Decentralized Credit and Stablecoins: The Potential for Swiss Banking

Transcript

by Lutus Meiser who is a very prominent person of the Swiss industry when it comes to blockchain and when it comes to Bitcoin and he's uh co-founded the Swiss um Bitcoin association. He is expert and expert of the Swiss blockchain federation and I could go on also on the board of Bitcoin Swiss please Lucio the floor is yours. Great. Thanks uh for the introduction. Uh good to be here. I have a few more slides before you get your welldeserved lunch.

So that's me. I'm talking about decentralized credit and stable coins and especially the potential for Swiss banking. So I hope I could create something that is relevant to you. So stable coins are relevant. At the moment, we stand at 300 billion dollar stable coins in circulation. So, I say dollar stable coins because 99.5% or so is dollar stable coins and it's about 1.5% of the dollar money supply. So, total dollar money supply is about 20,000 billion and stable coins at are at 300 billion and in a few years it might be 5% of the money supply. So this is something that has the potential to

become very relevant and something that banks cannot get around anymore because banks are about money. So I try to sketch the different types of money just to get a clear overall picture. What we have at the right side is the most boring option of money. It's just traditional cash. This used to be backed by gold at the central bank. Today it's backed by the trust in the central bank. Then a big political topic is central bank digital currencies. We've heard about them. So and this raises a lot of political questions. Should the central bank issue them? Should it pay an interest? And there's a lot of big discussion. ECB wants to do it. But they do it they tend to do it in a broken

way. So the the directive I recently reviewed a paper on the directive. So it's at at the same time they wanted to be successful. So that in the the draft directive there's a mandate that everyone has to accept the CBDC. At the same time they are scared of it being too successful. So what they also put in there is a limit the holding limit for each individual citizen. And this is incompatible. So how can you have an obligation to accept it when there's a holding limit? It doesn't work. If you already have 3,000 and that's the limit and I owe you 100, I cannot. So one of us has to break the law. So I hope at some point they make more reasonable regulation but at the moment they are not on a good track.

So next is uh bank money but like we know it uh in the bank account there's the digital version of that is the deposit token which we have heard about before. The deposit token is not a true stable coin. It's essentially just using the blockchain to instruct the banks to send money from one account to another. So this is not truly revolutionary but economically this is a big paradigm shift between central bank money and bank and bank money. So commercial bank money can breathe money supply is adaptable to the economic situation. It adds a lot of value because the banks and the whole financial sector in the end is a calculated risk-taking machine.

And this calculated risk-taking machine, it takes the role of the central planner in a communist uh system. In a communist system, there's a central planner who says this uh factory gets this amount of capital and this hotel gets built, this gets not built and so on. And in the capitalist system, it's the financial sector that in the end decides about the allocation of the resource in the economy. And that's why it's very important to have an efficient and effective financial system because that brings you to the optimal growth path. It unlocks efficient resource use in society. So everyone must have an interest for this to be effective and this to be free and this having this breathing effect. So what banks do in

effect they they mix the central bank money with credit money. So if you have 100 Swiss Franks in a bank account maybe 20% of that is central bank money and 80% is backed by mortgages by securities whatever had the bank has on its balance sheet and what we see now is that stable coins emerge as a new type of money but that resembles bank money. So instead of a bank you have an issuer and the issuer instead of having uh uh traditional bank assets it has other assets. It also has securities. Ted has a lot of gold and bitcoin as well. They don't tend to have central bank money but they tend to have bank accounts with money in it. So indirectly it's still there's still a fraction of central bank money in it.

And this business as you know is hugely profitable. Like tether is essentially printing money. They are twice as profitable as the largest Swiss bank. And then we get to the next stage which I think is by far the most interesting and this is DeFi stable coins. So what you do there in this step it's economically very similar again. You have some asset behind and you have a token that that represents money and the asset backs the token. But what you get here is you disintegate this. So the bank and the issuer is replaced by a set of smart contracts and this is something with huge potential and uh which I think is in the end should be the gold

standard of money something that is fully transparent and public on a public blockchain and fully accountable and so uh yes so we will get into that uh in the end what can Swiss banks do about this uh there's a lot of political challenges I won't go into detail I mentioned the with the ECB. There's one big political question is should issuers of stable coins be allowed to pay interest and there's no economic justification for an interest prohibition but it's still very high in the political agenda because the idea is to protect banks. So this is we will see. I hope Switzerland goes for uh a regulation where interest payments are

allowed because it makes economically sense. Uh in the US the discussion is open. It could be at the moment what stable initsuers do is they make these back payments. So they pay Coinbase or they pay other intermediaries some kind of premium or reward uh that they can use. And this is a little like an interest but it doesn't go to the end user. So it would be in the interest of the end user and the citizen to have an interest that flows directly to them. So what is also good is that decentralized protocols are largely exempt from all these regulatory discussions that means they are still quite free to do whatever makes sense.

If you look at defi lending so just to give you an impression I'm not sure if how often you check out morpho. This is my favorite lending protocol. What is very astonishing to me is the interest rate. So at the moment, I checked this morning, it's even lower. This was done, I think, on Thursday. It is now at 2.73%. So you can actually borrow dollars at 2.73% on Moro to the tune of hundreds of million with Bitcoin as collateral. If you want to do a Lombard loan at Swiss code, I think they give you 6.5%. Maybe you get a better rate if you have a better private banking relationship with a good bank, but you will never get 2.9 or 2.7%.

If you are attentive, you also see this is an arbitrage opportunity. You could buy, you could deposit your bitcoins, borrow uh tether here, buy the Beni token, get 3.6% yield on the Beni token and get and pay 2.9 here. So, it's like almost 1% interest arbitrage. Of course, with all the friction of back and forth, maybe it's not worth doing it. But in the end, I think it's very interesting to see that the risk premium that was in DeFi, the interest rate was much higher than traditional markets has reversed.

And now there's it's almost like the market is telling you DeFi is more safe than traditional finance because interest rates are lower. The relevance of DeFi lending is about 40 billion. So it's not as big uh as the stable coin market and that's clear because you need a stable coin as an input for all these lending mechanisms and uh this is also how it works. So how it's how uh morpho works for example is that a lender puts in some dollar stable coin into the protocol.

Uh this these stable coins they are in the protocol and wait for a borrower. A borrower comes, deposits some bitcoin and borrows these stable coins. So this is traditional borrowing where someone gives money uh lender gives money to a borrower and the borrower has some kind of credible collateral that can be liquidated in case uh that there's a problem with the loan and this can be very mechanically put into a smart contract. So this is a core function of banking that is put in a smart contract and decentralized system and can be accessed by anyone and this is very revolutionary. I think

this is has a huge future because it makes a business fully transparent and disintermediated and essentially contize containerizes it in the analogy of uh question that we have heard earlier this morning. So, but the next step to that is to turn this cycle around. So, here you have the token first, you put it in a protocol and someone borrows it. But you can turn this around and this resembles banking a little more. So, normally the average citizen imagines that if he goes to the bank says here is a house worth a million. I want to have half a million mortgage. He thinks that he gets half a million from saving accounts from other

bank clients. But in reality, what happens most of the time is that the bank pushes a button and prints half a million. It expands its balance sheet. It creates money that then is on the bank account of the client that takes the mortgage and and can be spent and sent to others essentially selling that freshly printed money to other bank clients, maybe also of uh other banks. And this is what can be done with DeFi money creation, with DeFi stable coins. It turns this order around. Instead of taking existing money and lending it to someone, you start with the borrowing process. You deposit a collateral like in this case in the Frankencoin system.

A disclaimer, I'm in the board of Frankencoin Association and I I helped developing this system. It was part of my PhD. So, but this is something where I see a big potential because that's also why I did the PhD on that topic. So it's you can put in a collateral in this case in this example bitcoin you can uh depending on the value. So this screenshot was to taken when bitcoin was a little higher you can borrow against that bitcoin and instead of getting borrowing existing money the frunken coins are printed. So you print money you take that money printing step putting on a blockchain and it happens uh when you push that mint button and then you sell the franken coins on the

market. someone else buys them and maybe puts them into the savings module of the Franken coin system and earns an interest closing the circle again. But there's a big big qualitative difference. It in this case we have money multiplier. We are creating new money. We are increasing the money supply. We help the system breathe. We help capitalism do its magic. And that's why I think this is this is uh very interesting and it's also something that banks must be aware of because while it's essentially their business it comes with very different risks and also very

different rules and these rules they still need to be figured out in detail but it's uh something you should have a look at and you should have a plan on how to take part in DeFi because this is often the blind spot with banks that they they have maybe a custody offering, maybe they have even staking but there's no concept for interacting with DeFi. So what are the consequences for Swiss banking? So I think this is a huge opportunity for Swiss banking on a global scale and this automatically means we shouldn't infight about small advantages. We shouldn't lobby against interest payments on stable coins. We

should all together push for an innovatively uh fertile ground that can do experiments, that can innovate, that can take risks and this also implies a paradigm shift in regulation. At the moment, politics says stability is the first, second and third priority. But with stability only, you get stagnation. You regulate growth to death. You cannot do experiments because experiments are risky by nature. You need to allow the risktaking machine that is the financial system to do its magic to to to allocate resources. You need to trust the market

to not be completely stupid. And this is something that I think we have lost a little this will to innovate, this will to experiment, to see what happens. And we need to together to bring that back. And in the end for the banks, so I'm fully aware that banks are not the big experimenters. It's like all big companies, they struggle with experimentation. They they observe the market and then they see something and they try to catch up. And this is most effectively done if you have innovation in your home market. This is how Silicon Valley got big. When Oracle sees a new database startup growing, they acquire it. And that works if this database company is also in the Silicon Valley.

If it's in China or anywhere else, they discover it much later. So, and this is also why the Swiss banks have a strong interest in having a very fertile innovative ecosystem in Switzerland because then the the small companies, they can take experiments. 90% will fail but the 10% that succeed you can invest in them and you can acquire them and you can grow your own business when you see the potential like Zuckerberg when he acquired Instagram when it was only 1 billion large and now it's larger than Facebook itself. So this is the spirit we need to bring wake up again to have more innovation to have more investment into fintex and to have more better risk management. So better risk management

means taking the calculated risks where the opportunity where the reward outweighs the risk and it doesn't mean just avoiding every risk then we are stuck in stagnation. Thanks.