Alijah Poindexter 00:06
Welcome to the Buzz, a Bank Automation News podcast. I’m associate editor Alijah Poindexter. Recently I spoke with Giles Ubaghs, strategic advisor at Aite-Novarica. We discussed the good, bad and ugly of crypto applications for banks, along with how banks can best approach implementing services for digital assets.

Gilles Ubaghs 00:24
Bitcoin, you know, if you judge it purely as a payment tool, right, so you know, so even ignore being a currency, but just as a means of, you know, giving money from person A to person B, in whatever kind of instance of exchange, it’s pretty terrible. It’s actually pretty bad. By most metrics, right? It’s complicated to use, you know, the onramps. If you don’t know what you’re doing, or, you know, very confusing, very difficult. It’s not that cheap, right? You know, the volatility of pricing, everyone knows very, very well. When you look at things like the speed of a transaction, you know, kind of bitcoins top beats or transactions per second TPS is about seven. Right? So it’s literally it’s a handful, ethers, maybe double that, you look at, you know, kind of Visa and MasterCard, they’re in the 1000s. Right, kind of the instances where those go down is very rare, you know, kind of the fraud considerations compared to other payment tools are is terrible, right? If something goes wrong, trying to get a chargeback, on a on a cryptocurrency transaction is extremely difficult, if not impossible, right? It’s kind of written into the actual kind of, you know, into the whole point of Bitcoin itself. So actually using it in a day to day use case, it’s just it’s not practical, right? It doesn’t really have any benefits over something like say, you know, say contactless card, right, a contactless card payments, people know very well from Visa or MasterCard, big bang, boom, you’re through, you’re done. It happens very rapidly. We’re talking kind of milliseconds, there’s very minimal interruptions there. It’s accepted nearly everywhere. You know, there are costs to the merchants, yes, as a consumer, you do have to have a relationship with the bank.

Gilles Ubaghs 02:03
You know, so are there cons depends on your point of view, but freedom for the vast majority of people, in essence, says, that’s fine. That’s part and parcel, especially if you don’t have the technical details to really go into crypto from scratch, which the vast majority, even most crypto enthusiasts do not have you talking about going via some sort of, you know, a Wallet platform via an exchange, you’re still working with a third party, which is kinda like a bank. You know, except now, suddenly, you have less, you know, less protections, right. There’s less underwriting, you know, it’s I know, Coinbase said, you know, your your assets could be lost, and sorry, if they’re lost, too bad. You know, it’s there’s no insurance from the from the Fed under any of these kind of funds being held there. It’s even when you start looking at cross border transactions, and that’s one of those areas where it always comes up, right? It’s a cheaper, faster, easier way to send money internationally. In theory, yes, it could be depending on the mechanisms and use there again. But you know, at the same time, look at a lot of the other payment tools, which are they’re currently in use, right? So you know, you can do direct to card sending these days account to account sending, you know, Pay Pal works pretty effectively, those fees are not that bad when you compare a Pay Pal fee to what often crops up in an ether gas fee, right? So that actual cost per transaction, suddenly your whole benefit of using ether to make a cross border payment disappears pretty rapidly, let alone if you’re a bank or financial institution, do you want to be enabling a payment mechanism which can circumnavigate, circumvent, you know, AML, right, kind of fraud detection? You know, AML money laundering is a big issue that banks I think, rightfully need to take on board, right sanction screening, you know, very critical considerations. It’s one of those issues where it really sounds good, like, Oh, it’ll be censorship proof, but just take a step back, like, Okay, but what does it actually mean in practice? Right. Now, obviously, there are use cases in some markets where it does serve a purpose. Think about, you know, kind of troubled regimes with much more authoritarian circumstances, it might be a very useful way for people to move money back and forth. Sure, okay, I’ll buy that. But for the vast majority of people in most markets, that does not really apply. You know, it’s not necessarily relevant payments, or that other solutions can’t do better. Now, if you really, if people were really interested in creating a means to send money internationally cross border more quickly, more cheaply, you can actually do that via the central infrastructure that’s coming into place. So take for instance, there’s real time payments are growing now in many markets around the world. So this is where you can almost instantly send money between bank accounts at a fraction of the cost of even a normal card transaction. So these are springing up in a ton of countries. So the UK has a system Europe has a system. The US is rolling out its own system, right. There’s TCA or there’s you know, there’s real time payments RTP from a CH in the US, just country by country, and now what we’re starting to see it’s kind of its early days, is these systems becoming more interoperable? Internationally? Right, kind of using international standards. So suddenly, you know, it won’t take that long for us to have an international monetary system where you can send money for pennies fractions of a normal card transaction internationally, directly account to account. Yeah, which again, there, you know, that’s infrastructure that’s in place, it’s regulated, it’s insured, it’s covered. There’s no real benefit that I can see other than perhaps, you know, a dislike of central banks, that dislike of banks themselves. That really, you know, is better via cryptocurrency for those instances.

Alijah Poindexter 05:40
If you are the standard us, maybe not a community bank, let’s just say a, you know, 500 knots way too much $50 billion bank, right? What is the best practice or some best practices, you know, how should these banks be approaching? Bitcoin, of course, being the big kahuna, but then it’s a large, you know, just kind of cryptocurrency stable coins? You know, how should they be approaching it? Where is the business value there?

Gilles Ubaghs 06:04
Right. So, ya know, it’s a good question. I don’t know, if there necessarily is a best practice yet. I think number one is really just, you know, taking a look under the hood, and actually one, audit trails, right, kind of just finding out, you know, what is governance look like? What do audit trails look like? You know, what do regulatory compliance issues look like? You know, that’s one that’s that kind of, you know, risk based factor, I think that should be done really, in any investment that a bank is doing anyway, regardless, but I think, more importantly, is really taking a look at why are they looking at crypto, right, what is it they want to do? If it’s purely as an investment asset? You know, that’s legitimate, that’s fine. I think that’s totally, you know, it’s something that banks probably shouldn’t be doing. Right, whether it’s an investment tool or wealth management practice or something like that. Yeah, I think that’s reasonable. However, you know, again, there you take a look at the underlying use case for what is it these cryptocurrencies are actually aiming to do, right, there are use cases, which I think have potential longer term. So one that I quite like is, you know, kind of tracing authenticity of goods, right, kind of tying things into a blockchain. Now, the example I had conversation with someone from New Zealand about this years ago, manuka honey, you know, it’s one of those where you think, Okay, what honey, but it’s one of those things where, you know, it’s a very specific, you know, high value object, which is very easy to imitate, right. You know, most people don’t really know what manuka honey actually tastes like her looks like, it’s easy to slap a label on, it’s easy to fake it. But having the ability to kind of trace the authenticity of that manuka honey, every step along the supply chain, is a good use case for something like a blockchain. But that’s not what a lot of these coins that we’re seeing today are doing. Right, they’re tied into very random things, be a kind of, you know, some sort of NFT play some sort of web three, play, you know, whatever it may be, but I would say, Look, you know, just look at the actual use case, what is it that crypto actually wants to do? Right, what is it that it says that it’s doing? You know, is that really a thing? Does it actually do anything? Um, because I still think there’s this factor that you know, what we still keep seeing today. So frequently is this constant notion of, you know, let’s put, we’ll put on a blockchain, right? I’ve seen a lot of different fintechs out there, where it’s like, well, we have the solution that lets you put x y Zed in the blockchain. And maybe we have another solution, which lets you connect various blockchains so that you can have these kinds of chains of chains and connect everything. But you kind of got to take a step back and be like, Well, okay, but why? What’s the purpose? I keep hearing about, you know, kind of blockchain secure ticketing. Right, which on paper like, Okay, that sounds good, neat. But then just think about that for two seconds. Like, well, why what’s the point? Like, ticketing is not challenging today, as it exists, what is the benefit of putting that onto a blockchain? And building on top of that? So you know, just Yeah. So for banks, it is that step of you know, just what is this actually doing? What is the point of this? What is the point of this crypto yet, even if it’s just purely as an investment asset, I do think there’s a factor of you know, those Kryptos that do potentially have more of a use case, that will I think, have longer term survival chances, I can’t guarantee anything Kryptos a wild world who knows what’s going to be successful, I could be completely wrong, maybe things will explode, maybe a little utterly collapse by the time of this recording goes out. But you know, a use case helps. It definitely gives it a lot more solid grounding, I think, for future growth.

Alijah Poindexter 09:21
Are there any banks that you know, of, you know, maybe focusing on the US and Canada, but but maybe anywhere in the you know, and let’s just say Europe, or America, or Canada or North America, rather, that you think, have successfully sort of at least again, crypto so volatile, so what’s successful today may not even you know, it may not be successful tomorrow. But are there any, you know, institutions banks, you know, larger financial service providers that have successfully in your opinion, or in the opinion of a lot of payments and crypto and digital financial services experts sort of broach the crypto problem successfully.

Gilles Ubaghs 09:55
I’m not sure anyone’s fully cracked it yet. Right. I think there’s people who have made a lot of money there. I think you know, their hands has been money to be made, it’s impossible to deny that. I don’t think there’s one bank that stands out at all as being kind of, you know, again, kind of best practice was a leader, someone worth imitating here. Now I’m sure someone could come out of the woodwork or someone could point out like, oh, well, you’re missing this initiative, or x, y Zed, or looking at the returns on this portfolio are indexed fine of Kryptos. So, you know, maybe they’re out there, I’ve not seen anything, which makes me think, Okay, that’s it, these guys have really solved it, right, which is they’ve really cracked it. I think the problem we’re in now is just more, you know, just the hype and investment levels and activity, it just have reached such a, I don’t wanna say preposterous, but maybe I do want to say preposterous levels, where it’s just, you know, things exploded so quickly last year. And of course, now we’re seeing this big correction within the market. I think, you know, it’s going to take a little bit of time to see like, what really works and what has worked, right, I think kind of the old Warren Buffett could have, you know, when the tide goes out, you see who’s not wearing a bathing suit. I think we’re still at that point where the tide is still receding. So maybe it’ll check again, I’d say in about six months time to see who’s doing well, or at least better than perhaps the rest of the market?

Alijah Poindexter 11:09
Well, you know, let’s, let’s tap down on that six month thing. I mean, again, crypto, we keep saying is so volatile. I mean, are there any trends or anything you’ve identified that you that you can sort of point to is saying this is probably what it will look like in you know, the crypto banking market and, you know, six to eight months to a year down the line? Is there anything, you know, concrete that that you’ve seen? So

Gilles Ubaghs 11:28
I mean, forecasting in the crypto, I think is always very, very difficult. I actually don’t think it’ll look that much different than it has now. Right? I think, you know, there’s so much investment, there’s so much money in so many interested parties here, even this latest, I mean, I do think it’s a little bit more than a blip. But this, you know, these latest hurdles within the industry, and I don’t think it’s going to derail a lot of the path of what we’ve seen so far. Right? I think it’s going to take a bit more of a massive, you know, kind of, well, I don’t want to, well, maybe it is a collapse, right? It’s something much, much bigger before we see a major change in direction. Just because there’s too many vested interests within this right? I would not underestimate some of the ego and human personalities involved. When it comes to crypto, you know, when people kind of dedicate this, if you look at it more so than any other technology that I’ve seen in my lifetime have been quite so perhaps ideological, you at least such a focus for people, right, it’s almost an identity point for for many out there, including within the banking and investment world where, you know, there, it’s the crypto bros are kind of at the worst end of the market. But I think there’s a lot of true believers out there who really feel that, you know, this is a huge growth opportunity, I don’t see the latest challenges, shifting opinions that much. The danger is, of course, if you know if there are bigger challenges to the market, if those opinions still stay very rigid, that’s where I think things start getting more problematic. But in terms of kind of current developments of where we are today, I think we’ll see more funds, you know, being invested in I think we’ll see a lot more. Again, crypto as an investment asset, right, it’s much more than investment tool, that wealth tool, much more so than actual payment mechanism. So you know, this is what I find interesting. If you speak to a lot of banks, there’s a few proof concepts out there. People playing around with crypto as a means to, oh, well, we’re gonna build a mechanism to do payments via this. And there have been some initiatives for more, you know, intra banks, particularly cross border crypto players. So think of things like our three, or you know, ripple has been around for quite a few years, they do pretty well, they’re, you know, that’s much more establishment aspect of the crypto scene, I think they’ll keep going along, you know, they’ve, I think, probably got a lot more reputable legs compared to much of the market. But yeah, maybe a little bit of pulling away from things like the NF T’s thing from some of the banks out there. So perhaps just a bit more skepticism, at least in the near term. But again, like any asset, right, once crypto starts going back up in value, I think it’ll be a lot of people leaping back into it, which again, I think that’s why it’s hard to you know, you can’t really overstate how big of a challenge the latest hiccups are. Because just you know, taking that longer term view, crypto is still way up, you know, I put 100 bucks on ether back in like 2018. And it’s gone up and down. But I’m still way up from 100 bucks from a couple of years ago. Right? So, you know, for any investor who takes a long term view, which I think most investors hopefully do, or they should, you know, it’s still looking pretty good at the moment.

Alijah Poindexter 14:22
A lot of banks that are in that middle ground between fully jumping into into you know, all things crypto and kind of being steadfast and not doing anything involving crypto at all. A lot of them I think are looking to stable coins and stable coin development and the interest from from regulatory bodies in the US and another European in North American countries. They’re looking at that to kind of guide how they how they approach you know, digital assets, we’ll call it so kind of maybe a final question here for you is, does a stable coin offer or does it create a different use case than the den Bitcoin or a comparable, you know, coin?

Gilles Ubaghs 14:58
I mean, I think it does have stable coins are pretty interesting. The one that I think is really the wildcard to watch out for that’ll really make or break the market and change it completely is very much it’s those, you know, the the central bank, digital currencies, right, the CBDCs. I think that’s really what most banks are going to be waiting and looking for. It’s the I think, with all this, there is still and I wouldn’t underestimate this, the regulatory considerations for most banks are still going to be very top of mind. Right, I think, above and beyond anything else, based on the latest murmurs that we’re hearing some of the attitudes that we’re seeing, especially when you do see these big losses that hit quite a few, you know, there’s the commercial investors, but also the retail investors, that pressure for regulatory action of some kind, you know, just to provide some sort of protection, some sort of control some sort of limits. It’s a bit contradictory. For some, that’s kind of the death knell of crypto right for the true believers. But for the banks, that kind of makes it more than anything else. So having something like you know, stable coins, I think, do have a very important role to play in the future. The shifts and challenges we’ve seen recently, though, suggests that, you know, stable coins, they need some work, right? I think people are gonna be a little bit dubious about just hearing, well, it’s a stable coin. So it’s fine. I think people are gonna want to see well, okay. What is it pegged against? Right? Do you really have those assets that you’re seeing are backing it up? And yet, what is the domino chain that could make this collapse? I think there will be that healthy skepticism. I think coming through there, that plus, I think, some more regulatory oversight, and then suddenly, you’ve got much more of a winner there. So they have a role to play. I think there’s a lot of changes to come. But we’ll just have to wait and see what happens there. The Crypto space, it’s such a fascinating space that keeps evolving in so many unexpected and just, frankly, weird ways. And it’s one that I think will keep happening. I mean, it’s one of the you know, it’ll never die. I know it can’t die, right? There’s no off button to crypto that you don’t you can’t switch off Bitcoin, even if you really want it to. So in any, you know, no matter what’s going to will keep evolving and permutated in new ways. And it’s really just a question of keeping an eye on see, well, what does that mean? What are the implications? And what does that mean for banks? And I think that’s it. You know, that’s my biggest advice to all banks today, is to just really take a look at it, like what does this actually do? I think people have been kind of, you know, sucked sucked into the buzzwords quite a bit without taking a step back. So okay, but what problem does this solve? What does this actually do? You know, that can’t perhaps be solved better by another technology. I think, you know, I think the Mark I hope I think the markets moving in that direction. Because what scares me is just when people say, well, it’s okay crypto is different, right? This time. It’s different. All these dangerous words in the financial services community.

Alijah Poindexter 17:36
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