Will crypto solve the payment problem?

0:04I've got $30 billion maturing next quarter. I need to deal with it before the market collapses, right? All of that takes place without me, without the bankers. Eventually we won't be needed. Thank you for joining me for another season of I See Your Trade. This year, the Securities and Exchange Commission in the US approved Bitcoin ETFs, but that's of course something entirely different to the use case of cryptocurrencies as a mode of payment. When Standard Charter's Global Head of Digital currencies, Erik Pascal, took the role, he was tasked with looking at whether cryptocurrencies could solve some of the payment problems that have dogged financial institutions for decades. Eric, thanks very much for joining me today. Just to jump right in, what are some of the biggest universal problems when it comes to payments? Wow.

1:00Well thank you for having me Pamela. So first of all, my comments are within the the context of wholesale pretty large scale financial demand and use of payment systems. So universal problems pretty consistently among both corporates, corporate treasures, managing working capital as well as financial institutions, buy side asset managers etcetera are really down to three things pretty consistently #1 visibility of working capital of cash of money, #2 is access to that money, #3 is control of that money and that goes into an awful lot of depth in terms of the activities of those kinds of financial participants or financial system participants. Well, we have banks.

1:41We have payment services like MasterCard, Visa. Those in the past have dominated the space in terms of handling payments, but now we have things like Stripe and Block and others that are challenging the incumbents. Where is the gap would you say though for crypto currencies or is there a gap? Well, that's a that's a loaded question. So yes, MasterCard and Visa process payments extremely fast in large volume, but that is dependent or the access to that payment stream is dependent on having accounts with those institutions or card carrying banks from those institutions and hence bank accounts.

2:20So that in itself means that the population of users of those rails so to speak payment systems have to have bank accounts, credit card accounts etcetera. Therefore, the gap is for the population that does not have access to bank accounts and credit cards and so on. And it is a a pretty significant population around the world, maybe not in Singapore and and what some people might call developed markets, but it is an enormous population. And that was the initial, one of the main initial reasons for Bitcoin. Yeah, for creating access to maybe not even a payment system, but a, a a value transfer mechanism. Yeah.

3:06So that is the clear gap. Yeah, And when it comes to the large corporations and financial institutions, they need a pretty compelling business case in order to invest in technology in a big way and things like crypto currencies, for example. What do you see as some of the key drivers and trends in 2024? Wow. Another load of. So a couple of things to to unpack there. Yeah. So yes, corporates, banks, etcetera need pretty solid business cases for investment in technology, visibility, access control.

3:39All of those revolve around the ability to manage time and access to money quickly for specific needs that generate income, shall we say, or returns. Yeah. And before we started the conversation here, we were talking about tokenization. And so you interestingly have said that tokenization is a new frontier when it comes to value creation. Can you explain that? Wow. That's a great that you seriously guys do you have like 3-4, five hours maybe a day. So like it's it's it's it's near dear to my heart and it's one of the reasons major reason for which I'm doing what I'm doing now at Standard Chartered.

4:17So what that means is the ability to create, let's say move assets and liabilities into a digital Ledger format. Yeah. So think of what it means now for the generation of an asset. Banks, as you all know are in the business of originating credit among other things. It's one of them own basic features of a bank origination of credit at the wholesale level. Again, very large MNC types of credit take an enormous amount of time. But very clearly, in order for a bank to issue a loan, execute a loan.

4:58It can take months, literally months. So think of that tokenization process as a smart contract, right? I'm sure your audience is well aware of how digital Ledger technology works, how crypto works, But the short version is a smart contract is something that is effectively self executing and think of it as code. I mean literally think of it as as Python code that you can get straight off the Internet and it will create a representation of whatever you want fundamentally.

5:27But let's call it value in this case, you know, so we can now create loans with legal documentation that is represented in the form of a smart contract. It speeds up the process, but what about the trust that people have to have? So, OK, so remember the three, the three main universal problems, right, all revolve around time. So what I've just described is immense value certainly from a borrower, if not even from the lender. So there is There is an extension to this as to why I say tokenization creates enormous channels. Time is money.

6:04Time is money, but trust. Interestingly enough, what if the tokenization process is now managed by the same bank that you trust and hence borrow from and have a relationship with? Right, and have the same implements? From a regulatory point of view of sanctions screening, KYC, AM, LCFT, everything is the same. Documentation process of execution becomes literally almost instant. Yeah. So that's part one. Part one is the origination of assets broadly speaking in financial institutions, banks, etcetera.

6:43So we call that the sell side. Where is there a market for these assets? Yeah, basically the whole world, but in almost any of these instruments takes between two days, three days, 3 weeks, 4 weeks, 5 weeks, etcetera. So think of the buy side now involved in these assets and this is real buy side and I mean institutional buy side means real money accounts, it means asset managers, investment managers etcetera that are churning trillions, I mean trillions of dollars almost daily in in fixed income alone, not even equity markets. So the numbers are staggering.

7:25But what they, what they need, what they want is access to different forms of exposure. All of these investors have appetite for various forms of exposure that they today have great difficulty accessing. Let me give you an example. In, in the US, the loan market, so pure corporate loans, not structured loans, deeply subordinated and and what we would loosely call parts of the high yield market, basic corporate loans are very easily accessed and traded in fact by institutional money. Once we have loans in a token form, that process becomes not only instant, but a lot easier to package, to move, to capitalize, to recapitalize, to restructure etcetera. So that's part of the answer.

8:18The, the longer form of the answer is then financial balance sheets. So balance sheets of banks, insurance companies, asset managers become almost fungible. Yeah. Why? What does that mean? That means that the, the assets that are originated become easily traded, moved on and off balance sheet, but by definition more liquid, absolutely. So right now the bank market owns, you know as I said, significant chunks of the loan market, right. It's bank to bank basically. Institutional addresses don't see a lot of that. So we want to bring in more liquidity, a greater depth of not just capital, but types of investors. Well, we're just going to switch gears for a moment, talking about central banks, central banks adopting digital currencies.

9:02That's a conversation that's been ongoing for years now. But you rate that as a sort of low priority this year. Why is that? Well, it's not that I rate it a low priority, it's that I think that that it will take time to develop for scale. Yeah, again remember my my primary attribute and and criteria for success is scale. CBDC, central bank digital currencies have I think largely struggled in most markets for a couple of reasons. The 1st is that the the initial impetus has always been to try to create inclusiveness and to create a currency that individuals can can control, right.

9:44I don't need a bank, I need a wallet, a hot wallet, cold wallet. I can have effectively a a central a piece of money, right, without having a bank account. How cool is that? But there's problems with that market, right? Or that model, sorry. In the market specifically, as we all know, right, there's a multiplier effect for creating deposit taking institutions that will then go on and lend money if those deposit taking institutions no longer have an enormous source of deposits because people's money is in their wallets and not in a bank, they can't lend against it, so it stifles lending.

10:22You're sending billions across the world to operate effectively real time, let's not say instantly, but real time and 24/7. There needs to be a clearing mechanism now so that my account with the Fed will reflect a debit or taking money out of my account with the Fed and moving my money to some other bank's account with the Fed. That's clearing, and that only happens when they're open, yes? So that clearing mechanism can now become real time, let's not say instant and 24/7. If the central bank now gives me or your bank significant scale of that currency U.S. dollars on the blockchain issued by a central bank and the model differs by central bank but effectively think of reserves held in the central bank by commercial banks.

11:23Those reserves right now are in Fiat form. If they move into a tokenized crypto form, let's call it the token. So it's not BTC, but it's it's actual central bank M0 money. If it if that becomes tokenized, our clearing mechanism and movement of M1M0 capital across all economies, all financial systems becomes real time instant 24/7. There's solutions, a lot of folks are working on that and I think we'll get there pretty soon. In fact, the main, let's call it, elephant in the room in respect of moving U.S. dollars across borders and borders that don't necessarily use U.S.

12:10dollars for their their national economic systems is FX. Yeah, foreign exchange. So nine. OK, maybe just South of nine trillion U.S. dollars of this stuff trades every single day. Can you imagine that scale and liquidity, right. And it is most cases somewhat arbitrage free. So imagine how CBD CS are now going to move liquidity across borders. Commercial banks will have to be involved and that is the jigsaw piece that no one has really worked out yet and that's why it's going to be a longer term proposition.

12:48Well, plenty more to come from Eric, a little later. This is IC your trade brought to you by IC Markets, a leading high performance trading provider trade up to IC Markets. Now let's check in with our resident economist Alex Holmes from Oxford Economics. Thanks Pamela. Yeah, well, after a decade in the making, here we are. We've got Bitcoin ETF. So to go back and explain, Bitcoin is still a slightly tricky prospect to buy directly, especially for those who are not tech savvy like myself.

13:16So the thing was that ETFs would make getting exposure to Bitcoin much easier and hence really broaden its appeal. And that's actually the sentiment that has been driving up the price of Bitcoin in the run up to these ETFs launch. But while there was initially a lot of optimism, this seems to have evaporated pretty quickly. Most of the Bitcoin ETFs have been pretty lackmaster in their first couple of weeks trading, particularly the big name financial institutions.

13:41And instead of the launch of ETFs driving up the underlying price of Bitcoin, what's actually happened is there's been a bit of a correction. It's plain to see here in this next chart. In the days immediately after the ETFs began trading, the price of Bitcoin slumped by about 10%. So while we did see capital inflows of about 1/2 a billion dollars into just the top three Bitcoin ETFs, almost at the same time we saw the price of Bitcoin pull back from its recent highs, there's still definitely tangible volatility in this market.

14:12Thanks so much, Alex. Now, Eric, looking back at your career, you've worked out some of the biggest financial institutions in the world, mostly advising around risk. What do you see first with crypto currencies, risk or opportunity? I think I know the answer, yeah. Well if you define crypto currencies as the you know the the form of crypto used for generating representations, let's say representations of value like Bitcoin or Solana, algo etcetera. Those those fundamentally are very difficult to assign a place in a in a global financial system. You know for reasons of scale, for reasons of effectively the connectivity into the real economies. I think there is there is risk in the volatility and that's really what makes crypto currencies difficult to apply to a payment system even in the retail level. I mean I'd I'd, I was very involved in in my heyday in the crypto world of developing crypto based payment systems in places like Indonesia, which is a a very densely populated part of the world.

15:22And interestingly enough merchants didn't want this stuff. I mean, first of all we had to tell them what it was and explained it and how it works and everything else. But then they looked at us and said, well yeah, I don't want to get paid in something that changes 10% in value every day or every hour. Yeah, so there's there's some fundamental issues. So again, with a payment lens, wholesale banking, it's going to be a while and and honestly I I kind of agree with Augustine Carstens at the BIS and and Ravi Manon at the MAS that that I I think increasingly there will be a dwindling role for crypto currencies in the global financial system, monetary system to be specific. So a a lot of people when they think of crypto currencies, the word currency is a little misleading. Perhaps it's more similar to equities rather than currency. And if that is in fact the case, to see growth in this market, could it possibly rival the global equity markets? Wow.

16:23Short answer is no. And and I think you know, we we have evidence to that effect right now. Right despite the hype and you know the front page of the papers that people read or or you know their their apps, if bitcoin's done very well and it remember just just an FX daily $9 trillion are we even close to that in web three are we even close to that in BTC Bitcoin no. If you add them all up together and their market cap, you get, I think last time I looked a few months. So like no, three few weeks ago was like 1.3 trillion, which is, you know, huge, right?

17:02When you think about it in terms of the equity markets, as you've just asked, equities alone alone as an asset class, it's over well over 100 trillion. Well over 100 trillion. Yeah, it dwarfs the size of this activity by miles. And just in terms of numbers, I checked today, there's officially about 58,000 listed equities on this planet across all equity markets, publicly traded, just corporate money flow is 156 trillion U.S. dollars. Honestly, I mean it it's, it's it's a completely different field, completely different. And it would have to, it would have to literally solve all of these fundamental issues, part of which we discussed, right. If you're receiving crypto, what are you going to do with it? Right.

17:56As an individual? OK, maybe you're going to invest in it. And you know, there's there are places where you can pay with crypto, but out of the people in this room, you know when is the last time you bought Milk or Bread or anything with crypto. So. When it comes to the head of digital assets for a a bank, people think of digital assets as may be headed up by somebody who's very young and hit, perhaps somebody in A at shirt and trainers. Granted, you're not wearing stocks for those who can't see. For viewers who are listening.

18:29Eric is a very experienced veteran with over 30 years of experience. Why do you think you are the right person to be in charge of an emerging technology well? I mean, first of all, I think it's a stretch to say I'm in charge of an emerging technology. But you know what? What I what I do in the back is really three things. Number one, I am integrating blockchain into the bank's payment systems. Yeah. And that is, that is, I mean, literally, I think moving mountains might be easier.

18:56It's it's an enormous amount of of work #2 I'm creating products effectively that will satisfy the problem statements that we described and work with customers our our our MNC clients for the most part and FIS other banks other asset managers in in developing ways to solve real problems. Again visibility access control time. Yeah #3 is I I work with a a series of let's call it channels in the bank to create a that's probably a strong word to to enable shall we say ecosystems that will evolve into market infrastructure. You know, so that we can do the things that I talked about when we said, you know, tokenization creates a whole new set of avenues.

19:46And that, you know, eventually, honestly, and I hate to say this because I'm a banker, but eventually we won't be needed. Fundamentally, the information flow that generates the ability of the corporate treasurer to raise money becomes instantaneous. Yeah, there's nothing more than code. And it's, it's Python. I studied C++ and Python. So it works out really well for me. Now in the crypto world, they don't need to call me anymore and say, look, I need $500 million in 10 years, right? I've got $30 billion maturing next quarter. I need to deal with it before the market collapses, right? All of that takes place without me. Without the bankers, we are going to become disintermediated.

20:31And I hate to say that because I'm sure most of my colleagues are going to hate me for it, but honestly, that's where this is going all. Right. Well, thank you very much, Eric. A big thank you to our special guest, Erik Pascal, Global Head of Digital Currencies for Standard Charter Bank and our resident expert Alex Holmes from Oxford Economics. Thank you both and thanks for tuning in to our first episode of IC Your Trade Season 4. I see your trade is brought to you by IC Markets, a leading high performance trading provider trade up to IC Markets.

21:00Thanks for joining us today. And remember you can watch and listen back the episodes from the past three seasons on Spotify, Apple Podcasts, as well as YouTube and wherever you are listening to this podcast. See you next time.