACO for having us today to cohost this webinar on digital assets.
Before I start on my section, just a very quick introduction on who we are. We at Synpulse are a management consulting firm. We are assisting clients in digital and implementation projects from a business and technology aspects. We have been working as consulting firm on quite a variety of topics to help financial institutions to harness the crypto math nascent potential in terms of business value, definition, target operating model, or regulatory requirements that were already underlined here by rich Richard and quite getting some traction this year, 2022, in Asia.
To start introducing, I try not to overlap too much in terms of intro of what Richard said. I’ll try to do quite fast on this one. You emphasized it very well. The first point when we are looking at the macro factors that will have an impact on the crypto assets environment, the first one, one of the key ones, the regulator that are marking up their requirements to frame the crypto playground through licensing rules, notice to customers to prevent them from all these scams and dangers related to the crypto assets.
But also from a standpoint, to push so innovative projects and sandboxes, we can list down a hotbed of initiatives that have popped up in the last few months. There was the regulation at Mika in Europe. Also the HKNA and SFC published some quite detailed circulars regarding the framework that the FIs must implement on their digital assets operating models. We can also more recently take as example the project Guardian by the mass, that has objectives to develop inter-operable networks to promote trust and course, and iron out asset tokenization standards and DeFi institutional protocols. We have seen for these projects trials pushed by the regulators. Some actors trying to be at the spearhead of these initiatives come to my mind here: DBS, JP Morgan, who have been dynamic to take a proactive hole in all these sandboxes.
The second macro aspect that has a huge impact now on the market that we all witnessed recently was a bear market. But the FinTech and the Regtech who are also high gearing to have even a faster pace compared to their equivalents in the track environments as regards, for instance, all the trade life cycle solutions, tools, platform, to ramp up the end to end life cycle of your digital assets.
Here we have seen especially FinTechs emerging in terms of collateral solutions for crypto asset exchange, liquidity pools, interoperability wallets, policies, KYT, KYA, controls, one stop shops also from many rec techs. I was mentioning it a few seconds, the market is undergoing some turbulence, but it was also highlighted by METACO when we were talking about the bubbles or the destructive creation as we were mentioning some of the economics about the century ago.
Also some criticisms, let’s be honest, have also emerged to the crypto markets. For instance, they’re soaring energy conceptions. There is also the lack of security when we look at the crash of USDT, of some of the stablecoins that were pegged theoretically on the dollar. That being said, the industry cannot be one side stands tall only bashing, because there is also a great potential to unlock, especially to decrease the energy and the data consumed. When we think for instance about cross-border currency transactions, there are a lot of use cases that show that crypto assets can be leveraged to reduce the energy and data consumption.
When as a financial institution you want to start the digital asset journey, and the vast majority of financial institutions are newcomers in these environments, we try to represent what could be the challenges that they want to tackle, the business strategy milestone that they want to answer before they start going into a project mode and into an implementation mode. It’s what we sharpen. What is your target operating model that you want to get at when starting your digital asset journey, and what are the levers that would help you define that target operating model?
We do believe that there are several factors affecting those decisions, such as the type of digital assets that you want to exchange or have into custody? Is it some derivatives anchored to the crypto markets? Is it a native or non-native token? Is it pegged to the four top cryptocurrencies?
First, what is the business value, what is the digital asset that you want you or your clients to get access to? One of the other key factors for us would be also the risk exposure that you want to get, or you want to mitigate. The SSF defines three possible types of services and related type of exposure to the markets that you can get if you are either distributing directly the assets, if you are proposing dealing services, a package services and solutions to your clients; or if you are only in an advisory mode, explaining to your clients what digital assets to invest into, and the risk related to it. There can be lots of discussions and dozens of operating models, but we have fleshed what could be the three main operating models if you want to start here your digital assets journey.
First, you could diversify your portfolio. Diversify and get exposure to the crypto asset markets via ETF, via derivatives, but non proposing necessarily, digital native tokens. You can also distribute, if you are a hedge fund focusing on crypto funds directly to your clients on crypto, tokenized funds to your clients. You are into a distribution mode, hence you need to get specific licensing requirements. The last model that is actually the middle one, and we see it really developing a lot in the industry when it comes to the sales side but also to the private banks, that is the facilitation one for actors that want to oppose an access to regulated marketplaces for the digital assets and also who want to have partnerships as regard to the custody solutions in terms of technology that they are proposing to their clients, is this facilitation that we see a lot developing within the markets. Still looking at the facilitation, if you look at the right part of the slide of presentation, what are the milestones, the roadmaps that you want to start if you are the COO or Innovation Officer and you want to start off implementing this this model, what are the key actually targets that you must have in mind? One of the key aspects is to propose end to end solution, to have access to some regulated market venues. It has been highlighted also quite tremendously by the HSC, the HKMA, the solutions that you are providing to your clients when you are a services dealer must be connecting to a regulated market venue. The other aspect, and we are here a bit, a mode of securities services provider. You want to propose also account management solution, wallets management solution, in terms of corporate events, for instance for the security tokens. In terms of connectivity, to your core banking systems or treasury or payments.
In terms of, know your transaction, know your address control screening, these are really the three or four roadblocks that you would consider as a COO who wants to have interaction with the business in infrastructures, who wants to have accounts and control management well-designed of the chain, and finally who wants to propose cyber risk mitigation of key encryptions solutions.
I’m done with this slide; I can go on to the next one. Here it’s a bit of a logical follow up of what I was just explaining. If you are starting an MVP and you want to define, what are the concrete frameworks that I want to iron run out during my project? If we look actually at the spectrum of deliverables of countries that you want to get, you first meet the regulator requirements in terms of controls, in terms of whole business, of infrastructure, as regards the inbound and the outbound, and the flows off and from the different blockchains from the crypto market venues. That’s the first thing. You want to propose to your clients powerful scanning tools as regards all the off and on the blockchain transactions.
Secondly, I was also mentioning it a bit earlier, you want to have an overarching picture with your existing infrastructure and framework. What is key is the connectivity, again with the current framework, the current infrastructure layers, especially for treasury, for payments. You want to develop what would be the key API and node functional requirements that you want to implement. A key aspect that was also highlighted by Richard is the model of custody you want, in terms of legal custody providers but also as technology custody provider. You want to be bulletproof in terms of resisting potential cyber attacks that are happening a lot as we all know in the crypto world.
Finally, and it’s also what you want to implement in many other projects, you want to have a BAU life cycle as regards all the transactions that are either requested by your client, USD to Ethereum, for instance. Receive a transaction or from crypto markets that are authorized of non-authorized by the regulators. You want for them to have policies in place, stress holds defined for the fiat to crypto for instance conversion for your funds quarantining, or so.
In a nutshell, those are some of the key deliverable roadblocks that you really want to define when you are starting a few months MVP potentially regarding one of several partners of solutions that you want to implement for your crypto journey.
I define from a regulatory framework documentations standpoint what could be useful for you as a Chief Digital Innovator, as COO, as also Chief Risk Officer, but it’s also important to when you are starting your business case that you are proposing something that is from a technology standpoint understandable by all the stakeholders. I will stop my part here as the management and business consulting presentation. I will hand over to METACO and to Maximilian to go more into the details of the technology.
[00:34:42] Richard: Thank you, Adrien. Max, I will hand over to you and you can take us through starting with the right foundation, what that can look like from also a perspective.
[00:34:53] Max: Thanks Richard. I will quickly share my screen so I control the slides easier. Hello everyone. Starting with the right foundation, as we heard already the main concept to be understood is no key, no assets. The key to crypto is managing and protecting the private key. To understand what is public and private keys, the public key works something like the EBAN or the address where you sent your funds to, and it technically works that it verifies the transaction. Then the private key is there to sign the transaction. The private key is something like the pin to control, you don’t want to give out the private key to anyone because the private key is essentially your assets. You as a financial institution or as a bank, you would protect these private keys. You would be the custodian of these private keys, because if you’re the custodians of private keys you’re the custodian of the assets.
In an earlier case scenario, at least what we are imagining, is that the world will run on a system where these private keys are not accessible by anyone. You can’t actually extract the private key by itself. You can do transactions in and transactions out, you can do something with the private key but it essentially sits on the most secure place possible.
Typical ways to manage keys all started with paper based wallets. Bitcoin where I’m coming from, you took a piece of paper and you wrote down 12 words, MEIC phrases which were actually a representation of your private keys. With these words, you could always reset up a wallet with your assets from anywhere in the world. Ideally, perhaps not even used that paper, you just remembered 12 words in your head, and you were good to go to access your funds or your assets from everywhere in the world. In this case, it was only Bitcoin.
The next evolution step was desktop and browser wallets. It’s today the most used wallet methodology. At the same time, it’s also the least secure one. It’s the most prone to being hacked, because the interface of a browser based wallet and you’re sitting in your Chrome or a similar browser, it’s just not safe enough. There are multiple ways, like you save your password to that Chrome extension, you save it in your iCloud or in your Apple Cloud storage, and that Apple Cloud storage exposes your password. It exposes your private key, because you could just take out the private key from these Chrome browsers. These are very handy, you can use them right at the spot where you need them, but they’re very unsafe.
At the same time of these desktop and browser wallets, which are software based, hardware based, wallets came out of code storage, if you will. These were like mini HSM hardware security models. These were for private use mainly. They were actually used to a certain extent in institutional cases as well. We don’t think the world will run on these mostly. As much as I’m a big supporter of holding your keys privately, we see regulation, but we also see cyber-crime becoming more prudent. We need more secure methods of storing these keys.
How an HSM looks like, if it’s not a used B stick, if it’s part of a computer or server, it’s one of these partitions that you see in black in the middle. One of these instances could be used to physically separate part of the private keys for institutions, and you can use another one to secure the private keys of retail clients. There’s also a way to do institutional clients and retail clients on the same partitions. But normally if you go with these HSM then on-premise, and if you scale up your business or you go into more high volume use cases, you probably will look into something like a Linux 1, a mainframe computer, which has integrated multiple of these HSM partitions, but also has integrated the whole technology stack of, for example, METACO Harmonize. What you would do as a bank, if you think, I’m putting something into my data center, you would put one of these big black boxes in your data center, which is probably the most secured lock solution of storing these private keys.
We have moved a lot into the cloud, why move something into your data center now? We have worked out together of IBM a solution to use these HSMs through the cloud, not only for hot but also for cold storage. The two concepts of hot and cold, I will explain later on another slide. But you can use fully managed cloud services for HSM storing solutions. But the cloud service provider cannot access the private keys. They’re completely cryptographically locked from him to being used. Even though he’s managing the computer or the mainframe or the server, he cannot access the private keys. If he would get to some data it would be only gibberish to him because it would be cryptographically hashed, and he cannot use these hashes.
Another storage option is multi-party computation, MPC. Here, you would separate the key into different key charts and then decentrally store the different key shots at different places. We support this methodology as well. Just being set MPC is not always MPC. It’s very important to consider multiple things along the implementation roll down till you get a very safe MPC key management solution. You have to consider backups, you have to consider how you’re computing methodologies, because it’s not always the same when you implement MPC.
The temperatures, what I mentioned before, this is for balancing liquidity and persistence. The first option you would set up, or the first version you would set up would be a hot wallet, which is an internet connected wallet, most likely fully automated with no human intervention. The contrary on the other side of the spectrum would be the cold wallet, it’s disconnected from the internet in a traditional way. Cold wallet means I need to use a B stick to bridge that air gap. You would air gap a cold wallet, meaning that a human would need to go from one side where the information for the cryptocurrency transaction is being sent to, he would take it on a used B stick and bring it to the code wallet, connect the used B stick to it The transaction would be built and signed. He would take out the use piece again and then plug it into the internet connected computer. There’s also quite a lot of innovations coming to the market together with IBM and our solution, where you can consume a cold wallet through the cloud. In this case we would not use a human anymore going from A to B. You would not trust a human. You would trust a piece of technology, which we are happy to elaborate on in further discussions.
Then there will be in between hot and cold, the warm options. Warm options will always be internet connected options where you have a human intervention needed to approve any step in between of the governance process. You would set up an internet connected wallet, but you would set up a policy governing the transaction coming out of this wallet, where a human needs to press a button to approve or reject the transaction on their smartphone or their laptop device.
Coming to the standard custodian dilemma, and the dilemma normally goes between flexibility or agility and security and compliance. You want to grow, expand, and diversify your business, but at the same time you have to manage processes, operations, and systems. This trade off while it can never be completely neglected, you can build an architecture, you can design an architecture or a platform with an architecture, so this trade off can be minimized to a very low extent. In general things get complicated very quickly. But what we always advise on, because what we sometimes see, a bank, a prospect, coming to us comes with a very complex use case already, then it’s like, now I want to have the custody part of that. What we always try to advise on, we heard in this webinar in this presentation today quite a bit, is start with a solid custody solution first. Get the custody part right. What we mean by that is set up a platform, ideally not what Richard you called a solution, but a platform solution, which actually minimizes the tradeoff between flexibility in compliance. It’s a highly secure, but highly agile and flexible platform to fit any various regulatory requirements and different jurisdictions that you’re also going to phase later in different data frameworks, accounting frameworks. Also if you want to do regional expansions you will need this flexible, but still very secure platform.
Every time you face a new use case, you don’t want to add a new system to your technology stack, because otherwise we come into these times again where we had this spaghetti legacy infrastructure which we used to have back in the times at banks. What we have thought of and what we always advise, think about when you implement the first puzzle piece for your digital asset expansion or innovation, a puzzle piece which is constructed like a platform and not like a rigid vertical solution giving you the whole use case but not being able to move into another use case once required.
METACO Harmonize, the platform for digital custody and orchestration for first tier bank and financial institutions, there’s a bit of a cognitive overload slide, but I will keep it very simple. If you look at the architecture of other players, they’re probably done a bit different, but how we expect an architecture to look like that is, on the very bottom you’re going to have Walt, which is a software module, which is connected to the key management system. The key management system is what you saw before in the presentation HSM or MPC or cloud HSM. This Walt module is connected to this key management system. In this Walt module, you would set up the hot, the warm, and the cold wallet. This is for self-custody purposes. There’s also an option that you can bring a sub custodian to our platform as well. You don’t have to use the self-custody model, you can also bring a sub custodian to our model. But we generally think what sits on top of this Walt module is a unifying governance layer, which could be seen as an orchestration layer. This governance layer we perceive it’s best to be end to end secure. We brought a fully configurable policy engine to the market here. We also think this governance layer has to be fully robust in a way that has to serve any use case which comes up in the future.
What you can imagine is, we want to differentiate the use case for example governing the Bitcoin trade or the crypto trade with new organization, and the person who’s issuing a 100 million stablecoin, we think the governance layer should be able to differentiate between those two use cases to build policies for the respective use cases. Furthermore, we have thought the governance layer in a way that we not only govern transactions in and transaction out, the actual cryptocurrency transaction. We also are governing all the administrative processes on the platform. Meaning you can visualize it in your head a bit like we not only want to protect the assets, the keys in the wallets, but we also want to protect the door, which is authorizing who is able to access these keys in the same fashion as the wallet the assets are being connected. This is what our governance layer does. Furthermore, you can use it for end to end automation and you can use it to control smart contract methods. This is when, for example, you’re going into the fields of issuing stablecoins. We enable you to govern all the different methods sitting below that smart contract with different policies.
To the right side, you see blockchain interactions. In general, METACO Harmonize is agnostic to any protocol out there. We can integrate with transaction based protocols such as Bitcoin and the likes, and account based protocols which is Ethereum and the likes. We can integrate it with any other protocol which is out there. We also integrated with 15 other protocols already, and also with all the tokens sitting on these protocols. The biggest use case here is Ethereum ERC-20. This was the ICO mainly in 2016 and 2017. Not all of them came out healthy. We see one of these parts where the DeFi protocols are going bust, which are based on these tokens, but in general we support all of these tokens.
On the top, through APIs we are connected to your core banking system. Adrien was talking about this before. We also created a graphical user interface. In general, our solution is consumed by API. We are built for integration deep down in new technology stack, but we also created a graphic user interface. We are connected through third party channels, AML, KYC tools. You can connect the platform to any services here, you don’t need to stick with the ones we already have integrations with. You can bring any service to the platform you want.
Also being connected to DeFi protocols will be an essential part of our roadmap this year as well. Your retail client, your institutional clients, or your traders can, for example, connect a wallet. The browser based wallet I mentioned before, is unsafe because the key is safe in the browser in some sort of cloud storage. What we are bringing to the market is going to be a DeFi connector where you can connect to the decentralized exchange or to the NFT platform. You can trade at this platform, but you trade out of the custody wallet. The custody wallet, the private key sits in these very secure HSMs or is protected by an MPS algorithm. Nobody can steal the private key getting into this interface on the browser.
To the left, the liquidity venues. These are the centralized exchanges. Here we integrated to Coinbase. This is needed that you bring liquidity to the digital asset platform.
All in all, what you look at is a platform which completely crossed out the option for a single point of failure. There’s never the chance to create a super admin, which gives themselves all the rights and removes all the funds from the wallets. This is not possible for our ice principle in our governance layer. Furthermore, at the end, you look essentially at a multi-asset wallet management system coming as a platform, which has very powerful native features already integrated interventions of multi-tenancy features, auto quarantining feature, but many things more to be happily presented by us in more detail in conversations.
The one other USEP of our platform is that you could choose the best way for you to secure keys and keep the control. Hardware security model, multiparty computing or cloud HSM, it doesn’t matter. You can choose one of them, you can start with one of them and then add another one down the road and run them parallel side by side, all seamlessly with a unified governance layer sitting on top.
We also created a fast go to market procedure or process where we identify the right opportunity, and review it. Sometimes the prospect or the banks already comes with the right opportunity, then we only choose the right operating model and we execute a de-risk MVP in here. We are creating a minimal viable product which is not meant to be thrown away later on. It’s all set up in a sandbox environment where we virtualize the wallet. The key management solution is not yet connected, the private keys are not yet connected, but we set up the whole configuration of your platform, we test it, we export data together with you. We let you look at the data so you understand, how does my system need to handle this data? How can I build reportings out of this data? Then between the MVP and the production phase, there can be a pilot phase to iterate user feedback and set up the system in a more robust way. On step five you can scale to millions of wallets, and we are not going to stop you there. We have no limits on that. That the platform can be vertically and horizontally scaled in any way, how you require it.
Before we wrap up to Q&A, just one little sentence I will let you go with, never let a good crisis go to waste. Niccolo Machiavelli said that once. It was a sentence which always rings in my head. I think it’s a good time right now to invest in this and go into this $350 trillion opportunity, which Richard laid out in the beginning of this presentation.
[00:52:21] Richard: Thanks so much for that, Max. That closes off the content part of the webinar. We open the floor to any questions. There’s a Q&A button that you can go into and ask any questions that you like, and we’ll hopefully be able to answer. If you want to reach out directly to either myself, Max or Adrien, feel free to do so as well.
How will regulations impact using stablecoins for cross border payments?
[00:52:55] Max: That’s a good question. It’s a very good question at the end of the day. The whole regulation of stablecoins will become more clear with what’s going to come up. But to answer this in full, it would be like, Richard, we can actually take that question and take everything out of the regulation internal workshop we did together with Catherine and get an answer out of that, because at the end of the day it’s also depending on which jurisdictions you’re tackling. There’s no global regulation yet for these kinds of things. There’s not even local regulation.
[00:53:43] Richard: Yeah, it is a good question. I think as just touched on at the moment. It feels like stablecoins are still very much in this experimental phase as well with what we’ve seen over the last month or so. In terms of how that develops, certainly there is space.
[00:54:01] Max: Especially with Circle coming out now with the Euro stablecoin now. I mean, there will be regulation at some stage, because as of right now it looks a bit like the wild west going on there.
[00:54:14] Richard: Yeah. On that point, with what’s happened over the last couple of weeks, and Max and I were actually talking about this internally on Friday, I think what’s going to happen is there’ll potentially be a bit of a market consolidation that’ll happen. I think off the back of that, it’s ultimately going to end up forcing the hand of regulators a little bit as well, or accelerating what this regulatory landscape could look like.
At the moment, there’s no one that’s really got any really clear defined frameworks about what it’s going to look like. But I think it’s certainly coming. With what’s happened, perhaps a bit quicker than what was expected, and it’s going to vary jurisdiction to jurisdiction.
We’ve just got another question on the chat, which is, is METACO Harmonize suited for smaller players, such as FinTech as well? Short answer is yes. We have multiple subscription plans. We have one that is exactly for startups, smaller player as well, which is like an entry level solution. Happy to have a one-to-one conversation on that if you so wish.
Just to make things simple, if anyone wants to reach out to myself directly, I’ve put my email in the chat. Feel free to take that, and any questions that you have that you want to ask direct or get in touch, please feel free to do so.
I think if there’s no more questions we can perhaps wrap up there for the webinar. I very much appreciate everyone’s attendance. Thank you very much. Hopefully we look forward to speaking to some of you in the future as well.
Thank you for your interest.
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