Mathias Imbach (Sygnum Bank) on the importance of crypto banking (EP.153)

Thanks for having me.

Absolutely. Yes, it is true that obviously I also been following your show with interest and yeah rightly so there's lots going on in the US but I think today hopefully I can contribute a little bit by you know also providing some insights what's happening in Europe, in Switzerland but also in Singapore which I think is actually a lot and I think you guys in the US should follow that too.

Yeah, sure. Before just immediately before co-founding Sygnum, I managed a family office. The family office of an Indian industrialist Ratan Tata is India's largest conglomerate that he was heading. After stepping down as the chairman he wanted to build an investment platform called R&T Associates and I had already earlier known him actually met him about 18 years ago and he became over time a mentor and friend and later then my boss because he had asked me to then come to Singapore, India and help him set up and grow R&T Associates. What we did is we invested in technology globally with a focus on particularly Silicon Valley, India, Singapore, China, VC deals also in blockchain companies. And what was really interesting for me is that as a Swiss and you know maybe a little bit the Swiss rather risk averse right people are well off in general so I really learned the Indian Jugaad means to be able to handle ambiguity, to always find ways to get to a solution and also to take risks and that both data as well as gut feel is equally important when taking these issues. So ultimately I would even say that he is a key reason why I then later became an entrepreneur and before that was with Bain as a management consultant focusing on tech companies and private equity funds and studied in Switzerland, London and the US.

Yeah, I think it's very important because that also led ultimately to the founding of Sygnum. So, initially it was actually curiosity. It started in 2012 where actually my brother was looking at Bitcoin from a much more technical level or standpoint than I ever did. For me it was just the concept of transferring originals and not copies from me to you without intermediaries. It was just very intriguing and I initially just really felt it's just a great human invention. But then really from 14, 15 it became more fundamental for me. It was because at that time by that time I had a history of investing as a VC. I've seen all these Jaron Lanier called them siren servers the very few companies which basically soak up all our data, monopolize it then monetize it. And I was literally just looking for a way out to take back control. And when Ethereum came out, the Ethereum white paper, the ICO issuance and then the whole emergence of the ICO movement, I started a bit of a libertarian phase and I really love the idea of democratizing access to capital and also to have the opportunity to invest in opportunities early. And it was also the time when I then met my co-founders. We ultimately then set up Sygnum. One is Luca who actually is the legal brain behind setting up the Ethereum Foundation or more generally using foundations as a means of raising or launching decentralized protocols. The third co-founder Manu was a banker and techie in one person. And then the fourth Gerald who brought in the institutional investor knowledge but with equal curiosity and hence sort of that was my way into the rabbit hole started really in 2014 beginning 15.

Yeah, I really think it's alive and thriving in many ways. I would say the Crypto Valley was also very much the reason why ultimately Switzerland even from a political standpoint took the stance to really go all in. There was a federal council of Switzerland saying we want to build a crypto Switzerland should become a crypto nation right already years ago. And that also led to or that also triggered the regulator being much more open than in many other jurisdictions to enable what for example we have built. We've become the first regulated digital asset bank globally where when FINMA took that leap of faith in August 19. That is one such element which I feel would not have been possible without the Crypto Valley being in Switzerland and the many foundations having being launched here also the talent that has come to Switzerland for that very reason and continues to be there and today we have a great mix in Switzerland of companies at the infrastructure level, also more established players that have already launched in 2013 or between 13 and 17. So it's very much alive and thriving and I think there's much much to come. What is also interesting is it has led to now increasingly also traditional financial players to dabble with it and invest in it. We have various banks that are now have already or will be launching crypto offerings including actually cantonal banks which have made public cantonal banks is basically state or canton state controlled banks which is quite amazing right which are making public statements that they're going to get into crypto.

Fundamentally because some of the things I've mentioned before we really wanted to find a way to provide more choice to people again and to provide more direct access to ownership and value and in that sense a way back a way to take back control particular data identities and yeah to some extents also freedom, right? And what we saw in 2017 after going through or you know the hype cycle all the many ICOs in full swing was just great ideas, a lot of talent flocking into the space, but sometimes the business models were just sometimes a bit detached from reality. Let's put it this way. And not because in many cases because of any bad intentions just the lack of understanding that maybe future has heritage right and that is also the heritage is equally important and the heritage in the space that we then became active in is just a heritage of also regulatory frameworks of investor protection of anti-money laundering anti-terrorism financing laws which ultimately is good because it creates a level playing field to do fair business which is good for society and for all of us to thrive. And what we basically wanted to do is to help bridge these two worlds. Before launching Sygnum, we wanted to for example launch a crypto fund but institutional grade and we realized we can't because there's no custody in place. We can never get it through an investment committee of a serious institutional investor. And so we came together and said well let's build a bank in two very strong financial hubs with strong regulators. No shortcuts, right? No arbitrage. And what was really cool for me personally was that it didn't feel like a whiteboard exercise. It was not like us coming together and ideating what can we do at that point. It was actually during the 2017 Singapore FinTech Festival. It just felt like okay Sygnum is needed. And so yeah, since then we've worked hard to get to where we are now.

Very much so it is a very fundamental it's actually very core it is the very core of the company that we from the very beginning have set up two offices teams across the two locations. It is one company we have we want to have one cohesive team and culture we feel it's an extremely strong link right to have Switzerland many things being similar right to stability from a political standpoint regulatory frameworks etc then bringing together Switzerland which stands for history of excellence in banking and Singapore for the promise of growth of Asia and bringing that together and use these two as hubs to then further expand just felt right from the very beginning and in addition we also have then made sure that we had for example at the beginning two co-founders were located in Switzerland, two in Singapore and so it really you know felt we've built the whole thing with this in mind down to the investor base by the way about 50% of our investors are from Singapore and about 50% from Switzerland. So it stays true till today.

Sure. For Sygnum, we offer a regulated digital asset banking platform and with an all-in-one account approach. We also are in Singapore a licensed asset manager with focus on crypto products. And maybe I should just briefly say how we categorize or what we mean when we say digital assets. For us, it means three different categories. It's first selected cryptocurrencies, Bitcoin, Ethereum, etc. of course then stablecoins including our own digital Swiss Franc which we may touch upon later and also asset tokens and ultimately what we then from a product standpoint offer is we offer a fiat and crypto fiat and fiat accounts, fiat and crypto custody. We have a 24/7 trading platform for crypto, payment services for corporate banking related activities, then a lending business and asset management services really that all-in-one account banking platform for digital assets and in addition we've built an in-house end-to-end tokenization solution called Designate and when I say end-to-end it includes the actually Switzerland's first regulated security trading venue SIX Digital Exchange which always with the goal to ultimately empower particularly institutional investors, corporates, qualified private customers, but even other banks also to invest in crypto and more broadly the digital asset economy with complete trust. It's a lot about bringing trust to an industry where in 2017 this was a lack of trust was a key inhibiting factor for more broader adoption. The very adoption that we now have entered the next phase of.

Yes. And that point I really wanted to make and stress. Right. First of all, we were extremely happy when we learned and read about for example the licenses being granted just most recently in the US. That's exactly what it's needed. We need more such nodes of trusted players which can help to also bring more institutional demand on the other side so to say. But it is true that Sygnum is a fully licensed Swiss bank and we can do exactly that pretty much. We can act like any other Swiss bank in terms of service offering. We don't have some of the restrictions that the institutions that you've mentioned before have both on the fiat side and the digital asset side and I think that's quite unique.

Yeah. So basically our focus is really on helping to bring about institutional adoption. So our target clients are non-retail, right? We right now do not serve the retail segment. I think that's important. We focus on institutional investors, qualified private, it's crypto foundations, it's brokers, it's also crypto exchanges, it's asset managers, it's family offices increasingly, it's high net worth individuals and via our B2B offering also other banks. And we do this because we want to really help bring about that next level of adoption on the path towards yeah as we call it future finance. And why do they work with a bank that knows both traditional finance and crypto is because we are you can think of us as a technology company with a banking license. And that banking license helps us to project trust and particularly for people that are managing third party money. This is an important element, right? It just helps tick the boxes in terms of counterparty risk assessment in terms of reporting in terms of being sure that we have the right capital base to etc etc. In Switzerland there's also insurance on a certain level of assets that you deposit with the bank and all these elements make it a valuable value proposition.

Yes, that's partially correct. So yes, that's typical which is true for all the Swiss banks to the same amount that is the Swiss insurance. Correct. Yes. However our crypto custody solution has also been vetted by large reinsurance companies to be insurable. So if for example a large institutional investor wants to have these assets insured we can do that.

I really think it's a necessity for us to get the next level of adoption as mentioned before because you know imagine you're an asset manager, you're a hedge fund manager or you even you're a family office and you're a manager managing the families the principal's money or whenever there's third party money involved you just need to even from a fiduciary standpoint you are liable in some cases as well that you do proper diligence on the counterparty and that the counterparty is audited etc. right the cyber security measures are in place. All of this is just a necessity and what we see is that particularly if you look at just the last three months right we see this convergence of on the one hand side more regulatory clarity the Switzerland is a case in point but also Singapore certainly also the US increasingly even though I think there's still some way to go but also very positive signs even in Europe with Germany Luxembourg on the one hand side but then you have also an increased I feel at least clamp down on unregulated players particularly when there's derivatives financial products involved which just for people managing third party money they can't take that risk right that one day suddenly the withdrawals are locked and you cannot trade anymore so that's where we feel both regulated and unregulated players are needed maybe for different client segments.

Sure. In Switzerland I would characterize as a first mover in that sense right it started with the issuances of the protocols the early the you know Ethereum, Tezos, Cardano all the foundations are based in Switzerland to just name a few obviously the regulator had to figure out early then how to deal with this new phenomenon and I think both the key proponents of the early Crypto Valley including my co-founder with Luca and others have done an excellent job in educating the regulators and also making them ready for what was then to fast follow. Second was then yeah the crypto bank movement so to say we were the first bank to get a full-fledged banking license in Switzerland. This was a huge leap of faith for FINMA I'm sure right it's not something you do lightly of course coming in conjunction with very clear and rigid clear guidelines when it comes to anti-money laundering rules etc we have to fulfill each and every such regulatory framework as any other bank does so there's no loopholes there's no shortcuts and now the next level is that just recently Switzerland has passed a new DLT law which will be enacted next year which will also make the asset tokenization concept scalable and from a legal standpoint fully robust. In Singapore I would call it rather a fast follower. But when it comes to fintechs in general for example Singapore has always been very open for example it's the only country I know where in the central bank building you have a fintech hub for example I think it's around 40 Yeah exactly it's quite amazing it's about 40% of the fintechs in Southeast Asia are based in Singapore so it's a magnet for talent for funding again the stability that you have there in non-COVID times also hot for travel, right? People like living here. But when it comes to crypto, a bit less fast than maybe Switzerland, but just recently, you may have heard that the largest Southeast Asia, Asia's largest bank, there was a leak that DBS that they're launching a digital asset and crypto exchange. So, it's also now coming. So, they're a fast follower and we're excited that this is happening.

Yeah. And you know maybe just to add on Switzerland you know the political system it's direct democracy it's federalism it's deciding at the smallest possible kind of unit village what is possible and then at the cantonal state level and then at the government level what you can and what makes sense subsidiarity principle this is all very much lends itself right to the very thought at the very core of the decentralization movement of open source of creating ledgers basically and hence I think it's not a surprise and no coincidence that Switzerland is so proactive in this regard.

I don't know whether it's more onerous than what would then be effected once you would have full regulatory clarity in other jurisdictions. Maybe that would be my first statement. But what it certainly is, it is very strictly following the FATF guideline when it comes to KYCing the or basically making sure that the transaction monitoring that you have to do as a bank as a regulated financial institution can be performed also in the crypto industry. And I would obviously lie if I said it was not a huge challenge for us to deal with it, right? We've invested significant money in creating actually a tool we call it crypto AML tool where with various workflows and also interaction tools with the customer to make sure we can still smoothen out the customer user experience as much as possible. But it is indeed a bit of a step to make your digital assets your crypto bankable. But I wouldn't say it's significantly tougher than other jurisdictions particularly once they then have the same clarity. And maybe last point here I would make is you know imagine in 2019 when they gave out a banking license it was also the year when Libra came out. Libra as you know is also based as a big base in Switzerland and going through a regulatory process in Switzerland. So there's also a lot of pressure, international pressure I can imagine, including and in particular from the US that everything goes right and there's no loopholes. So I think that also contributed to that.