CVA Social Club: Using CBDC in Business, Lessons Learned from the Helvetia Pilots

Transcript

okay so welcome everybody for our uh crypto Valley Social Club Edition this time together with shulia uh Don uh product manager or head product management at the at the CDX the digital exchange of of the six group and I'm very pleased to have you here to have a good discussion on what we can learn actually from from your Pilots that you did with the FIA one two three four something like that um but quickly my name is Dennis flat I'm the chair of the Enterprise blockchain working group of the crypto valy Association the crypto valy

associations for the ones that don't know it is is a nonprofit organization located in soup but has chapters and uh and uh yeah around the world and the main objective is really to to help the crypto Echo systems to Foster actually to to grow to become bigger and uh we in the Enterprise blockchain working group we really try as well to help that to bring idea of Enterprise blockchain ideas closer to the people see the advantages of Enterprise blockchain and we do that in this kind of interview sessions or oneon-one fire talks like tonight yeah and tonight uh yeah topic

is I mean you did pilots on with uh Central Bank digital coins yep cbdc or wholesale CBC in your currency uh in in your in your setup and of course that is for the Enterprise blockchain working group or the for the Enterprise blockchain World very interesting as well most of the Enterprise blockch use cases are about trade it's not trade of assets or about money and usually it is you know luxury watches cars art all these kind of things but there's always you're trading something against money and that is of

course A lot of these Enterprise blockchain uh Solutions it's always a problem okay how do I make the settlement so I thought actually you can tell us how you do the settlement can you give us perhaps start a quick overview on on CDX and especially what the Linkin to cbdc yes of course of course so sdx stands for six digital exchange so we are part of the six Group which operates most of the financial infrastructure in Switzerland so namely payment uh settlement uh financial data and so on and so forth so we are a subset of six group um we have two main pillars in our business the first pillar

is web three and crypto so we offer uh custody to our client for cryptocurrencies we offer trading for cryptocurrencies and we try also to offer um peripheral services around smart contracts so we want to also help our members to either innovate using smart contracts or find business use cases and help them deal with the infrastructure behind it the second pillar and this is currently our bigger pillar is the regulated business so digital Securities and um this pillar run on a cord infrastructure so a private permissioned DT infrastructure and um runs a regulated

exchange The Exchange is not running on Corda it runs with you know Legacy Tech from NASDAQ and uh a CSD and our main difference is that our CSD which is fully regulated so a central security security depository is running on DT and it is the only regulated CSD in the world which is running on DT infrastructure fully mhm so out of this CSD we offer a range of different uh features possibilities you name it and you mentioned one settlement so we offer the possibility to issue Securities so bonds for instance

we so to bonds are effectively issued as tokens we offer the possib to trade this uh this the Securities so if you want to do a delivery free of payment a delivery versus payment this is all possible within our CSD we offer a coverage regarding corporate actions and so on and so forth so basically you find in our CSD all the basic uh functionalities that you will expect from a Securities depository our clients are banks and securities firms uh so only we don't use uh uh we don't provide any services to to to customers which are private we don't do b2c we do only B2B with

regulated Financial entities in Switzerland and abroad also in Europe so so um we see ourselves really as an enabler a catalyst for Innovation around digital assets you know it's a it's a very Niche field at the moment it's still nent it's not something which is uh has achieved scaled yet so we see ourselves ourselves also as a partner for our members we want to uh build things together we want to gener business models together business cases to get together and we want to help our members to uh bring their projects to life so now you you you asked me what is the link with

cbdcs so as you can imagine when you are running Financial infrastructure you deal with Securities with assets but then you deal also with cash with money and our vision uh long term is that uh a big part of the weals in the future will be tokenized on um a blockchain but not only one it could be a mix of blockchains it could be uh permissioned one public ones it could be you know any kind of blockchains and as such you will find assets which can be real estate it can be uh Securities it can be whatever

you you you you think has value would be represented as tokens on some kind of blockchains and we at sdx we see ourselves as one of the gateways towards these different blockchains these different tokenization Islands we we call them and as such we want to offer our members access to these different assets which lay scattered all around the place and we want to be able to bring them into a cohesive you know offering to our members now when you are speaking about cash you have different types of money and cash which are tokenized you have uh you know I think most of the people here are familiar with the usdc and the usdt is

of this world you know all this uh private money which is tokenized on public blockchains uh in our system we um also have our own version of tokenized cach at sdx we have token Swiss frank and tokenized Euro which is available to our members but it's not the same as central bank money right like uh if you speak about usdc usdt you take a risk uh with circle with tesser because if they default basically uh your your tokens are worthless if you use our version of tokenized cash you also basically have liability with us and this

can be fine for most people um but for you know very risk adverse Banks they expect more they expect to have some kind of cash vehicle which is a liability of the Central Bank and as such is as good as you know physical uh Bank notes and and coins and that's our angle that's why for us it's important to have a form of tokenized cash which is completely risk-free and which is backed by the central bank because I remember as well in the original setup um and I mean you work on Koda and Koda is probably the it's one of the blockchains most Enterprise blockchain Solutions are

using so that's why it's very good good example here um uh you said at the beginning I think you were fully on re prean set first users of your platform needed to buy the tokens from you that you had on the coda Network and needed to pre but I think that has it upsides and its downsides as you said um yes absolutely um maybe you don't have to buy the tokens from us this is not the case so how the tokens are created how this tokenized version of Swiss Franks and Euro is created uh at sdx is basically via first um a deposit in our accounts so in the

regular system and once the deposit is being done in our s account then it triggers the emission of a tokenized version of the cash in the sdx ecosystem so this is how it works for the token Cas sorry there we I'm landing up there we go um you know you we mentioned Corda and this is also a question I have a lot when I discuss uh with uh Crypt native crowds let's say um why do you use Corda why why do you do are you on Corda and this question is even more relevant today because um we have different ways to represent the Securities on chain now with the the DT

pilot regime but at the time we were um filing for the the license to operate and we one of our main differentiator is always to be regulated MH you had limited choices in in terms of of of uh of uh of Technology yeah and today our choice I think is is fruitful we operate a business that works and that is in the rails of the regulation and as such so far the choice was was was a good one it does not mean that in the future there will be know other ways as well to AIT Securities in other networks but so far uh our case is a demonstrated case well

I think the one thing is the technology that you have behind the other thing is the logic and I think the logic how you have set it up with DT and Koda I think that will not really change because that's how financial institutions basically think and work and sure feel comfortable with yes and so on but the pre-financing I think they felt not very comfortable with didn't they uh so I mean maybe let's take a step back and go back to elesia as is and then from elesia let's move to the and ANC topic because I think this is a big one and this is a a friction uh full topic let's do that so we established why we needed um tokenized cash uh or you know a

risk-free version of tokenized cash now for the SNB and for Switzerland uh you know Switzerland was always perceived as a place where Innovation thrives for uh digital assets we had a lot of different associations which established the hqs in in zuk which created their their their incorporation here we uh have also a lot of traction in the tokenized space tokenization is also a topic which is which is uh which is going forward so for the SNB it was also important to be part of the discussion and to investigate how you could use a tokenized version of central bank money as the cash leg in transactions so so

this was for them important because they are looking for financial stability and as such this goes also with diminishing the risk of liquidity and settlement and there is no better way to do it than using uh a central bank uh money so it was also the goal for them to reinforce the the position as an anchor in the financial system in Switzerland and also a good opportunity for them to participate in the private sector Innovation so how can we not block but enable Financial Innovation uh coming from the public sector so this was basically I think the first and I'm not from the the SNB so maybe I'm not

telling the full story but at least the one I'm aware of so they had strong reasons why they wanted to start to dig into the topic of Central Bank digital currencies and over the span of the last five to six years we had different phases in Elvia and every phase in Elvia which is the cbdc project in Switzerland you basically achieve something to go towards the goal to have something that can be usable in uh in today's world so the first occurrence of elesia was in 2018 and in 2018 the goal was to stay in test environments and prove that you can issue that you can redeem that you can

also use uh cbdcs as cash in a DT system and at the end we were able to process all these different use cases in test environment and it was a success the second phase of elesia was now we want to include private sector now we want to include also banks in the story and we want to also enable the banks to use uh the cbdc in ways they are comfortable with so when you are a bank you have a uh a core Banking and usually you are happy to discuss with other banks with other systems through ISO

messaging right so we uh as a financial Market infrastructure we also C to this need we have interfaces with ISO messages and as such one of the topics of the phase two of of elesia was to promote this integration with the core banking system and also with the rtgs system in Switzerland so the payment system M um another and I will come back to this afterwards big innovation in the second phase was uh the ability to monitor the different transactions using cbdc so we are still in test but as a central bank as you can imagine governance control over your currency is

Paramount it's extremely important so while in phase one it was more about demonstrating that the transactions can happen in phase two we start to dig into what does it mean as a central bank to manage um Central Bank digital currency on a third party platform while remaining in control while remaining uh comfortable with how it it is being used now phase three uh ended this year in June 2024 and uh I join sdx last year so I only saw this uh within elesia but I think it was a very big step forward

because this was the first time we transitioned from test environment to production so we are not anymore speaking about you know I don't want to say dummy transactions but at least transactions which are not implying a real exchange of value but now we have productive transactions where you have members clients who are expecting it to work correctly and you are dealing with real money which is the equivalent of uh what lies in the site deposits of the SNB uh on the other side so as such the pressure to make it work and the pressure to ensure that it works within the right rails and with the right

controls in place is way bigger MH and over the year I think we we achieved what uh was supposed to happen within this third phase we had multiple emissions or issuances of of bonds using Wale cbdc we had uh Market transactions also including Wale cbdc and everything worked according to plan now we are entering since uh July the elesia pilot which is uh another um two years of elesia experimentation which will focus more on the use cases that you can generate out of uh the cbdc uh in productive

system so now that we have established the history of elesia why would you want cbdcs cbdcs are important in our system because in the traditional Financial world you have assets which settle in one environment and you have cash which Shadows into another one so we have a very siloed Financial infrast structure and as every time you have Silo infrastructure you have cash on one side asset on the other you need to reconcile everything you need to synchronize everything so it takes a lot of effort to do so it requires a lot of energy to and calories to be burned to be to make sure that what happens in one is

correctly refected in the other one and you need also an intermediary in the in the middle uh so the Clearing House for instance that will basically take the risk of accepting transactions and making sure that what happens works so with a blockchain you don't have that in the sense that the trade happens on one platform where you have the asset which is there and you have also the cash which is there so you bring into the same system both legs of the transaction and as such you diminish risk and so on and so for Force you generate new possibilities you eliminate

also some of the burden happens in the traditional infrastructure and so on and so forth so this is in a nutshell why it is interesting to have cbdcs and assets like laying on the same uh infrastructure now I think you you were interested to know as well what did we learn from elesa correct what did you learn what what is this think that you would say Okay um pitfalls and success factors behind it so while I cannot share uh everything obviously uh I have some uh some insight that that are interesting so the first one uh you know is what is important to

consider when you are uh building a cbdc so first is the the the governance the governance uh for the NB is extremely important and when you delegate to a third party the responsibility to handle operational processes that involve the national currency then it needs to be done in a way that uh C to any dysfunctions and so on so I think this was probably a little bit underestimated the beginning so how much work will be synced or will be invested into having the right processes in place the right controls and so on

and so forth the second one is fragmentation so if we go back to the crypto word uh if you have usdc which is L laying on on ethereum and then you you want to also have it you know usdc on avalanche on any other evm compatible blockchain you cannot have like the same token which is on both right so you have to dilute your liquidity over various networks and the more networks you you add the more your uh monetary mass is uh you know dispersed fragmented uh it's mathematical so same for the the SNB uh the

more platforms you include the more your currency is getting fragmented and this was always one of the goals of the SB was to limit this fragmentation MH now one learning I have which is more personal as a product person is that and this is not only for adves but it's in general in the field I'm working in which is digital assets uh in the regulated space is that it is very difficult to uh balance Innovation so what you want to create as you know new which does not exist in the financial place or sector and what is catching up and this is very difficult because your clients expect

you to offer them the same range of uh features and uh and and products that they can access to in the traditional space but at the same time they also expect you to provide them with something new with new value and as such being able to balance what you are willing to invest in one or the others area is extremely difficult and for aesia as well do you want to have the same functionalities for the money that you have in the in the traditional world or do you want to focus attention on new exciting ways you could use it but I mean yeah I mean you you I understand as well

that the pilots or what you showed with Pilots was as well like say the first step into this t plus zero settlement absolutely I mean today when I buy shares or I buy assets then I is always t plus 2 mhm and I think that is that is that is one of the big advantages of bringing it down to to a zero to instant settlement one um but I want as well to take the opportunity to ask the audience if you have questions or if you want to um [Music] [Music]

proposals having regular citizens having CC accounts so it's a very good question you said it's we probably just quickly repeat the question oh sorry yes uh so the question was uh there are multiple ways to implement cbdcs some are retail oriented say what is the plan foral uh So currently the setup is so only designed to be held and used by regulated financial institutions for interbank uh payments uh and financial transactions

um I want to just make it clear that the elesia pilots are in no way a commitment by to implement tools are test pH to determine how it could look like how it could be used but it's not a commitment that it will one day be available every day in production and so on as a disclaimer as a big disclaimer I mean I think that's why we call it pilot exactly okay some other questions um I'm not sure if I correctly so did you say you have digitized traditional Securities and have accomplished

transactions on train right so i' be curious to understand how do you see do you work with external codent um represent those assets on chain and if not uh if if yes how do you see the custodian versus Sub custodian relationship and uh if not where do you see the efficiency gain coming from one chain transaction oh this this is a very wild question um that I'm getting a lot uh efficiency gains it's difficult to to to prove efficiency gains until you have really scale right because um and especially in the financial Market infrastructure business it's usually all

about scale so for for us the efficiency gains are probably coming from maybe um the risk side because by definition uh a trade which is made on the blockchain is instant and as such does not have counterparty risk between both parties and as such will eliminate the need for all the functions which are here to C to this risk um in terms of efficiency you run usually in infrastructure which is available at more than the traditional infrastructure um but the real value for me using a DLT will not come from

efficiency but will mostly come from you know programmability of the tokens of uh the smart contract automation that comes with it and will come from there but it's not an exact science and I think today it's difficult to prove empirically that you have real efficiency gains using a DLT that brings me then to the question to bring it now from the typical trading or or digital trading world to the blockchain Enterprise World um and uh and when you have an when you are an Enterprise blockchain solution provider for example uh and they are thinking of using or

want to have cbtc implemented M um so so I mean as I said it is slightly different because you use wholesale cbdc so it is actually the central bank that is issuing the money in other Enterprise Solutions it's probably then more the the retail banks that are reissuing um cbdcs which are probably then backed with cbdcs from the central bank again um but from that what you saw now especially in health fre as you said it's the main pilot that you had so what will be good ways what what kind of tip what kind of

recommendation would you give to these Enterprise blockchain providers what they should watch out how they should do it what what kind of yeah recommendations or tips would you give them so I'm going to go to the end of my answer first and then start over um the most realistic scenario that we have today for an entprise which is not regulated Bank to think about how they will be using cash in the future probably and this is only my uh interpretation will be that you will have ass said different levels of of of of money you will have the central bank

money which will be probably W sale in Switzerland and as such they will not have anything to do with it uh if you are running you know classic business which is not interacting with uh with s with with six with sdx and so on then you have no reason to really prepare for World Sal cbdc whatsoever because we'll never touch it to will be only used for transactions between Banks and for financial transactions now what could happen is that the second level the the the the M1 would be tokenized money emitted by Banks and so commercial commercial bank money MH and here every

bank has an idea about what they want to achieve and how they want to achieve it which infrastructure they want to use to to to emit it um as such I think it's and now I'm getting back to the start of my answer it is very early in the sense that uh we have 100 different pilots in the world for cbdcs uh we have I think I checked today four which are in production and none of of toos are you know big economies so we have Jamaica you have the Bahamas you have Nigeria I think which is arguably a big economy but less relevant for us in Europe so H as such we don't know exactly how it will uh Bloom we don't know uh when we don't know how we don't

know which technology will be which will be will be used to have so many different options and so many different Pilots that it's actually very interesting to compare them um I was planning to to to give a small you know comparison between Norway and China which are antipodes in how they see cbdcs you know in Norway uh one of the main differences in Norway with us in Switzerland or China similar to China is that they have um Accounts at the central bank for all the citizens and as such this enables them to think about a retail of a cbdc so how Norway is is picturing it is that they would have a cbdc which runs

on Bess on hyger bz familiar with this this is the Enterprise ethereum version they are thinking about a near C20 standard for the cbdc they are thinking about so sale version which will be running on fabric with the bridge between them and so on and so forth and this is I mean not exactly the same but closer to what we see in the crypto native space right uh and I find it passina like it's it's for me it's it's it's amazing what China is doing is completely the opposite they have something which started as a DLT and now is not a DLT anymore they are

um heavily promoting and incentivizing the population to use the eu1 so now it is in uh production in 29 different places in China and you can use it to uh get your salary you can use it to uh to uh to pay for the transports and so on and so forth um but at the same time in China they have very strong concurrence challenge coming from the private sector because most of the Chinese citizens are used to to use alipe and wichat as a payment option and this is extremely integrated into the da the daily lives of the Chinese CI and you pay for everything with wichat and with with alipay so as such they are facing

internal competition which is I find also funny good yeah sure sure so yes so we about China be retail yes yes yes that would be talk about to organize the for I does have like a huge effect consum techology yes at all it should it should be completely transparent for you and it should be maybe your transactions will be safer in some way will be faster but you as me we don't really care about if

your trade is being settled right now or in 10 seconds like the the bank bear the risk yes exactly yeah okay there's another question but uh different to the Norway so there will be no D account of Citizen you don't have this so the question was will we then this the swis version be closer to China now closer to

Norway terms of C yeah exactly citizens having accounts in the Central Bank yeah so the the main difference already from the Chinese version and what we are working on is that we are well sale they are retail so we are dealing with financial institutions they uh issue Direct the currency to the population second difference is that we are using a DT system they went away this system we try to be transparent about what what we do how we use it I think there is less transparency coming

from China in terms of usage of the the the world cbdc and so no it has to be Central Bank LED and the Central Bank uh is not planning to to uh issue or to manage retail Wale cbdc yeah I think that is what s National Bank was very clear that they will not issue commercial digital coins or digital currencies it will be always wholesale

and it is really the commercial banks that will do it and as you said it is still away might do it might do it exactly the might as I just want to say as you said we're still very much at the beginning of it which of course still leaves the Enterprise blockchain World a little bit in a unsatisfied situation because then we need to work with stable coins um sadly you do for the time being uh um I mean you know today it seems unrealistic to have a cbdc or or at least a Swiss frank which is running on on ethereum or or Avalanche I would be very excited to work on such a project

but currently feels kind of like uh utopic but in 10 years it doesn't mean that it would be still the case like uh you have tons of initiatives around the world where Regulators uh where you know govern governmental bodies are involved in exploring how it may work so if you are interested in the topic I would suggest to see uh what project guardian is doing in Singapore um because here we have the Mis which is the regulating body in Singapore which is working actively with uh with banks to experiment on public chain mhm and in that case one of their

learnings is exactly this we need a cash FL on on on public chain uh that is avilable and we as a bank are not comfortable always to use uh other ways of payment okay well that's very good that's like a perfect closing word from you I think yes it's unfortunately we still have to wait a bit for uh for cbdcs in the Enterprise blockchain but I mean there are alternatives like um you have but of course like stable coin and and so on um or even other crypto currencies um but it's still a way to go um but as you said 10 years is probably

when we were sitting here and said oh you know those days when we discussed that we never was not well I thank you very much for the time and I would as well invite now everybody for the um upper row that is outside and that is sponsored I think I L question yeah but if it's no time for that I can ask it also in the upper row yeah let's let's do it let's do it at the upper row where everybody um still I hope um yeah let's stay here and and answer the questions bilaterally uh thank you very much for coming and as well for the audience on the on watching us on the on the video uh then um thanks and um yeah the next

event will be probably then in the new year um again from the Enterprise blockchain oneon-one talks where we dig a little bit deeper than in the nor in the normal panels thank you thank you