Reinventing banking: Why is Standard Chartered so drawn to Web3?

Despite the persistent gloom in the crypto market, institutional adoption of Web3 in finance circles is advancing surely and steadily. From the tokenization of traditional assets to the provision of decentralized finance exposure to institutional clients, Web3 finance is a big draw for the likes of J.P. Morgan, Jane Street Capital and others. For Standard Chartered, one of the world’s oldest banks, Web3 technology is not only an investment opportunity but a disruption that all market players must embrace.

According to Alex Manson, who heads up SC Ventures, a unit of Standard Chartered, the adoption of Web3 technology is a vital means by which the storied lender can thrive in the future.

“I think of blockchain as a foundational technology for a lot of different things, which will become very seamless over time. And we think of digital assets as a new asset class, which is just here to stay and will become an integral part of our lives. And therefore we have a very important job to do in terms of enabling it and building and maintaining the infrastructure for it,” Manson told Forkast.News in a video interview.

Founded four years ago as a platform to promote innovation in financial technology, SC Ventures is currently building infrastructure to allow more institutional adoption in the Web3 space.

“For institutional adoption to occur, the infrastructure has to be at institutional grade, and this isn’t the case today … So, when we first wanted to explore the asset class and trade it, the first question we asked ourselves is, ‘So, where do we put it?’ Severe real question. ‘Where do I put the Bitcoins, the keys?’ And we looked around and found a number of start-ups, some of them very well funded, but they’re still start-ups, and, importantly, without the operating experience and the governance framework of an institutional custodian,” Manson said.

To answer these questions, SC Ventures backed the launch of Zodia Custody in 2020, and Zodia Markets in 2021, to provide institutional-grade custodian, exchange and brokerage services for cryptocurrencies – areas in which Manson says traditional financial institutions can really shine.

“We’re absolutely sure that institutional adoption is inevitable, but somebody has to build a robust, safe, compliant infrastructure for it. That’s exactly what we do,” he said. “And I do think this is a differentiation versus fintech or tech new entrants, who are very capable on a number of things — and we partner with them all the time — but may not know what they don’t know in the context of regulations. And that’s important, too.”

As Web3 technology enables people to regain control of their information from Web2 giants, banks, with their deep reserves of trust, might play a more sophisticated role in the Web3 economy than simply being custodians of money.

“I think the future of financial institutions is in part to sort of diversify from just money to data and be the right custodian for data. And here I think we have not only a right to play, but a duty to really get it right,” Manson said. “Apply that DNA of operating in a hyper-regulated environment and so forth, and keep customers’ data not only safe but really ensure that they never get broken into, and also put them to good use, which is what people will expect from us.”

Watch Manson’s full interview with Forkast Editor-in-Chief Angie Lau to learn more about SC Ventures’ vision for Web3, how blockchain technology can reshape financial institutions’ business models, and what the current Crypto Winter means for the industry.

Highlights

• External expectations: “The conviction we started SC Ventures with is that financial services, and banks in particular, we’re going to have to do a better job of fulfilling societal expectations of them … and moving into the future, to not just cope with the future and technological disruption, but really thrive in it. So, blockchain digital assets are a subset of that conviction. I think of blockchain as a foundational technology for a lot of different things, which will become very seamless over time. And we think of digital assets as a new asset class, which is just here to stay and will become an integral part of our lives. And therefore we have a very important job to do in terms of enabling it and building and maintaining the infrastructure for it.”
• Infrastructure impediments: “Digital assets are here to stay. I’m not saying Bitcoin‘s going up or down — doesn’t really matter … Therefore, institutional adoption is inevitable. However, for institutional adoption to occur, the infrastructure has to be at institutional grade, and this isn’t the case today … So, when we first wanted to explore the asset class and trade it, the first question we asked ourselves is, ‘So, where do we put it?’ Severe real question. ‘Where do I put the Bitcoins, the keys?’ And we looked around and found a number of start-ups, some of them very well funded, but they’re still start-ups, and, importantly, without the operating experience and the governance framework of an institutional custodian.”
• Data deposits: “Banks historically are here about trust. You trust them with your money … And I think the future of financial institutions is in part to sort of diversify from just money to data and be the right custodian for data. And here I think we have not only a right to play, but a duty to really get it right. Apply that DNA of operating in a hyper-regulated environment and so forth, and keep customers’ data not only safe but really ensure that they never get broken into, and also put them to good use, which is what people will expect from us … It’s another area where we apply the same standards and rules as a regulator or organization.”
• Peaks and troughs: “No asset class ever goes up forever … Asset classes, in order to be asset classes, have to go up and down. And the fact that we have or are going through a winter now and digital assets obviously are still here — and, by the way, there’s been bubbles and bursts before — so, that we’ve gone through a few cycles in the context of cryptocurrency, specifically, is a sign of resilience and a sign that the asset class is actually here to stay. So, from an institutional perspective, it’s actually encouraging and a good thing.”
• Entering the ecosystem: “The conviction here is that ecosystems with today’s technology are more powerful than buying and integrating. Ecosystem is an API (application programming interface) plug. I can plug a capability into a platform or the other way around. It’s very quick, it’s very nimble, whereas just buying things, integrating them as a whole, is clunkier and has integration risks with it, so building ecosystems is the way to go … So, other investments we’re making … Settlements is going to be pretty important. Tokenization of assets is going to be pretty important. We’ll tokenize securities, almost certainly. We’ll tokenize real assets, certainly. But we’ll do all these things in the context of a broader ecosystem of serving the digital asset economy as a general matter.”

Transcript

Angie Lau: There’s no escaping the fact that blockchain technology is transforming the world of money, one protocol at a time. But how are traditional finance giants getting into the game? You know things are getting serious when institutions — including those that have been around since the 19th century — are starting to back ventures that are disrupting how we invest and work in the 21st century. And that’s what one global institution is doing, one venture deal at a time. And today we sit down with a veteran leading the charge.

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Forkast Editor-in-Chief Angie Lau.

And today I’m excited to tell you we’re in conversation with Alex Manson, who heads SC Ventures at Standard Chartered to lead innovation in entrepreneurship at the bank, and also looks to invest in fintech companies that are changing the way banking will be done. Alex, it’s great to have you on the show.

Alex Manson: Thank you, Angie. Thanks for having me.

Lau: All right. So Standard Chartered — this is one of the world’s oldest legacy banks. I think it was back in the 1860s, where it was the merger of two older banks back in the UK. And here we are.

Manson: You’re absolutely right. It obtained a charter from Queen Victoria in 1853 and established the first branch in Calcutta, followed by China, and merged with another bank in Africa, which was established in 1862. Started with ships, gold, diamonds and Southern Africa, generally speaking.

Lau: From what we traditionally know as commodities, now evolving into this 21st century, how do you think about crypto? How do you think about these new digital assets that are available because of blockchain?

Manson: Let’s see. We just talked about the discovery of new assets and years of legacy, which makes it a great platform in terms of operating in a number of parts of the world where it’s sometimes difficult to operate, as a separate matter. But this is where we are. And yet the conviction we started SC Ventures with is that financial services, and banks in particular, we’re going to have to do a better job of fulfilling societal expectations of them — meaning serving clients the way they need to be served, the way they want to be served, and moving into the future, to not just cope with the future and technological disruption, but really thrive in it.

So, blockchain digital assets are a subset of that conviction. I think of blockchain as a foundational technology for a lot of different things, which will become very seamless over time. And we think of digital assets as a new asset class, which is just here to stay and will become an integral part of our lives. And therefore we have a very important job to do in terms of enabling it and building and maintaining the infrastructure for it.

Lau: When was that realization, that ‘Aha’ moment, where it was a recognition that this is disruptive and it could disrupt us, so either ignore it at our peril or figure it out? When was that moment?

Manson: I’ll get back to the question about when. But I would just note that ‘disruptive’ has a negative connotation to it, meaning it’s bad for you. And my instinct in the context of banking is actually quite the opposite — it’s very, very good.

I was running one of the business units of the bank, the transaction bank. And at this point we were running a nice, stable business — so I thought — but unsustainable in many ways, and had to be reinvented anyways. And that’s where we as a group of professionals just became exposed to the so-called technological disruption with blockchain emerging, as well as data science and a number of other trends. And so we started applying these things within the bank. We did a proof of concept. We engaged with fintechs. We really became intellectually curious about it, and also came to the conclusion that changing the bank just from within the bank was going to be really difficult.

So we acquired the conviction that in order to transform banking — our bank, but generally speaking, banking — we’re going to have to do a combination of doing work inside the financial institutions, but also outside, and build ventures with business models that are fundamentally different from the business models of conventional organizations. And so this is how the idea for SC Ventures was born, setting up independent business models and beginning to get serious about it.

Lau: I get that. I think a lot of people get that — that sometimes when you’re so close to the issue at hand, or the business at hand, or the model at hand, you can’t see beyond what’s staring at you. How did that evolution take place internally in accepting that crypto and digital assets and blockchain was something that you wanted to engage in?

Manson: I think the quick answer, the simple answer, to your question is it’s about clients. It’s about clients and listening to clients, and listening to their needs, and listening to what society — generally speaking, but specifically the people you’re involved with, all your stakeholders — are telling you. Banks, historically, have been pioneering, have been audacious. They take risks. We were reflecting on the legacy of Standard Chartered from in the 1800s and building economies and supporting development, etc. It’s the DNA of banking.

However, following the financial crisis, where a lot of financial institutions kind of lost lots of plot, it was an element of remediation. It was an element of reviewing the way we conduct business, which was really important, and, frankly, we wouldn’t have a right to exist if it weren’t for that. There was an element of becoming accordingly very risk-averse and process-oriented and internally focused, and perhaps paying less attention to what stakeholders, clients specifically, are telling us.

So, listen to clients. They were telling us things they’d like us to do for them. Clients were asking us about digital assets. This is an emerging asset class. What are the possibilities? What could we do with them? (By the way, institutional clients). Can we trade them? Can we keep that? And there was just an element of being aware of these requests and needs, the emerging needs of their real needs already, and trying to address them. So, that’s the basis of banking, frankly, any service business, generally speaking.

Lau: You’re based in Singapore, very specifically. Does that have something to do with some of the directives from MAS — the Monetary Authority of Singapore, the de facto central bank — some of the initiatives that they’re doing in the crypto space?

Manson: In many ways, where we’re headquartered in the UK, we think of Singapore as an operational headquarters, as well, if you will. And we have constant dialogs with the MAS, as well as a number of other regulators. But we weren’t specifically driven by any regulatory regime in terms of setting up SC Ventures and the ventures that we had. In fact, reflecting on digital assets, specifically, we incubated these ventures in Singapore and moved them later to London, not for regulatory reasons, but in order to be closer to the clients we wanted to service, as we were focusing on the institutional space, at least initially.

Generally speaking, I would also add that all regulators around the planet are learning dealing with the subject. And by ‘learning,’ I don’t mean this in a condescending way at all, because we’re all learning. We’re all sort of discovering new things as, literally, as we speak, and a number of frameworks are emerging, and I expect they’ll converge over time, and that we’ll have pretty consistent regulatory regimes around the world for a new asset class and the way to operate it.

Lau: Well, two very interesting hot spots, almost. Singapore — Asia — being one, obviously, but London increasingly, with its deep interests in the digital asset space and wanting to really create an environment that supports those innovations. When you look at SC Ventures and you look out into this environment, how do you think about the joint ventures that you have? I note that you just collaborated with BC Group in the digital assets and blockchain space, with Zodia Markets. Is this an international play?

Manson: So, two things. First, where are the ventures which we’re building? We’re headquartered in Singapore, but the ventures are all across our footprint. So, the question I’d ask myself is: Do we have a competitive advantage that we have the right to win, and does our DNA play a role in this? How to do this? And that’s a competitive advantage that outweighs the cost of perhaps never taking a shortcut, because we’re backed by a regulated financial institution — and that’s a positive differentiation in my mind, so the ventures, accordingly, are a little everywhere.

So, joint ventures and the partners — back to a point of principle — there’s virtually nothing we really want to do by ourselves. Everything is in partnership. When we initiate a venture, we may own 100% on day one, but sooner rather than later, we’re going to want to have partners in it to help us scale it, bring additional expertise, validate the commercial proposition, validate the financial proposition as investors. So, we want partners one way or another. And pretty much all the ventures we incubated at some point welcome partners. So, Zodia Custody, which is the other one in the digital asset space, welcomed Northern Trust. And Northern Trust is our joint venture partner in this venture at the moment. So the custody is now registered with the (UK Financial Conduct Authority) — also in Ireland, so Europe, and it’s operating.

And in the case of Zodia Markets, you’re right — we partnered with BC Group in Hong Kong, which is again a partner we’ve been in touch with for a long time. And, generally speaking, we will want partners in any event. And, generally speaking, we’re just very, very open to engaging partnerships, and every dialog is worth having. And if something comes out of it — and, ideally we can add more value, being two or three or four partners as opposed to just ourselves — then that’s the objective.

Lau: The objective is a big one. The goals are great. The question is, will this pave the way for more institutional dollars coming in? Are those dollars ready to be invested into crypto, into blockchain, into Web3?

Manson: So, it’s a super-important point, and I think you’re putting your finger on our investment thesis when it comes to digital assets ventures specifically. And the thesis is that, one, digital assets are here to stay. I’m not saying Bitcoin‘s going up or down — doesn’t really matter. I’m not even saying that Bitcoin is here to stay. I think it is, but it kind of doesn’t matter. All I’m saying is digital assets are here to stay.

The second point is that ,therefore, institutional adoption is inevitable. However, for institutional adoption to occur, the infrastructure has to be at institutional grade, and this isn’t the case today. This isn’t the case today. So, when we first wanted to explore the asset class and trade it, the first question we asked ourselves is, ‘So, where do we put it?’ Severe real question. ‘Where do I put the Bitcoins, the keys?’ And we looked around and found a number of start-ups, some of them very well funded, but they’re still start-ups, and, importantly, without the operating experience and the governance framework of an institutional custodian.

So, we parked the idea of trading and started building a custodian at institutional or bank-grade, which is Zodia Custody, on the back of which Zodia Markets is a brokerage and exchange platform, again targeted to the institutional market. So, to go back to your question, not only does it pave the way for it — it’s a necessary condition for institutional adoption. We’re absolutely sure that institutional adoption is inevitable, but somebody has to build a robust, safe, compliant infrastructure for it. That’s exactly what we do.

Lau: When you say institutional grade, what’s missing? And I understand the custody space, but the compliance space remains so complex because the regulatory and policy space remains evolving. It’s ever-changing.

Manson: Sure. And that’s the case in financial markets, generally speaking. And all financial institutions have to adapt to an evolving regulatory environment. That’s the story of our lives. So, for example, what I call segregation of church and state — the exchange shouldn’t be the same as the custodian, shouldn’t be the same as the settlement agent. In the retail digital asset market today, this is amalgamated. The same firm does it all together, that’s a big no-no for institutions, just as an example. Just managing keys in hardware security modules is, by the way, easier said than done, and very important.

But there’s other things. How about white-labeling? How about implementation of travel rules? How about all the things that you’d expect in terms of conventional securities? And then there’s more because we’re in digital assets, but the principles of institutional business — it’d be custody or brokerage and trading — have to apply for institutions to ultimately pour into the sector, which they will.

Lau: Yeah. And look, it’s a new space. And to your point about, in the retail crypto exchange market, a lot of these things are conflated in the same space, and then there’s a hack, and then there’s risk mitigation that could have been had but wasn’t applied. How do you think about user protection? How do you think about it in the age of digital privacy, user protection, data protection? You don’t want this in the wrong hands or with the wrong people.

Manson: For example, in the metaverse, how we protect our identity in the context of Web3 — and at some point we’ll protect our avatars, perhaps even better than we want to protect ourselves, but before we get there, you call that Avatar singularity, if you will — but before we even get there, an element of controlling identity is absolutely, absolutely important.

Look, banks historically are here about trust. You trust them with your money. Your money is pretty important. It can become very emotional. And so we used to put it in the vault and then it became more virtual, more digital. We’re rediscovering vaults, by the way, in the context of digital assets, because there’s a key that has to be physically somewhere. It’s called the hardware security module. But that aside, you’re trusting us with important things and we have to take good care of them.

And I think the future of financial institutions is in part to sort of diversify from just money to data and be the right custodian for data. And here I think we have not only a right to play, but a duty to really get it right. Apply that DNA of operating in a hyper-regulated environment and so forth, and keep customers’ data not only safe but really ensure that they never get broken into, and also put them to good use, which is what people will expect from us. Over time, if you trust me with your money and financial data, maybe you’ll trust financial institutions with other data around health, for example, or identity, as we just discussed. And that’s potentially the role that financial institutions can play. It’s another area where we apply the same standards and rules as a regulator or organization.

And I do think this is a differentiation versus fintech or tech new entrants, who are very capable on a number of things — and we partner with them all the time — but may not know what they don’t know in the context of regulations. And that’s important, too.

Lau: You said something really interesting, which was that in the future, if you’re in the custodian business of digital assets — and some of the valued things could be our health information, our consumer behavior, all of the things that are being monetized, whether we like it or not right now in the Web2 world — the Web3 world really allows us, as individuals, to seize that power back using blockchain and decentralized technologies to actually monetize that for ourselves. How in that future do you define a bank?

Manson: Banks are institutions relying to some extent on trust, and therefore with the job of preservation — originally wealth preservation — as well as growing wealth and supporting growth. So, the question is: What form does it take in the context of Web3 and digital assets? But if we go back to the basics of what I’ve just said, in my mind, it’s about banks setting themselves up to be able to fulfill these functions, so keeping data and keeping data safe and using it for good purposes is an integral part of growing wealth or enabling growth.

Over time, When people seize control back, as you said, of their identity and destiny in Web3, I would have thought that the transactions within Web3 are going to be quite central to the architecture. So, the way we pay money to each other, the way we finance each other, the way we protect ourselves, etc., is going to be quite central. And so I’d expect finance to be a very central theme in Web3, perhaps unlike Web2, where we notably and proverbially sort of forgot money on the internet at inception — (that’s) very unlikely to happen in the context of the next generation in Web3. So, building infrastructure, operating this infrastructure, I think, is a critical element of what banks would be expected to do by Web3 users and society at large.

Lau: You’ve already invested in Ripple. We know Ripple in METACO, which provides security-critical digital asset infra. What’s next on the acquisition list? When you build out the infrastructure and the architecture, what else is on that shopping list?

Manson: So, maybe a generic point first, which is we’re building an ecosystem. The conviction here is that ecosystems with today’s technology are more powerful than buying and integrating. Ecosystem is an API plug. I can plug a capability into a platform or the other way around. It’s very quick, it’s very nimble, whereas just buying things, integrating them as a whole, is clunkier and has integration risks with it, so building ecosystems is the way to go.

And so, the various ventures we’re building will form an ecosystem. Obviously there’s a connectivity between Zodia Custody and Zodia Markets, because they’re in the digital assets business fulfilling very different roles, but they can plug into each other. METACO is a critical technology vendor to Zodia, and so we took a stake in it, and they’re great partners and doing a great job, as a separate matter. So that’s their part of our ecosystem.

So, other investments we’re making. In terms of predicting what we’ll do next in that ecosystem, what are we missing, settlements is going to be pretty important. Tokenization of assets is going to be pretty important. We’ll tokenize securities, almost certainly. We’ll tokenize real assets, certainly. But we’ll do all these things in the context of a broader ecosystem of serving the digital asset economy as a general matter.

Lau: And so it goes back to: Do you care that it’s Crypto Winter right now? Do your clients care it’s Crypto Winter right now?

Manson: So, first, do I care? Yes. Because I look at the market and I’m very sorry that a number of people got very hurt. And my observation being an element, which I hope doesn’t sound like schadenfreude, but I could have told you that. But also, no asset class ever goes up forever. That doesn’t exist. Asset classes, in order to be asset classes, have to go up and down. And the fact that we have or are going through a winter now and digital assets obviously are still here — and, by the way, there’s been bubbles and bursts before — so, that we’ve gone through a few cycles in the context of cryptocurrency, specifically, is a sign of resilience and a sign that the asset class is actually here to stay. So, from an institutional perspective, it’s actually encouraging and a good thing.

Lau: Well, the ideas are here, the innovation is here, and, increasingly to see more traditional finance taking really a very specific view, with a lot of conviction, on building a future ecosystem that’s based on decentralized blockchain technology or any version in between — that alone is a huge signal for the maturity and the maturing aspects of this space. Alex, it was great to hear all of it from you. It was a pleasure talking to you today.

Manson: Thank you. Angie. Thank you. That was great. I appreciate it.

Lau: And I want to thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Forkast Editor-in-Chief. Until the next time.