Fintech Opportunities in Central Bank Digital Currency - Part 1


Executive Summary

This episode is part of our Subject Matter Expert Interviews. It will be one in a series over time, keeping up with the development of the central banks and their digital currency. This episode is just the start! We talk to Kimmo, a regtech entrepreneur, who formerly worked at the central banks of Finland, Norway, the Bank of England, ECB, and the Fed in New York City. This episode is a starting point for us, from which we will dive deeper, keeping up with the developments on CBDC.

At the Federal Reserve in New York I siumlated attacks on critical infrastructure on the back of the 9/11 attacks.Kimmo Soramäki, Founder and CEO of FNA

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We work with a lof of clients with three letter acronyms. So we decided to name our company financial network analytics, FNA.Kimmo Soramäki, Founder and CEO of FNA

The Expert

This episode is part of our Subject Matter Expert Interviews. It will be one in a series over time, keeping up with the development of the central banks and their digital currency. We talk to Kimmo, a regtech entrepreneur, who founded with FNA a company that helps banks, central banks and financial institutions. He has already advisde the central banks of Finland and Norway, been a visiting researcher at the Bank of England and expert at ECB. He also spents a year as research economist at the Fed in New York City. His first software simulated for finish banks the impact of joining the euro zone.

When the financial crisis 2008 came, we realized that we don’t need an outside attack on the symstem to destabilize it. Kimmo Soramäki, Founder and CEO of FNA

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Topics Discussed in This Episode:

central banks, central bank digital currency, digital currency, bank of english, federal bank, federal bank of new york, bank of england, currency, timeline, cbdc, stable coin, usd coin, us dollar stable coin, euro stable coin, cny, chinese yuan, chinese stable coin, yuan stable coin

Welcome to start bread dot I own your podcast and Youtube blog covering the German startup scene with News, interviews and live evets. Hello and welcome everybody. This is Joe from startup right do all year startup podcast and Youtube blog from Germany. Today I do have a little bit unusual guest joining me from London. Hey, Kimo, how you did very good. Glad to be here, jodline, my pleasure. Everybody can tell from a name WHO's watching this on Youtube. Chima, how do you pronounce Your Family Name? Sorra? Mamckie? Yeah, terribly sorry if a bunch of your name. You are originally from Finland and you are currently in London, but we talk because you are a subject matter expert to us and we will talk a little bit about the impacts of Central Bank digital currencies, especially where there are opportunities for fin techs out there, and I have been digging a little bit through your CD will soon get to that. There's some very interesting positions. First, I would like to thank our sponsor today, startup, braving dot com, the easiest and most efficient way to connect with investors and corporation partners. In today's interviews also in Corporation with the Digital Your Association, who actually poked on up, thanks to the guys players. Um Talking about digital euro central banks and all that stuff. I have seen in your CV on Linkedin. As always, will link it down here in the show notes. A lot of positions usually down and see where the startup founders. Um, for example, I found Naugast Bank, the Central Bank of Norway for all the Americans. That's very up in in Europe. Um Bank of England, European Central Bank, very fascinating, the Federal Reserve Bank of New York, which is very important in the US Federal Reserve System because they implement the actual interest rate policy, and, of course, the Bank of Finland, so Chello. What on Earth did you do there? How did it lead to you startup? And while we're talking central bank, to the currencies right now, yeah, maybe, maybe, it was a little bit of an entrepreneur in those central banks. So so I started the Bank of Finland and the first, first task I was given was to build a Simul lator when Finland was joining the European Union and the Finnish banks wanted to know what will happen to their liquidity and payments when they become part of the Ural area and then don't just circulate. Marca in Finland, and I think I maybe over the a little bit. Probably they were thinking of a sort of an excel spreadsheet, but I built a software to do the simulations. UH, and too bad, because the very first thing about when he said about a built assimulator, the very first thing I had in mind was a flight simulator and was going he was building a flight simulator in the center back. No, thank it. YEA, it was a way simulator. Build a software to do assimulations of payment systems and how banks operating those and what kind of mechanisms those have, and I was invited to the New York Fed and the Bank of Japan to do simulations about their systems after a couple of publications. So that, I think, took me on this sort of assimulation path. It was always something that I was interested in. Um, from there I went to the European Central Bank. I was during the Europe change over there. Um mostly always seeing payment systems. Again at that point of time, also doing doing the money, and I always told my friends and I'm working in payments and was very unsexy.

Why? Why? Why? Why? Do you do such a boring topic? And now with the skin techs and Crypto, you know, like it's become one of the most exciting places to be, but I was there when it was very boring in other people's mindswer. Um. From there I went to New York feddis research department and they are really encountered the literature network science and network theory and I said, Hey, this is a great way to understand how many moves within the economy, within the banking system, and we we did some research on that and that caught the eye of the national laboratories in the US and and we started to build software again together now on simulating attacks on critical infrastructures. So this was at the back of the nine element terrorist TAXA. And then then my plan was, would assume your focus would have been more like a tax on central payment processors, like exactly like the Sur things like this. After the nine elementariest attacks, I think there was a lot of worries that maybe the next attack will be on different critical infrastructures. They could be banking systems, payment systems, road networks, bridges, Um. So we were building models and simulation models on how how these attacks on these stayment systems would play out and how would we be able to protect the payment systems from from attacks? Now it's, of course, very relevant with all these cyber attacks against against the infrastructures, and with the with war in Ukraine going on as well. Um So, Um, so that sort of took the other side of when the first it was about making these systems better. This was about how can we disrupt them or or how can they be disrupted by others? Um, and seeing sort of receidients about the instructures and Um, yeah, my plan was to m to Um they plan to put that software into open source, but that they never got around it. So then I decided that I'm just gonna Start Building from scratch something similar and that that that was staying away the birth of the of the F and a software that we have have today. And now you have to solve a big riddle for me. What does F and a mean? I cannot find it on new website. Yes, and it's the fun we work with a lot of other like three letter acronym organizations. So most most of the fun clients have also three or four letter acronyms, like like E, C B, or or or I N F um, you know, but F and a means is financial network analytics. So that was the route of of what we am but we went out to do is to build a platform for understanding these complex financial networks, MAPP the financial networks and then do simulations how to make those systems more efficient or how to do stress testing on them. So, Um, first a little little smile here, because when you said, Oh, a lot of our clients, I think, using three letter acronyms, I was wondering, did he seriously could sita to name his company T L, a three let AC company? said that aside. Um, my understanding is right now you are doing simulations, meaning not that the very small ones, but the very big months. You generate maps of how money is flowing, and that's why we are talking today here, Um, because we will be talking a little bit about the potential impact of Central Bank digital currencies. Um, you're always weigh ahead of the curfew with us. Um, when do you believe seriously that the European Central Bank and or the Federal Reserve will have real central bank digital currencies, C B, D C s? Um, I think it's it's four to five years down the road. Really...

...a little progress sounds sounds right. And maybe just go back. When we people speak about the cbdcs, there are so many, so many different varieties and ideas. What the cbdcs so for me, Central Bank digital currencies, is that there can be two versions of it, that there can be something that is used by normal people, um, like they do cash today, which is something that is issued by the central banker, but there can also be wholesale Central Bank digital currencies, which is the what that, let's say, the banks that would exchange with each other. And I think the more interesting part is the is the but it's called the retail CBDC so, which is a cash like a payment instrument that is in a big digital form. So instead of giving someone banknotes, I would be able to attack my phone or transfer you some central bank tokens that that Central Bank you should token, so that that that digital and I think they will, they will come. I think so. When I was in the European Central Bank and the Bank of Finland maybe twenty years ago, Um, the thinking was always that central banks won't issue digital currency because there is this risk that if the system gets compromised, then we lose all money, you know, like we can't trust the money, and it was too important of a topic to be to be lost because we have without money, where we are quite a handicapped in all economic activity. Every economic and activity needs attainment Um. But now, with the rise of the CRYPTO so and and sort of cryptographic techniques and other techniques, I think the technology has gotten much better. They've been out there for a while already. People have gotten more comfortable with the idea. So I think now, in a way it is the is the the the environment is right for Central Bank ingital currencies and the fact is that the cash is declining as a means, the instrument, that means of payment and Um and then I think central banks need to keep a pace with that technology and provide provide new means of payments into the digital into this new digital space that this we're spending more time, we're spending more money Um in on the Internet and online, doing more non non personal in person payments. So there needs to be a payment instrument provided by central banks for that. Before we get into that, you're not only a consultant two very important central banks, you're not only startup founder, but you have been working in the past, for example, uh, during the Lehman Brothers collapse in the aftermath, Um doing some interesting work there. That's why we're talking about here. Before we get into the real discussion, can you share a little bit about what you did in the aftermath of Lehman? Yes, so, Um, so this is a continuation of the of the in a way, the work that we started to Um to do to simulate the attacks on critical infrastructures and the banking system. And then when the when the financial crisis came like, we realized that well, actually, we don't need anyone to attack the system. It can. It can dissolve and destroyer itself. But a lot of questions that that came out from that were related to the interconnected nature of the financial system. Everyone was asking, Hey, who is connected to Leman? Who is connected the people who are to the WHO the WHO's who is connected to Leman, and who is connected to the banks that have lend to Lima and so for. So everyone understood their certain senses of the large network of interdependencies. And then some of the the work and we had been developing these network maps of the financial system in the USA. Um, everyone started to find those not more interesting...

...than before? Before, let's say classical economists were saying that the links don't matter. It's a market, we're facing the market. There was sort of more sort of like purists and classical economists, UH and Um. And after the financial crisis there was really this realization that it's a network, all these connections, exposures matter, and how risks cascading these networks and we need to understand much more granular level these uh, these in the interdependencies within financial institutions and corporates and others. And so some of the work that I had done research was used in congressional hearings, for example, to argue that the regulators need to get more information about what is going on in the in the financial systems of pre financial crisis. There was very little information that was provided them and that information came later about the exposures and and about risks. So so there was this drive to the regulators need to get all these information, and that's that. That's been happening now the last stuff fifteen years, and that today it's called Super Tech or supervisory technology. So it's a spinoff from reg tech, with the regulatory technology, which the spinoff of Fintech with this financial technology, and I think fintech probably most people know, but that there are the subcategories that. So it's technology used by by by central banks and supervisors to make a better sense of what is going and going on in the financial system and to identify systemic risks, Um and Um, and that's sort of a key pillar of F and a today, that is to provide technology for for these types of network analysis and understanding and simulating financial systems. I see. So we headlined this today, Fintech Opportunities in Central Bank digital currencies. Let us talk a little bit about the potential impact of CBDC ease Um. First, I do believe at one point down the road, uh, you would be able to transfer almost instantaneously money from every place in the world to every other place, including from one cell phone in Japan to another cell phone in Brazil like that. That should be possible in the future. That is one of the main reasons why you have central bank to two currencies. But that will also change quite a lot because there are a lot, a lot, a lot, a lot of different intermediaries. You have there. For example, you have your android phone, you have your Google pay, then you have a master cat behind it, then there's the master cant network. Then it goes into your bank account, there's the central bank, it works with another central bank, it works with a commercial bank which then in turn sent it somehow to your cell phone. And a lot of this will be cut out. So can you tell us a little bit, can you give us a broad overview of work? I'm not sure that a lot of people will be cut out because all those intermediaries emerged for a reason that you say they could be cut out right. Yeah, and give us a little bit of over a few of them. Yeah, so, Um Um. I think with this, this this idea, with this the central and finance and Cryptos, that sort of the intermediary is kind of be cut out. But I think the reality is that things get bigger, all these intermediaries that we see today and will emerge because they serve a key role. Um, the other point of it if we don't have intermediaries for that example, with like sending money from your phone to someone in Japan, what kind of money are you sending there? Are you sending euros? So that means that the Japanese counterparty maybe has can hold your euros in Japan, and I think that's one of the key drivers for this conversation around Central Bank digital currencies. Is that... that whose money is it going to is it going to be that we're going to be using globally? Is it going to be in the euros or that? Currently it's the dollar bank notes that we talk about dollarization and you can go to many countries and play with dollars. But in the future, when we are in a digital environment, whose currency are we going to use for these digital transactions? This is going to be dollars, the digital dollars, or is it going to be the digital euros? Yeah, Um, we may go back a little bit into history here, because after Breton Woods, after the Second World War, the factor, the leading currency of the Western world became the years dollar. In for quite some time. Even today, you cannot just exchange one currency for another, just say euro into Um, into some Brazilian reality Um. For most of them, you first have to trade them in US dollar and then into this currency, because everything is measured again the U as dollar. That's why you're referring to the U as dollar there, and maybe there's even an opportunity to go into something uh even more central, like uh nailing it to the special drawing rights. That's the currency of the International Monetary Fund. So there is a lot of uncertainty here and that's why we are talking, and that was just a little detour. People who are listening to me know that I love to do teachers in tea the history and why do you're why do you ask dollar is they're so important and why you still need to have in mind the exchange right you or US a lot? Sorry, go ahead, yeah, so so. But I think that's one of the key drivers, is that there's a there's Um in a way, a a people are also there's quite a lot of uh in the news around the Chinese digital Chinese currency Um. Does it become a world currency? So maybe that's a threat, you know, like the dollar or the or the West. But I think you know, like a lot of the thinking around these digital currencies, because in the digital world everything, everything can spread so much quicker and that's why we saw the scriptos spread so quickly around the world, because it's much faster to move digital tokens around than it is to move cash notes around. So so when when we have central bank digital currencies. Um, I think there's a little bit of a race between the different countries to h to at least not be later than others to launch their own digital currency, because otherwise it might be that if you us, tollar launches a digital currency and then it proves very popular and everyone in your Europe starts to using it instead of Euroso Um, for for transactions in the sort of online and in the digital world, making payments to each other. So Um. So there are no the borders are not so clear within digital currencies as they are with the national cash, sort of bank note based currencies. I see and Um, we were recording this end of June, two and we've just seen Um in the last days at the collapse of the terra you as dollar stable coin. So it currently looks like you need a reliable, trusted person, institution, organization group that issues stable coins. I do believe the collapse of the terra use the UM maybe the nail in the coffin of the stable coins out there, at least the privately issued, at least the ones issued from just regulated. Yeah, regulated like any other sort of financial institution that is issuing UH securities or holding your balances of money, which has not been the case so far, but but I'm sure it will be in the future. They will be getting in the normal regulatory follower. Mm...

Hmmm, yeah, possible. Um. So basically, Um, you've been saying central banks will have digital currencies. Is Faster to move around. What, in turn, does this mean? Because when when you're doing something via papal, via Um, especially within papal, you can have money sent around within hours, where actually it takes a lot because going back, it's it's the idea, Um, that basically two banks, they have to settle the cash with each other and instead of at the time they still had to transfer cash, instead of sending fifty fifty million years dollars there and getting back fifty one million year as dots, the bank will only send one million year as dollar and then you just Um. Then you just do the transfers internally, so only the ones you really the delta. You need to Um, you need to transfer. This is something you go back from because you can only make a cut at the end of the day, and so we get more real time, more faster. What will be other implications there, because I do believe also to transfer between central banks, between banks and central banks. It will all be much faster. Yes, I think in the black. In these sort of modern economies we already have very well functioning payment systems um that are very fast. Um Um and most use cases that we can think of you can already already be done very easily and it doesn't cost a lot of money. So I don't think the Central Bank digital currencies are so much of a of a competition for existing use cases. I think there will be new use cases, might be smarter money, but maybe related to some government subsidies, UM and other types of new use cases that we can't think of yet that we can do with the with the central bankagual currency, and I think will be. It will be used for this new use cases more than maybe replacing the existing ones. We'll continue to use our cards and debit cards and credit cards for for daily transactions. But I think there will be more niche roles for the Central Bank digital currencies where they can provide additional benefits, for example limits on what you can spend the spend those moneys in sort of for example, these covid checks that that, like a lot of countries, had giving money to people during covid to cope with things that could have been said that hey, you can use them for grocery shopping or you can use them for whatever things that the government thinks that people should be spending the money because they want to promote that area of the economy, or other types of sort of smarter, smarter sort of for an aid, for example, is more track at tractable instead of like giving countries a lot of cash or or or money and a lot of it and something corruption. And maybe with Central Bank digital currencies we can limit the recipients of those money. Is Uh to do those enter this we want that money to be spent, to be able to track it better. So I think that's quite a number of new use cases that will be will be interesting for the Central Bank digital currencies and that we shouldn't think that it's going to compete with the with the the daily day, day to day things that we already find very comfortable and are very cheap. I actually just felt the moment when you said you can limit on what, when and how you spend Central Bank digital currency. I felt the moment when some libertarians who are embracing digital currency because it frees you from the state oversight. That was the moment they were very close to stroke, when they realize, Oh, you can abuse scrypture in that way, um, making the your only spendable on necessary and necessary stuff, for ex even social payments.

Limit them on what you can do with them, maybe forbid online gambling. Yeah, and I already found a pretty, pretty good use case for this for a startup that actually can help you circumvent those permitations. Sorry, I think you can always circumvent things said, but then in most cases, you know, like you, you're of the people who the of of the usage would be cut by that. These types of us. I think there surely there are ways, always a certain event, but I think it's still can provide you like benefits for those use cases, if you think they have benefits, depending on your stance on what the government should be doing. M One more question, because you may have seen this. Here in the background there is the drum schoon get. It's actually a little experiment that was done after the Second World War and basically they had money, like physical money, like notes, and they had to standard in use before and there's also something you could do with central bank currency, because there's several things you can do to jump start an economy. One of them is just giving it more money and the other one is too increase the circulation of it and say, guys, you need to spend this within year. Otherwise. Yeah, yes, of course we don't. We have a couple of central bankuagual currencies out there, like in a smaller sort of like economies, but we don't have one yet. Yea. So we can only imagine what sort of like it could have. But I think it's also already providing a lot of thinking for innovation, like what kind of use uses it or limits or what kind of features it could have, and that's one of the the of course, like is used by data. So what we've done is Um we build a simulator for the Central Bank diagital currencies where you can test all sorts of different features and configurations and limits on usage. Can I use it for a person to person payments? Once a business receives it, can pay other businesses? Can it pay its uh its employees every day? Give them a little bit central bank digital currency instead of a monthly attainment per, you know, per bank transfer. What kind of use is bill? Is a central bank doages digital hard currency have are there going to be caps up? I can only hold three thousand because maybe the feature of the Central Bank digital currencies that it's actually on my wallet. So if I lose my wallet, I lose the money. or or how does it work? Do I need to actually bring those tokens into storage at the bank um? So I think there's so many, so many moving parameters around the design and features of the Central Bank diagital currency and it's it's very hard to understand how all these different parameters interact with each other. So that's why we build this like a simulator to where you can look and simulate and change assumptions and see how how things fold with the different configurations of Central Bank divisual currency in competition with the existing payment instruments. And are offering that central banks and banks who want to understand how the new world might look like them. And how could our audience, our Um Fin tech's entrepreneurs, investors out there who are listening to this right now, how could they get access to it? So I get in touch with myself, for example. I think maybe there's my emails somewhere. KIMO AT DE fire down here in the show notes that will be your linkedin profile, linked as always, and people can directly reach out to you. Yeah, Great. So we already know a lot that is possible with cbdcs and guys, now you can think about all the opportunities. Yes, of course the most obvious way is to circumbine the limitations you can put into central bank digital currency, but I totally do you believe you can do more with that? Um kime on,... was just a pleasure having you here. Thank you very much and I'm totally sure we'll have you back pretty soon, like in a year or a year and a half. And to talk about more recent developments. Yeah, hopefully we have. We have more experience already from existing CV disease by them. That would be totally fine. Thank you very much, with pleasure. Thank you. Excellent right to be here. That's all the folks find more news streams events at interviews at www. That's startup reread that I remember sharing is car.

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