Highlights from our Blockchain status report, featuring János Pereczes (MBH), Péter Fáykiss (MNB), Bálint Fischer (Dorsum) and Péter Kanti (Dorsum)

The following are some of the highlights from our recent Blockchain status report webinar, organised in partnership with the Cubix Institute of Technology. You can check out the entire webinar embedded (in Hungarian), or read the highlights of our panelists’ comments in English below. We hope you’ll find the conversation enlightening.

INTRODUCTION

János Pereczes: I’m responsible for MBH Bank’s innovation projects. I think when we talk about the various elements of the blockchain, such as tokenization and cryptocurrencies, then our basic task as a bank is to get to know, understand, and really thematize it for our customers and ourselves. And otherwise, as a private person, I deal a lot with technological trends, how they affect society, and where they currently sit in the hype-cycle. We had a couple of years of having blockchain being the talk of the town, and my opinion is that it hasn’t gone away, it’s just that people after a while have enough of a story. Then all of a sudden, we realise that it’s become a part of everyday life.

Péter Fáykiss: I lead the digitalization business in the Hungarian National Bank. We have, let’s say, three main goals and mandates there. On the one hand, we are trying to help the digital transformation of the traditional financial sector. This market is becoming more and more regulated in the European Union. The other is that we are also trying to help the Hungarian fintech sector. There are several fintech teams dealing with cryptocurrencies or blockchains in Hungary, and we are trying to support them through the MNB Innovation Hub and with professional consulting as well. The third is the digitalisation of the MNB itself. This may seem less closely related, but in this case, it is still a very important element. We are not only looking at, studying, and researching blockchain technology, but we also have several implementations, so there are live projects that are already on the blockchain.

Bálint Fischer: With Péter’s leadership, blockchain technology is a very active domain at Dorsum, and as Péter and Jani also mentioned, we are now getting over the hype cycle, and into the period of maturation with regulated growth for the crypto world, the tokenization world, and the blockchain technology itself with the first financial use cases that are promising and exciting.

REGULATORY FRAMEWORK AND THE MARKET

Péter Fáykiss: The European Union will be the first large economic region in the world where there will be a completely uniform regulation of this asset class on a market of 400 million, which I think is a serious thing.

This does not mean that it will be safe to invest in. There are of course many risky assets already operating in a regulated framework, from junk bonds to more serious derivatives. And in fact, this is still a risky investment tool, at least in my opinion, and this is also the official, how to say, official approach. However, it is very important that it will have its own regulated framework, with customer information, a MIFID suitability test, and with all other necessary customer insurances. So, this is a very important to keep in mind.

Bálint Fischer: Today, no one thinks that all this will disappear, that there will be no more tokens tomorrow, or no more cryptos. The blockchain technology running financial ecosystems that has begun to emerge in some way, won’t just disappear in a flash. And a very important assurance of this is the start of an active regulatory wave.

And what Péter said here is extremely important that the European Union is leading on a global scale, and that, in fact, by the end of this year, incumbent players, i.e. banks, brokerage companies, will be able to give crypto services, i.e. Bitcoin to their customers. This is a radical change compared to how we have been so far. Sure, you could buy through Revolut, and other means, but knowing what you actually bought is another thing. But the fact that you can buy tokenized instruments, for example Bitcoin, but this can be a thousand other things, and you can even really transact with it, you can really pay with it, the doors to that will open within a short year, from a regulatory standpoint. And I think this will re-shape the operation of the financial system for the next few years.

Péter Fáykiss: In economic terms, this is a completely different type of market than security bond, a share, or a bunch of other similar financial instruments. So, in this respect, it must grow in the same way. And I’m not at all sure that in 50-100 years it will still be just like this, maybe it will be smaller, maybe it will be bigger, maybe it will disappear. So, I’m not so sure that this will stay here forever, sorry if I bring down the party a bit.

But in fact, it doesn’t matter, the point is that there is a new asset class, which is getting a regulatory framework now, and from now on, of course, you can trade with it, or you can do investments with it. So, the most important thing here is to provide the right information for customers due to this high risk.

Bálint Fischer: If we look at the long-term history of the whole securities market and the stock market, then the first bonds were issued in the early 1700s, in the 1690s. So, in terms of time, these markets are very similar. So basically, it takes a long time until a new asset class on the securities market gains hold, transforms the economic landscape and really becomes mainstream.

In contrast, we are talking about something that has been with us for 15 years at most. So, it’s so young, compared to the stock market’s history, and if we add to this, let’s say, that the derivative devices exploded in the 90s, then by the 2008 crisis almost completely disappeared, now they are coming back. So, in the history of securities and the stock market, there are healthy ups and down, and this world is at the first small wave, but everything started like this, the bond market started like this, the share market started like this, the derivative market started like this, the investment market started like this, so that’s how it is.

CRYPTOCURRENCIES

Bálint Fischer: In my opinion, it may be true to state that there is a bubble or there is no bubble around the entire crypto market, but that doesn’t mean that there’s not a lot of value in it.

János Pereczes: Today, we already have customer demands from people who have wealth in crypto that they want to invest in something else, like putting it up against a loan for buying a flat or handing it over for private management. We have to acknowledge that even such an entry level question is a problem today. So, it’s not whether I offer crypto, or give crypto advice, but rather, can I as a Bank accept that someone is dealing with it as a real income or asset acquisition resource.

If we accept that sooner or later this will appear in our offer, because it has become an asset class, and we accept that it is worth keeping it in a full portfolio from 0 to 5%, in a diversified portfolio, such tools as Bitcoin, Ether, let’s say these two, then how can I do this, and how can I prepare my infrastructure so that I can deal with it? What form should it take?

Some kind of derivative product, some kind of specific crypto storage or other digital asset. We work on these two levels, and whether these two levels are formed and at what speed in a large Hungarian bank as we are, depends on two things. The first thing is how big the customer demand is, how many interested people are there?

If there are only 1,000-1,200 people who already use international solutions and might use a Hungarian one as well, is not enough of a deal for a bank to jump on it and prioritize it above everything else. The second thing is personally, how does it fit into our banking strategy and our roadmap? We are now at some stage of a multi-year collaboration phase, we have put together three banks, we still have a lot of work to do, we are trying to position ourselves in this, when will the customer demand be enough to jump on these two levels in time?

This is not just coming, it’s already here. The question is, when is it worth it, and how to get in? I think these are the two levels as a large Hungarian bank, which is worth considering as a start.

Péter Fáykiss: According to estimates, about 8% of people have some kind of asset like this, the EU average is also about that, so if this is logically representative, it’s about 500-600 thousand people who have or had such an asset. Which is a very interesting number in that it’s a lot and also not enough depending on our point of view. On the one hand, about 20% of Hungarian citizens have some form of investment, including every asset type.

If we look at it this way, then 8% is not a small number, so surprisingly a lot, I think.

Bálint Fischer: How does all this look when it’s a transaction tool? So, in other words when it can be used for payments in general. And now I don’t want to deep dive into which of the hundreds of cryptocurrencies is designed for this and is suitable for it to be a payment tool.

Bitcoin, for example, is typically not like this, and neither is Ethereum. So, they’re not really good as a transaction or payment tool if we look at the characteristics of the instrument. There are cryptocurrencies that are very suitable for this, but this opens a very exciting new world when we can change it in return for goods. When we exchange money, when they want to pay for goods from China to a Hungarian company, so in completely legit businesses. This is what the wholesale CBDC story is about, how we can shorten real-time transactions from remote countries, from D3 and D4 to real-time. There are countless use cases in payment, in transactions where cryptocurrencies can open very exciting new dimensions and how they can adapt to the banking sector.

Péter Fáykiss: I think it’s starting to become more and more obvious that there are solutions on the Bitcoin side that accelerate this, such as R2, Lightning Network and so on, where the speed of the transaction can be turbocharged. However, it is basically clear that the infrastructure and the framework in which they were created is not necessarily the fastest or the best use case in which this can work for transactions, but it is rather a special high-risk investment tool, and it is not by chance that the regulators are thinking in this direction. For example, the so-called wholesale use of digital money where the transaction is between institutions, there’s a use case to see how cross-border transactions may be faster, cheaper and more transparent.

OTHER USE CASES

Péter Fáykiss: I’ll give you a couple of examples. One of them is data storage and data management. This seems to be a very, very boring area at first, but with this technology you can make such privacy-focused, Zero Knowledge Proof cases, which can practically prove some kind of fact-setting from a cryptographic point of view in a way that I don’t need to examine individual private data, as the process can be handled without it.

By the way, we ourselves, in the MNB, have been using it since May 22 actively.

This is a hyperledger fabric system where we issue NFTs in a gamification framework in the Money Museum’ app, and in the near future everyone who has a mortgage and real estate insurance related to it has probably come across a new DLT framework which checks every mortgage and makes sure that the relevant insurance is in place. This, by the way, I think will be useful in the near future for Banks as well as their clients. So there are several live areas where we are already using the technology.

Bálint Fischer: When we were working with Jani on this topic, we drew up a fairly broad and comprehensive use case graph from factoring through payment, where you can actually use blockchain technology in theory. But we also saw that there are only a few areas with meaningful use cases. I’m not really surprised by this, nor is it a bad sign, in the sense that if we look at the internet’s development, which I think is a pretty good parallel to this, it started in the 1960s, at the end of the 1950s. And it took until the 90s, so about 30 years so that real meaningful use cases began to grow and of course our world is faster but basically the fact that new use cases for such a new type of the technology are measured in decades I think this is a completely normal thing. We’ve been at it for 15 years and more and more meaningful use cases are coming out day-by-day so from this point of view we are on the path of a normal technological development arc beyond the first hype cycle.

János Pereczes: This is basically going to scale up, but we must accept that all we see today is that blockchain is a miracle technology and bitcoin is going up. That’s all that gets to a layperson’s level unfortunately whether we like it or not. But I think someone who understands what is behind bitcoin and who has followed the market is already convinced that there will be use cases that either open up new business opportunities or transform core businesses. We also look at it this way and there are some solutions which don’t fulfill that promise, but we can learn from them to have a better understanding for future projects.

Similarly to how Péter said that issuing NFTs is not what will revolutionise the National Bank, but in the same way we’re also forcing ourselves to test the technology, and I see this in all Western banks that have gone through this process in the past 10 years. Once we have the understanding and knowledge then we’ll have the necessary perspective when facing these business challenges such as a security tokenization or the transformation of our leasing processes.

AI is not only interesting in the sense that it turned the spotlight away from the blockchain but that AI itself presents new problems that the blockchain as a technology can solve. My go-to example is that Sam Altman, the director of OpenAI recently founded a startup which uses the blockchain to give you a digital identity using a retina scanner. This is what Péter has already mentioned, the zero-proof method. There are many problems such as authentication, identity and falsified information with AI that will raise issues in the centralized internet where we work today, and this is something the blockchain can solve.

Finally, I don’t think that this is a bubble, just because we can’t see the whole. As Bálint said this is a very long cycle which may take generations and we are currently somewhere at the bottom of what we think the blockchain can or can’t do.

But I think there is enough knowledge out there now and enough challenges to be solved by new companies, new businesses, and new products for the next 10 years. Most people won’t even know that the blockchain is behind these new solutions, except for those in the know, such as our group right here. So, the technology has already brought real value, beyond an ever-maturing crypto market.