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[Music] you I'm so Chung you're very very welcome to the IAEA John is managing director of digital investment banking in Banco Santander enough the UK but bankers under the broader almost global bank John's experience comes from engineering from trading I guess proprietary trading in fact and in Chicago to his own startup business and to eventually Santander bringing with them to some time there are a host of Legion of learning experiences and I would guess so he didn't say so downstairs that some of them were quite hard experiences in others were probably the the the the the formation of the manor I'm asking maybe to introduce himself a little bit before he moves into his presentation because I get the impression that there is a lot of learning for all of us in his life story as well as in the the presentation just say on behalf of the IAEA that you're all very welcome some of you are members others of you are honored guests I IEA is spending a good deal of time and attention to digital issues and to blockchain and you'll have seen from our program that there's been a series of events on that topic and this is one of those but I think it it risks being one of the best of those not that they haven't all been good sure Kevin thank you very much for the introduction and thank you very much for the invitation to come and talk I'm from Carlo originally and did my engineering degree in Dublin UCD and like many people in the early 90s emigrated to the United States as an immigrant with no job no money in order to live looking up at skyscrapers thinking what the hell am I going to do now and managed to work for a while as an engineer did an MBA in finance became a at the Chicago Board Options Exchange in the trading pits entered the management consulting business left that founded a startup which became a blockchain startup one of the early ones in 2012 raised money twice spent it and failed and went back to consulting and ended up consulting for several banks one of which is now my employer banco santander which I joined in 2016 to run the blockchain lab one of the very first bank run blockchain labs a new unit in the investment bank called a digital investment bank which is really the warehouse for our advanced technology programs including blockchain distributed ledger artificial intelligence robotics and other things although even though I'm responsible for all of these things globally I am actually the program manager for our blockchain digital assets program internally which is actually my own technical expertise anyway I give a lot of talks a lot of talks on different topics related to blockchain technology whether that's in front of regulators across the world whether it's business leaders in Banco Santander and groups such as this which have a write a wide range of different skills and expertise so what I'm going to do is I'm going to run through quickly some foundational concepts about why we're here get into why this technology is actually important for banks and the financial industry more broadly and then more specifically some of the things that we are doing along with other banks like Credit Suisse for example and other large global banks that are moving this technology almost to the point where it's going to become somewhat ubiquitous in the financial industry all right so being an engineer I was like to go back to first principles and I like to start with the history of Finance going all the way back to the very beginning so there are two problems that have existed in finance since day one day zero number one is the concept of counterpart risk now what does that mean if you've got gold in your hand there is no counterparty to that gold but if you accumulate a lot of gold it's too heavy to carry you got a store it somewhere so I give my gold to Kevin I said Kevin you store the gold and Kevin Kevin gives me a paper ticket in return that ticket is a Canadian against the gold in Kevin's gold vault we are counter parties to a transaction I have to trust the Kevin will redeem the gold when I go to redeem to go anyway this idea seems great but what actually happened is the gold vault operators realized they could issue as many tickets as they wanted because nobody ever came to redeem the goals that's perfectional Reserve was born we'll get into that the second problem number one encounter in finance counterparty risk probably number two and finances related its counterfeiting risk how do you know that the gold is real well you don't until our friend our Kameda has appeared stories famously ran naked through the streets of Athens shouting Eureka he had discovered a way to prove that the gold was real using the laws of physics does anybody here remember the equation for density good mass over 1 plus anyway so our friend Archimedes had figured out a way to prove that the gold was real so to propers and finance counterparty risk counterfeiting risk now extrapolate forward to today's financial system we have twenty five thousand banks in the world with banking licenses we've got a million non-bank financial institutions asset managers hedge fund pension funds hedge funds other stuff and we're all counterparties to each other's transactions all of this built on a system of fractional reserve where we hope we do not know but we hope that 10% of all the assets all the cash in existence is on deposit in a central bank right and we can imagine that a precarious system that's built on this leverage that's opaque has some potential systemic problems we all know what happened in 2007 2008 my father spent 42 years with AIB at the branch level there was chaos in Ireland and all over the world we know that thankfully were it looks great here in Dublin these days actually let's not make the same mistake again blame the banks anyway so 2009 something new came along this Newton thing was called Bitcoin I won't get into the details too much but Bitcoin was designed to operate entirely separate from the financial industry to be its own mini financial system by itself and it is within the context of it solves the two problems in finance it solves counterfeiting risks it solves counterparty risk and it also solves a third problem from computer science just geeks would know about PhD in artificial intelligence yes sorry does that team genders problem how a distributed system reaches agreement on the overall state of the system interesting stuff anyway what is Bitcoin bitcoin is essentially a payment system it was designed to be this is a direct quote from the white paper that described it originally peer-to-peer electronic cash its payment system and it's really three things it's a secure distributed database or ledger so I've said there's a record a ledger of all the transactions in the between network up running all over the world many many copies number two it's a communication protocol so the ledger has the ability to communicate with itself in other words to reach agreement on the state of the ledger so it's kind of the records are true number three then bitcoin and this was this something new VidCon is also a digital token it's this idea there's a digital representation of value in the ledger and in bitcoins purposes it serves two functions number one is as an anti-spam mechanism the ledger is open in order to enter a transaction into the ledger you actually have to record or pay some small amount a Bitcoin limits the amount of transactions that could occur and then number two it also serves as an incentive mechanism some operators of the ledger validate and process transactions that term Bitcoin terminology is known as mining I won't get into the reasons why or how it actually works but some parts of the ledger operators validate transactions and they get rewarded by the ledger itself and that ledger is known as Chane why is it called blockchain it's a nice buzzword it's called blockchain simply because bitcoin is inefficient and has the ability only to validate transactions every 10 minutes so every 10 minutes block of transactions validate 10 minutes later block of transactions validated ten minutes later block of transactions validated now they're linked together these blocks of transactions are linked together using mathematics cryptography that's okay but what you have is block block block block block chain that's all it means that's what blockchain means it's no more than that it's a very simple concept okay now so all of this has led to an explosion of what are known as crypto currencies this idea that you can have this digit these digital representations of value out there trading in the marketplace this is a deep topic by itself working for a bank I'm not even supposed to talk about crypto currencies but that's the world that I came from I got inspired by Bitcoin in 2012 started asking questions how does it actually work and went down the rabbit hole which by the way never ends am i right yes and there are tons of cryptocurrencies out there I mean when you hear about blockchain on CNBC and Bloomberg that's what they're really talking about they're talking about the act of liquid market for crypto currencies Bitcoin ether XRP litecoin all of these things people don't understand why they have value there are very good reasons I think why they have value it's a topic for another time happy to chat about that perhaps during Q&A ok so what we have with Bitcoin starting with Bitcoin s idea of a shared ledger does golden rector this Universal source of truth where my copy of the ledger is the same as your copy of the ledger and I know it's true because of the power of mathematics and cryptography just something there now there's lots of discussions about different flavor some of these Ledger's are public some of these Ledger's are private banks are more inclined to operate private permission Ledger's where we restrict access to the ledger systems to other banks I would say up until recently the public ledger systems have not been particularly interesting although that is changing and it's changing because the technology is evolving it's becoming more performant it's becoming more secure and it's becoming easier to understand how to use from a legal or regulatory point of view we did some of that recently ourselves now this idea of Ledger's and records begs the question and this is where I try and connect the work that's come before from the public open-source blockchain world with banks what is a bank a bank is just a ledger it's a record of who owns what now of course banks are special Ledger's because you know they're wrapped up in regulation our bank well it's called part non it's written in COBOL we have COBOL engineers were taken out if anybody here programs but you have a job tomorrow you might have to move to Madrid but you've got a job and it lives it's a COBOL mainframe system and it lives inside an IBM zseries mainframe I've never seen I've seen a photograph of this thing it's as big as this room I don't know why anyway but we're will migrate off it eventually but these ledger systems that banks have are very complicated they're very cumbersome and every bank has its own ledger so john bank has john ledgers kevin's bankers kevin's ledger multiplied by twenty five thousand and one of the big problems is we do business with each other but we don't trust each other right so john bank does business with kevin bank we don't trust each other and because of that we've got a huge amount of reconciliation auditing ccp central clearing part CSD central securities depository regulators auditors compliance all of these things that essentially are there to verify that my ledger is the same but officers of Kevin's ledger multiplied by 25 thousand plus million non-bank financial institutions on top we've completed we've created a system architecture it's called of the financial industry of many banks many Ledger's cumbersome grew organically wasn't designed by anybody okay so let's imagine a new future what if the banks were to share the same ledger I don't think there'll be just one ledger I think there'd be lots of Ledger's but let's just say let's imagine if there was just one ledger for a minute that means that John Bank and Kevin Bank we do business together we don't trust each other but John Bank trusts the ledger and has a copy Kevin Bank does business with Laurie Bank they don't trust each other but Kevin Bank trusts the ledger and has a copy and because of the power of mathematics cryptography which are part of the laws of physics we know that our copies of the ledger are true and in that regard we have done exactly the same thing as Archimedes did three thousand years ago we have used the laws of physics to solve a human problem the problem of trust right so it's not cops the concept about why blockchain or shared ledger distributed ledger technology is powerful for that financial services it's not this technology's complicated but the concept is so simple it makes sense right now I don't think there'd be just one ledger for everything there may be a ledger for payments there may be a ledger for bonds there could be ledger for equities there could be ledger for derivatives there could be a ledger for trade finance activities we trade sorry yes that's an example of a shared ledger system and what we're talking about here really is just infrastructure the internet its infrastructure so we'll move from an architecture of many banks many Ledger's of today to a different world which will be many banks fewer Ledger's and the regulator's like that because they like the idea that if they had a special you know land they could shine a light into this ledger and have an understanding of counter positions of counterparts bilaterally multilaterally or across the entire system systemic risk and that's why regulators like the answer so no need for banks to trust each other just like today because we don't well because the ledger anyway the killer app and all of this then is this idea of programmability our ledger is a special ledger it's a computer what the computers do their own programs so this idea of programmable value or programmable money now the buzz word from the blockchain world is called smart contracts they're not smart and they're not contracts in the legal sense their little computer programs scripts persistent scripts is probably a better term but the world calls them smart contracts that's call them smart contracts this idea that you can attach behavior automated behavior to value give you an example so over here we have a [Music] transaction let's say we enter into a securities transaction I buy one you so and that there's a valuation that needs to be done associated with that transaction which determines the amount of collateral which needs to get posted by either counterparty well in today's world that's kind of done manually to a certain extent and there can be a discrepancy between as valuations change over time in the market the amount of collateral that Bank and banker John Banks should be posting and what actually happens is back off a saying back off a speak and on the phone to each other and we reach some kind of agreement and if we don't like that we call these guys and we end up in court now in the future and that's very cumbersome lot of paperwork back offices for every front office salesperson in the bank they're probably five to seven people in the back office performing reconciliation tasks right it's expensive it's costly terrible but you can in the future be able to take you know the valuation model the link it to the collateral system as a five lines of code we're on the same edge we agree implicitly sign the contract and we agree that this code represents the valuation model and it automatically posts collateral as things move no back-office involved we've agreed that's the code we bought to you right so this idea of programmable value programmable money contractual behavior encapsulated in code that is visible and agreed to by all parties executes automatically based on certain predetermined criteria now think about a bond bond is when a company goes out and borrows money usually has interest payments known as coupons that pay quarterly and then there's a Redemption when the principal is paid back you can automate the entire thing righ we've got CCPs that's returning parties CSD is paying agents calculation age there's all these intermediaries verifying that everything's supposed to work correctly checking boxes we can automate all of it okay so I work for a bank that is mostly retail and commercial branches small businesses SME small and medium enterprises although I work for the investment bank which deals usually with large corporations and financial institutions but we looked at use cases across the bank in retail banking corporate banking capital markets and we start by asking the same three questions that anybody asks regarding technology when you look at a particular process in a business doesn't matter what it is you ask is it slow is it costly and is it error-prone well if the answer is yes yes and yes now you've got let's do something with technology and if you add an additional layer on top which are there are different parties that need to interact together that don't necessarily trust each other that's a promising use case potentially for some kind of shared ledger technology and looking at these things how many people here have lived in different countries in their lives everybody international payments sending dollars euros in Carlo two dollars in Chicago actually at the time it was pounds because that's what my father had to do to send me money when I was an immigrant United States took seven days to get there even today with transferwise it could take three to five why does it take five days to send money across the world when money in value are just ones and zeros just data in a machine should be instant right so and back to Santa dear now we actually have blockchain based international payment system system that's running on four of our corridors Brazil Mexico San UK Spain it'll be on all ten soon instant transfer at very very tight spreads 30 basis points that's a nice nice user experience I use it myself sent money to the United States it's available same-day fantastic at a guaranteed rate even better now if it's usable person-to-person business-to-business you talk to a treasurer of an international technology company who is you know buying chips in Taiwan and has to pay the Research Center in Tel Aviv well they probably have three bank accounts in Taiwan because they need to be sure that they can make the payment to pay for the chips so the chips get on the boat to meet the just-in-time needs of their supply chain what about in Israel when you have to pay the shekels to the local research team these PhD cryptographers that are designing your next generation systems well you probably need three bank accounts there as well in case a glitch happens and a payment gets stuck because people don't go to work if they don't get paid right now once you talk about business-to-business payments you can put automated things like what's called cash pooling this automated liquidity management for large companies that are that manage big pools of capital around the world you can move that capital instantly sweet but on topic again difficult to do on existing analog transaction rails but the future which will be 24/7 365 you can automate a lot of this and then when you get into the capital market side of things almost every single business process in capital markets cross currency swaps syndicated loans structured products trade finance bonds equities derivatives slow costly error-prone by and large the size of the back office is the indicator that the answer is yes what we we've lived with it and we've kind of accept no longer because we can't and the reason why we can't in banking accept us any longer is as an industry our return on tangible equity or OTE which is the measure is lower than our cost of capital as an industry and there are too many banks that's unsustainable that means we're in it's hard to survive if your return on equity is lower than your cost of capital doesn't make any sense so we have we have to figure out how to reduce cos number one and part of the story there is potentially blockchain systems for shared infrastructure why why should we watch the three banks build the same infrastructure why don't we just share the same infrastructure we're still going to compete with each other on products and services go to market the different ideas of concepts anyway so when you look at a bank any trying any transaction process which is slow costly and error-prone is probably a good target all right so where are we in 2014 the very first Bank study was conducted by Banco Santander titles and this is it's publicly available now it's called it was titled the impact of cryptocurrencies on banks at the time banks were worried about Bitcoin and they submitted a tender out to the world to find a consultant to do that study I was the consultant that was selected to do the study I found a job but I didn't know that at the time and the conclusion of the study was simple enough in that it's not about the coin it's not about the Bitcoin it's about the ledger it's about this idea of a shared Universal source of truth this we could we could trust then going from 2014 there was a lot of proofs of concept prototypes into 2016 2017 we started to see real money pilots supported by a lot of the consulting firms started getting interested whether it's you know Deloitte or Grant Thornton or consensus and like there's a lot of expertise out there now last year we formally made the decision let's take some of this to production which actually means now out of the lab and to go through the new products committee 11 separate subcommittees each one has ten people none of whom understand technology all of whom have the power to say no none of them have the incentive to say yes I don't know why I took on that job and additionally you have to work with the regulators Santander we're Spanish bank local regulators Banco de espana at the central bank level as a proxy for european central bank and then the CNM V which is the Spanish equivalent of the FCA are the SCC it's the securities regulator so before you can do anything real you have to sit down with everybody internally all the lawyers fifteen internal attorneys I'm not popular in the legal department we had outside counsel actually Allen & Overy Madrid office of ano and London office of a I know it was complicated to figure out how do we actually take these things live and now the first live platforms that are blockchain based or distributed ledger based are available incremental e and you as a user so as a user I take out my Banco Santander app here and if I want to send euros to dollars I as a user all I see I don't see any blockchain I don't see anything complicated all I see is rate midpoint is X X plus 30 basis points which is almost nothing and I can send it to be in my account same day that's great there's a nice user experience to speed so the idea here is that blockchain is just infrastructure you as clients whether retail corporate small and medium enterprises you'll never see any of this is just infrastructure underneath kind of like the chips in your phone or just infrastructure use your phone you don't think about the chips right I do that's because that's cuz I'm weird anyway so we at banco santander six weeks ago we shoot a digital bond this gets a bit technical and I'm gonna apologize in advance but some of you in the audience will understand exactly what this means we issued a digital bond a bond that's represented on the public etherion blockchain as a digital token the bond itself is a set of rights and obligations to cash flow but ownership of the bond is recorded on a blockchain instead about a CSD central securities depository 20 million dollars dollar denominated financially inconsequential but at a bank whether it's one dollar or a billion dollars you still have to go to the new products committee and all the regulator's so we picked a numbers of a sizable enough to be meaningful but if there was a problem that the risk wasn't so high one year maturity for coupons quarterly coupons and a fixed rate of interest of 1.9 8% priced right off our yield curve nothing special about this vanilla bond for legal entities four separate legal entities of the bank involved of the transaction banco santander s a which is the corporate parent in madrid was the issuer on the investor side Santander securities services Treasury which is a Spanish custodian but their treasury group was the investor I work for the dealers on that regard I was a bond salesman that day a bad one probably and then underneath all of this to make it all work as the custodian Santander security services which is actually licensed and regulated in custodian in Spain now custody in this new world changes a custodians responsibility relates to custody of cryptographic keys these long random numbers which control digital assets that's kind of technical custody of the digital cash because we didn't just digitize the security we also digitized the cash stable coins we talked about that earlier where you take real money on deposit in a bank account so the money is in a bank account and then you create digital tokens that are backed by the real money in the bank accounts like on to an amusement arcade you put ten bucks in you get ten bucks two tokens back by real money maybe you can redeem them at the end same thing with digital money real money in a bank account create digital tokens to represent that cash and now you've got digital cache and you can use that to transact and actually Facebook here yes sorry can't see Facebook made an announcement back in June relates it to Libre this idea you could build a payment system on a blockchain where you create a digital token backed by a basket of currencies where the basket of currencies pounds euros dollars Canadian dollars Singapore dollars I think was the mix something like that yeah it was closing but the real cash would be on deposit in custody accounts in banks around the world and then there's a kind of a digital token that sits on top very powerful compelling concept not new a consumer facing SDR Special Drawing right from the IMF which has been talked about since the 1960's banks haven't failed to deliver it shame on us not new but very provocative and I think something like this is going to come into existence for sure if it isn't Facebook it'll be the Chinese Europeans we won't be able to move fast enough unfortunately anyway number 9 on the list here is we use the public atif so there's lots of block chains out there the two big ones number one is Bitcoin which is just a payment system really and the one that's most interesting from my point of view in the public world is aetherium why it's programmable you can do cool things with it so we were able to create a digital representation of a security bond digital representation of cash we were able to then take the digital cash to digital bond and in the blockchain perform what's known as delivery versus payment this idea that you can exchange value cash for an investment simultaneously irrevocably and instantly and new that's called delivery versus payment and usually we rely on an entity called a CCP a sense of hearing party to perform that why because if you're an issuer of a security and you're an investor you want to make sure that the transaction happens instantly it's not fair if the issuer ends up with both the cash and the security at the same time you need to verify that the transaction happens in blockchain terminology we call that atomicity atomic it's cool yeah anyway so the first step is that the digital cash what am I going to do with it well I'd like to invest it in the future many digital securities to invest in but today there was only one was issued digital bond what can they do with it nothing in the future they'd be able to invest that digital cash into another security but today there was nothing else to do so the the issuer now at the 20 million dollars of digital tokens needs to redeem the tokens for real cash super simple they send the tokens back to the custodian that's redline number 5 custodian destroys the tokens sends them to the zero address and then the custodian transfers the real cash by Swift which is the message system when used to do that transfers the real cash from the custody account to the counter the issuer fullcycle takes about an hour traditionally in today's world this process usually is T plus three takes three days to verify a lot of paperwork so you go from T three issuer now has cash available instantly instead of three days or five days later to t0 which is instant capital optimization quite visible right on the issuer side anyway I won't get into the rest now does tokenization concept because it's kind of a fudge for something bigger that is coming known as central bank digital currency CBD C and that's when central bank's can issue digital currency themselves so there's currently a central bank there's two types of central bank money there's cash which is in your pocket that central bank money that's kind of a claim against the central bank although it doesn't really represent anything it used to represent gold today it represents nothing kind of hard to get your head of money it's just a PHA it's a faith-based concept and then we've got cash in them we've got reserve accounts that's kind of the electronic money that's in a central bank held on behalf of banks well in the future central banks will be able to issue directly to individual individuals our two institutions digital versions of central bank money so we at Banco Santander and 15 other financial institutions Credit Suisse UBS in Switzerland KBC ing Commerce bank Santander eurozone Barclays Lloyds pounds Bank New York Mellon State Street Nasdaq dollars CIBC Canadian dollars mu F G Mizzou ho s NB C Japanese yen 15 banks have been working on creating central bank digital currency as a consortium for the last three and a half years I've been working on this for three and a half years quietly the central banks that said to us say nothing and then our friends at Facebook announced Libre and all of a sudden thank you by the way from firm because we were allowed to talk about what we've been doing and finality international which was previously known as we called the project utility settlement coin because we're blockchain errs and that's a cool word but the idea that you can take government ensures tokenize and all of a sudden you have the ability to settle between banks wholesale because this is a wholesale system a billion dollars anytime of the day or night 24/7 365 I want to settle a billion yen on midnight on a Saturday night I can't do it today why because the central bank payment systems known as real-time gross settlement systems RTGS have windows target to euros open 6:00 a.m. to 6:00 p.m. Monday and Friday so those are that's your banking hours you can't go to the bank and make a payment after 6 o'clock on a Friday but tokenize money you can do it anytime and when you add some of the extra characteristics of program ability and security multi-currency pounds so the initial target for finality International which is the name of the company now that was incorporated back in May of this year when we and the 15 other banks put 60 million dollars behind us the first live currency will probably be available for testing purposes if we're lucky q3 q2 q3 2020 much closer than anybody actually thought why because we've been working on for three and a half years and thanks to Facebook now and I really mean that this topic has gone to the very top of the highest levels of the regulators in central bank's whether that's ECB Bank of England Federal Reserve Bank of China Bank of International Settlements which is the central bank of central banks in Basel in Switzerland this is a hot topic and it's going to happen and has all kinds of implications for transaction processes and banks we will have a new settlement rail with certain unique characteristics what are we going to do about that don't know yet and longer term something like finality international can be used multi currency we can imagine for instance a use case potentially what we trade those currencies manage the workflow between buyers and sellers in an international transaction to minimize the collater l against us and then all kinds of things like cross-border payments whether it's person-to-person business-to-business or fully automated cash management solutions now having said all that Dilbert's always sells it says it best one of the reasons why blockchain technology has been moving more slowly than we would like is because we've gotten distracted everywhere oh my god job security for guys like me but the truth is that only certain transaction processing workflows will genuinely benefit from shared ledger blockchain type solutions and we need to be pragmatic about what those are and our job today as technologists let's say in financial institutions or in large corporations or in consulting firms having done all of our proofs of concept and our research and development and exploration over the last few years is to figure out okay what are these use cases and there's a there's an arrow if you will where we will start and we'll go from there I hope I didn't take too long which is gracias a todos and I'll take any questions [Music]