Access recording of this METACO Webinar, where together with EY we explored the business opportunities presented by digital assets to banks globally, with lessons from Tier 1 banks.
- What use cases do Tier 1 Bank build on top of digital asset custody?
- How does a scalable custody platform looks like, and how should it fit with the discussed use cases?
- Lessons learned from Tier 1 bank projects
Dr. Jan Rosam is a Partner in the Technology Consulting Department at EY’s EMEIA Financial Services Office and is leading the Digital & Emerging Technology team in Germany. Furthermore, Jan is the EMEIA consulting lead for Digital Asset & Digital Currencies in which role he advices banks, asset managers and fintech’s in the area of tokenization, trading and custody of Digital Assets. Jan has more than 15 years’ experience within Capital Markets / Investment banking / Technology sector and holds a PhD in mathematics & computer science. Prior to joining EY in 2015, he has worked for LPA and CAPCO within several projects for a variety of financial institutions.Speakers
Max has extensive domain expertise in digital business models, DLTs, NFTs and crypto markets. He spent more than a decade building and scaling digital ventures and managing digital product initiatives, from strategy to go-to-market. He worked among others for Rocket Internet and UniCredit Bank.
Build and launch your digital asset business model
*Disclaimer: The accuracy of this transcript is not guaranteed. This is not investment advice, and any opinions expressed here are the sole opinions of the individuals, not of the institutions they represent.
[00:00:09] Maximilian: Welcome everyone to our webinar, Digital Asset Use Cases for Banks, Scaling Business Models Beyond Digital Asset Custody: Lessons for Tier one Banks. I have Dr. Jan Rosam from EY. Welcome, Jan.
[00:00:24] Jan: Hey, Max.
[00:00:26] Maximilian: Just a few words for an introduction so everybody knows who the two of us are. I’m Maximilan Ruf, I work at METACO. I’m a business solutions consultant, and my domain expertise lies in Web3. I have Dr. Jan Rosam with me. He’s a partner in technology consulting in the department of EY’s financial services office, and is leading the digital and emerging technology team in Germany. Furthermore, Jan is the EMEIA consulting lead for digital asset and digital currencies, in which role he advises banks, asset managers, and FinTechs in the area of tokenization, trading and custody of digital asset. Jan has more than 15 years of experience within capital markets, investment banking, technology, and holds a PhD in mathematics and computer science. Prior to joining EY in 2015, he has worked for LPA and CAPCO within several projects for a variety of financial institutions. Welcome, Jan. I’m excited you’re here.
[00:01:36] Jan: Thanks very much for the nice introduction. Pleasure to be here, looking forward to our discussion next half an hour.
[00:01:43] Maximilian: Absolutely. I would like to kick this off with a little question. How does the current market situation with FTX and the aftermath of the FTX affect your current day to day business and how does it affect the demand for digital asset use cases?
[00:02:00] Jan: It’s a good question, thanks for mentioning. First of all, it’s a disaster. It’s a disaster for the industry, for the crypto industry, for the crypto fintechs, and at the end of the day for the regulators but also for the clients. We’ll see next month what comes out of all of these investigations. But from outside it looks really bad, it’s harming the overall public opinions maybe about the industry, but it does not mean that crypto is dead, what you can read in the press.
I think there are for, specifically when we look at banks, three or four takeaways. The first one is clients will look for a much more trusted party in this business going forward. I think there’s a role to play for the banks. They’re looking for bank grade crypto services. That’s what I believe in, specifically when we talk about custody. I think there is a need for harmonization of regulation. I’m not saying there needs to be more regulation. I always give this example that we do a monthly review of all the regulation around crypto for Europe. Since the last 12 months there were more than 80 publications around regulations. We have a regulation in place, but I think it needs to be harmonized. I think that that’s a takeaway. The last takeaway is definitely that crypto is for some of the banks, not priority one anymore. It’s really tokenization for assets. That’s what we see across the board. Tokenisation of assets is really at the forefront of the discussions we have with banks at the moment.
[00:03:53] Maximilian: Makes total sense. When we talk about this today, I slipped in two slides which were not intended to show, but I think they make a lot of sense to show to our audience today. Then we will move into the digital asset and the use case terminology, and what are the different digital asset use cases on top of digital asset custody. But we’re pretty much seeing, and pretty much confirming your views at EY. Essentially what we are also observing is a paradigm shift in this overall market of digital assets.
What we were observing was the first wave and the end of the first wave, the final end of the first wave, which was a wave of market creators. These are the crypto native companies as you could see here. The security of digital as a custody of the crypto custody just needed to be good enough as we saw on the infrastructure layer, but also on the authorization layer, which most of these hacks actually happened. The second part is that compliance was, if there, probably not fully adapted or adopted by these players. Or secondly, it was just not there at all. Some of these names, we’ve seen these first waves are probably not even going to be there, or most likely not going to be there in the second wave.
We are seeing this paradigm shift to the second wave, to the wave of established top tier regulated financial institutions adopting the space of digital assets; building serious institutional grade market infrastructure to actually gain from the efficiency gains of having assets on chain or sitting on distributed ledger technologies here. Some of these legacy received to the right are clients of METACO already. But most of them have already the endeavor into the digital asset ecosystem.
What I think is the core message of all of this is that all assets will or could potentially sit on distributed letter technology. We gather this to one big pie of 1000 trillion US dollars of the total assets which are on the market as of now, we did not count into the new assets with the new utility tokens which are about to be created or which are created as we speak. But what I think is important takeaway is that crypto is only 1 trillion of that market. It’s not even 1 trillion anymore, but it’s only one little pie within a much bigger pie of capital market securities, fiat currencies, private assets, other assets, and a big part of the pie, which is real estate.
If you take a 2% tokenization rate within the next seven years, you will end up with a 20 trillion US dollar market. That really is something to look out for. What we have experienced in our conversations with tier one regulated financial institutions is what everybody looks forward to, what everybody wants to get ready for, because there will be a market volume which is much bigger than these 20 trillion US dollars at some stage. Moving into the European digital asset taxonomy, I would be very excited, Jan, to hear a little bit how you guys at EY see that space and carve out and categorize the space.
[00:07:18] Jan: Thanks very much. It’s a nice outlook. I would come back to you in seven years to see whether it has happened, but I’m totally with you. Digital assets has arrived at the mainstream. We see a lot of transactions in the market now from big players, regulated players, players who are close to the government. I think it has arrived at the mainstream.
Usually what I like to do, is to start with, what is digital assets, because that gives us a bit of an overview of the potential use case we will discuss later on. When we talk about digital assets, people often come to me and say, okay, why don’t you say it’s crypto? Why do you say it’s digital asset? What is it? I like the definition to say a digital asset is a digital representation of value which is stored and transferred electronically via a distributed ledger technology. If you think this sentence through, you will notice it’s a very wide definition. Representation of value could be a financial asset, it could be a real asset, it could be a type of payment, it could be money. Digital assets is much more than crypto.
Usually we classify in two areas. Max, I can’t see the other area. On the left hand side you see what we call the digital financial and real assets; and on the right hand side we see digital programable currencies. Because if you take a financial asset, you always have two legs. You have a leg which represents the assets, and you have a leg which represents the payment or the money. If we want to see going forward a cost optimized way of market infrastructure for digital assets generally, we need always to think about both sides of the game to have delivery versus payment model as we’re all aiming at.
If you look on the left box, specifically in Europe, we can classify the products a little bit around the regulation. First of all, we have on the top right, this is where it has a bit of a dotted line, we see a lot of use cases at the moment around digital assets with crypto underlying. I will come back to this later on. You can argue, this is a traditional asset, you don’t need a custody for this. It’s not a digital asset in that sense. But if the underlying is settled physically, then you need to have a custody for the underlying. That’s the reason why it’s shown here. Then you can split between the security tokens, let’s say, those type of assets which fall under the MIFID regulation, so bonds, equity, et cetera. Then you have the rest which falls under the MICA regulation, which is what we call crypto assets, where you have the currency tokens. This is where you find crypto, asset reference tokens, and utility tokens.
All of these assets can be classified in these boxes. That’s the left. On the right hand side, we have digital currencies where we can split between central bank digital currencies, to be honest, it’s not even clear whether this will be on a blockchain. If you look at what ECB is currently doing, and others, it might be even account based, but CBDC might be on a DLT. Then we have private programming currencies. Here you have the commercial bank money and commercial bank deposits and also the stable coins.
You can see that digital assets is much more than crypto. It’s a wide range of use cases. I think this is why I like this classification, so that people move away from this belief that digital asset is same as crypto. It’s not. Crypto’s just one box here in this whole picture.
This is the taxonomy we use, which is a bit around European regulations. Now the question I, and thanks for flipping the slide, where do we see the use cases coming and which are the use cases specifically for banks?
Generally speaking, when we do strategy projects for banks, we look at the current business model. Depending on the business model, so are you a retail bank? Are you a wholesale bank? Do you do custody already, et cetera? The use case depend on the business models. But generally, what we see is custody and safekeeping is the angle point for all of the use cases around this, because you need to do something with token. Even for yourself or for your clients, you need to have a possibility to safekeep and secure private keys and have an infrastructure around this. you can do it yourself, build up the platform yourself, or you can use asub custodian for this. But that’s another discussion. Generally, custody safekeeping is the first thing currently banks are looking at, and I think we can see in the press every week announcements around this.
Once you have this in place, then we see a lot of movement on tokenized traditional assets. I’ll come back later to this. Equities and bonds, banks are working on this already. Some have come very far, some are a bit behind, but this is the most implemented use case. Then you have trade execution and transfers, so trading offerings. Specifically on cryptos, banks are a bit hesitant. Those players who are very strong in brokerage today are not super active in crypto yet, so the trading side is something banks are careful to look at.
But then you have things like collateral management. How can you replicate or lend out assets which are on a DLT infrastructure, whether it’s a digital assets or a digital representation of an asset? There are a couple of use cases around this, which is very interesting. Then you have in the outer area, which I think is a bit far out; things like financing, lending, wealth and asset management, and also tokenization of maybe a bit more exotic assets out there.
But generally as I said, the classification of the use case depends on the business model from the banks, and it could differ from bank to bank. It’s not a one-size-fits-all solution for all of the banks. It’s a careful decision to be made.
If we flip to the next slide, we can go a bit more in detail. We try cluster it a little bit. We have seven areas of use cases we see at the moment. That shows that we have a full range of crypto tokenization of traditional assets, up to dealing with nonfungible tokens to acquire land in Metaverse and where else, we also need a custody resolution for the NFTs. It’s a real a wide area. Let’s start maybe with box one. There a lot of cases around traditional financial assets with crypto underlying. For those banks who are on the retail space, they see this as a first product for their retail clients; giving retail clients an exposure to crypto without investing directly in crypto. I think we will see on this more banks coming out with their own products. At the moment you can trade them as exchange traded notes different exchangesrs. But if you look at the bank, structured notes issuance is a core business for some of the banks. Those players, I think will move forward on.
But it also means that we see a lot of buy/sell clients adding digital assets or cryptos in their traditional fund structures. It’s currently a bit limited, specifically in Europe. You can’t put them in a public fund, so it to be a special terms of investment fund. But at the end also the umbrella is a traditional product, it’s a fund, but the investment is a digital asset.
Then we see some movement around derivatives. ISTA has published their recommendation on their proposed common domain model. We see banks getting engaged in futures, NDFs, et cetera, for hedging purposes. If you issue a structured node, then you need to hedge the exposure. As I said at the beginning, on this product you can argue, why do I need custody? But if you have a physical settlement, NDF or a future or structured note, then you have the asset which you need to settle, and also I think for a lot of banks it’s very interesting to build the exposure themselves by acquiring the underlying. That’s a box, it’s a whole range of use cases we see.
The second one, we see a lot of use case around digital representation of traditional assets. What do I mean by that? A digital asset in a sense is an on a DLT issued contract, which is also legally binding. But a lot of use cases use the DLT technology just for the purpose of increasing their operations. They load the traditional assets on a DLT infrastructure by creating a digital representation to be able to move them around much quicker than they are today. We see some use case on collateral management side and collateral trading. I believe there will be more use case going forward also on the trading. There are some use case around because we still need to live with an legacy portfolio going forward. You showed this. If we believe that digital assets is 2% of the whole market, or some predict 10% by 2030, it still means that 90% is not on DLT rails. Therefore it makes sense to think, maybe we can bring these assets also to this infrastructure to optimize operations. Then if you tokenize them, you need to think about, what I’m going to do with this token?
The third use case is around supply chain. I think ESG is a use case, which we will see much more going forward. Here it’s around the traceability solutions, as we call them. You can trace goods, machines, cargo, whatever, really from the source of production to the customer. Based on this underlying data you can, for example, issue or offer insurance services. We’ve seen this on cargo. There are a couple of insurance products in the market available where the underlying data is captured on a DLT infrastructure based on the supply chain solution. That also is the case for trade finance, where you track the whole process in the trade finance value chain on a DLT infrastructure to have a full end to end process. On the ESG side, what I believe is going forward, the biggest problem of ESG is the ESG data. The corporates but also the banks themselves and the whole industry, they need to disclose data. They need to have a possibility to go back in their supply chain to understand where I do I produce carbon emissions or consumptions? Why not tracking this on a DLT infrastructure? Because you cannot change it, it’s fully transparent, and these data need to be disclosed anyhow so there’s no privacy discussions around this. It’s public data, it’s publicly available, so you can use the DLT infrastructure and then you have it on much more efficient rails to deal with the data and even to put bank products on it, like carbon credit trading, you can block them in the marketplaces. I think this is a great potential going forward.
The fourth bucket is around crypto. That’s the core. Most of you know, everything from offering retail, crypto trading and wallets down to crypto credit cards, saving products and lending and staking, I think this is the classical box where a lot of people started at the beginning to look at because it seemed to be obvious . It’s still important, as you were saying, Max. In order to execute trades on the DLT infrastructure, you need crypto. Banks also will need to hold cryptos if they want to engage at least with public blockchains.
The fifth box is really the token organization of financial assets. I think this is at the moment in the heart of most of the banks’ implementation projects. How can you tokenize securities, bonds? But also fund shares, it’s a big topic. Maybe it’s a bit specific for Germany because we have friendly regulation around this. This is really great. If you want to offer tokenized bonds, you have to decide whether you issue it via a central or if you want to offer a decentralized, which is something new. I think there’s great potential around this.
At the moment, mainly in the OTC market, we see a lot of primary issuances. For the secondary market as most of you’ll be aware, we need to see how the DLT pilot regime will work out. But still in the primary market on the OTC side, it’s still a sizeable volume on the funds side, that’s a big thing. If you look at fund shares, this can revolutionize the fund industry. It’s not so public. but there’s great potential on this and it’s possible. I think the operations could be much more easened for the fund industry. I think this is the biggest byside use case, to be honest, is tokenized fund shares.
Then we see equities and other products come in. The German government currently is working on regulation around equities to allow equity to be issued on a DLT infrastructure, which is fantastic. New use cases will arise around us.
The middle part, box six, is the tokenized real assets. I think it’s everything around NFTs, where you really try to tokenize assets which are currently not accessible to a wider audience, or where you can make certain asset classes available for your clients. It could be nonfungible tokens around music. We see art, luxury cars, jewellery, anything around this. This is interesting as an alternative investment for institutional, but also for retail clients, because potentially it could also ease some pain around alternative investments. When you look at the buy side clients, the fund industry, alternative investments, it is still a very manual processes around this. Maybe tokenized assets could help in this area of alternative investments. The second point is really we see a lot of use cases more on the marketing and communication side. I think this is where Metaverse falls in a little bit. Some banks are a bit more proactive in using NFTs for Christmas card, for example. EY issued 15,000 Christmas cards last year as NFTs. A lot of clients are trying to use this technology for communication and marketing. The last point on tokenization is real estate. That’s a little bit to be discussed. Some banks feel interested in moving into this space. But there’s some discussion around, because you can also invest in real estate if you buy a real estate fund, so if you offer a tokenized real estate, you need to think about, do penalize other products I have for my clients? I think it’s a valid use case and a lot of banks are looking at it for a lot of other players as well.
The last box is around tokenized deposits and digital currencies. I think this is a bit early days. I personally believe if we want to see the full benefits of DLT infrastructure in capital markets and payments, we need to have money on the blockchain in whatever form, if it’s private money or central bank. It’s really important to engage in this discussion on tokenized commercial bank money or commercial deposits. But also there’s discussion around, can you use stable coins? Some banks are looking at maybe to issue coin or not. It’s also a discussion with the regulators.
The last point, which I included here, which you can argue it shouldn’t be in here, but it’s around loyalty points. We’re also in discussion with a couple of institutions who try to use the loyalty point concept to create stickiness of clients on their banking platform, or if they have a sales platform, so they don’t change assets back into Fiats, or they give them loyalty points or whatever you want to call them so that they can use them then to buy other products on these platforms. There is thinking around how you can create stickiness to products by using the loyalty point concept, so tokens which represent an internal currency.
This is probably not complete, and it may never be complete, but it shows the breadth of use cases banks or financial institutions are currently looking at. Hopefully Max this is also what you see in the market.
[00:29:01] Maximilian: Absolutely. Where I come from where I’m still going to be looking to establish my career, and is going to be assets, which are slightly in these seven boxes, but these are assets which are going to be created. I loved your ending this with the box number seven and the loyalty points. I was discussing this with multiple people, with big corporations but also with thought leaders in the NFT or Metaverse, however you want to put it. What I also clearly understood from listening to your presentation here is now it’s really the for not these very innovative new type of assets, it’s really the time to make whatever we currently have, make it much more efficient. You could probably say the digital assets is the final fuel or it’s the accelerator for the digital transformation in the regulated financial industry. That is my takeaway from this. We are now building the rails and the infrastructure to digitize the regulated financial industry, which will come with a lot of benefits. If you do it the right way, and here you see the METACO Harmonize platform in this light blue box, I just want to get this point across, if you think about all these use cases, what we at METACO always try to say, it helps us do more business but at the same time we back this up with a lot of arguments and we truly believe in it, you have to get the digital asset custody piece right. You don’t want to fall into the trap of spaghetti or legacy type of infrastructure where you are connected to multiple platforms, or for some of the use cases you’re connected to one. Then for others, I don’t know, for tokenized real estate it could be another one, for tokenized securities it’s a third one; all have different type of governance layers on top. The one can only do this, the other can do that, and the third one can do something else. You always have to learn these new systems, and at the end you have this crazy architecture, which perhaps nobody understands anymore, or somebody understands but these people are very rare in the organization.
METACO Harmonize has always been architected and built in mind to become a single point of integration for all things digital assets. Having said that, METACO Harmonize does not hold any personal or client data. It was always meant to be connected to core banking systems or to core client management systems.
What METACO Harmonize is as a platform, it’s connected to everything you need to do or execute on these digital asset use cases you just saw in the presentation of Jan. You can do them in a compliant way because it has been built and you can abstract. We’re not talking about an email inbox here where you have to receive and send information, even email has cryptographic security. This should first of all secure digital assets. It has to be secured in the most secure way possible. Secondly, you have to be highly flexible of receiving and sending these assets. Thirdly, you have to be able to bake in all your compliance: your KYT or KYC, all of these services need to be connected to this platform.
This platform also, when you look at the top left DLT adapters, you could just think of that word as blockchains, it needs to be connected to as many protocols, which are being used later for these use cases as possible of the serious protocols. We have seen some of these protocols like Unna. Luckily METACO never integrated that protocol, so none of our clients was exposed to that. But here it needs to be connected to the most serious protocols which are out there. What is very important is that the digital asset custody infrastructure piece is capable of, for example, parameterizing the tokens which sit on top of these protocols. There will be token sitting on top of Ethereum, or there will be token sitting on top of the layer two like Polygon or Avalanche, or Binance.
Ideally that piece of software you see in the middle here is automatically parameterizing, acknowledging these tokens so you don’t have to do anything on your side anymore. The bottom left, financial service providers, these platform for liquidity requirements need to be connected somehow to financial service providers. Here, our platform is connected to Coinbase. We have deep integrations to these platforms, so you can run your governance rules on top of them. We also integrate it to Fiat settlement networks like Signature or Silver Gate Banks networks. These serve for you to not only trade around with crypto on these exchanges, you can actually trade fiats against crypto and crypto against fiat, and settle them back to these settlement networks.
Harmonize to the right of it can be connected to tokenization engines. Very important for tokenization. At least in the EBM based world, you need smart contracts. These smart contracts need to parameterized and be deployed somewhere. You want to connect the digital asset custody platform. It reduces these parameterized and deployed smart contracts so you can run governance on top of the interaction with these smart contracts later on down the road. Here we can connect through a Web3 connector to these tokenization engines, or we can connect it through APIs. Web3 stands for a group of APIs.
Then very important, to the bottom left, financial service providers, you saw the centralized exchanges. You also want to connect the wallets being secured in this platform to decentralized exchanges, so Uniswap, Sushiswap, or to all other DeFi or Web3 applications like the NFT platforms, like the lending protocols et cetera. Ideally, the architecture is built in a way that you can still run your governance on top of the interactions with this Web3 decentralized applications.
To the bottom, you see an API connection to the key management solutions. Obviously a wallet management system, which METACO Harmonize is with quite a lot of powerful banking features. But it needs to be connected to a place where the keys are being stored or where the keys are being managed. METACO Harmonize is here unique in the market that we can connect it to any type of key management solutions, whether it be hardware based or software based, HSM, or MPC. Here we can even connect it to different HSMs from different providers. We cannot only connect it to different ones. We can even connect it and run them side by side, so an MPC solution next to an HSM solution.
While this is, to a certain extent some tier ones had that requirement and have that requirement, and came to us because specifically of that requirements, what we are currently seeing in a couple of jurisdictions is that the regulator with their new regulation of how digital assets have to be custodied, they will define the regulation around how the keys need to be stored and how, for example, cold or let’s say frozen cold storage need to be set up. METACO with the Harmonize platform where it’s multi capability is perfectly capable to adapt to these regulations. Even if they come down the road and you already have integrated, you can just connect a new world which is connected to a new way of storing the keys, which sign the secrets in these cryptographic operations around cryptographic wallets. Because what you can imagine is the one thing everybody needs going into this world of digital assets is cryptographically secured wallets which can send and receive these tokens.
Ideally, what you see here to the right, these wallet management systems or digital asset custody management systems have a governance layer, which is end to end secure, which ideally not only secures the transaction management, so in a way it can build authorization route for transactions, but this governance layer can also build authorization route for every administrative process on the platform. I think what is important to be said, and I mentioned it before as well, is that most of the hacks around crypto, and one example is Axie Infinity and AXS (Axie Infinity is the game, AXS is the game publisher from the Asian region), hackers stole 580 million US dollars worth in Eth from that company. Imagine waking up to that effect. What happened is there was a five out of nine signature scheme, which the hacker was able to first of all achieve the four signatures, but then the fifth partner was able to socially engineer that part of the fifth level to remove the funds. They were able to socially engineer that part because there was no such governance layer controlling the authorization of the transaction later on down the road.
When we deep dive into the light blue box of METACO Harmonize, METACO Harmonize has a custody layer. That custody layer is unique because it cannot only host self custody. Your hot, warm, cold or ice-cold wallets; and it can also accommodate for sub custodial integration. You can custody assets with somebody else, still connect that sub custodial infrastructure to your Harmonize platform. You have a consolidated view out of your self custody and your subcustody holdings. Thirdly, it can also have a consolidated view of your exchange holdings. If your assets are held on an exchange, you can connect that account and see it in Harmonize, so you have one consolidated view for your digital asset holdings.
On top of that, there’s an accounting layer, and this accounting layer normalizes the data. When you export data out of Harmonize, it’s very simple to integrate it into your system. You have a trading layer sitting on top of that, so you can actually execute trades as well. You can do transfers out, transfers back in for post trade settlement, and you can execute spot orders here. This platform is also highly capable that you connected to an OEMs service or other execution management service if you want to automate certain processes, more complex trading is required, any kind of orchestration around your trading operations is required. We also that some of our clients actually connected auto execution management systems to the Harmonize platform.
On the top layer you have tokenization. You might wonder why there’s tokenization engine to the top right and tokenization engine on the very top. That’s because we see a digital custody platform needs to also accommodate for tokenization. Here you want to have a platform which is asset agnostic, which can hold all these tokens, which is able to enter and manage the token life cycle. Ideally, the system is capable of governing the interaction regarding tokenization. Imagine you’re minting, you burning stable points, you obviously want to have bespoke rules where you can differentiate based on the amount of stable points that are about to be minted or burned, that you can say, I want here, I want a human compliance officer to look at it and approve it. Here you can completely automate it; I don’t need any humans to look at that.
I would say best practices that this platform can be connected to rest APIs and you have some SDKs which help with the integration to the core banking system. Ideally, you experience enough to not only integrate this to one core banking system, but you have gathered experience like METACO has, that this can be connected to all sorts of core banking system and to all sorts of third party systems. Perhaps also you will find a company in the market which had already experienced with some system integrators or consultants to do such projects, so you don’t start from zero with these endeavours.
One thing I would love to mention regarding the platform is also, when you go into the depths and the details with Harmonize, you will also see nice features like quarantining transaction, for example. It’s very important that you don’t automatically accept all the transaction coming in on your wallets and you taint your own wallets. The system has something like a quarantining feature where you can run your AML check before you actually release them from quarantine and let them get into your wallet.
One very specific thing about METACO Harmonize and then I’ll get to this slide here, METACO Harmonize has a fully temp proof audit trail at every time and every level of the system. Fully temp proof, what does that mean? On a technical level, it’s an append only database which collects all these things you do on the METACO Harmonize platform. You can show it to external auditors what has happened and who has done what and who has approved or rejected certain transactions, or who has made these requests to the system. You can always prove what happened to the system. It’s appended only. Our database is protected by jellyfish market tree technology, so nobody can fiddle with the data.
What I’m presenting here is trying to broaden the scope a little bit. It may be a little bit more exotic from a first point of field, but it will feel very natural to regulated financial institutions. When we are discussing with our current clients embedded wallet and custody into DeFi applications, for example, the other things we also discuss but this is one thing which makes a lot of sense, Open C is just a proxy for DeFi applications now. This is an NFT platform; the NFT platform was the highest volume still. At a certain point in time in July, you were able to buy this beautiful ape here, this beautiful monkey, for 100,000 US dollars. I’m doing this currently with my non-custodial MetaMask wallet, the wallet where I keep my keys safe, hopefully. If I spend that much money, I don’t do it only with my MetaMask. I secure my MetaMask with nano ledges or with an HSM, with a use B stick.
But what we look at in the future, because I’m not running an AML check on these transactions, I don’t know who my counterpart is, and perhaps I’m doing a fat finger type of thing and I’m buying the monkey accidentally. Though. I have to click through three things, but perhaps this happens and I would’ve never wanted to buy that monkey, or I just don’t know what I’m doing here. What we believe, in the future what our setup will be, will be that you can connect or a retail customer can connect his custodial bank wallet to open C. If he wants to execute a transaction on open C, there can be two things integrated. One is an AML check. First of all is check who’s to counterpart. The second part is that an account manager of the wealth management department could call up and the client and say, look with your wallet and with your money here, there’s a transaction to be made, are you actually executing that trade? Because that thing will be final on chain. You will not get your funds back if a malicious person has somehow tricked you into this. But a bank before they execute the on-chain transaction could run through the governance layer escalation to the respective account manager, and call up the private client and ask him if he’s about to do this transaction, if he’s consciously wanting to buy this monkey.
Just to round quickly up this webinar and then we’ll get into Q&A session where you can ask all your questions to Jan and also to me, if you want, who is METACO? METACO is a Swiss based company that provides mission critical software infrastructure in enabling complex banks and financial institutions to secure custody, trade, and manage digital assets. That’s the reason why we’re talking about this platform today. We more or less have become already we can probably say the market standard for the world’s largest custodial banks, to become this core platform, the single point of integration for all the digital asset use cases. We built a platform where you don’t need to change the platform anymore. If you want to scale or expand to a new use case, you can just do it from the same platform if configured in the right way.
First of all, I wanted to say, thanks Jan that you joined the webinar. I want now to transition into our Q&A part. I already saw now that we have two questions already. But I would love to grab the first chance to ask you, Jan, if our webinar audience have to take three things away from this webinar, what would be the three things you would mention where you say, these are the things you have to look out for regarding dealing with digital asset use cases?
[00:45:48] Jan: It’s a good question. From my point of view, the first thing is that digital assets is not crypto. I think this is important. Digital assets is much wider, this is really important. The second point is the idea of DLT technology and digital assets to change the rails on which the financial market is working on to, to gain all the benefits we are hoping, so atomic settlement, delivery versus payment, reduction of settlement cycle from T+2 to T+0. All of these things, we need to change the rails and the market infrastructure, for markets, for venture products, but also for payments. This is one takeaway.
The next takeaway is, custody is in the heart, so you need to think about where do I keep these tokens, regardless whether it’s for myself or it’s for my clients? There will be regulations around this if you offer this as a service for clients. Regardless, if you also want to keep it for yourself, for your own bank accounts or for your own balance sheet, then you need to have a custody solution.
The last one is, the outlook is great. It has arrived at mainstream. You showed your clients, we showed our clients. Everyone is currently in this game, from industry clients, corporates, retail banks, buy side clients. I think it is really time to get engaged. My hope is that specifically on the bank side, the banks come in together to build this together. At the end of the day, it’s about scale. We know that market infrastructure is driven by scale, and that means we need standardization. We need to decide together, or the industry needs to decide on the standards. This is really important. Engagement is needed from all of the parties. Those are the takeaways, I believe.
[00:48:08] Maximilian: I very much agree. Just being conscious of time, we’re probably going to take one or two questions just so that we don’t run too much over time. We’re already three minutes over time. The first question from the Q&A section, how would banks manage all tax and fiscal implication knowing fiscal regulations are different from one to another, and that no PMS internal or external can manage it?
[00:48:31] Jan: The point is, and you showed this picture, is that if you see from architectural perspective, then the custody solution, for example METACO, is fully integrated in their core banking infrastructure. That means that the product we are issuing on DLT is still kept into their core banking system, and it must be there from a regulatory perspective. A bank cannot just say, I have a couple of tokens on a DLT and I don’t book this in my core banking system. It needs to be integrated in the whole banking process. These products are booked in core banking systems, then automatically it’s integrated into tax reporting, et cetera. I think that’s my answer to the first question. Tax regulation is different everywhere also. But I think things have moved. In various countries we see clearance on tax implications.
[00:49:33] Maximilian: That’s a great answer. I actually took some from it as well. I’ll ask the last questions. We have two more, sorry for not having the time to all these questions, but I will take the one from Amadia Kuiger. Could you please give an example where banks see benefits of those use cases in their P&L statements?
[00:49:52] Jan: It’s a good question, definitely. It comes down to the commercial model. I don’t know, maybe if we have another hour we can discuss it. Depending on the use case, you can ask the question, what’s the commercial model? Custody, I think is clear. Usually we have like asset under custody fee type model. At the end of day we talk about fees. They can gain from offering service. Then on the trading side, I think it’s clear. It’s trading fees they can gain on offering trading services.
You can see that some of these are new products, so you have more product to sell to your clients. You have higher trading fees, you can get fees on the custody of offering the infrastructure. The commercialization of these use cases is great. On the other side, it’s a cost play. The ambition is to cut costs. If I need less people for doing reconciliation between silos in different ledgers, having everything on a decentralized ledger reduces cost. That’s the hope. One the one hand side, we see increased fees for banks. On the other side, we see cost saving, and that’s on the P&L. That’s the play, and it depends on the use case.
[00:51:42] Maximilian: That’s a great answer. I want to grab the opportunity to thank you again. You can always get in touch with Jan. I just see that there is a small typo on both of our emails. It’s email@example.com, and firstname.lastname@example.org. Feel free to get in touch with one of us or both of us if you have further questions or inquiries, or you have an interest in us diving deeper, either on the consulting side to digital assets, use cases, or on the execution side, and how you can set it up essentially in your system. Thank you very much for listening.
[00:52:22] Jan: Thanks very much, Max, for having me and for inviting me.