Patrick Hennes: From Fund Chain Pioneer to the Future of Tokenized Asset Servicing

Speaker A: You're listening to the Applied Blockchain podcast hosted by Adi Ben Ari, founder and CEO of Applied Blockchain. Today's guest is Patrick Hennis, a digital asset expert, uh, from Luxembourg. Um, he specializes in tokenization, mica and digital asset operating models. Patrick brings deep expertise across capital markets, regulation and institutional grade servicing.

Speaker B: Patrick, welcome to the Applied Blockchain podcast.

Speaker C: Thank you, Adi for this invitation. I really feel honored, uh, to be here for this recording. Thank you very much.

Speaker B: Okay, good. Please, uh, share with us your background, what you're doing at the moment, how you got into the space, your story.

Speaker C: Okay, the story, yeah. I'm a storyteller. In fact, I've been for 26 years, in fact, in the fund industry in Luxembourg. Started in a bank, uh, in an asset servicing space. In particular it was, uh, or it is a transfer agency space. So where the subscription and redemption into the investment funds are happening, that's my specialty. I had different roles during these 26 years, mostly as a consultant, so consulted for software companies that provided software for the fund servicing industry. Independent consultant where I did a lot of fund migrations. So funds that migrated from one asset servicer to another. I migrated roundabout, I think, 360 billions of assets under, um, management from one company to another. Then I was 6 years director at PwC in Luxembourg and now I am with DZ Private bank as the head of digital asset servicing. We need to come back to the period at PwC, probably to see why I am in the blockchain space. I'm already a decade in the blockchain space. Back in 2015 I was on a management meeting with PwC and there were two guys from a startup company. I can name the company. It's Corchain in Luxembourg, very new startup company who works in the aml, uh, crypto compliance space. They were talking about blockchain and bitcoin and we were there as a management team from PwC Luxembourg. And uh, bitcoin was far away for us in our, in our minds. But, but when the panel ended, I went into a discussion with one of my partners and we said, hey, this underlying technology, this could be something very interesting for the asset servicing industry. M We could automize processes, we could make things more efficient without knowing all the details of the blockchain.

Speaker B: What did you imagine then? Did you imagine that the assets would be on chain, like the assets themselves would be on chain? Or was it a case of like a, uh, decentralized system so parties are staying in sync? What was the thing that kind of clicked for you.

Speaker C: Well the click was that it was for me an interesting technology. We were not talking in the beginning about tokenization.

Speaker B: Yeah, you didn't know yet.

Speaker C: Yeah, but, but we did it. Uh, we did it because once we came out of our first chat with the partner we started immediately an initiative for the market in Luxembourg. So we created in fact the first blockchain initiative for the asset management industry in Luxembourg which was called Funchain. We made a roadshow, we made a blueprint and then we could win eight market players. Scorchain as the startup company to bring us the technology during, during trainings and things like that and also the development and we created a pilot. So we created the first pilot on Ethereum blockchain. We created the dummy investment fund and we created the first subscription uh, on the Ethereum test network into a fund. And it was really amazing uh, for the industry because the guys from Scorchain, they were not familiar with the fund industry. And I remember that I was in a co working space with them explaining them um, how a subscription works into an investment fund. This was at 4pm in the afternoon and I went back to them the next day at 9am in the morning and I saw the first smart contract for a tokenization. And this was, this was the starting point. But it was too early. It was too back in 2016.

Speaker B: So what happened after that?

Speaker C: Yeah, after that. But the initiative itself we continued during two years. And then you have to know that most of the traditional banks and the participants went back to the headquarters and the headquarters said okay, let's keep it in the headquarter and we will not share it with the market. So this was the point where we stopped with the initiative.

Speaker B: What does that mean? The banks were interested in learning more about it but they didn't want to put anything out there.

Speaker C: Uh, everybody did it on their own,

Speaker B: everybody wanted to own it and um, develop it or whatever. Right.

Speaker C: But overall today it's different. It's completely different. But at that time it was like that. Uh, but we wrote a white paper, published a white paper, the name of the initiative which is still online. You can find it on the website of PwC title. I think it's the genesis of a new business model for the asset management industry. Was the co author of this paper and when you read it today, with what we see today in the market, we were pioneers really.

Speaker B: Okay, okay, Interesting.

Speaker C: I see things in return that happen now. This is amazing for me, yeah, it's

Speaker B: interesting to sort of forget how you know what the beginnings look like. Right. I mean I remember we were kind of early on Ethereum. There wasn't even the concept of uh, tokens other than ether itself. Right. There wasn't ERC 20, there wasn't certainly we didn't have NFTs, we didn't have a lot of these other concepts, uh, even created yet. Custody wasn't a thing that people had really worked out how to think about or do.

Speaker C: This was the missing piece. There were two missing pieces in fact. The digital custody layer itself, which is for me today the most important layer that we have to work on. And the cash. Cash was not on chain.

Speaker B: Mhm. So that's taken a while as well, Kurt. Yeah, exactly.

Speaker C: It was not necessary to talk about tokenization when you have still to send uh, fiat money into the.

Speaker B: Even today we have versions of cash, but still not everybody's happy with what's there. Right.

Speaker C: But we imagined Already back in 2017, we imagined a uh, so called cash backed fiat account as a token. This was the stablecoin. And you can find it in some papers that we have written. And today we see it in the format of a Stablecoin or of a deposit token or a cbdc, whatever. We have it now. So uh, tomorrow, and not in three years, but tomorrow we can build this missing payment rail into traditional financial instruments that are also tokenized. Then on chain. We will not replace totally the off chain world. Not at all. The world will be hybrid in my opinion.

Speaker B: So let's get to that. Take me through. We're in 2016, 2017. So this initiative has been around for two years. You realize that the banks at that stage are uh, really looking to build systems internally initially what happens next?

Speaker C: What they built was in fact not systems, but we did all proof of concepts. Proof of proof of concept. Sometimes we tried to get to a minimum viable product. So we little, we did a lot of experimentation. Yeah, I think this time is over. We still do proof of concepts, but the proof of concepts are really the kind of certification of a vision that we have. When the proof of concept is okay, we can say okay, we switch it on.

Speaker B: This is more like a minimum viable product.

Speaker C: Yeah, the experimentation period for me is now over. We need now boys a kind of evolution. Uh, we see that we have a regulation that was the missing piece as well, uh, in 2017. So the regulation is there. For example, Luxembourg, where I am based has four blockchain laws, has mica as well. And we were one of the first countries in Europe, together with Malta I think. Yeah, With Malta to have blockchain laws, we had very early, already in 2020, the virtual asset service provider law, which was part of the AML law in Luxembourg. And today we can say that Luxembourg has one of the best regulation on um, blockchain. And we are uh, really innovation hub. We can start immediately, uh, to doing all this nice stuff.

Speaker B: Give me an example of what the regulation allows you to do. Like what does that look like in practice?

Speaker C: In practice, for example, in Oxford we have two levels, uh, in the legislation you can do immediately, uh, a sort of digital, um, infrastructure. So you can digitalize the whole value, uh, chain.

Speaker B: This is one thing of an asset, of a security.

Speaker C: Yes, yeah, an investment fund, whatever. Then you can also we have a law to issue and to allow transactions natively on the blockchain. Uh, you can run your full infrastructure for an investment fund on the blockchain or on um, a distributed ledger technology infrastructure. And there is a specific license that financial institutions or financial priors can apply for, which is called the control agent. So the control agent will be responsible for this tokenization infrastructure for the issuing accounts or issuing wallets and also the control over the wallets of the account keepers on different marketplaces. So this is everything is possible. So we can launch tokenized money market funds, either just on a traditional basis, but digitalized. So you can have a digitalized infrastructure and, and making the distribution outside in a tokenized form. We can issue tokenized share classes of an investment fund. This is possible.

Speaker B: Okay. Okay. So just continuing on your, your path, you continued the PwC and then uh,

Speaker C: came back in fact, uh, to the beginnings in the bank. So I started in the bank, I in the bank.

Speaker B: Now.

Speaker C: The, the point was that it was pandemia as, uh, well, when I was still with PwC and I was in contact with my, my current bank. And they said, patrick, we want to create a team around digitalization, around this blockchain stuff. We need to prepare in fact for the next generation of finance. And then, uh, I said, okay, I will join you. We are the past, we are the present and we are the future. We are one team. Because the past, you have history, you can ignore it. The present is, uh, you run the business, uh, as usual every day. Um, but we prepare also the future. So we are rethinking the full value chain, the asset servicing. So from the entry point, which is investor onboarding until the end to the legal reporting and we try to see what activities are inside this value chain. We think in fact each activity and we see is there technology out there in the market that can help us to improve this activity, to automize it, to make it more efficient and uh, to remove Excel.

Speaker B: Okay.

Speaker C: Excel sheets. I will not say the other word but in fact the bank is still very paper heavy and very Excel heavy. And for example, and also human power. We will not replace human power. Not at all. But we will make it more efficient.

Speaker B: Mhm. I mean we see this across, ah, I think across enterprises in general that quite often there's a lot of processes which as you say kind of spreadsheet based and so on. And the push towards blockchain is also a general push towards digitization. Right. We're going to do some next generation, uh, implementation of a platform. So where do you see things heading? What are you interested in now? What are the things that you're focused on if you can share?

Speaker C: Yeah, uh, for me the most important is that we create the infrastructure of the digitization. So a lot of people are talking only about tokenization, but this is for me the ultimate use case that we tokenize the assets. It doesn't make sense to be very honest with you, to tokenize. And in the beginning of the value chain you have still an investor who needs to fill in 30 pages of an application form.

Speaker A: Yeah.

Speaker C: Uh, okay, so let's begin on the starting point to digitalize. And then step by step you take all the activities of the value chain and the ultimate use case will be the tokenization. That's for sure. We use the words of Larry Fink. Uh, we entered in fact the era of uh, tokenization of all assets. But I prefer to use the word digitalization and tokenization because this is quite confusing for a lot of people. Uh, talking about token, uh, when I talk about public investment fund. Okay, So I prefer to use the word digitalization.

Speaker B: Okay. I mean where do you stand on I guess the types of blockchain infrastructure? Private blockchains, public blockchains. This stuff's been going on, you know, these debates have been going on for 10 years I guess.

Speaker C: Wonderful topic. I had already a discussion last night about this. Okay, uh, you are right, the discussion,

Speaker B: it's one of my favorites.

Speaker C: The discussion is 10 years old.

Speaker B: Yep.

Speaker C: I think there are a lot of masterpieces that have been written around the public or private blockchain. Just have a look on what institutions are working on, on what proof of concepts or uh, MVPs. They are mostly on public blockchain.

Speaker B: Really.

Speaker C: They're on Polygon of course.

Speaker B: Okay.

Speaker C: Uh, and why? Because on Polygon, so on Ethereum you have standards. That's what we are looking at. So you have ERC standards that are made for us.

Speaker B: Right. But a lot of what I see is maybe Bezu, uh, Canton.

Speaker C: Yeah.

Speaker B: More private blockchain.

Speaker C: I know structure.

Speaker B: Yeah.

Speaker C: You know that I have never worked on, uh, a private blockchain.

Speaker B: Really? Really.

Speaker C: All my stuff has been done on public chain on behalf of the bank

Speaker B: or through the bank.

Speaker C: Yeah, yeah. We did, uh, a. We did a proof of concept for a tokenization. Okay. So I have a sandbox, and this sandbox is running on an ERC standard. And I think that you have to analyze the IT security risk. There is risk management, uh, standards. We have dora. Uh, but if the provider who provides you the tokenization platform can fulfill all the standards that we provide on a security checklist, why not going on public blockchain? Um, you can. Inside the public blockchain, you have your space and everything relies on the entry point that you give and on the kind of data. We don't put all the full data set on the blockchain. What we put on the blockchain are results. Auditable results.

Speaker B: Yeah.

Speaker C: Okay. So when I say there is a transaction on the blockchain, there is not my name, there is not my bank account. There are results.

Speaker B: Yeah.

Speaker C: Okay.

Speaker B: Okay. Interesting. You touched earlier on payment tokens.

Speaker C: Yeah.

Speaker B: Uh, I mean, I guess from what you're saying, there's still a long way to go. Right. Uh, there's all the digitization that needs to happen around this because as you say, you can't just look at the blockchain. Part of this, that infrastructure say, oh, this is really efficient. Everything else around it is like a stack of paper. It's not going to. Your overall efficiency is going to be held up by the stack of paper. So obviously you need to sort that out. Um, uh, we need to sort out as an industry. Um, but then at some point you get to actual tokenization. And then when you have tokenization, I guess the next thing to think about is the payment leg.

Speaker C: Of course.

Speaker B: Right. So again, where, where were you kind of in on that journey? Uh, where were you in your.

Speaker C: Thinking about this for weeks now is that we definitely need the onchain payment rail. I think the payment rail is there we have it. There are stablecoin consortiums out there. We have Kivaris, there are Unity, you have the Forge. Stablecoin, which has been accepted now as a settlement currency by Clearstre.

Speaker B: Yeah. So this is the soc gen.

Speaker C: Yes, the soc gen one.

Speaker B: Yeah.

Speaker C: Right. So I think we are there From a technical point of view, now we have to merge the tokenized assets with this payment rate, okay? So what we need to do is to create the infrastructure for it. And this infrastructure, uh, from my point of view, goes only through the fact to implement a digital custody layer on top on what we have so that you have an on chain ramp for payments. We will not remove our legacy systems in the bank because the legacy system they fill in the balance sheet, you know, your financial statements. So this will remain. So this is the on chain, off chain.

Speaker B: But you don't see the wallet holding the coins. Is that not your, is that not another account with a balance or how do you look at that?

Speaker C: I would see it separately, okay, because, well, this is only my point of view because we will, we will still have fired, fired currencies, okay, Euro dollars and whatever. And it's just uh, moving from one layer into the other layer. But we need to change our, um, to have a change in our mindset, I think to see stablecoins are still seen as a crypto and it's not a crypto. For me, a real stablecoin issued by a financial institution with a license behind creates in fact a digital money supply. So for me, let's take the forge. Uh, stablecoin is an M M1 money supply, okay. And it's not a crypto. And we can move this M M1 money supply on a digital layer. Okay. Creating ramps between this digital layer and the off chain books can be a batch process once a day. But okay, we don't tokenize things and create digital and we remain with batch process. But you understand what I mean. So we need to create oracles or APIs to move between the two layers.

Speaker B: Do you see the stablecoin as being something, you know, like the, I don't know, the tether circle USDC stablecoin where you know, you have an on off ramp and the user, you know, the holder of the coin goes to on and off ramp manually at their will. Or do you see it as something more like m. I don't know, like a digital twin where you always have the. Where, you know, maybe more like a deposit token. Like I've seen from JP Morgan where there's a deposit account and now it's represented, uh, in token form, but the claim is a claim on that deposit account.

Speaker C: Uh, I like the digital twin. These are my words.

Speaker B: Okay?

Speaker C: So I think that's where the industry is heading to, to have digital twins. First of all, a stablecoin for me must be packed 1-1m as one thing, so not an algorithm, but as such. So if you use €1, $1 stablecoin as a payment, mean by the euro and the dollar must really exist on a reserve account. This is based on MICA regulation as well.

Speaker B: Okay.

Speaker C: I'm not very familiar for the moment with genius act, but uh, there is also one.

Speaker B: Yeah, it's a U.S. treasury.

Speaker C: Yeah, it's a Treasury bonds, but okay. For MICA as well. Uh, it's treasury or cash deposits, but it's a reserve account. The money is there.

Speaker B: Yeah.

Speaker C: You don't give out any stablecoin if the money is not. Money is not there.

Speaker B: Yeah. But maybe, uh, a difference in my mind, and I'm certainly not an expert on the regulation or banking side of it, but in my mind if I have, if I hold usdc, I might go to, let's say circle to onramp, I hold the usdc, I might go to someone else to off ramp, maybe Coinbase or someone else.

Speaker C: Yeah.

Speaker B: Um, and so the interaction with a fiat bank account is almost decoupled.

Speaker C: Yes. This is the biggest challenge I think to have when I have, for example BNP Paribas issuing something. So Citi General uh, issuing something. BNP Morgan and I take the stablecoin from BNP, but I give it back to ING or whatever. Or I need a sort of arbitrage.

Speaker B: Yes.

Speaker C: Somewhere they need the central centralizer. We need to know the total balance of each stable.

Speaker B: Yeah. Because the banks need to settle behind the scenes.

Speaker C: Yes. Yeah, yeah.

Speaker B: Okay. So this is more like the deposit token, I guess.

Speaker C: Yes.

Speaker B: Okay. And do you think it's possible or realistic to have these payment tokens on the same rails as the assets, like on the same ledger? Or would you see. Um. Yeah, yeah. Okay.

Speaker C: I think, uh, this must be possible. Yeah.

Speaker B: Okay.

Speaker C: Um, everything relays in who controls.

Speaker B: Yeah, that's part of the question, I guess. I mean, certainly some of the initial projects we've seen, you know, different ledgers, like some of the stable coins, maybe on uh, or some of the deposit tokens on private blockchains. Some assets.

Speaker C: Yeah.

Speaker B: You know, and then they're on different ledges.

Speaker C: And it depends on also on the issuer inside. Because you can, as if you are, if you are a bank with a full banking license, you can fulfill different activities. You can be the issuer of a stablecoin, you can be the asset servicer, uh, you can be, uh, the issuer of a Treasury bond, whatever. Okay. But you can also be just the issuer of a stablecoin. Which is another license. You will receive a MICA license. You are not a full bank. Okay. So you have to see which activity is managed by which player.

Speaker B: So Patrick, going back to your vision if you like, 10 years ago. M. Uh, how far are we into that? Let's say percentage wise.

Speaker C: Ah, from what I have written 10 years ago, or it was nine years ago now. Um, I think everything, when I read the uh, the white paper again, everything was written down there. We have it now.

Speaker B: We have it. Like we have the tools.

Speaker C: We have the tools, we have the. We have the, the companies who have developed all this. But we can, we can. The building blocks are there. Yeah. And what we have on top is we have the regulation.

Speaker A: Mhm.

Speaker C: Okay. And it's not that Genius act or MICA has brought in the last piece that we needed because this is just to aligning a little bit technology. Because MICA is regulating technology because the basics of regulation are the same. The regulation that we use is AML payment directives, MIFI 2. We have DORA, we work with this. And then we have now the technology layer which allows us to do different things. And MICA regulates this. In fact, I always say I like to use meta force, you know, and I was used to be a sailor, a uh, competitor. And the regulation is the wind for me. Okay. And you cannot change the wind.

Speaker B: Okay.

Speaker C: But you can change the sails. So the sales is the technology that we use now.

Speaker B: Okay. Okay. I'm in the. Interesting. So we have the wind, we have the technology, but there's not much out at sea. Why not? What's, what's holding things back in terms of volume, in terms of activity? Like what, what do you see there?

Speaker C: It's starting in fact. And I think Defi companies need to be a little bit patient for the moment with. TRUDGFI is working on it. You must imagine that trudfy we are permanently adapting uh, architecture systems and processes due to regulation. And it's not MICA who brought this in. We have regulation permanently. We have new, new payment rules, we have ima. And this is um, it's heavy work in an institution, but I saw a real shift at a certain date. Okay. And it was the 30th of December 24th when Mica came really into force. That was the moment that DLT blockchain tokenization entered the bot rules. Because before there were some laws and things like that. At that moment MICA came into force. So we had notifications in the banks. All the banks received notification. And the first question was, do we need a new license now. M. And so when you have this question, it means that there is some reflection going on, um, and you have to provide information to the management. And then we say, okay, this is this, this and this. We can do this and this. And then the reflection starts. And this was the moment also where in traditional finance we started to lift our vision and to redesign architectures. But you cannot change from today to tomorrow an architecture that is working 25 years. Um, this is a big monolithic block with core systems, legacy systems that you cannot destroy tomorrow. We are not doing revolution here. We are doing an evolution. And we do it step by step. But it will come.

Speaker B: Yeah, it's an interesting perspective that the regulation, you know, that it brought the question to the table at the highest level. That's, uh, that I've never sort of thought of that perspective before.

Speaker C: Regulation is, for me, very positive, you know, and we have, especially in Luxembourg, we have a fantastic relationship with the regulator. I work in different, uh, associations. The banking association, in the fund industry association, uh, we have technical committees. We are reviewing the value chain altogether. So we are competitors around the table. But for this thing, we cannot be competitors. We need to collaborate on the market, infrastructure to keep in the market.

Speaker B: Very good. Patrick, one question that I ask. Ask, uh, all our guests. I heard about it. You've heard this one. Okay, so it's a little bit random, but, uh, like a nice source of information that you. It can be related to blockchain, can be related to what you do. It can be completely unrelated. Yeah. Uh, but something interesting that you have as a source of information or a book you read or something you've seen. Anything you'd like to share?

Speaker C: I think we should take it outside blockchain and work. You know, I'm a big fan of work life balance because the work life balance, if you have a good work life balance, then you can really be a high performer in your. In your work life. So I. I can tell you, or I can give a recommendation on books, if you like.

Speaker A: Yeah.

Speaker B: Uh, okay.

Speaker C: So in the last 24 months, there were three books, in fact, that changed a little bit my mindset, that helped me really to achieve this work life balance, to make things how they are today so that I can be performant in the bank. I can be a performer, uh, on LinkedIn, on discussions like this. So this is Atomic Habits.

Speaker B: Okay.

Speaker C: Yeah, you know, from. It's James Clear.

Speaker B: I've got this book at home on a pile, and I haven't read it yet.

Speaker C: Yeah, yeah, I Live. I live with this book now. Well, I don't live every day with it, but I, I read it and I apply things of it.

Speaker B: Okay, good.

Speaker C: There is a second book, which is the 5:00am Club. Uh, you know this philosophy to wake up at 5am okay.

Speaker B: And then to Bethany here, who's helping us with the recording is nodding away. Okay.

Speaker C: Yeah.

Speaker A: I'm also a fan.

Speaker B: Yeah.

Speaker C: But okay, I, I admit I don't stand up at 5:00am um, and there are theories about it. You don't need to stand up at 5am but if you apply the philosophy of the up, which says you start the first hour of your day with things for you.

Speaker B: Okay.

Speaker C: And the first thing is 20 minutes of sport.

Speaker B: Yeah.

Speaker C: Okay. Then it's 20 minutes of meditation or yoga or tai chi, whatever, and 20 minutes of reading.

Speaker B: Okay.

Speaker C: And so you have 60 minutes for you. And this is the fuel of your day.

Speaker B: Okay.

Speaker C: And it really. Well, I stand up at 6am every day, even on weekends. And, uh, I generally, I start my day, uh, with sports. Uh, even this morning I'm used to run, in fact, so in Luxembourg, I run also in the morning. And this morning I went for a run, so I went to Tower Bridge. Uh, uh, it was amazing. And there was one funny story about this. It was raining this morning. Well, it's raining today here in London. Uh, but, uh, there is one thing. This is very particular. In London, the rain is not humid.

Speaker B: Right.

Speaker C: In Luxembourg, I do the same. I'm completely wet. And here it was raining. I was not wet when I came back to the hotel.

Speaker B: Funny thing, because it's also cold. Yeah. No, I cycled in today as well and it was, uh. We have. In London, we have this drizzle. It's like. It's not proper rain. No, it's just like. It's light. It's annoying, but you can get through it.

Speaker C: Uh, you know, it's a little bit like you have in the supermarkets or what they are spreading over, uh, when

Speaker B: it's hot, fresh food, you know. Yeah. Yeah. Okay. So just. I'm going to look at this book.

Speaker C: Yeah.

Speaker B: I'm a bit like you. I'm an early morning person anyway.

Speaker C: Uh, I call myself an early bird.

Speaker B: Yep. Yeah. But, uh, but I think my wife might have a different view on this. Uh, spending the first hour just looking at myself. But. But I'll work through it with her. I'll have a look at the book. Very good. Very good.

Speaker C: Great.

Speaker B: Thank you very much, Patrick. Pleasure. Pleasure meeting.

Speaker C: It was a pleasure to be here.

Speaker B: And uh, thank you very much for coming in to speak with us.

Speaker C: Thank you.

Speaker B: All the best.

Speaker C: Thank you.

Speaker A: Thanks for tuning in. Catch every episode wherever you get your podcasts. Follow Applied Blockchain on socials for the latest insights and explore our layer 2 silent data@silentdata.com.