Privacy AND Compliance on Blockchain? w/ Concordium Founder

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1:32what's up everybody it's ash bennington welcome to real vision crypto daily briefing today i'm joined by lars sire christensen the founder and chairman of concordium foundation also the founder of sire bank and saxo bank excuse me sire capital and saxo bank i should say Lars, welcome to the show. Thank you for having me. Well, it's great to have you here, and we're going to discuss a lot about the broader context of what's happening in crypto, particularly from the perspective of financial services and regulated markets. Lots to talk about here today. But first, I want to take a look at some price action.

2:06Bitcoin trading right now at$30 ,418. It's up about 2 % on a trailing seven-day basis. Trailing 24 hours, it's almost flat. It's down about a quarter of a percent. Ethereum trading right now at$1 ,859 on a trailing 24-hour basis. It's down about half a percent. Ethereum is on a trailing seven-day basis. It's up about half a percent. Let's take a look at Concordium, which trades under the symbol CCD. Right now, it's trading at spot 008355 on CoinMarketCap. Also, I wanted to take a look at something else as we're talking about this, which is the daily GBTC premium discount to net asset value. This has come in quite a bit.

2:52Remember, back in December, this was trading at about 50 cents on the dollar. Now it's come into nearly just over a 30 % discount. So obviously, this represents price strengthening some speculation on that about the fact that this is something that we're seeing in the wake of the BlackRock ETF. But that's the price action right there. And the chart tells the story quite eloquently. Lars, really exciting to have you. I mentioned at the top of the show that you're the founder of Sire Capital and, of course, Saxo Bank for our friends in Europe who have probably heard of that institution. I want to talk a little bit about your background, your journey into crypto.

3:25You were involved in this space very early for someone who has very deep and serious financial experience in traditional financial services. Yeah. Saxo Bank was a very early adopter of the Internet. We made one of the first online trading platforms in the world really. And obviously when you had some success with benefiting from transformative technology back in the day, you can't help looking for the next one. And a few people made me aware of Bitcoin very early on, or relatively early on, but maybe 2011, 2012. as well. And I took an interest in it both from sort of the ideology that was driving it.

4:11I'm a little bit of a libertarian myself, right? But also, of course, I saw it as a potential asset for us to have on the platform one day. So as I look more into it, I got more and more enthusiastic about this new space, not least the blockchain itself and and the many, many applications that that might have for very many processes in different industries. So it reminded me a bit about the early internet days, and it still reminds me a little bit about the early internet days, to be honest. Yeah, at Texobank, you guys were early to some of those technologies that took place during the first internet boom.

4:53Let's talk about what specifically that you identified back in 2012, because this was extremely early. Lots of folks in the TradFi space were incredibly dismissive of this technology. What was it that you saw or identified that made you think this was an asset that you might want to make available to your customers? Well, you know, I remember going to some very nerdy conferences in the early days, and I was with certainty the only person from the banking industry participating at the time. So it didn't have much attention in the TradFi sector at the moment, that's for sure, at that time. for sure.

5:30But I mean, I looked at it as a potential asset, which was perhaps less obvious at the time than it is today, because there wasn't an awful lot of trading places or very complicated to buy and sell. But it had like the feel of a fiat currency, which had been our mainstream business for a long time, spent a lot of time in traditional foreign exchange. And of course, crypto and tokens and coins seen from a trading perspective is somewhat reminiscent of that. So that was the interest. But then as time passed by, I realized that there's much more to it. And as I said, really fascinated by the blockchain technology, for sure, TradFi, which has a lot of horribly inefficient processes, a lot of single points of failure that sometimes break down and create lots of problems, Lehman Brothers style events, right?

6:30So, and a lot of settlement issues and cost and cross-border complications that this seems to potentially solve. So, I still think that it has a lot to offer. TradFi and while that's not the lowest hanging fruit due to regulation, I'm sure that eventually it will play a big role in how we do trading in financial assets on a broader basis. Let's dig into some of that. I would love to get your survey of where we currently stand in the traditional financial space. I think a lot of people learned in the 2007-2008 financial crisis era and then 2012 in Europe about some of the challenges that were in the system, things like custody, counterpoint party risk, a lack of transparency in some of these assets.

7:14I'm very curious as someone who has been in this system for a very long time to get your view of how you see the system functioning today and what some of those weaknesses, limitations and potential breakpoints might be? I don't think that the sort of key breakpoints have improved much. I think they're still the same. We recently saw a run on a couple of American banks, right? We saw Credit Suisse getting into trouble. So I'm not sure things have changed that much. You know, settlement is still pretty inefficient, expensive to do transactions. No finality in this space, right? so things can be rolled back.

7:54So I think there's still a lot of issues to solve, right? And then I think there's a lot of new stuff to offer. The whole aspect of tokenization, I think, will be very, very interesting to TradFi when they realize fully that they can now give access to new asset classes to assets that are largely uninvestable today, that they can be now accessible to a broader public through tokenization and fractionalizing of assets. So I think that could be a big icebreaker into the industry. But of course, it has to be a slow mover for the few reasons that the number one consideration when you are considering a new product in TradFi is regulation.

8:38And the second and third points are also regulation and regulation, right? So until we have a much clearer framework there, I think that the TradFi sector will have to hesitate to enter into this. It's not that the interest is not there. It's not that some of the more visionary people can't see the benefits, but they just need to have a very clear regulatory framework in order to adopt it in a serious way. So at this point, it tends to be experiments, sandbox stuff, you know, how could it work and awaiting regulatory clarification, right? Yeah, that's something I totally agree with and something that we talk about a great deal here on this show, regulatory, legal, compliance, legislative, all of those points, something we're going to talk about in just one second.

9:21But I just wanted to dig down on one other point that you made where you said that the system really hasn't changed that much since the 2007-2008 vintage challenges. I would argue that the one change that we've seen has been a change for the worse, and it's been driven by technology, which is what we see. You mentioned some of the challenges we had in regional banks here in the United States in terms of bank runs and capital flight. Interestingly enough, technology, and not Bitcoin technology, but this technology, right? Your cell phone that everybody carries around in their pocket. What do you do if you are a company?

9:53You're the CFO or treasurer of a company. You've got$10 million deposited at a bank significantly above the FDIC limit. The second that you hear that there is a risk that there might be a bank failure, you grab your phone and you start transferring all the assets you humanly can to your local G-SIP, right? This idea that you move to a globally systemic, important bank because they're too big to fail, so-called SIFIs here in the United States. That's something that's changed really dramatically since the 2007-2008 era and not for the better. I mean, back in the old days, going back to the 1980s, this savings and loan crisis, a very quick bank run took weeks.

10:30Now it's ours. I fully agree. And thinking back at the Northern Rock Bank run in the UK where people were chewing up down the streets to try to get their money out, clearly that's a lot easier now. And you're right. Why take chances if you are overexposed or uncovered with a financial institution and you can move you can move money very, very fast. So you're absolutely right that actually the risk of very rapid bank runs probably worsened rather than the opposite. On the flip side, I would say, I think the regulators and the central banks, etc. learned a lot from the big financial crisis back in 2008, where they were not prepared to move in and actually let Lehman go over a weekend.

11:22And you saw how quickly they reacted to the recent troubles in the US. So you can say the system is more prepared for those types of rapid bank runs. But the fact that they can occur is absolutely becoming much easier with technology. Hey, everyone. We're going to take a quick pause and hear a word from our partners. We'll be right back.

11:47You know, you mentioned earlier when you were talking about the 2012 vintage when you came into the space, that those were very early days. In my view, when we look back at this from the perch of 2040, 2045, we're still going to see the days that we're in right now, today, in 2023, as very early days, because there's still a great deal of integration to take place between the traditional banking system and the digital asset space. I know this is controversial. I know there are a lot of sort of politically loaded issues in this, but I want to talk about those three points that you just raised a few moments ago that are top and first and foremost in your mind in this space, compliance, compliance, and compliance.

12:23Where do you see where we are today? Obviously, here in the United States, we're in this period that many perceive to be a regulatory tightening phase. Talk a little bit about the current state of affairs that you see in the digital asset space from the perspective of legal, regulatory, and compliance. I agree that we are at a very early stage here, and much as the industry, and we like to think ourselves very big and very important and very disruptive, it still does a drop in the ocean. Right. So it's also not too late to come up with great ideas and be part of it. It's a little bit like the internet in the late 90s or something like that, right?

13:00Before it really took off. And that, of course, opens a lot of opportunities, but it also means that it's fairly predictable, in my view, what's going to happen. Now, regulation is typically a fairly slow process, because what needs to happen is that first, there needs to be some asset that gets attention. Secondly, you need to identify how does it work. Thirdly, what are the issues with it? Then you've got to prepare legislation. Then you've got to get legislation voted through the parliament. Then you need to get it implemented. So regulation, per definition, has to be a slow process. On the other hand, once that process is rolling, it's never ending.

13:38And I think there's a rather naive belief in this industry that if we could just get regulation in place and we all know what we have to deal with and we can move on. Now, that's not the way regulation works. That continues to the end of time, right? With new issues being identified, with new tightenings of areas, with new issues occurring that needs addressing that has been unknown before. So we are also at an early stage of regulation. But I must admit, one of the reasons I started Concordium back in early 18 was really that I consider this development completely inevitable. You know, it's not a 99 % probability, it's 100 % probability because I watched it in decades in TradFi, right?

14:32And regulation will come when there's something that looks like a financial asset, when there's something that looks like trading, when there's financial gains and losses, you know, the regulator will take an interest in it and feel responsibility for it. And maybe not that unreasonable, to be honest, because also we've seen a number of excesses in this space where people were lured into things that there was absolutely no redress or no framework. So I think it's a natural evolution. It's very predictable. I think regulation will ultimately maybe look slightly different than what we know from TradFi because it's a different technology and it's different to some of the stuff that they're used to.

15:16But the outcomes that regulation will look for will be the same. And that is protection of the retail, protection of weak parties in the market. It's about proper KYC, the protection against money laundering, tariff financing. And ultimately, it's also about capital adequacy. If you are trading and you get it wrong, are you in a position to actually cover your losses? So I think we can expect something that looks very much like what we've seen in the past. So I think this is fairly predictable. And as I said, it will continue till the end of time because that's the nature of regulation. And it would be very irresponsible not to prepare for it, even if it's not very clear yet.

16:04And again, there are some things that are always going to be essential in regulation. ID is the cornerstone of all of this because KYC, AML procedures, etc. are academic. if you're not sure who you're dealing with. So that's why we started with IDE, because we think that that is the cornerstone of actually most interactions in society, particularly if money and assets are involved. And there's just no way that that's not going to be applicable across this industry all over the place. But it takes time and there's time to prepare for it. and a good regulator actually gives you time to prepare for it.

16:47They will implement a rule and they will say, comply with this rule inside 12 months, 18 months, whatever, typically, and you have time to adjust. But if you don't, you will suffer the consequences. The flip side of it is you will actually see more business because the trade-off industry was a wild west back in the 80s and well into the 90s in Europe. and people were not comfortable using many of these services. When regulation came, obviously it put some people that were not serious and didn't want to comply, put them out of business, but the people that actually embraced it and did what had to be done were rewarded by multiple small businesses in the coming years.

17:32And I think that's the silver lining and this is, it is necessary for mainstream adoption. It is necessary to see this space really take off and the people that are willing to embrace it and meet the requirements, most of those being quite reasonable actually, well, they will be rewarded by much more business and much more adoption. Lars, let me ask you just the one big picture skeptical question that I hear and I know that you hear too. I have a lot of Samart friends, believe it or not, who are in the TradFi space who are still skeptical about cryptocurrency as a decentralized asset. And the argument that they make is, yes, Ash, you're right.

18:08Digitization is coming. More automation is coming. But it's not going to be decentralized. It's going to be centralized. It's going to be run by big financial institutions. Obviously, those of us who are in the space who are passionate about decentralization disagree with that statement. What's your view on why the future will not just be digitized, but also decentralized? Well, I think that the regulator will have a preference for centralized organizations because it's easier to hold somebody accountable and it's easier to find somebody to speak to if there's something you're concerned about.

18:41That being said, I think actually in many ways, blockchain could also be a regulator's weather stream, right? Because at the end of the day, it gives you an audit trail that is very clear, whereas as if you're dealing in a traditional foreign exchange markets and the whole line of trading is very opaque and often ends up in jurisdictions where you can't necessarily easily access the information. So in a way this audit trail that's created by a blockchain should be very attractive to regulators. And the other point being that neither the financial sector nor regulators like single points of failure and we have had our fair share of individual institutions failing or because of lack of risk management, malpractices, negligence, including central banks all over the world regularly fail in certain economies.

19:43So I think that there's an advantage to decentralization if it feels to be possible to control and achieve those outcomes I mentioned before, that a regulator will also appreciate that the risk of catastrophic single points of failure will be significantly reduced and the audit trail will be better. So I think regulators are in some areas beginning to understand that. It also provides some funding mechanisms. There's a lot of problems with funding SMEs, particularly in the traditional financing system. And I think that, in fact, I know that some of the people designing these laws appreciate the opportunities that the blockchain could bring to improving these areas.

20:30So I think there's an understanding that the good regulators are willing to listen to input. They will take it into account. They have to fit into some outcomes that they see as desirable and politicians see as desirable, but that they also in many places actually recognize that there's a lot of benefits to blockchain. So I think that this will eventually work out fine. The only thing is you've got to make the decision. Are you willing to accept that it becomes like that or do you want to live on the fringe? I mean, you still have a few brokers living on the fringe of the TradFi system. They don't have very great businesses.

21:11They don't have very great lives because they have to look over their shoulder all the time. But if you want to have a big business and mainstream adoption, there's no choice. You have to comply. Hey, everyone. We're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

21:34So now that we've covered some of the big picture topics, your overall view of this space, let's talk about some of the use cases that you mentioned. You mentioned that your first use case is in identification. Let's talk about the Concordium project, what the purpose of it is, what you see the scope of it being, and fundamentally what you see those first use cases being in terms of the sequencing and how that technology and use cases come online. Well, as I mentioned before, being quite enthusiastic about the early generations, I was still the CEO of Saksha Bank in my day job, inundated with regulations and new legislation and multiple jurisdictions and all this.

22:12And I found it hard to reconcile. So what I did was actually sit down and say, what are the problems we really have to solve here? And I think I think anonymity is very, very high on the list and that is just unacceptable to have parts of the system anonymous. And I don't think we should expect that that will be accepted in the longer term. You know, transfers will have to be possible to ID who transfers to who. And that's just the way it's going to be, whether you like it or not. Right. So I think again, ID is a fundamental building block of all trust in society. And actually we use a lot of middlemen for providing these trusted intermediaries.

23:00Sometimes that trust is misplaced and not well deserved, but the fact is that we use middlemen all the time. So the more you can enable people to be identifiable, to be directly trustworthy, That will open up for a lot more peer-to-peer types of business models where you can actually trust the counterpart. But that depends very much on ID and therefore we put that at the core of it. It's not us issuing the IDs. You can choose between various ID, trusted ID issuers so you can make your own choice who you want to trust with the ID. We don't publish the ID. We actually allow a lot of privacy around what you do, as long as we know that you have been willing to go through an ID process.

23:47That doesn't mean that you can't take your privacy. There's knowledge proofs and a lot of technology can help you preserve privacy. But we just also want to see that the user is willing to be accountable. Now, there's a lot of benefits from the users as well, because on Concordium, I can prove with certainty to you that I'm lost. and you can prove with certainty your identity to me. So if that's something we need to know for some reason, well, we have the option of doing that. It's under my control whether I want to disclose that to you and vice versa. So it's not something where you can just go in and take that information.

24:24But if you have a reasonable request because you want to do a piece of business with me and I want to do that piece of business and I can see it's reasonable that you want to know what country I'm from or whether I'm over 18 or whether I have this or that characteristic, or my full ID is under my control, but it might be a reasonable request. And if I'm not willing to provide it, you can say, well, I'm sorry, Lars, then we can't do that piece of business. Now, that's not needed everywhere. If you're dancing around at a virtual concert, maybe you don't need that information, just like you can go into a pub and order a beer and you don't want to to see everybody's passport before you're comfortable having that beer.

25:04But if you end up making a bet on a football match running in the screen in the pub and the one you're betting would say, if I lose, I'll pay you tomorrow. Well, then maybe you want to know that guy's ID. So it's horses for courses and it's about having the opportunity to actually, with certainty, prove that you are something if you want to. and for another person to be able to at least request that information and be sure that if I do comply and tell you that it's true. And I think that need will only grow with AI, with deep fakes, with metaverses, where you can very easily and may even enjoy being something other than your sort of real life self.

25:46That's fine for some use cases, but in some cases where there's a transfer of value or a social relation or something, you might want to know who you're dealing with. then we try to provide that opportunity. Let me ask you this, because it is a very controversial point in this space. You mentioned that identity is coming, whether you like it or not. There are lots of folks out there in the space who do not like it, who are very passionate about things like credible neutrality and anonymity in transactions. They would say, for example, if you have a bet in a pub, the best way to do that is with a smart contract over Ethereum or some other layer one protocol where you can essentially lock the funds.

26:21And so it becomes a trustless system. I'm curious, when you go around and you speak, what's the reception you've gotten from this viewpoint on the world, both from the traditional finance community on the one hand, who it may not be rigorous enough for, and on the other from the digital asset community who may feel that it's an encumbrance? Well, I started sort of realizing that the discrepancy between what I saw in my day job and my free time, it wasn't a very popular message. But to me, it's evident that that is going to happen, right? Now, of course, you can't enforce that on anyone. You could also open a brokerage down the road and just take people's money.