The following interview was originally published in Hungarian on portfolio.hu.
“Blockchain is breaking into banks, the ostrich policy no longer works
MBH Bank has established a dedicated strategy to harness the opportunities presented by blockchain technology, as the moment may come when blockchain becomes mainstream and achieves a breakthrough similar to the generative AI technology with chatGPT – revealed János Pereczes, the CEO of MBH Bank, in an interview with our publication. Currently, those at the forefront of researching the applications of blockchain technology are the ones who can disrupt the markets first, and proactive adaptation is the only effective strategy. “Banks must confront the fact that the ‘ostrich policy’ towards blockchain technology, especially cryptocurrencies, is no longer viable,” believes Bálint Fischer, the Director of Business Development at Dorsum. In our joint interview, we discussed various topics such as cryptocurrencies, MiCA, the most exciting blockchain use cases, and tokenized securities with the experts.
Recently, the EU has adopted cryptocurrency regulations known as MiCA (Markets in Crypto Assets). What kind of changes can these regulations bring to traditional banks and the market for digital investment instruments?
János Pereczes: MBH Bank has established a dedicated strategy for exploring the potential of blockchain technology, and we are collaborating with key players in the market, with Dorsum being one of our prominent partners. We believe that the moment when blockchain technology becomes mainstream will come and will achieve a breakthrough in understanding, similar to what generative AI technology has done with chatGPT. It is no coincidence that the CEO of openAI, the developer of chatGPT, is also involved in another project, WorldCoin, which aims to facilitate global identity verification using blockchain technology. My personal belief is that some of the mainstream use cases will emerge from the convergence of these two fields in an AI-driven world, where the management and ownership of personal data and digital identities become increasingly important.
This breakthrough can come from regulatory or customer-oriented perspectives. Currently, the regulator, through MiCA, is providing a framework for entering the cryptocurrency market. We are also exploring how we can take advantage of this opportunity. Several years ago, we invested in and collaborated with companies active in the crypto world, joining London based and Italian teams that specialize in automated trading and distribution in this domain. However, for a traditional bank, facilitating cryptocurrency trading may not be the sole objective. A financial institution can, for instance, assist in securely storing digital assets or recognize cryptocurrencies as collateral for mortgage lending. Despite facing challenging times, we have been custodians of our clients’ values and trust for hundreds of years, and we must carry this forward into the era where blockchain-based assets become more influential.
Bálint Fischer: This is a very exciting topic, and it adds further relevance to our conversation that we are currently working with MBH Bank on a joint project aimed at exploring business opportunities related to digital assets and blockchain technology for the bank. In fact, there are numerous exciting possibilities and use cases for the application of blockchain technology in the financial market. Among these, what truly fascinates us at Dorsum is how we can issue securities or other traditional capital market instruments in the form of tokens (digitally stored assets on the blockchain) and become significant players in shaping this new ecosystem of securities and capital markets. We aim to become a prominent European player in this area as partners to banks and asset managers, and that’s why we are actively building up this knowledge within our organization.
In order to trade tokenized securities, would it be necessary to overhaul central systems? What advantages would this bring?
Bálint Fischer: One of the most important capabilities of blockchain technology is its ability to transform processes related to central intermediaries, which primarily includes central clearinghouses and exchanges in the case of securities and capital markets. Currently, the entire process of securities settlement globally operates on an infrastructure that has been evolving for 50-60 years, making it outdated and inefficient in many aspects, not just in the realm of securities markets, but also in various large financial infrastructures. However, replacing these large infrastructures is not a straightforward task. Blockchain technology promises to build a much more efficient world, running in parallel with the existing infrastructure, offering faster settlement times, cost-effectiveness, and enabling use cases that are not feasible with traditional securities.
Nevertheless, this transformation will not happen overnight. We expect that these infrastructures will run in parallel for decades, similar to how it took decades for dematerialized securities to gradually replace physical securities. Existing central players will need to find their roles in this new world. Their technological roles will likely undergo fundamental changes, but their legal responsibilities will undoubtedly remain in some form, and the regulatory authorities will play a significant role in shaping this framework.
János Pereczes: It’s a bit like if from now on, you could only buy Teslas, but it would still take 25-30 years before Teslas dominate the roads. International money transfers are also an exciting area: 95-98 percent of the traffic goes through a few major banks, and here too, blockchain technology could bring radical changes. Currently, it still takes 3-5 days for a transfer to reach Brazil, and blockchain and tokenization could offer a clear solution to this. SWIFT, which operates the international banking messaging system, needs to prepare for this. It’s not a secret that they are also working vigorously on how to remain at the forefront of international money transfers. Another significant question is the Central Bank Digital Currency (CBDC) and its possible implementations, which we are also examining. This is a topic that needs to be discussed at each leading bank to form our own stance and not to become passive recipients of change.
Bálint Fischer: We see that those who are at the forefront of researching the use cases of blockchain technology are the ones who can disrupt markets first: this includes SWIFT, Mastercard, Visa, and central banks. They have the financial background, possess the necessary competencies, and are capable of proactive adaptation, which is the only long-term successful strategy when dealing with new technologies that can disrupt markets.
If you don’t buy a lottery ticket, you won’t win. If you don’t stay in the game, you’ll definitely lose. By entering the game, which is not a cheap endeavor, you are buying yourself a chance to survive and even to gain a competitive advantage.
Security tokenization will not only enable significantly faster and near real-time settlement, but it will also make securities easily divisible. Corporate events, dividend payments, and even highly complex processes, such as tracking shareholder resolutions, could become much simpler and potentially fully automated through smart contracts. Of course, many things can still be accomplished without the blockchain, just as we have done so far. Today, one of the biggest challenges is to identify where this technology truly adds value and how we can sensibly and efficiently exploit its potential.
What are the use cases that are currently in focus at MBH Bank?
János Pereczes: Fundamentally, we are considering three categories, with the first and largest category being the world of blockchain and smart contracts. As a banking group, we have a leasing company, asset manager, and function as a universal bank. We see several use cases for contract automation, even though the regulatory environment may not be fully established everywhere yet, the technology has the potential to significantly improve our operations and functioning.
The second area is tokenization: about 1.5-2 years ago, there was a lot of hype around NFTs (non-fungible tokens), and while it has subsided, we are now seeing more real-world use cases. For example, if we were to tokenize ownership of a property using a public blockchain like Ethereum, it would be possible to purchase even a small fraction of it, which could open up new dimensions in the field of real estate investments.
The third topic is digital assets, with a special focus on cryptocurrencies. Today, at least half a million, typically young Hungarian citizens have some form of crypto investment. It is essential to acknowledge that we had to remove the term ‘crypto’ from our vocabulary to deal with blockchain, but we need to bring it back because the fact is that this world is witnessing an increasing influx of money and use cases, and we need to respond to this challenge.
A real problem is that there are individuals and companies who possess wealth in such assets, and as a bank, we find it challenging to handle them when these assets come into the picture. To address this, we need to build regulations and processes.
Bálint Fischer: MiCA will soon enable banks to handle cryptocurrencies in a regulated manner. From then on, it will hopefully be easier to discuss with financial players that there could be another 100 meaningful use cases for blockchain technology in the life of a financial institution.
Banks must confront the fact that the ostrich policy towards blockchain technology, especially cryptocurrencies, is no longer sustainable. The first step in this process is to accept that the issue must be addressed at the organizational level. Afterward, we need to map out why this technology is advantageous for the bank or asset manager and select 1-2 use cases through which we can embark on pilot projects to gain experience. This is not a theoretical subject; we need to take action, try it out in some business scenarios, as that’s the only way to learn.
How can a bank manage the risks associated with cryptocurrencies from the customer’s perspective? For example, can this problem be solved with a solution similar to the MiFID test?
János Pereczes: This is a spectrum ranging from ignoring and not acknowledging it at all, to recommending and proactively offering it to customers through all channels. Like in most things in life, the solution lies somewhere in the middle, personalized to individual needs. The biggest challenge for us is that we are still in the early stages of the process: we understand the movements of the assets we currently offer, but we have less knowledge about cryptocurrencies. Therefore, we will likely enter this market by making them available but not actively promoting them.
Several factors need to be taken into account when a bank shapes its possible strategy. The business opportunity is clear, as a visible portion of the revenue for many neobanks comes from enabling cryptocurrency trading for their customers. As the market matures, more players will adopt similar approaches, and the commission levels will approach the investment commission levels that we know today. However, caution is necessary, as customers’ trust and tolerance for mistakes are different between rapidly growing neobanks and stable universal banks. Given that fast yet secure transition between fiat and crypto worlds is very challenging globally, a small country that ventures into this territory may find international opportunities, and one of those opportunities is the world of cryptocurrencies.
As customers, it is crucial to understand that not every investment in stocks or cryptocurrencies is a good one; it’s about investing in the right assets at the right time. I believe there are already cryptocurrencies that have reached the required maturity to become understandable. There are still many scams and deceptions in the cryptocurrency space, primarily due to the lack of sufficient regulation. When regulations catch up, there will still be frauds, just as there are in the stock market today, but their number will be reduced.
Bálint Fischer: The capital market started as a wild west, which is a normal evolution for every new industry. Then came regulations, and the market gradually cleaned up. Unfortunately, scams still occur in the traditional capital market today, but it is a far cry from what it was 30-40 years ago. The digital asset and cryptocurrency market is experiencing its own wild west phase, but inevitably, the same cleansing process will happen here, and I believe that with the impact of the current new regulations, it will happen faster than most people think.
So, for example, you only make the five cryptocurrencies with the largest market capitalization available to customers?
János Pereczes: This could be a good entry point; for example, large banks accept Bitcoin and Ethereum as collateral, and later on, it might be possible to buy or hold these assets.
Bálint Fischer: Banks do not want their customers to get burned through them, and this is a natural and understandable stance. The larger a company is, the truer it is that reputation is one of the biggest risks. However, I believe that this risk can be consciously managed, perhaps differently for each customer segment. For instance, for a retail customer, initially, only Ethereum or Bitcoin will be available, and even these won’t be included in investment recommendations. If a customer specifically requests it, wants to buy it, and would buy it elsewhere anyway, then now they don’t have to choose a potentially inadequately regulated foreign provider.
In the case of a private banking portfolio, a few percent of exposure to cryptocurrencies are considered healthy according to most professional recommendations, and customers rightly expect digital assets to be included alongside stocks, precious metals, real estate, and art in a well-diversified portfolio.
Some opinions suggest that MiCA is already outdated; do you agree with this?
Bálint Fischer: The fact that the regulation is already outdated is substantiated in many aspects, as there are areas related to crypto, such as NFTs, that are not addressed. However, for a regulation governing such a new technology and market, this is, in my opinion, inevitable. Technology and its applications are constantly evolving, and bringing together such an EU-level regulation takes several years, and we have now reached the point where the Parliament and the Commission have both approved it.
So, in many ways, it is justified that it is already outdated, but it is still very positive that it is coming into effect.
This regulation can and should be further developed, but in the meantime, it sends a message to the market that we are addressing it, regulating it, and starting an evangelization process. It will be exciting to see where the EU will position itself in the global crypto industry with this regulation because it is evident that there is a healthy competition among the world’s major powers in shaping the regulatory environment.
With MiCA, the EU is not doing so badly in this regard at all.”
Photo: portfolio.hu, Ákos Stiller