Demystifying Tokenisation, Digital Currencies, and the Future of Payments with Arjeh van Oijen

Speaker A: Welcome to Dave and Dom Demystify, a fintech futures podcast helping make sense of the world of fintech and digital finance. Please sit back and listen as the two Ds take a subject and discuss it to make it clearer and easier to understand

Speaker B: Demystify. Welcome everybody to the Dave and Dahm Demystify Show. And this week we are going to demystify tokenization. And I know Dave is really looking forward to this. So many different types of tokens in the market I guess. Well we say so many but there are a few different types and it is quite confusing. It is the hot topic for this year, especially coming back from Money20 20. It seemed that everything was all about tokens so we need to demystify this topic. And who better than Arjun from um, Icon Solutions to come in and explain all this stuff? Because arj, you're a bit of an expert in payments, aren't you?

Speaker C: Yes, I've been in payments for more than 35 years. Um, and related to the subject of digital assets, Blockchain, um, and DLT Technology, I've been involved already for 10 years. I'm quite familiar with the topic.

Speaker B: I can say that's great. I mean uh, for the benefit of our audience, would you like to give a bit of an introduction to yourself and Icon Solution? What do they.

Speaker C: Icon Solutions is a software company based in the, in the UK and we are delivering software to banks to enable them to do the processing of their payments. And um, the unique part of our proposition is that it allows banks to customize and extend the solution without being dependent on us as a vendor. And that gives a lot of flexibility to them and vendor independence. And in particular the larger banks were servicing large corporates really like the concept and uh, my role in the company is that I'm responsible for the product strategy.

Speaker D: I mean just start by giving a couple of use cases that you've got just to help people understand more about the product itself. Sure, sure.

Speaker C: It's account to account payments processing where we are payment type agnostic. So it can be domestic payments, can be high value payments, cross border payments, also direct debits in every foreign sort, and is also independent of the clearing and settlement mechanism through which the payments are clear to settle with other banks or other financial institutions. And like I said, it's up to the bank that uh, they have the flexibility how and in which parts of the full value chain they are using the product that can be across the full value chain but it can also be a certain part of the value chain a lot of our customers are using our product to start consolidating the payment processing, where they tend to have multiple different solutions for different types of payments, different clearing and settlement mechanisms. By consolidating, they can not only reduce costs, but but also improve the quality of service that they were offering to their customers.

Speaker B: Dave, the logical thing is that, you know, a bank just does payments through one kind of set of systems, Right. But every time they add a core, typically that core might be connected to a different payment mechanism as well. So it's not only core duplication, but it's duplication of the payments Rails as well. So that's the problem that they really helped us solve.

Speaker C: Absolutely, because multiple systems means multiple integrations, multiple maintenance, multiple testing, multiple deployments. So, uh, it's adding a lot of complexity, but also costs, and that is what we aim to solve with our solution.

Speaker D: It sounds very much like this is a product which is quite focused on efficiency. Do you go beyond that thinking in terms of what you offer as well? So once the banks sort of started using your product to create a more efficient process, what other things can they start doing with your products?

Speaker C: Very good question. Although I emphasize the efficiency benefits. The other benefits is, of course, because they are able to add their own functionalities and features to the product without being dependent on us. They are much quicker to innovate and, and launch new services and features of services to the market and to their customers. So that flexibility to be able to respond to new initiatives and developments in the market and of course, request from customers, that is another very major benefit, uh, of our solution, because they don't need to come back to us to say, do you want to add this functionality to the products? They have the possibility to do this themselves without depending on us. And that's a m. There's a major benefit. Absolutely.

Speaker D: I mean, it feels like quite a big step forward. So does that mean at a kind of corporate level, like, if you had an institutional customer, you, uh, could really start tailoring your offering to them without involving you from a kind of product? That sounds like a big step forward.

Speaker C: That's spot on. As a summary. Absolutely. That's exactly what we were offering.

Speaker D: I mean, I know Dharmesh is sort of jumping at the bit to ask a few, but just a quick question around that is, you know, from your experience, are banks geared up to do that? Because often they are quite reliant on vendors to provide solutions. So culturally, you know, the thought that they may be able to kind of drive, uh, more of a strategy around the product. Do you think they're ready to do that?

Speaker C: Yes, absolutely. So Our solution covers 90% of the functionality they need. That's pretty standard functionality that's required by all the banks. But it's that 10% which is essential for them to differentiate in the market to service the customers in the way they want to be serviced. And it's that 10% that is often causing the barriers for them to service their customers because they are depending on the vendor. And in our situation, they are able to do this themselves without depending on us. That's absolutely a shift in the way banks are starting to use technology.

Speaker D: Yeah.

Speaker B: And I should add, Dave, that um, most of icon solutions are the large tier one banks. Right. And this is kind of their specialism. So it's the banks with the big IT departments that are ready to customize. Cool. So I would like to get into A.J. uh, let's start with, because I'm keen to that Dave, he's going to walk away as an expert in tokenization by the end of this. Let's start with domestic payments. What kind of tokens will play in the domestic payment space? And you know, and how are they solving that problem? Like how will tokenized deposits work?

Speaker C: Yeah. So I will take a small step back and then come to your question. So if you look into the digital assets space, you could divide this in cryptos like the Bitcoins, the Ethereums and the dog coins and so on, which have a value on their own. They are not related to what you would call real world assets, meaning their value is completely driven by supply and demand in the market. Then you could say, uh, you have different digital currencies, which is related to a fiat currency. And I will come back to that later on. And then the third category is other assets, which can be securities, bonds. But even you could of course digitalize real estate. The uh, ownership of, let's say a house, you can split it up, digitalize it, tokenize it, so that parts of the ownership can be transferred. Just as an example of how you can digitalize real world assets, as they call them, so that it can be easily, more easily be transferred between parties involved. If you go back then to the digital currency, then again there are three types of issuers that you can distinguish. It's the central bank and in that case it's called a, uh, central bank. Digital currency, it can be commercial bank, then they refer to that as a tokenized deposit. And then there can be non banks and then it's called a stablecoin. And in Particular in that last category, in the last few years regulation and new laws have been taken and have been accepted that regulates that stablecoin market, meaning that issuers of those stablecoins that they need to hold deposits in such a way that they can always be able to pay back when holders of the digital currency redeem the currency back with the issuer. And then if you look to the second category where you talk about commercial banks, then it's the commercial bank who's issuing a digital currency. And um, that can be obtained by putting a deposit with that commercial bank. And in exchange parties which can be other banks, which can be corporates, which can be also even individuals could acquire that digital currency. And then if they have that digital currency in their account on the blockchain or DLT network, they can start using that for transferring money.

Speaker B: So that commercial bank that's basically taking existing money that was held in an account and then just putting a wrapper around it to use new payment rails in effect. Is that the case?

Speaker C: Yeah, well it's actually put actually in another ledger so it's actually not creating new money, it's existing money. But then um, it's put in a separate ledger so that. And I will come back later on with a very concrete example so that it becomes more tangible what it really means. But coming back to your question from a domestic payments perspective, the typical use cases are uh, for instance declaring a settlement of high value payments between banks where existing infrastructure like RTS systems can still be a bottleneck or barrier because of the limited operating hours where then with the digital currency you could then um, settle transactions on a 247 basis. But it is also possible to do settlement of other financial transactions like security trades or bond trades in a way that you can settle them in an atomic way, meaning they call that also in the market T0 where uh, the parties involved don't have any market risk anymore against each other. And that's a huge benefit in comparison with the current situation where there's still T plus 2 settlement.

Speaker B: So the way that it currently works is that you know, if I'm sending money to Dave in the UK and I've got a UK account, I actually send, you know, I send an instruction to the central bank, right to the bank of England and say I want to give Dave 50 quid and then the central bank basically says to Dave's bank that you're getting 50 quid from Dharmesh. And then, you know, but no money's actually moving until the end of the day. This is the gross settlement that says. Right. Dharmesh's bank, which was, let's say TSB and Dave uses Monzo. There's been £1,250,000 worth of transactions going from TSB to Monzo for you know, 677 customers. And that's the net difference because money would flow either way. And so the real time gross settlement is saying, well instead of doing these like small transactions between individuals, we're just going to settle up between the banks at the end of the day. Is that the real time gross settlement?

Speaker C: You need to make a distinction actually in the UK there are three mechanisms. You have Becks.

Speaker B: Right.

Speaker C: Which is net settlement and that's the mechanism that you just explained.

Speaker B: Right.

Speaker C: At the end of the day the totals are being, all the amounts have been aggregated in totals and then a net settlement is being settled. Then there is FPS which is a deferred settlement system, meaning it settled through the day in different cycles. But the actual creditor account, beneficiary account is being credited in a um, real time or near real time basis within 15 seconds. Yeah, that's faster payments.

Speaker B: Yeah.

Speaker C: And then the third mechanism that is uh, cheps and that's a true gross settlement mainly used by large amounts or the settlement of cross border related transactions between banks. In all of those cases the bank of England has a role in that settlement because for all those settlements the evolved banks need to hold an account with the central bank. Okay, with the bank of England.

Speaker B: Yeah, yeah.

Speaker C: If you look to digital currencies, it becomes possible to settle transactions via an infrastructure that is. And then also accounts that are uh, not with the bank of England but registered on the blockchain or DLT network. And uh, that's a key difference.

Speaker B: In the old world you've got like these two ledgers, one for me and one for Dave and I get debited and Dave gets credited. And in the new world both of those happen on the blockchain, is that right?

Speaker C: Depends on the majority of the initiatives is related to settlement between banks. But rather than that those banks hold accounts with, with the bank of England. In the examples that we just discussed, they hold both hold an account on the DLT network and then there is uh, a liquidity provider, the provider of the tokenized deposits, which can be one of those banks but which can be also another commercial bank that is providing that liquidity that can be used. And that means that you can then um, set up clearing and settlement mechanisms where the central bank is not directly involved and that of course explains where central banks become a bit nervous because that means that they have less control on the settlements that take place and the risks that are in the market. And central banks, one of the key roles is of course to take care that there is financial stability and this makes their role a bit more difficult. So that's the reason why central banks are a bit reluctant in accepting these kind of initiatives.

Speaker D: I mean it's interesting in terms of domestic payments. So thank you because there's a few nuggets in there, things that I probably should know but didn't. So that's really helpful. My real huge bugbear is international payments at the moment. So I can't believe in the year uh, 2026 it can take five days for a payment to turn up from America for inst. And you know, one of the reasons I love wise is it shows you where your money's at in that process. You know, it kind of demystifies, demystifies that. And it's extraordinary to me how many steps can happen in a payment process. What's the future for international payments do you think around tokenization?

Speaker C: Absolutely. So in international payments a lot is happening at the moment, like you mentioned, you see parties coming up, likewise Visa Direct and so on thunes that do these international payment settlements in a much more efficient manner because they have the network and so on. So that is absolutely a big change in the market. Maybe I need to go to say that traditionally these payments were cleared, settled, settled through correspondent banks. And yes, you are absolutely right, that takes quite a lot of time, is error prone, is quite costly because each party in the chain is taking a uh, charge. So it's absolutely something that absolutely needs to change. There's a second development very much driven by for instance the bank of International Settlement with the Project Nexus where real time clearing and settlement infrastructures in different countries are uh, interconnected. Meaning that what you can do on a domestic national basis with real time payments infrastructures, it becomes also possible to do that on an international basis. And the third development is of course the use of digital currencies where banks then can settle directly with each other via digital currency that's registered on the DLT network without any intermediary banks being evolved anymore. And that means that you can then um, process a payment in a matter of seconds between banks that are located in different countries, even with a third currency involved, which is quite cumbersome when you in the correspondent banking world. And in this way it becomes much simpler. So yes, it is not just one development the future will prove which one will dominate. Maybe it will be a variation of different mechanisms. But what is certainly sure that the correspondent banking as we know it will not exist anymore between five or ten years from now.

Speaker B: Just to be clear, the correspondence bank is basically, if Dave lived, let's say, in Uzbekistan and I wanted to send him some dollars, it may be that my bank has an account with another bank in Uzbekistan or actually has to go via another country with another bank that has an account with a bank in Uzbekistan. So it could be one or many jumps before it gets to Dave. That's what's taking the time and also the large fees. It's multiple jumps potentially.

Speaker A: Right.

Speaker B: Is that right?

Speaker C: That's absolutely right. Absolutely right. Okay. Yeah.

Speaker B: And so that role for those intermediaries goes away, kind of removes the time frames for the jumps between and it also removes the cost. I mean that sounds like a lot of money is going to come out of banking for those organizations, right?

Speaker C: Absolutely.

Speaker D: Yeah.

Speaker C: It should drive down the costs. Also the cost of the banks themselves, meaning that they should be able to offer these kind of services to their customers against lower fees because, and still keep the same margin. But, uh, because the overall costs are going down, it can mean that also the fees that the banks are charging to their customers can go down.

Speaker B: Right, right. And therefore, you know, also potentially there's going to be more transfers as they become more affordable. So rather than, you know, me sending Dave 50 quid every month, I could just say, uh, well, hold a sec, I'll just send you the, you know, five lots of 10, you know, $10 every week as we do the work, whatever. Right. So I might break up the payments again because it's cheaper to do it.

Speaker C: Absolutely, absolutely, that's absolutely correct.

Speaker B: So coming back to the question of then the correspondence banks, what will happen to them? I mean, will it, you know, is this like an existential crisis for them or will they reinvent themselves to do something else?

Speaker C: Well, it will remain there, will serve because the correspondent banks, it's not their only uh, business. Main business is of course servicing corporates or SMEs and of course retail customers. So the payment infrastructure they're using are uh, used mainly for that. And the correspondent banking is mainly that are also offering services to other banks. But it certainly will affect the P and L. And yes, they need to innovate and like you said, they are uh, already experiencing a lot of more competition from companies likewise Banking Circle and so on thunes who are uh, actually taking over that correspondent banking model so it, it is also very important that banks are starting to move. And that's also in the conversations we have with banks, that you need to have a flexible solution to innovate, otherwise you're going to lose a significant part of the market.

Speaker D: I'm going to. This is probably a really stupid question, but I'm going to ask it anyway. But if Your Visa or MasterCard, I mean you make a ton of cash out of moving money around the world, but from a consumer point of view and from a kind of business point of view is great because you've kind of got these trust in marks and you know, trusted networks. From what you're saying, there's alternatives that will kind of come online. Like how does that turn up from a consumer point of view? So I go on holiday to Greece and you know, I want to make payment, but I don't want to use Visa or MasterCard. I want to use one of these new Rails. What does that look like? I mean and as I say that could be just a sort of fantasy, stupid question to be asking and I've probably misunderstood something.

Speaker C: It's a very valid question and very actual. It's a bit different because if you look to the cards world, maybe coming back to the previous Part, Visa and MasterCard are also one of the players in that space of clearing a settlement of international payments. It's a new kind of business they have adopted and they're pushing very strong for that. If you go to the traditional business being cards, there is a lot of happening especially, well, not only in Europe. If you take examples like in India with upi, India has introduced a complete new payment infrastructure that is not car based, well, which is digital because in India the majority of the payments took place with cash. They have completely digitalized it and now on a daily basis billions of transactions are being processed. And that's not true. The traditional card reels which are often branded by Visa and MasterCard, meaning that there is a complete new infrastructure where MasterCard and Visa don't have a role. In Brazil you have a similar initiative and you talk about big volumes, if you know the two. For instance, in Europe now there are different initiatives and I think one of the examples is the European Payment Initiative and where new infrastructure is being built that becomes an alternative for the traditional cards that are uh, provided by Visa and MasterCard. Meaning these are then payment infrastructures, retail payment infrastructures that make use of the account of accounts infrastructures rather than the traditional cart infrastructures. And that means that those payments that ah, take place through those new rails I.e. volume that will drift away from Visa and MasterCard. In the UK a similar discussion is taking place where also voices are raised that they should create a payment infrastructure that is independent of or a retail payment infrastructure that's independent of Visa and MasterCard. So yes, it is a very valid question. And that could mean that let's say five years from now, as a retail customer, you have more options to pay at a shop in Greece, let's say, rather than just using your visa card or MasterCard.

Speaker B: I've got a random question as well. Just on that. The other day when the US shut down, I guess Anthropic's fable, it kind of highlighted that, uh, they control some of the tech companies, but Visa, MasterCard are American companies and if they so wished, they could shut down that outside of the US as well.

Speaker C: Right, well, that's part of that same conversation. It's the, um.

Speaker B: So it's more than just about creating competition, right?

Speaker C: That's true, that's true. It's not only about creating competition. There is also geopolitical element to this in exactly in the same way that you mentioned that theoretically it can become possible that Visa MasterCard is going to exclude European cards from the network and then you have a big issue. So that's also one of the reasons why they want to create an infrastructure that is at least independent of any American large companies where the risk is that the service is being stopped.

Speaker D: Gosh, new fear unlocked. I hadn't thought of that. Thanks, Thomas.

Speaker B: Yeah, I thought you might like that angle.

Speaker C: It's very actual at the moment.

Speaker D: It is really interesting because you've kind of got the many levels of kind of geopolitics. Like as we were kind of growing up, I think we assumed the world would become a much more homogeneous place. And yeah, it sort of seems to be going the other way, except in technology terms. What you're discussing offers a lot more kind of efficiency and the world becomes a lot more friction. So it's sort of this weird pull between technology and geopolitics, which I think is deeply fascinating, to be honest with you. I mean, it does make me wonder, like, you know, not five years in the future, but let's go 50 years in the future. What's the point of national currencies anymore? If you've kind of got these rails in place, have you got any views on that? And you know, just listening to you, I sort of feel like you might have a thought on that.

Speaker C: Well, if you take look to the history of the euro, which is actually, I think, yeah, that has been the biggest initiative in the world where national currencies have been exchanged into shared currency. At the moment the US dollar is still the global reserve currency. But also that especially also with all the technology developments like digital currencies, that is very likely to change. All payments for oil are uh, taking place now all in dollars. But in particular the BRIC countries are absolutely working on clearing settlement, payment clearing settlement infrastructures that makes it possible to clear, resettle or pay for commodity trades in other currencies than the dollar. Uh, and China is of course a very strong promoter of that.

Speaker D: Fast mate.

Speaker B: I mean just on this kind of topic of I guess, you know, national currencies, etcetera, it seems to me, I don't know, can you confirm this or not, uh, that maybe about 18 months ago there are like a hundred countries all investigating, piloting, doing something around a central bank currency. And then, you know, in the last six to nine months, probably since the US announced the genius act and plans for clarity, et cetera, I think since then I'm hearing much less about central bank digital currencies, especially like on the retail, you know, for the consumer side of things. Do you think countries are moving away from that because there are other options? What's happening in that space?

Speaker C: You're correct that there is less focus on central bank digital currencies. I think, although they're still looking at it for taking away the barriers for clearing a settlement or financial transactions. But then you talk about real big values between banks and between in the wholesale area. From a retail perspective, there actually there is one serious initiative and that also will take place and that is of course what they call the digital euro. And the reason behind that is twofold. One is the uh, European Central bank as an issue of banknotes because see that the use of banknotes becomes more and more an issue because the number of acceptance points is decreasing. There are even restaurants and other places where they don't accept cash anymore, meaning that in potential you could exclude a certain part of the population from making payments in those shops. And uh, they believe that it's still necessary for them to be able to pay as well as of course they also want to be able to allow people to make anonymous payments, which is of course the case with cash, but which isn't the case with cards. So what they are doing is launching a payment instrument that makes it possible for people to make payments via anonymous card so that it can't be tracked and traced where they pay and for what they have paid, which is, of course, possible with cars. There is a. The other element is, of course, again, the geopolitical element, that they see this infrastructure as a possible fallback in case anything happens with the large carbons.

Speaker B: And so, I mean, it sounds like there are benefits to doing this. Obviously makes things cheaper, especially, uh, within your own jurisdictions, etc. But what I didn't understand was why last year the US Banned themselves from building a, you know, digital dollar. Why do you think that's the case?

Speaker C: I don't know. I think the strong push also for stablecoins is because stablecoins either need to be held on commercial bank accounts or in treasury bills. And I expect that the, uh, U.S. government sees a significant stream of money going into treasury bonds and to finance the U.S. deficit. So I think there is also that macroeconomic element in that. At least that's also what I hear from people in the markets and the macroeconomists that know much more than I do. Of course.

Speaker B: Yeah, I kind of figured it was something to do with the, uh, shoring up the dollar, making sure that it stays like the reserve currency, because, you know, 99% of stable coins are, uh, in dollars, which means that, you know, we keep the dollar as the reserve currency.

Speaker D: Almost.

Speaker C: That's also an important reason. Absolutely. Yep.

Speaker B: Dave, do you have any more questions?

Speaker D: Well, no, I don't. I mean, I feel like there's a few things I'm sort of walking away from this conversation. You know, it's given me pause for thought, as ChatGPT so often says. But it's been brilliant, actually, because there's some things I didn't quite understand, which I now understand a lot better. What it kind of makes me realize is this whole thing plays into a kind of broader future. Like it's making the world a smaller place from a technology point of view, which is. Which I can only think is a great thing. But the friction between that and the way of the geopolitical kind of just means it's going to be a heady mix, all of this going forward. So it's been a really good conversation. Thank you so much for your clarity of thinking, Raj.

Speaker B: I had spent a bit of lunchtime from Money 2020 with ARJ, and, you know, I just keep learning every time I speak to him. So thank you so much, A.J.

Speaker C: it was a pleasure. Thank you. Thank you very much.

Speaker A: Thank you for tuning in today, Dave and Dharm Demystify. We hope you enjoyed the show. Don't forget to like and subscribe and tune in next time as we take another topic and demystify it.