CBMT

Michael Salmony 0:12

hello, my name is Michael Salmony and I'd like to welcome you to another episode of the Trilogue. And this time we have a guest looking at one of the more forward thinking, more revolutionary ideas around payments about tokenization. This is Claus George. Maybe Claus, you can quickly tell us where you come from.

Claus George 0:30

Yeah, thank you for the introduction. My name is Claus George. I'm working for the DZ Bank in the transaction banking department. And over the last few years, I'm mostly dealing with building new money forms like building trigger solutions to connect DLTs to the conventional payment rails. But the main topic now is the tokenized deposits, the CBMT as we call it. And the idea is to bring commercial bank money onto DLTs.

Michael Salmony 0:59

Well, that contains a lot of things which we will need to unpack. just to put it in layman's terms, my understanding of tokenized money is basically it is wrapped up in a cryptogram to put it technically on my phone and it goes to your phone directly without touching a bank account, without touching clearing and settlement. That's a new way of sending money around the place. Is that completely wrong or is that roughly right?

Claus George 1:25

Somewhat, somewhat. mean, it's difficult from a customer perspective, it's okay. You have a new account and like today you have an IBAN number and in future you have some DLT address and you can transfer the money. Yes. But it will be not on your phone. I mean, it is on the DLT. We are working with Ethereum, so we have no Bitcoin stuff. And it's commercial bank money. is still commercial bank money. This is very important.

So it's not a bearer instrument like some cryptos or stable coins, it's commercial bank money. And yeah, there are some interesting points and people are not used to it when they come from the stable coin space or the crypto space that they are dealing with a restricted asset, but commercial bank money is a restricted asset.

Michael Salmony 2:12

So one

can see that tokenization comes in many flavors. Some people think of tokenization as a tokenized card number, which is what we're not talking about at all. And you've also made the distinction between these cryptograms, which move around completely without touching a bank, to actually bank-based tokens. So this stays within the bank. It still has an IBAN. But it uses different means of transferring the money. It uses a...

a DLT rather than the clearing and settlement infrastructure.

Claus George 2:44

Yeah, exactly.

If you are coming from a non-technical perspective, let's say you're working in an accounting department, you can think of it that we are just building a new accounting system. It's very similar to the existing accounting systems. It's a deposit, it's a bank deposit, it's a one-to-one relationship from a customer to its banker. But this new accounting system by chance happens to run on a DLT. This is a big difference.

Michael Salmony 3:12

And why is

that better than the existing clearing and settlement?

Claus George 3:16

We don't touch the settlement. We will always settle as we do today in central bank money. This is the plan so far. What we do change is that our customers can transfer the money directly between them. I mean, you're an expert in payments. I know it. And you know by heart these four party model from the payment systems. And this is no longer true. I mean, the customers can transfer the money by themselves.

But it's still a deposit. It's still a deposit and banks have a say in it because we have to make sure that at any given point in time, any entity can only hold deposits issued by a bank where the customer is a customer of. I mean, you need to have an account with them. You need to have been KYC'd and stuff. Otherwise, this wouldn't it wouldn't be commercial bank money.

Michael Salmony 3:47

That's

Gijs Boudewijn 4:11

See, Ralf, this is not what you want to hear. I was right.

Ralf Ohlhausen 4:14

No, hang on. on. So I'm I

Michael Salmony 4:18

Thank

Ralf Ohlhausen 4:18

have been fascinated by this here for like a couple of years, or I think it's three, four years you you have been working on this. And there were also some publications about it. But so the idea of commercial bank money tokens, I thought is revolutionary, because in my mind, it turns payments upside down and the whole concept of where

we everyone has money at the bank. And then it's shifted there inside the bank somewhere in the bank from one account to another or whatever is is turned upside down by now the the money, the bank, the bank's money being on the customers.

vault or the customer's blockchain and the customer system. So it's not the corporate having their money at the bank, it's the bank having their money at the corporate.

Claus George 5:15

Yeah, exactly, that's

what we're doing. That's what we're doing.

Ralf Ohlhausen 5:18

And yeah, so therefore, and of course, the interest of having that or doing that, in my mind, being that if you then combine it with other tokens on that, whatever blockchain of that corporate, like their digital assets or digital twins of assets, and what I always have in my mind there, the like a supply chain, especially like for a car industry, for example.

Claus George 5:46

Okay.

Ralf Ohlhausen 5:47

or you have all these suppliers to the brand. and I've seen that Mercedes was participating in your trial there. So they would have basically all their suppliers on their blockchain. And they would probably then deal with token representations of some whatever parts that they would get from the supplier. And then they could trade this directly by having

Well, the money of the bank on the same blockchain and there you can have all of these atomic trading and you know, the things that we like about DLT. yeah, in my mind, this is quite revolutionary.

Claus George 6:34

Yeah, this is exactly what it Yeah, sure.

Gijs Boudewijn 6:35

Can I ask a question Claus?

Ralf is always looking for ways to circumvent the traditional bank of course which is fine, but all these tokens Ralf, on that blockchain or wherever they are, they still represent a claim on a bank by the end of the day. And that is what your connection, you have to understand the fundamentals don't change. They are tokenized commercial bank money deposits.

So by the end of the day, wherever Mercedes puts your token, the token from your bank represents a claim of you on your bank. It does not change with the bloody cryptogram or whatever. I'm just a lawyer, I'm not technical. So it's just doing stuff quicker, simpler. But when you have a token from your bank, a bank's commercial money, and you pay me, another bank, it still will need to be settled.

Claus George 7:15

Exactly.

Gijs Boudewijn 7:34

between your bank and my bank in some way. Because your claim on your bank is changing in the claim of me on my bank. And these two banks, and this claim has to be transferred from your bank to my bank, and we call that settlement and that don't change, Ralf.

Claus George 7:51

Exactly. And we even have to swap the token. If you have different banks, we have to swap the token.

Gijs Boudewijn 7:58

Exactly.

Ralf Ohlhausen 7:59

Yeah,

maybe if you could explain that a little bit.

Michael Salmony 8:00

Isn't that a bit of a disadvantage? I mean, if every bank has its own token, you know, there's a Volksbank token and a Commerzbank

Gijs Boudewijn 8:09

But it's

not a bearer instrument. It's still representation of a claim on a bank.

Michael Salmony 8:14

Yeah, but they are all different, right? And if you want to send from one bank to another, you're going to have to convert the...

Gijs Boudewijn 8:19

where standardization

comes in of course you agree on the start.

Claus George 8:21

This

is the trickiest part of the concept, mean, we have technical, we have one form of token, but we call it color token. Every token unit has a data tag, which is the issuer, which bank has issued this token. And if we move it around, we have to check, we have to make sure that these tokens are just moving to customers of the issuer, nobody else. If we wouldn't make sure that this...

is still valid for every point in time it wouldn't be commercial bank money any longer.

Michael Salmony 8:54

Yeah. I mean, that

But that seems to be a bit of a problem. We have 4,000 banks in Europe. That means we have 4,000 flavors of token. Isn't there sort of more generic solution to have something like a stable coin where every bank can send money to every other bank?

Claus George 9:12

First of all, I think it's not a problem to have 4,000 different colors, so to say, for token. I there are lots, I mean, there are 256 bits available, so we can use it. I mean, you can have a lot of colors, lots of colors. And on the other hand, the stablecoin, I mean, it's a problem that this money is about the address default risk. We are targeting large corporates, treasurers.

And they know about default risk. If you're just buying coffee, it's okay. Or small or if you're a smaller medium enterprise, it's no problem to use stable coins. And then I don't have anything against stable coins. I think this is just another product. It's a completely different product than commercial bank money is. And that's it. And we are targeting for these corporates who want to use commercial bank money. And so we looked for a way how it could be, how to model.

commercial bank money in a DLT. And this wasn't easy, to be honest. So we had to do some tricks, but it works. I mean, we did a proof concept and everybody said, okay, from a functional point of view, this is commercial bank money, it works fine. So we can have commercial bank money with all the advantages, but the disadvantages or the restrictions, if you want to say.

We have it today. We have 4,000 banks and we have 4,000 flavors of commercial bank money. Nobody cares. Nobody cares. It's not a problem.

Ralf Ohlhausen 10:45

Yeah, but I'm right.

Right. But I think one reason why people don't care is because they don't realize that currently, the euros have the same color. So you're not having you're actually not having that visible. Now with this in this tokenized world, you will have to it will become visible somehow.

Gijs Boudewijn 11:02

Yes, sir.

Ralf Ohlhausen 11:13

to people that whatever the DZ Bank money is different from the Volksbank money, from the BNP money.

Gijs Boudewijn 11:14

But why, Ralf?

Claus George 11:17

Okay.

Gijs Boudewijn 11:20

No, it's the same, it's euros.

Claus George 11:23

It really depends to whom you're talking. If you talk to a treasurer, they want it to be visible. They want to know. They want to manage their address default risk. So in the future of treasury, if this would roll out the CBMT, you would have one address and you would see all your tokens with different colors from different banks in one place. I think this is an advantage. If you ask a treasurer, it's an advantage because they actively manage their address default risk.

If you don't care, which is fine, you can just send the money where you want to send it. You have just one bank relation, so you have always only one color in your DLT address. Nothing to worry about. Totally easy. As today.

Michael Salmony 12:16

One thing I do really like about your thing is it's B2B and that's something we talk far too little about in the payment space and that money is where the inefficiencies are where there's a need to improve so I love the B2B aspect.

Ralf Ohlhausen 12:16

I like it.

Gijs Boudewijn 12:31

Yeah, I'm

just as the least technical person here. So I'm treasurer of a large corporate and I've been paid with 4,000 different colors of tokens. What do I see when I look at my screen? So I want by end of day or whenever I want to know how much money do I have in my accounts traditionally.

I would also see a aggregate euro balance in my account probably, but it consists of four thousand different colors of tokens.

Claus George 13:09

No, no, no, sorry,

this is probably a misunderstanding. You will only have tokens from banks where you a contractual relationship with, where you're a customer of. Only those as today. If you're a treasurer of a large company and let's say you have 10 bank accounts or with 10 different banks the accounts, then you will have 10 different colored tokens as today. No difference.

You will never get your hands on a color you are not a customer of this bank.

Gijs Boudewijn 13:43

Okay.

Ralf Ohlhausen 13:44

because it's exchanged before it gets to me, right? If it comes from a different bank, from someone else with a different bank, it's the it's the banks in the background.

Claus George 13:46

Yeah. Yeah.

Yeah, exactly.

Yeah, this is the most

tedious part really I mean, as a customer you have two addresses on the DLT. The payer sends the payee token units to address called convert address. We choose this name because it's accepted what is happening on these addresses. The banks check if the payee is a customer of the issuer and if not, they exchange the token units. By some color, the payee is allowed to hold.

So, and then it is immediately pushed forward to your so-called second address, a general address. And this is the address where you can transfer the money from. At the convert address, you cannot transfer it as a customer.

Michael Salmony 14:42

And you also have the IBAN.

Ralf Ohlhausen 14:42

Hmm.

Claus George 14:44

No, no, no, no, no. IBAN not. We have a DLT address. Just a DLT address.

Michael Salmony 14:50

But there needs to be a mapping into your normal bank account in some way.

Claus George 14:55

Not necessarily. It could be that the customer has only a DLT account. This would also work. The process is that the customer goes to his bank, does a KYC if it hasn't happened already, and then says, okay, look, this DLT address, I would like that you white list it for me. And then the bank registers this DLT address in the DLT, and then this DLT address

is eligible to hold.

the color of this bank who has did the white listing. That's the process.

Ralf Ohlhausen 15:34

Could I ask you a question there a bit about the difference to Bitcoin? I love this quote from this comedian, John Oliver, there Bitcoin is everything people don't know about computers combined with everything they don't understand about money. So it is

Michael Salmony 15:49

You

Claus George 15:50

Hmm.

Ralf Ohlhausen 15:51

it is really difficult from on the on the computing on the IT side. And it is also really only for nerds and accountants to understand how commercial bank money differs from between banks, whether the why there are colors and not and how it differs from ECB bank or come back to that in a minute. But anyway, so can you maybe explain so how this CBMT differs from Bitcoin?

Claus George 16:19

Yeah, I think there are hardly any similarities. Bitcoin is a great instrument for capital markets, but it's not money in my opinion. I know that there are people who try to pay with or pay with Bitcoin I mean somebody bought me a coffee lately with Bitcoin, okay, but it's not money.

Gijs Boudewijn 16:24

Ha ha ha!

Claus George 16:45

I mean, even the difference between stablecoins and commercial bank money is huge, with Bitcoin you don't have an issuer.

So we can end this discussion about the similarities here at this point in my opinion. You don't have an issuer. I mean it's okay. I mean if I pay with metal, with precious metal coins, I don't have an issuer too. I mean God doesn't count. There is no issuer for gold. No problem. This works. You can have a stable value entity without an issuer. No problem.

Gijs Boudewijn 17:03

It's not a claim on anyone.

Claus George 17:24

commercial bank money is it's a commercial banks and they are under legislation and under supervision and there are certain rules you have to follow and that's it. That's the difference. You have commercial bank money.

Ralf Ohlhausen 17:38

and it's permissioned only.

Claus George 17:41

It's a restricted asset. mean, yeah.

Michael Salmony 17:45

What about CBDC? That sounds to me like a central bank money token. So you must love this.

Claus George 17:54

It's a complex topic. I think it's good that central banks are moving or upgrading their game from a technology perspective. The question is how they do it exactly. For example, if you have a look at the wholesale CBDC, yes, of course, I want it. I want it absolutely. And I don't know any banker who's opposing wholesale CBDC.

I this is just what we are trying to build for our corporate customers with the CBMT is they are upgrading the technology base of the money form and we could use it on a DLT with all things that come with it on the good side. When it comes to retail CBDC, I mean, there are different approaches how to do it. I mean, you could have, for example, the digital euro, currently discussing having an online CBDC, retail CBDC and an offline retail CBDC.

The online retail CBDC is basically very similar to the account models banks have. So this rises some questions about should the government of the state or the central bank go into this industry, into this private owned industry or not and why and how far, how far.

Michael Salmony 19:05

Thank you.

Yes.

Claus George 19:16

On the other hand, the offline CBDC is a totally different beast. It's really a bearer instrument. So there we would have this picture. You put two phones together and the money jumps from one phone to the other. Completely different from the online retail CBDC.

Michael Salmony 19:36

Yeah, I think you agree with all of us that the wholesale CBDC and the offline CBDC are the more sensible versions. We're all three here.

Ralf Ohlhausen 19:37

I was...

Yeah, we

discussed this here. from my perspective, like a fintech perspective, we are very much in favor of an offline digital version of the euro. So like the token based digital euro, where we are less supportive is the online the account based version, because this is as you just said, so it is then getting into the space of commercial banks, it is then

Claus George 19:56

Bye.

Ralf Ohlhausen 20:09

going beyond where ECB money is today. Today, ECB money or central bank money everywhere has been always has been token based coins and notes that you're exchanging P2P. And turning that into an online digital version is where all the problems then come in and all the difference it now. But I was I was wondering that if the ECB is going online,

Gijs Boudewijn 20:31

You

Ralf Ohlhausen 20:38

does that relate to you banks going offline in the sense of token base? So if I understand you correctly, your token is different from that ECB offline token, right?

Claus George 20:51

Yeah, completely I mean, and as first of all, nobody said definitely that the online version will be on a DLT. I mean, why? Why should they? There's only one issue and there's only one doing the booking. It's the ECB. And the D is for distributed in the DLT. And if you have only one who can change the truth, doing the booking on certain...

You don't really need it, in my opinion. So whatever technology they will choose for the online, it is very similar to what banks offer today. And if it is better to have the offline or both, I don't know. I mean, this is mainly a political discussion. I mean, there's a paper run from the Baltics and Finland, for example, that they say, resilience, we need more resilience in Europe.

have a look at the map and you know who's their neighbor to the east. So there's a different motivation. And I'm not sure if you should implement both online only or offline only. But you asked me about my money, commercial bank money being offline. Yes, we tried this actually. We did a little project with Giesecke+Devrien and some others and showed that would be possible to

transform the CBMT to an offline token, act offline with some machines and transform it back. But this is really far-fetched in my opinion. I mean I know that I have to explain a lot about the CBMT, the online version as it is. So I will try to first get this one up and running and then...

Michael Salmony 22:40

It also

seems like the offline version that doesn't really fit with the corporate B2B space, right? If Siemens is trying to pay its 10,000 suppliers, you don't really...

Claus George 22:49

But

if you think about, for example, mining, there's some mining equipment that is assembled together down there under the earth and it will never come up. But it somehow works for a few years. And I don't think there is internet in these mines. So I'm not sure. not sure. mean, we did this. We did this experiment with Festo, which is a global player in the industry.

Michael Salmony 23:09

Okay.

Claus George 23:19

And yeah, they were interested and that's why we did it.

Michael Salmony 23:23

Okay. I mean, you mentioned your POCs. If I could just ask you critical question there. I mean, I think it's amazing what you've done. You've brought together several huge banks. You've brought together several huge corporates, right? And you combine them in a pilot. I mean, that's a huge achievement and you're rightly getting a lot of press recognition. But one could ask critically, know, blockchain has been around for 17 years, I think now, and I don't know how many pilots and POCs and things have happened.

Is this just another one?

Claus George 23:55

Yeah, this is a good question, Michael. I hope not. I mean, but there are some differences. First of all, we are doing it together with the customers because there are extremely many startups and fintechs and la la la who have a fantastic idea how to make the world a better place. But they have never talked to a customer and then they implement it and then they have a problem.

We are talking to the customers from the first day and the report of the POC was published jointly by the BDI and the DK. So the Association of All German Industries and the Association of the German Financial Industries. There is some, I think there is some potential in these two associations. Let's put it that way. And on the other hand, I never wanted in the first place to implement it.

on a technical venue and we are just doing this with the other banks and corporates because there is no proper DLT where we can just implement, where we can just drop our token. The perfect idea for me was I publish the concept, people think about it and say, okay, this could be something. And then some network operators show up or DLT operators show up and say, okay, here's a DLT, give me your token. You can drop it here.

And then we attract some corporates to do some business processes on this DLT. I'm not a fan of building these financial market infrastructures myself. I'm just doing it because there is no alternative right now. And that's what I'm really happy that we have in the current state of the project. UDPN approached us and that we are trying to deploy our token on the UDPN network. Because this is how it should be in my opinion. If it works there, would be great.

Michael Salmony 25:51

So how would these scale then? I mean, how would this connect all the banks in Germany, in Europe, in the world to all corporates?

Claus George 26:01

Yeah, I mean, when the idea is that the money follows the customer, the customers will define where business happens. And if, let's say, for example, UDPN manages to attract some large corporates and they tell them their suppliers, okay, here we go, then we will have a first venue where we can really use it. You need the critical mass to do it.

But it's not from the banks. It's from the banks for the customers and the customers need to set up these venues where they put their business processes on a DLT. If they don't do this, nobody needs the CBMT.

Ralf Ohlhausen 26:43

Could I ask a bit about the use cases? yeah, I guess this supply chain thing is where smart contracts, I guess, come in there for this atomic transactions. I also read about micro payments because it's maybe more efficient using tokens for fractions of euro payments.

Claus George 26:59

Mm-hmm.

Ralf Ohlhausen 27:13

On the other side, I was also wondering a little bit about first mover advantage. if, say, is it the is it a big player in the supply chain, like the Mercedes here, who is then sort of imposing everyone onto that DLT onto everyone else. So if you want to play ball with me, then now you have to, or everyone has to put their digital assets or twins of physical assets into

Mercedes DLT's all the suppliers all the smaller companies are in the ecosystem. They're all forced onto the main players DLT isn't it

Claus George 27:53

Yeah, but I mean, they somehow do the business today too. And I guess most of it is not done on paper, but electronically. So we will just replace the current means of communication with the DLT. And this is a business decision from the corporates. This is none of my business. I mean, it was us very important in the design of the CBMT that we don't impose any restrictions on the corporates, how they design their business processes.

This is really just an offering for the corporates. If you want to put business processes on the DLT, banks can deliver the money. Because today it is difficult. If you're working in an IT department or doing some nice fancy project with a supply chain, you have a problem with your treasurer or your accounting department in-house. They will ask you, okay, and how do you pay?

and then they come up with some stablecoin lalala or some different... and you get questions in the good case. If you come up and say, yeah, with commercial bank money, you have no problem. You simply have no problem with it.

Michael Salmony 29:06

Very good. I think that's the key, right? To understand what you're doing is if corporates want to move on to DLT, then you have an answer for them.

Claus George 29:14

Yeah. Yeah.

And if they don't, can just put it away. We can just put the CBMT to go across the way. No problem.

Michael Salmony 29:20

Yeah.

No, no, excellent. Okay, I think we've gradually reached the end of our time. Gijs, Ralf, anything you still want to add or Claus, any other points you feel we should have touched upon?

Gijs Boudewijn 29:36

Well, just one thing, but that's probably because I'm getting old. I maintain and I contend still, Ralf, that the fundamentals don't change. There's just another technological solution to do things in a more clever way, but the fundamentals don't change. It is still commercial bank money deposited in euros in a bank account. And the rest is a representation in very clever ways to make stuff easier. But it's not like...

turning payments upside down and the money sits in the corporate. So the way you portray it, it doesn't do justice to the role the deposit holding banks still play.

Ralf Ohlhausen 30:13

Well, yeah,

no, I didn't mean to do that. Because as you know, I'm coming from a fintech angle where we are not issuing our own money. We're not doing also and no electronic money or not. No stablecoin, etc. So I'm not feeling in competition there with central bank money. but the question is real. I think didn't I just read it these days that there was a question of whether it is really bank deposits or not. There was legal opinion issued, which came to the conclusion it is. So, for example,

that it therefore does not fall under under MiCAR right

Claus George 30:47

Yeah, it's the second legal opinion. I I could phrase it all legal opinions I know, came to the conclusion that is a deposit. But okay, fair enough, it's two and a half. I mean, but yeah, you need to kick off this discussion because it doesn't fit 100 % into the existing regulatory framework or how people think about accounts. I mean,

This is a bit different. So we have these legal opinions and this is the main work to do on the way to having this into production, my opinion, is talking to the supervisors, talking to the lawyers. The technical side is not so much a problem.

Michael Salmony 31:31

I mean, Claus, you come from a bank, so...

Ralf Ohlhausen 31:32

Yeah, and actually, mean, the reason I'm excited

about it is because it does combine sort of the best of banking with the best of technology.

Claus George 31:39

What's the idea? That's exactly the idea. Easy.

Michael Salmony 31:43

mean, Claus,

you come from the banking side, so it's not a surprise you're coming with an approach that is anchored in the banks. But there are others who are more radical, right, who do what Gijs says Ralf wants, completely bypass the banking system.

Claus George 31:56

Okay, I don't know this

is about this radical or not I mean, the point is we are trying to implement the unified ledger. mean, BIS put it in their World Economic Report 2023, I guess, was an old chapter about the unified ledger. And that's what we are after. We are not trying to modernizing the payment systems and because stablecoins are there for payments.

That's it. We are not trying to upgrade payments. We are trying to upgrade how business is going. We trying to put the money and the business process on a unified ledger.

Michael Salmony 32:39

Understood. Yeah. No, very good. I think you made your position very clear and that's really helpful. And maybe we'll have another episode where we have a more radical approach which throws out the banks and throws out. But this was super helpful to understand what your approach is and thank you for clarifying that. So thank you, Claus. Thank you, Gijs and Ralf for this very lively discussion.

Claus George 32:56

You're very much having me.

Michael Salmony 33:04

So I hope those who are watching this will be tempted to see some other podcasts that we're doing. But meanwhile, I thank you all for your attention and thanks to everybody here and to everybody watching.