In 2023, the international financial industry has seriously opened its eyes to the potential of crypto and the tokenization of digital assets, which has also contributed to the price rise of Bitcoin in recent months, among other things. But what happens here on the mountain, for example at Norway's largest bank, DNB?
Kaupr by editor Morten Myrstad has been granted exclusive access to Ole Morten Sunde (left in the picture) and Nikolai Nyrud Gobel (right) who are working together to prepare DNB for the meeting between crypto and classical finance.
As the interview in DNB's premises evolved into a broad and deep conversation about the opportunities and challenges of the meeting between crypto and classical finance, we have chosen to reproduce most of the conversation in one coherent article. We stress that DNB is still at an exploration stage and has not decided which crypto-related areas and products the bank should focus on. But the insights, reflections and reasoning that Sunde and Gobel share with us also say a lot about what themes and issues will face everyone working at the intersection of traditional and digital finance in the coming years.
Ole Morten Sunde leads the Emerging Products section in Products & Innovations at DNB, while Nikolai Nyrud Gobel is Product Specialist within Digital Assets in the section. It is now well over a year since Gobel joined DNB from his role as entrepreneur and CEO of Kaupang Krypto, now an integral part of K33.
Kaupr: How does DNB work with Digital Assets, and how are you organized?
Healthy: Product & Innovation is responsible for exploring some key areas of innovation. Some of this goes directly into more established product areas, while other things need to have a home in the early stages, and then it quickly ends up with me. So I have overall responsibility for initiatives within Digital Assets, while Nikolai has the professional expertise in this area.
Kaupr: And what is it like to go from a crypto startup to a banking group like DNB, Nikolai?
Gobel: There are big differences, of course. In the startup world of crypto, everything is about finding product market fit as quickly as possible, building new products, gaining revenue and preferably making profits. In DNB you have other business models that are very solid, and there is a low risk appetite. It is not as important for DNB to find new profitable business models within digital assets as quickly as possible. Things have to happen at the right pace. We are, of course, committed to innovation, but with some very clear framework conditions. One must be assured that the risk is manageable.
The other big difference that Gobel highlights is the size.
“Things naturally slow down in such a hierarchy. But there is a completely different impact both in terms of customer mass, expertise and finances”. Nikolai Nyrud Gobel
Gobel: In a small tech startup team, things go very fast. Decisions can be made, more or less “on the go”. You sit next to each other in a team where you have all the skills you need. In a large organization like DNB, there are established structures and processes that must be taken into account, with the advantages and disadvantages that it entails. Things naturally go slower in such a hierarchy. But one of the advantages is that there is an insane amount of expertise in various areas. There is a completely different impact both in terms of customer mass, expertise and finances.
Kaupr: So when the time comes, do you have a strong organization behind you to possibly be able to bet?
Healthy: Yes. it helps that, in the phase we are at now, it also helps with practical domain experience to be able to get on the ball quickly and discuss solutions. Here Nikolai has been absolutely instrumental in dragging this area forward in DNB. Within Digital Assets and starting with DLT, you can also envision several different products. The Emerging Products section is also working on other emerging products and technologies such as Generative AI and how it will be able to impact financial services today and in the future. So it's a good mix. Some report directly to me, while in the early phase we also work extensively through the matrix organization of DNB and actively use our innovation resources. The goal is to establish firmer structures as things become more established.
Kaupr: DNB works on innovation in several areas. How then, for example, will the interface with Yngvar Ugland and his team be?
Healthy: The New Tech Lab does an excellent job of exploring areas where innovation risks are high, where we look further ahead in time, and where the effects can be large, such as Quantum computing. Yngvar's team has a special focus on the technical opportunities and challenges within an area, while we look more at the entire business model. Yngvar and his team also work with us at Digital Assets and have contributed a lot of learning and maturation. Emerging Products also has a focus on how this can be established within DNB's existing structures and risk appetite. So Emerging Products has a slightly closer time perspective than the New Tech Lab, thus complementing two important functions.
Kaupr: So Digital Assets is more mature? It's more ready to go to market? Is that what you're saying?
Healthy: Yep. These are important things that we know are coming, but where the withdrawal is not yet clear. Digital Assets are in a kind of intermediate phase. We still believe that it is early, but we do see the contours of this being an area we want to be positioned within.
Gobel: And then there are many different types of products and models within digital assets. There are some things that are more mature and have been experimented with for several years, while other other things are completely “cutting edge” and are far ahead in time.
Kaupr: Yeah, and then I guess it's also in the cards that you don't run a Lab, right? You will explore possible business models, including how things can also be rolled out. If I interpret it correctly?
Healthy: Yeah, that's a good summary.
“We still think it's early. But we see the contours of this being an area we want to be positioned within.” Ole Morten Sunde
Kaupr: More about Digital Assets, how do you define it?
Gobel: Broadly speaking, there are various products based on Distributed Ledger Technology (DLT), or optionally on blockchain technology, which is a sub-category of DLT. Within that, there are different categories and definitions. Cryptocurrency is a big category. Then we have digital money, which is also a large category and which includes, among other things, digital central bank money. By the way, you have stablecoins and you have tokenized bank deposits.
Nikolai Gobel also highlights the tokenization of Real World Assets (RWA), an area that many major international financial players predict could become a major growth area.
Gobel: We are also looking at the tokenization of financial instruments. As a bank, it's natural to look at the products we offer today. Some of these are being explored through tokenization. We see it as a separate category, including, for example, the tokenization of stocks, funds, bonds, etc.
Kaupr: What about the tokenization of metals and commodities?
Gobel: Yes, the tokenization of commodities is definitely an area that is being looked at quite a bit. And then we also have tokenization of other types of value objects, if you call it that, including things that are not traded through banks today. It can be, for example, the tokenization of houses and other property, but also other options such as photos, car fleets and art. You also have intangible assets, such as rights, copyrights, and patents. So tokenization can be much different.
“Tokenization can provide several advantages. The first is operational efficiency, (...). You can also make trading happen both faster and cheaper”. Nikolai Nyrud Gobel.
Kaupr: What is that tokenization adds of value, beyond investing directly in the underlying assets, like stocks, real estate, commodities?
Gobel: Tokenization can provide several advantages. The first thing we talk about a lot is operational efficiency, e.g. in the issue of financial instruments. This could happen far more quickly, particularly within bonds. You can also make trading happen both faster and cheaper. Part of the benefits of operational efficiency probably come first when you also get the network effects. So it is a bit in the cards that in order for this to be really effective, it requires that more people agree on the same standard.
Beyond the advantages that tokenization can provide in operational efficiency, Gobel also highlights increased liquidity.
Gobel: If you take illiquid or illiquid assets such as property, art and private equity funds, and to varying degrees other types of assets, then through tokenization you can achieve higher liquidity, insofar as there are marketplaces for tokenized assets of course. Private equity funds are often limited to a few approved investors, and are not traded on a stock exchange. Even a stock exchange can be perceived as closed. Then you have property, which is incredibly illiquid. If you can get common default tokenization formats established as well as trading platforms that support the same formats, then you can much more easily get these assets into trading and open up a lot of liquidity.
Another area that Gobel highlights is fractionation, or the division of an asset into investable assets, which investors can buy a stake in.
Gobel: If you look at property for example, then there are high barriers to entry. If you fractionalize ownership of a property, it will allow more people to invest in a real estate project. This contributes to additional liquidity, but also implies democratization in that people who do not have as much money can still invest in expensive products. In addition, it can increase transparency by giving you more visibility into past value transactions or the value chain in complex products.
Healthy: Through fractionation, financial services can also be made available to more people, for example in larger bonds, private equity, etc. These are also markets that are not available to most people today.
Kaupr: How will this really be able to work, if I were to want to invest in private equity via tokenization. After all, this is an area that is regulated by MiFID, and that requires me to have knowledge or money. Can I then easily buy a fractional share in a PE fund, or is it required that I have a lot of money and knowledge of the underlying asset class?
Healthy: Underlying knowledge you have to have, yes. But the idea is that this should be accessible to a larger group of people, where you don't need as much capital to participate.
Gobel: Now we turn to a very interesting topic, the legal one. This is a new technology, but there are still laws and frameworks that this must either fit into, or some new rules must be established. But purely technologically, the advantage is that you can much more easily and cheaply reach out to many more people.
Kaupr: Will regulation of tokenized assets be part of MiCA, or is it outside MiCA? (*MiCA is the EU's new framework for investments in crypto).
Healthy: MiCA is not very explicit on issues surrounding tokenization. But different things happen elsewhere in the EU, for example within the DLT Pilot Regime. Some banks are also exploring this area. We would like to not have full clarity today, but eventually there will probably be more clarity in this area as well.
Kaupr's conversation with Sunde and Gobel was also about MiCA, but as we have published a separate dossier on the reactions to MiCA now being investigated by the Financial Supervisory Authority, we refer to this article where Nikolai Gobel, among others, is quoted.
Kaupr: Why do you think that tokenization has sort of become a buzzword, where BlackRock and many other financial institutions, including you at DNB, have the topic high on the agenda. Is tokenization more stuerent than cryptocurrency?
Gobel: There is a lot about the potential that lies in blockchain technology. If you look at the efficiency of cryptocurrency trading, then it is both fast and cheap and based on a technology that is far more modern than the technology that underpins securities trading today. In today's securities trading, there are an incredible number of intermediaries, things are slow and are built on systems that are both 20, 30 and 40 years old. I therefore believe that many people are now seeing that blockchain technology, particularly in terms of trading and retention, is beginning to mature and ready to be taken over to traditional assets. This could potentially bring many benefits, particularly in terms of streamlining value chains and cutting some middlemen.
Kaupr: So in five or ten years, if we go over to the brokerage table at DNB Markets, then half of them are working and trading tokens? Is that the way it's going?
Healthy: It's hard to predict into the future, or at least that far into the future. But what we are talking about is, among other things, institutional adaptation. The new solutions must address some specific pains that exist in the market today. The regulatory thing needs to be in place and then we have to make it fit into our operating models. After all, maturation is happening now in all three of these axes, so once these things are in place, then your vision of the future may well be right. But it's still too early to say how this is going to unfold. The most important thing for DNB now is to be positioned, and to establish the necessary basic capabilities that allow us to deliver on what our customers demand.
Kaupr: And I as a private customer, then, then I can go into the savings app, and then I can flip, buy some crypto, and trade some tokens. Is that the way it's going?
Healthy: Well, maybe.
(Pause)
Healthy: This is definitely something that some customers could have imagined. But as I said, there is a lot to be done specifically in the regulatory area before we get there. Trust is our most important asset, so we don't compromise on risk. So it will be at the rate that this makes possible.
Gobel: However, we see how the market is developing and are following developments closely. Also, in relation to tokenization, I think it's primarily a technological layer. I don't think that for most end customers it will be all that interesting what technology underlies their stock trading. It is not even certain that customers will know about it, if there is a transition to the shares or bonds being suddenly tokenized. But maybe they'll see that it gets a little cheaper or faster, and that it's open for trade 24/7.
Sunde chimes in and emphasizes that DNB's entire exploration of Digital Assets is based on a few clear objectives.
Healthy: Now we are at the core. Are there any significant issues that we should solve for our customers? Then comes the next question: What relevant technologies exist to be able to solve this? Is it DLT or other technologies? And then there's a consideration whether this is something we're going to explore now? Is there maturity for that? Or is it more in the wait-and-see category. Or is it simply something that is not compatible with our existing business models?
Kaupr: And where is DNB located now. Right now?
Healthy: It will vary in all these areas. If you take Digital Assets, then we're in different maturities on the different product categories. It is important for us to see where the use cases exist today. We also see a lot happening in tokenization, but there are still relatively small volumes as we see it today.
Kaupr: Is crowdfunding part of the scope? For example, spokespeople for the European Commission claim that Crowdfunding 2.0, that is tokenization?
Healthy: This could be one of several use cases. But as I said, we are at a relatively early stage when it comes to tokenization, and are keen to ask the right questions step by step. Based on that, then we establish some sort of position for how we want to go into the different areas, whether it's in the short, medium or long term.
Gobel: If you look at Ethereum, or other smart contract platforms, the first big use case, ICO, was essentially crowdfunding. (*ICO = Initial Coin Offerings).
Kaupr: It didn't go so well then...
Gobel: The No. To a large extent, the ICO wave seen in 2017 was largely about regulatory arbitrage. One had found a technically very easy way to recoup money, which many took advantage of. Both ordinary startups, in addition to the fact that there were quite a few pure frauds. For consumers, it may not be so easy to distinguish one from the other. So in terms of using tokens to crowdfund, then there's a lot of potential in the technology. But then we need to get the regulations in place.
Kaupr: If we look a little at the other parts of the DNB. Where are the main interfaces? Is it KYC, is it money laundering, is it payment intermediation, brokerage or other areas? (*KYC = Know Your Customer)
Healthy: We have many interfaces and discuss opportunities with all the business areas. We work with all risk and control environments and have issues that we discuss with these. We work at all levels, from business development to technology development. That's why we've established a kind of ecosystem within the bank that works on this in an efficient way. We've established an organization based on what we're trying to achieve here. We have some overarching goals that we are working towards.
“We find that many of our customers buy and store crypto. We have such a large volume that we can't ignore it.” Ole Morten Sunde
Sunde elaborates on part of these overall goals.
Healthy: First of all, we find that many of our customers buy and store crypto. We have such a large volume that we cannot ignore it. Therefore, we have an important goal in terms of minimizing downside risks in existing customers and working effectively, and having an effective dialogue with those customers. The second is that we are working to position ourselves for the future, where digital central bank money can be part of the payment infrastructure. And how DnB should best be positioned within it. And then we have the third category that we have already talked about: positioning ourselves for the opportunities that are here in the short, medium and long term, including the different product categories within Digital Assets.
Kaupr: What is the status of retail customers who have invested in crypto, but who like to experience banks as a barrier both on the onramp and offramp? Where does DNB stand in this question?
Gobel: After all, there has been a maturation. I think it's important for the public to understand that cryptocurrency is perceived as high risk for banking in general. There is a high risk of money laundering. Because of the Anti-Money Laundering Act, a bank has certain obligations to know the origin of the funds and to make sure that these funds have a legitimate background. We have been working for many years to build expertise, have acquired new tools and also have existing tools in this work. So we have a lot more expertise now than we had before. If you as a customer have things straight, and can document this, then you have nothing to fear. But be careful to have documentation in place.
Kaupr: But if you have it in order, then shouldn't there be something in the way of transferring money from DNB to a crypto exchange?
Gobel: It's not illegal to trade crypto, no.
Kaupr: And not the other way either? (Red: From Crypto to Fiat)
Gobel: The No.
Kaupr: Can I come to DNB and ask for a mortgage based on the fact that I have made money on crypto?
Gobel: again if one has obtained it legally, and can document it, then there is nothing in the way of it. But what you see sometimes is that there is insufficient documentation or a lack of willingness to provide documentation. So then you have to understand that then the bank will not be able to do what the money laundering law requires. So then it can be challenging.
Healthy: But here also assumes that it is in Fiat. Asking for a mortgage on a crypto holding, with the volatility that it entails, will be demanding.
Kaupr: So one has to convert crypto to Fiat first?
Healthy: It has to be a safe security, which is relatively stable in the first place. But there is an overall assessment that is being made.
Gobel: Yes, it must be Norwegian kroner entering the account.
Kaupr: What about the other services, is the custody of crypto holdings an area that you might get into?
Gobel: In connection with the exploration of possible positions, custody is a natural part of the exploration. We're looking at several different possible positions. If you look at the types of products that are out there, and look at what banks are doing today, then it's either custody, trading or tokenized money, and then either stablecoins or tokenized bank deposits. That's what we're seeing are the most widespread pilots among banks today. In addition, one would like to look at experimentation on things that are even further ahead in time, such as the tokenization of bonds and decentralized finance (DeFi).
Kaupr: You mentioned digital central bank money. What is DNB's stance here?
Healthy: We are open to the opportunities inherent in digital central bank money. The answer depends on what kind of design you want to land on. So we want to be involved in discussing what the design should look like together with the central bank.
Kaupr: Could digital central bank money even be a threat to the bank's business model?
Healthy: Yes, depending on the design, then it can be. But it could also strengthen banks' business model, again depending on the design. What we're working on now is looking at what significant issues this is going to address. How does it fit into the existing payment infrastructure? Will it challenge or strengthen our business model? These are questions that we ask ourselves. But it's very early to say before exploring this a bit more closely and seeing how the design lands.
Kupr: When you say design, do you mean wholesale and retail central bank money are two different choices?
Healthy: Yes, that's part of it. There are also other issues, such as privacy, to name one thing. There are also questions like what should be the role of the central bank, what is the role of banks, what is Fintech's role.
Nikolai shoots in.
Gobel: And should it be interest-bearing or not? Should you be able to build smart contracts on top? Programmability is a key issue.
Healthy: Interest rates, in particular, are a very relevant question. So it's simply too early to say. But have to commend Norges Bank which has explored very broadly and deeply on various things already. Going forward, too, it is important that they involve the banks well in the process.
Gobel: If you look at the concerns of the public, it becomes clear both in social media and in mainstream media that there is a part that worries about the privacy aspect, that the state should be able to gain direct visibility into the finances of private citizens. This is the important thing to communicate to the central bank and, as they are aware, that they take this concern very seriously and explore different privacy models in their design. So there are several things that need to be weighed up here.
Kaupr: If we look at the payments side, are we heading towards a situation where Bitcoin, stablecoins, e-money and digital central bank money will coexist?
Healthy: It's not unthinkable, after all. After all, it will depend on where the balance is located, in matters such as financial stability, regulations, considerations for innovation, etc.
Kaupr: Is DNB also a bank for Web3 start-ups, i.e. companies that develop solutions and applications based on the blockchain?
Healthy: Yes, I would say that. We have a separate partnership unit that is on a constant search for opportunities ahead in time. If it fits in with what we're looking for there, then it might be relevant. Otherwise, we also have a venture arm. So I would solicit entrepreneurs who have exciting things going on to get in touch, and get in dialogue and look at opportunities together.
Gobel: I see a challenge that I think many Web3 startups do not take seriously, namely the money laundering risk inherent in what individual Web3 startups do. This is very important for a bank when it comes to accepting new customers. It is important to take this seriously and get a proper legal assessment of whether you need a registration with the Financial Supervisory Authority or not. For example, very many startups are engaged in NFTs and think that this does not concern them. But that's not necessarily the right interpretation. It is therefore important to make proper assessments around any registration or licensing requirements. In addition, you should ask yourself if you have good enough procedures in place to monitor money laundering risks in your own company.
“I see a challenge that I think many Web3 startups do not take seriously, namely the money laundering risk inherent in individual Web3 startups.” Nikolai Nyrud Gobel
Healthy: And here we can mention other issues such as cyber security and privacy. These are things that are extremely important to us and that we need to consider quite early on in a dialogue with new business customers.
Kaupr: Yes, where after all DNB signed an agreement with the analytics and security company Chainalysis. So the first crypto-related products you guys launch are with braces on, if you get the question?
All three laugh...
Healthy: We take customers seriously, we take AML (Anti-Money Laundering) seriously, and we are adopting new technologies in this work. It is important to minimize downside risk and work well and effectively with customers.
Kaupr: What about DAOs, is that something a bank that DNB can “take in”? (* DAO = Decentralized Autonomous Organization). After all, a DAO doesn't have a central bank account?
Healthy: It's very new technology, and very much uncharted waters for us, although there are very exciting concepts.
Gobel: Yes, you see some startups that, for example, are going to create a bank account. It is important to understand the risks associated with money laundering. If you have collected money from many people and you do not know where or from whom that money is coming from, then it can be challenging in relation to the requirements that are placed on DnB as a bank, from the Anti-Money Laundering Act.
Kaupr: After all, many large banks have tried in the past, around 2016-17, to take advantage and gain some control over blockchain technology, but it was not successful. Are the assumptions better now?
“What we are seeing now is a great deal of market interest, institutional adaptation and a regulatory framework that is on the way”. Ole Morten Sunde
Healthy: We've been working on these technologies for a long time, so this is nothing new to us. If we look back to 2016-2017, then there was a lot of hype. It was not the easiest thing to start with; to get all the banks involved and to put in place interoperability and networking between the banks. It was a nice thought, but the reality was that the actors were at a very different level of maturation.
Compared to 2016-17, both Sunde and Gobel believe the assumptions for banks are different now.
Healthy: What we are now seeing is a great deal of market interest, institutional adaptation and a regulatory framework that is on the way. After all, it could potentially be easier to get those things done as the adoption progresses. It is not always the technology that is the most demanding, it is building a common value chain and a network. That is often the biggest challenge.
In 2023, the international financial industry has seriously opened its eyes to the potential of crypto and the tokenization of digital assets, which has also contributed to the price rise of Bitcoin in recent months, among other things. But what happens here on the mountain, for example at Norway's largest bank, DNB?
Kaupr by editor Morten Myrstad has been granted exclusive access to Ole Morten Sunde (left in the picture) and Nikolai Nyrud Gobel (right) who are working together to prepare DNB for the meeting between crypto and classical finance.
As the interview in DNB's premises evolved into a broad and deep conversation about the opportunities and challenges of the meeting between crypto and classical finance, we have chosen to reproduce most of the conversation in one coherent article. We stress that DNB is still at an exploration stage and has not decided which crypto-related areas and products the bank should focus on. But the insights, reflections and reasoning that Sunde and Gobel share with us also say a lot about what themes and issues will face everyone working at the intersection of traditional and digital finance in the coming years.
Ole Morten Sunde leads the Emerging Products section in Products & Innovations at DNB, while Nikolai Nyrud Gobel is Product Specialist within Digital Assets in the section. It is now well over a year since Gobel joined DNB from his role as entrepreneur and CEO of Kaupang Krypto, now an integral part of K33.
Kaupr: How does DNB work with Digital Assets, and how are you organized?
Healthy: Product & Innovation is responsible for exploring some key areas of innovation. Some of this goes directly into more established product areas, while other things need to have a home in the early stages, and then it quickly ends up with me. So I have overall responsibility for initiatives within Digital Assets, while Nikolai has the professional expertise in this area.
Kaupr: And what is it like to go from a crypto startup to a banking group like DNB, Nikolai?
Gobel: There are big differences, of course. In the startup world of crypto, everything is about finding product market fit as quickly as possible, building new products, gaining revenue and preferably making profits. In DNB you have other business models that are very solid, and there is a low risk appetite. It is not as important for DNB to find new profitable business models within digital assets as quickly as possible. Things have to happen at the right pace. We are, of course, committed to innovation, but with some very clear framework conditions. One must be assured that the risk is manageable.
The other big difference that Gobel highlights is the size.
“Things naturally slow down in such a hierarchy. But there is a completely different impact both in terms of customer mass, expertise and finances”. Nikolai Nyrud Gobel
Gobel: In a small tech startup team, things go very fast. Decisions can be made, more or less “on the go”. You sit next to each other in a team where you have all the skills you need. In a large organization like DNB, there are established structures and processes that must be taken into account, with the advantages and disadvantages that it entails. Things naturally go slower in such a hierarchy. But one of the advantages is that there is an insane amount of expertise in various areas. There is a completely different impact both in terms of customer mass, expertise and finances.
Kaupr: So when the time comes, do you have a strong organization behind you to possibly be able to bet?
Healthy: Yes. it helps that, in the phase we are at now, it also helps with practical domain experience to be able to get on the ball quickly and discuss solutions. Here Nikolai has been absolutely instrumental in dragging this area forward in DNB. Within Digital Assets and starting with DLT, you can also envision several different products. The Emerging Products section is also working on other emerging products and technologies such as Generative AI and how it will be able to impact financial services today and in the future. So it's a good mix. Some report directly to me, while in the early phase we also work extensively through the matrix organization of DNB and actively use our innovation resources. The goal is to establish firmer structures as things become more established.
Kaupr: DNB works on innovation in several areas. How then, for example, will the interface with Yngvar Ugland and his team be?
Healthy: The New Tech Lab does an excellent job of exploring areas where innovation risks are high, where we look further ahead in time, and where the effects can be large, such as Quantum computing. Yngvar's team has a special focus on the technical opportunities and challenges within an area, while we look more at the entire business model. Yngvar and his team also work with us at Digital Assets and have contributed a lot of learning and maturation. Emerging Products also has a focus on how this can be established within DNB's existing structures and risk appetite. So Emerging Products has a slightly closer time perspective than the New Tech Lab, thus complementing two important functions.
Kaupr: So Digital Assets is more mature? It's more ready to go to market? Is that what you're saying?
Healthy: Yep. These are important things that we know are coming, but where the withdrawal is not yet clear. Digital Assets are in a kind of intermediate phase. We still believe that it is early, but we do see the contours of this being an area we want to be positioned within.
Gobel: And then there are many different types of products and models within digital assets. There are some things that are more mature and have been experimented with for several years, while other other things are completely “cutting edge” and are far ahead in time.
Kaupr: Yeah, and then I guess it's also in the cards that you don't run a Lab, right? You will explore possible business models, including how things can also be rolled out. If I interpret it correctly?
Healthy: Yeah, that's a good summary.
“We still think it's early. But we see the contours of this being an area we want to be positioned within.” Ole Morten Sunde
Kaupr: More about Digital Assets, how do you define it?
Gobel: Broadly speaking, there are various products based on Distributed Ledger Technology (DLT), or optionally on blockchain technology, which is a sub-category of DLT. Within that, there are different categories and definitions. Cryptocurrency is a big category. Then we have digital money, which is also a large category and which includes, among other things, digital central bank money. By the way, you have stablecoins and you have tokenized bank deposits.
Nikolai Gobel also highlights the tokenization of Real World Assets (RWA), an area that many major international financial players predict could become a major growth area.
Gobel: We are also looking at the tokenization of financial instruments. As a bank, it's natural to look at the products we offer today. Some of these are being explored through tokenization. We see it as a separate category, including, for example, the tokenization of stocks, funds, bonds, etc.
Kaupr: What about the tokenization of metals and commodities?
Gobel: Yes, the tokenization of commodities is definitely an area that is being looked at quite a bit. And then we also have tokenization of other types of value objects, if you call it that, including things that are not traded through banks today. It can be, for example, the tokenization of houses and other property, but also other options such as photos, car fleets and art. You also have intangible assets, such as rights, copyrights, and patents. So tokenization can be much different.
“Tokenization can provide several advantages. The first is operational efficiency, (...). You can also make trading happen both faster and cheaper”. Nikolai Nyrud Gobel.
Kaupr: What is that tokenization adds of value, beyond investing directly in the underlying assets, like stocks, real estate, commodities?
Gobel: Tokenization can provide several advantages. The first thing we talk about a lot is operational efficiency, e.g. in the issue of financial instruments. This could happen far more quickly, particularly within bonds. You can also make trading happen both faster and cheaper. Part of the benefits of operational efficiency probably come first when you also get the network effects. So it is a bit in the cards that in order for this to be really effective, it requires that more people agree on the same standard.
Beyond the advantages that tokenization can provide in operational efficiency, Gobel also highlights increased liquidity.
Gobel: If you take illiquid or illiquid assets such as property, art and private equity funds, and to varying degrees other types of assets, then through tokenization you can achieve higher liquidity, insofar as there are marketplaces for tokenized assets of course. Private equity funds are often limited to a few approved investors, and are not traded on a stock exchange. Even a stock exchange can be perceived as closed. Then you have property, which is incredibly illiquid. If you can get common default tokenization formats established as well as trading platforms that support the same formats, then you can much more easily get these assets into trading and open up a lot of liquidity.
Another area that Gobel highlights is fractionation, or the division of an asset into investable assets, which investors can buy a stake in.
Gobel: If you look at property for example, then there are high barriers to entry. If you fractionalize ownership of a property, it will allow more people to invest in a real estate project. This contributes to additional liquidity, but also implies democratization in that people who do not have as much money can still invest in expensive products. In addition, it can increase transparency by giving you more visibility into past value transactions or the value chain in complex products.
Healthy: Through fractionation, financial services can also be made available to more people, for example in larger bonds, private equity, etc. These are also markets that are not available to most people today.
Kaupr: How will this really be able to work, if I were to want to invest in private equity via tokenization. After all, this is an area that is regulated by MiFID, and that requires me to have knowledge or money. Can I then easily buy a fractional share in a PE fund, or is it required that I have a lot of money and knowledge of the underlying asset class?
Healthy: Underlying knowledge you have to have, yes. But the idea is that this should be accessible to a larger group of people, where you don't need as much capital to participate.
Gobel: Now we turn to a very interesting topic, the legal one. This is a new technology, but there are still laws and frameworks that this must either fit into, or some new rules must be established. But purely technologically, the advantage is that you can much more easily and cheaply reach out to many more people.
Kaupr: Will regulation of tokenized assets be part of MiCA, or is it outside MiCA? (*MiCA is the EU's new framework for investments in crypto).
Healthy: MiCA is not very explicit on issues surrounding tokenization. But different things happen elsewhere in the EU, for example within the DLT Pilot Regime. Some banks are also exploring this area. We would like to not have full clarity today, but eventually there will probably be more clarity in this area as well.
Kaupr's conversation with Sunde and Gobel was also about MiCA, but as we have published a separate dossier on the reactions to MiCA now being investigated by the Financial Supervisory Authority, we refer to this article where Nikolai Gobel, among others, is quoted.
Kaupr: Why do you think that tokenization has sort of become a buzzword, where BlackRock and many other financial institutions, including you at DNB, have the topic high on the agenda. Is tokenization more stuerent than cryptocurrency?
Gobel: There is a lot about the potential that lies in blockchain technology. If you look at the efficiency of cryptocurrency trading, then it is both fast and cheap and based on a technology that is far more modern than the technology that underpins securities trading today. In today's securities trading, there are an incredible number of intermediaries, things are slow and are built on systems that are both 20, 30 and 40 years old. I therefore believe that many people are now seeing that blockchain technology, particularly in terms of trading and retention, is beginning to mature and ready to be taken over to traditional assets. This could potentially bring many benefits, particularly in terms of streamlining value chains and cutting some middlemen.
Kaupr: So in five or ten years, if we go over to the brokerage table at DNB Markets, then half of them are working and trading tokens? Is that the way it's going?
Healthy: It's hard to predict into the future, or at least that far into the future. But what we are talking about is, among other things, institutional adaptation. The new solutions must address some specific pains that exist in the market today. The regulatory thing needs to be in place and then we have to make it fit into our operating models. After all, maturation is happening now in all three of these axes, so once these things are in place, then your vision of the future may well be right. But it's still too early to say how this is going to unfold. The most important thing for DNB now is to be positioned, and to establish the necessary basic capabilities that allow us to deliver on what our customers demand.
Kaupr: And I as a private customer, then, then I can go into the savings app, and then I can flip, buy some crypto, and trade some tokens. Is that the way it's going?
Healthy: Well, maybe.
(Pause)
Healthy: This is definitely something that some customers could have imagined. But as I said, there is a lot to be done specifically in the regulatory area before we get there. Trust is our most important asset, so we don't compromise on risk. So it will be at the rate that this makes possible.
Gobel: However, we see how the market is developing and are following developments closely. Also, in relation to tokenization, I think it's primarily a technological layer. I don't think that for most end customers it will be all that interesting what technology underlies their stock trading. It is not even certain that customers will know about it, if there is a transition to the shares or bonds being suddenly tokenized. But maybe they'll see that it gets a little cheaper or faster, and that it's open for trade 24/7.
Sunde chimes in and emphasizes that DNB's entire exploration of Digital Assets is based on a few clear objectives.
Healthy: Now we are at the core. Are there any significant issues that we should solve for our customers? Then comes the next question: What relevant technologies exist to be able to solve this? Is it DLT or other technologies? And then there's a consideration whether this is something we're going to explore now? Is there maturity for that? Or is it more in the wait-and-see category. Or is it simply something that is not compatible with our existing business models?
Kaupr: And where is DNB located now. Right now?
Healthy: It will vary in all these areas. If you take Digital Assets, then we're in different maturities on the different product categories. It is important for us to see where the use cases exist today. We also see a lot happening in tokenization, but there are still relatively small volumes as we see it today.
Kaupr: Is crowdfunding part of the scope? For example, spokespeople for the European Commission claim that Crowdfunding 2.0, that is tokenization?
Healthy: This could be one of several use cases. But as I said, we are at a relatively early stage when it comes to tokenization, and are keen to ask the right questions step by step. Based on that, then we establish some sort of position for how we want to go into the different areas, whether it's in the short, medium or long term.
Gobel: If you look at Ethereum, or other smart contract platforms, the first big use case, ICO, was essentially crowdfunding. (*ICO = Initial Coin Offerings).
Kaupr: It didn't go so well then...
Gobel: The No. To a large extent, the ICO wave seen in 2017 was largely about regulatory arbitrage. One had found a technically very easy way to recoup money, which many took advantage of. Both ordinary startups, in addition to the fact that there were quite a few pure frauds. For consumers, it may not be so easy to distinguish one from the other. So in terms of using tokens to crowdfund, then there's a lot of potential in the technology. But then we need to get the regulations in place.
Kaupr: If we look a little at the other parts of the DNB. Where are the main interfaces? Is it KYC, is it money laundering, is it payment intermediation, brokerage or other areas? (*KYC = Know Your Customer)
Healthy: We have many interfaces and discuss opportunities with all the business areas. We work with all risk and control environments and have issues that we discuss with these. We work at all levels, from business development to technology development. That's why we've established a kind of ecosystem within the bank that works on this in an efficient way. We've established an organization based on what we're trying to achieve here. We have some overarching goals that we are working towards.
“We find that many of our customers buy and store crypto. We have such a large volume that we can't ignore it.” Ole Morten Sunde
Sunde elaborates on part of these overall goals.
Healthy: First of all, we find that many of our customers buy and store crypto. We have such a large volume that we cannot ignore it. Therefore, we have an important goal in terms of minimizing downside risks in existing customers and working effectively, and having an effective dialogue with those customers. The second is that we are working to position ourselves for the future, where digital central bank money can be part of the payment infrastructure. And how DnB should best be positioned within it. And then we have the third category that we have already talked about: positioning ourselves for the opportunities that are here in the short, medium and long term, including the different product categories within Digital Assets.
Kaupr: What is the status of retail customers who have invested in crypto, but who like to experience banks as a barrier both on the onramp and offramp? Where does DNB stand in this question?
Gobel: After all, there has been a maturation. I think it's important for the public to understand that cryptocurrency is perceived as high risk for banking in general. There is a high risk of money laundering. Because of the Anti-Money Laundering Act, a bank has certain obligations to know the origin of the funds and to make sure that these funds have a legitimate background. We have been working for many years to build expertise, have acquired new tools and also have existing tools in this work. So we have a lot more expertise now than we had before. If you as a customer have things straight, and can document this, then you have nothing to fear. But be careful to have documentation in place.
Kaupr: But if you have it in order, then shouldn't there be something in the way of transferring money from DNB to a crypto exchange?
Gobel: It's not illegal to trade crypto, no.
Kaupr: And not the other way either? (Red: From Crypto to Fiat)
Gobel: The No.
Kaupr: Can I come to DNB and ask for a mortgage based on the fact that I have made money on crypto?
Gobel: again if one has obtained it legally, and can document it, then there is nothing in the way of it. But what you see sometimes is that there is insufficient documentation or a lack of willingness to provide documentation. So then you have to understand that then the bank will not be able to do what the money laundering law requires. So then it can be challenging.
Healthy: But here also assumes that it is in Fiat. Asking for a mortgage on a crypto holding, with the volatility that it entails, will be demanding.
Kaupr: So one has to convert crypto to Fiat first?
Healthy: It has to be a safe security, which is relatively stable in the first place. But there is an overall assessment that is being made.
Gobel: Yes, it must be Norwegian kroner entering the account.
Kaupr: What about the other services, is the custody of crypto holdings an area that you might get into?
Gobel: In connection with the exploration of possible positions, custody is a natural part of the exploration. We're looking at several different possible positions. If you look at the types of products that are out there, and look at what banks are doing today, then it's either custody, trading or tokenized money, and then either stablecoins or tokenized bank deposits. That's what we're seeing are the most widespread pilots among banks today. In addition, one would like to look at experimentation on things that are even further ahead in time, such as the tokenization of bonds and decentralized finance (DeFi).
Kaupr: You mentioned digital central bank money. What is DNB's stance here?
Healthy: We are open to the opportunities inherent in digital central bank money. The answer depends on what kind of design you want to land on. So we want to be involved in discussing what the design should look like together with the central bank.
Kaupr: Could digital central bank money even be a threat to the bank's business model?
Healthy: Yes, depending on the design, then it can be. But it could also strengthen banks' business model, again depending on the design. What we're working on now is looking at what significant issues this is going to address. How does it fit into the existing payment infrastructure? Will it challenge or strengthen our business model? These are questions that we ask ourselves. But it's very early to say before exploring this a bit more closely and seeing how the design lands.
Kupr: When you say design, do you mean wholesale and retail central bank money are two different choices?
Healthy: Yes, that's part of it. There are also other issues, such as privacy, to name one thing. There are also questions like what should be the role of the central bank, what is the role of banks, what is Fintech's role.
Nikolai shoots in.
Gobel: And should it be interest-bearing or not? Should you be able to build smart contracts on top? Programmability is a key issue.
Healthy: Interest rates, in particular, are a very relevant question. So it's simply too early to say. But have to commend Norges Bank which has explored very broadly and deeply on various things already. Going forward, too, it is important that they involve the banks well in the process.
Gobel: If you look at the concerns of the public, it becomes clear both in social media and in mainstream media that there is a part that worries about the privacy aspect, that the state should be able to gain direct visibility into the finances of private citizens. This is the important thing to communicate to the central bank and, as they are aware, that they take this concern very seriously and explore different privacy models in their design. So there are several things that need to be weighed up here.
Kaupr: If we look at the payments side, are we heading towards a situation where Bitcoin, stablecoins, e-money and digital central bank money will coexist?
Healthy: It's not unthinkable, after all. After all, it will depend on where the balance is located, in matters such as financial stability, regulations, considerations for innovation, etc.
Kaupr: Is DNB also a bank for Web3 start-ups, i.e. companies that develop solutions and applications based on the blockchain?
Healthy: Yes, I would say that. We have a separate partnership unit that is on a constant search for opportunities ahead in time. If it fits in with what we're looking for there, then it might be relevant. Otherwise, we also have a venture arm. So I would solicit entrepreneurs who have exciting things going on to get in touch, and get in dialogue and look at opportunities together.
Gobel: I see a challenge that I think many Web3 startups do not take seriously, namely the money laundering risk inherent in what individual Web3 startups do. This is very important for a bank when it comes to accepting new customers. It is important to take this seriously and get a proper legal assessment of whether you need a registration with the Financial Supervisory Authority or not. For example, very many startups are engaged in NFTs and think that this does not concern them. But that's not necessarily the right interpretation. It is therefore important to make proper assessments around any registration or licensing requirements. In addition, you should ask yourself if you have good enough procedures in place to monitor money laundering risks in your own company.
“I see a challenge that I think many Web3 startups do not take seriously, namely the money laundering risk inherent in individual Web3 startups.” Nikolai Nyrud Gobel
Healthy: And here we can mention other issues such as cyber security and privacy. These are things that are extremely important to us and that we need to consider quite early on in a dialogue with new business customers.
Kaupr: Yes, where after all DNB signed an agreement with the analytics and security company Chainalysis. So the first crypto-related products you guys launch are with braces on, if you get the question?
All three laugh...
Healthy: We take customers seriously, we take AML (Anti-Money Laundering) seriously, and we are adopting new technologies in this work. It is important to minimize downside risk and work well and effectively with customers.
Kaupr: What about DAOs, is that something a bank that DNB can “take in”? (* DAO = Decentralized Autonomous Organization). After all, a DAO doesn't have a central bank account?
Healthy: It's very new technology, and very much uncharted waters for us, although there are very exciting concepts.
Gobel: Yes, you see some startups that, for example, are going to create a bank account. It is important to understand the risks associated with money laundering. If you have collected money from many people and you do not know where or from whom that money is coming from, then it can be challenging in relation to the requirements that are placed on DnB as a bank, from the Anti-Money Laundering Act.
Kaupr: After all, many large banks have tried in the past, around 2016-17, to take advantage and gain some control over blockchain technology, but it was not successful. Are the assumptions better now?
“What we are seeing now is a great deal of market interest, institutional adaptation and a regulatory framework that is on the way”. Ole Morten Sunde
Healthy: We've been working on these technologies for a long time, so this is nothing new to us. If we look back to 2016-2017, then there was a lot of hype. It was not the easiest thing to start with; to get all the banks involved and to put in place interoperability and networking between the banks. It was a nice thought, but the reality was that the actors were at a very different level of maturation.
Compared to 2016-17, both Sunde and Gobel believe the assumptions for banks are different now.
Healthy: What we are now seeing is a great deal of market interest, institutional adaptation and a regulatory framework that is on the way. After all, it could potentially be easier to get those things done as the adoption progresses. It is not always the technology that is the most demanding, it is building a common value chain and a network. That is often the biggest challenge.
