Hot off the press: What makes a stablecoin

Author: Angelika Breinich-Schilly

Published on 11 January 2023 at Springer Professional – Follow this LINK to original text in German. Translation created with deepL.com

Experts quoted in the article: Stefan Behringer, Leef H. Dierks, Florian Follert, Jochen Werne, Dr. Johannes Winter, Joachim Wurmeling

What distinguishes so-called stablecoins from cryptocurrencies like Bitcoin, Ether & Co? By linking to one or more currencies, this form of digital money forms a bridge to classic FIAT currencies. How this works and where problems lurk is shown in our “Compact explained”.

Stablecoins are digital tokens, assets of private issuers that can also take on money functions. According to Leef H. Dierks, they usually replicate the value of a reserve currency, such as the US dollar, or even a whole bundle of official currencies.

Thus, they do not have to represent a claim on the issuer (the reserve currency) itself, but can also be backed by demand deposits of various currencies, securities or other assets. This so-called peg reduces the volatility of stablecoins compared to classic virtual currencies, such as Bitcoin,” writes the Springer author in the book chapter “Virtual Currencies and Monetary Policy” on page 234.

According to Dierks, stablecoins take on a bridging function to fiat currencies, “especially since, as long as they are backed by legal tender, they do not challenge the currency monopoly of central banks (analogous to bank deposits) at any time”.

Stablecoins make new business models possible

According to a thesis paper by the Landesbank Baden-Württemberg (LBBW) from mid-December 2022, stablecoins do open up new business models. At the same time, however, they are “anything but stable, but are subject to the risk of the holders fleeing from them if there are doubts about their collateralisation”. Digital money may have a negative impact on macroeconomic lending and reduce the influence of central banks on the aggregate money supply. One way to regulate it is to require issuers to hold central bank reserves.

The best-known stablecoin project is Tether, which is pegged one-to-one to the US dollar. “There has been repeated criticism of Tether, so that the company behind the issue has since admitted to using not only currency holdings in US dollars to collateralise the issued units of cryptocurrencies, but also other assets (for example, commercial papers of companies),” Stefan Behringer and Florian Follert describe the background in the book chapter “Controlling of cryptocurrencies” (page 187). This also explains why this stablecoin does not correlate exactly with the performance of the US dollar.

Risks of stablecoins

Jochen Werne and Johannes Winter explain in the book chapter “Cash, book money, cryptocurrencies and the digital euro” on page 84 that there are risks for the financial sector if stablecoins become widespread. They could undermine the banks’ deposit business and their business models. The Springer authors see in the central bank cash-backed stablecoins a possibility of a trustworthy transitional solution in hybrid form. This is a stablecoin that demonstrably holds any digital twin in the form of central bank money.

“Due to the tradability of the tokens, the flexibility of book money is paired with the guarantee of physical central bank money. Even the expected damage from a successful attack on the underlying blockchain could thus be minimised, since an unlawful acquisition of power of disposal over assets is quickly restricted in its usability. A regulated expert function guarantees that only central bank money or a digital twin is traded and thus the central supervisory function always lies with the central bank,” say Werne and Winter.

MiCA forms future legal framework

With the Markets in Crypto Assets (MiCA) regulation, the European Union has sewn a legal garment for the crypto industry in the 26 EU states. The new EU regulation is to enter into force by the beginning of 2023 and become effective 18 months later vis-à-vis all market participants.

“MiCA responds to the growth of the cryptoasset ecosystem and integrates a large number of new players into the European supervisory space,” explains Joachim Wurmeling, member of the Executive Board of the Deutsche Bundesbank, in a guest article on the occasion of the Bundesbank Symposium in November 2022. “In future, crypto service providers and issuers of crypto assets will not only have to ensure that the risks arising from the cryptoasset business are adequately managed; they will also have to apply for authorisation to issue crypto assets or to provide crypto services and be subject to ongoing supervision.”

In addition, he said, the regulation also applies to traditional financial institutions that provide services around cryptoassets. The regulatory approach for MiCA is new and is emerging alongside the traditional structure.

New Springer book co-authorship: “Artificial Intelligence meets Homo Sapiens“ in CRM GOES DIGITAL

It has been a privilege contributing as co-author for the fifth time to an inspiring book project. “CRM goes digital“ has been initiated by Dr. Martin Stadelmann, Mario Pufahl and David Lauch and is part of the Springer Gabler Edition Sales Excellence book series (ESE)

Artificial Intelligence meets Homo Sapiens – Possible applications and limits of artificial intelligence

Author: Jochen Werne

Werne J. (2020) Artificial Intelligence meets Homo Sapiens – Einsatzmöglichkeiten und Grenzen Künstlicher Intelligenz. In: Stadelmann M., Pufahl M., Laux D. (eds) CRM goes digital. Edition Sales Excellence. Springer Gabler, Wiesbaden

Abstract

A special encounter. Algorithms developed by humans meet everything that man and nature embody – from industrial processes to our very own behaviour. A race between countries and companies has begun to decide the enormous potential of AI and its impact on our consumer behavior, as well as on our society. However, despite all the euphoria, it is important to understand the topic, its possible applications and also its limitations well, so as not to succumb to the danger of losing oneself in technology-believing magic.

About the book: CRM goes digital

Consistent customer orientation and digital transformation lead to completely new approaches in management: the focus is on omnichannel or mobile CRM concepts, big-data and social media instruments, and automation. But what does this mean in concrete terms for marketing, sales and service? What effects does digitalization have on product and service optimization or on sales management and customer loyalty? How can methodical customer orientation contribute to an improvement in sales performance? Answers to these and other questions are provided by the contributions from science and practice in this book. The authors illuminate the requirements and possible solutions of CRM systems along the concept of the customer journey using selected industry examples. They provide concrete recommendations for action and offer managers and users from customer-oriented business areas valuable orientation aids for the implementation of digital customer management.

From the content
CRM: strategies, organisation, controlling and employees
Concepts in digitisation
Best Practices in CRM: Case studies of customer-centric companies
Topics of CRM research

Book recommendation– Innovations and innovation management in the financial sector

Transformation of an analogue private bank into an innovation driver

Co-Author: Jochen Werne

Chapter: Transformation of an analogue private bank into an innovation driver

Find a reading extract here

Buy at Amazon / Springer Shop / Thalia / Hugendubel / GooglePlay

published by Springer

Content extract

Chapter 5: Transformation of an analogue private bank into an innovation driver
Reflection on change, technological progress and human behaviour in disruptive times
The article analyses and discusses the changes, challenges, decision paths and implementation practices of Bankhaus August Lenz in the years 2014 to 2016. In addition, the author would like to provide executives and managers entrusted with the transformation of their institution with practical arguments that may help them to cope better with daily challenges in change management practice. As a traditional private bank with a European parent, the task was not only to complete the transition away from a fully analog bank, but also to adapt the Group’s strategy for the German market with the budget adapted to the size of the institution. The most important internal customer was also integrated into the change: the Family Banker®, which is at the heart of the philosophy and is responsible for customer contact. This human contact and personal contact is the guarantee for the indispensable relationship of trust between customer and bank. The author examines issues such as coopetition, agile project management approaches and cooperation with FinTechs. In addition, topics such as value proposition, behavioral finance, the need to concentrate on core issues, the importance of personal consulting in the digital age and exchange in an international working environment as well as communication are treated as essential success factors. The paper does not claim to be perceived as a scientific work, but focuses on the practical implementation of the core problem of a market participant in a disruptive market – the question of how to restructure and realign companies in order to continue to play a role as a market player in the future.

The bank is perceived as a brand

Original Source in German: published on Oct 5, 2018 – “Die Bank wird als Marke wahrgenommen” Translation by DeepL Pro

Author: Angelika Breinich-Schilly interviewed Jochen Werne, Director Marketing, Business Development, Treasury & Payment Services at Bankhaus August Lenz.

Banks need to do a lot to keep pace in an increasingly digital world. In an interview with Springer Professional, Jochen Werne from Bankhaus August Lenz talks about the challenges they have to face and the right strategies.

(c) Bankhaus August Lenz

Springer Professional: Mr. Werne, what do you see as the most important driver of change in banks that is being invoked everywhere? Is it just the ongoing digitalization or do you see other reasons that require a strategic change process of the institutes?


Jochen Werne: The industry is undergoing what is probably a historic upheaval. We live in times of exponential technologies and in addition to the cost-side necessity of digitizing a large part of the processes of the institutes, the rapid change in customer expectations associated with technology, poses great challenges to an industry which is not known for being greatly agile. This disruption will eclipse many things and later perhaps be judged as revolutionary as the invention of the steam engine. In recent weeks, this has hardly made anything as clear as the rise of the online payment processor Wirecard. Wirecard was not only able to outperform Commerzbank in the DAX in September. Founded in 1999, the company has already overtaken Deutsche Bank in terms of market capitalization. In addition to the ongoing digitalization, there are also other current challenges: The low interest rate phase, which has now already lasted for a long time, is putting massive pressure on the margins of traditional houses. Political crises, trade disputes, currency problems such as in Turkey and Brexit naturally also have a direct effect on the classic business models of banks: In the future, they will have to adapt more than ever and increasingly prove their agility.
The exponential leaps in technology and ever shorter product cycles are forcing the global economy as a whole to change and adapt to changing circumstances more than ever before. Kodak is a good example. For the sake of simplification, the company has often been accused of not being far-sighted, but it has failed because of a culture that has allowed little change. Two letters are currently electrifying the economy: AI. After decades of disinterest, artificial intelligence is suddenly once again regarded as the decisive guarantor of a company’s future viability. The immediate integration of AI into one’s own business model seems indispensable, even vital for survival. Without smart software, you’d think you were dedicated to meaninglessness.
Similar to Facebook, the financial industry holds very valuable data. The preparation and processing of this data will not only become easier with maturing AI systems, but also much faster, cheaper and more targeted. It is nevertheless private and sensitive data. In order to make this resource usable in conjunction with external data, the industry must at the same time ensure its long-term security. Data may only be used in the sense of the customer, the human being – an objective that certainly has to apply to all AI-based approaches. Artificial intelligence offers an enormous range of opportunities for companies to be closer to their customers. But it also has its limits and here we are not only talking about technical limits, but also about limits that arise when the customer’s mindset does not go hand in hand with what is technically possible. Technology will only prevail if people accept it. Too radical a step, without consideration for all three areas Human, Digital and Culture, is always counterproductive.

Springer Professional: You describe that many decision-makers in the banks are well aware of the necessary changes in the business model. At the same time, however, top management often does not seem to set a concrete course and have corresponding visions. Why do you think that is?

Jochen Werne: Digitization, technological advances and the acceleration of product cycles are forcing executives to reposition their businesses. The question is no longer whether and why companies should change and introduce a more flexible organizational form, but only: How quickly and sustainably can they do it? The need for successful Change Management is not new and digitization was not an unforeseeable event. What is new, however, is the sum of the technical innovations, the possibilities offered by the technological leaps and the resulting need for extremely high implementation speeds. This circumstance has far-reaching effects on the entire management of the company. This often leads to different change processes overlaying each other, individual change processes being interrupted, modified or restarted and the organization being in a state of continuous change. And this also applies to the manager.

Springer Professional: In order to become a driver of innovation as a bank, it is necessary to anticipate not only upcoming technological but also social changes, some of which still vary greatly from region to region. One example is the payment behaviour of customers, which looks different in Germany than in other European countries or even in Asia. Many financial service providers now have think tanks or innovation labs to take on this task. But does some good ideas go up in smoke due to poorly thought-out change management?

Jochen Werne: Every new innovative offering must be easy for the customer to understand, intuitive to use and as a bank, absolutely trustworthy in terms of data security. The customer relies on the security of the communication channels as well as the careful handling of his private data. The challenge is to ensure data protection while at the same time providing the highest possible level of customer convenience. The resources of traditional banks offer enormous advantages here. An established bank is perceived as a brand by its clients, who at best associate it with important values such as trustworthiness, competence, industry knowledge and personal service. This trust is enormously important to us and should definitely be used.

Springer Professional: Companies in other industries sometimes find it easier to cope with change processes because they are not subject to additional strict regulations, as is the case with banks. Nevertheless, financial service providers such as Wirecard have succeeded in clearly differentiating themselves from traditional banks with their business model. Recently, the share value of this Fintech has even overtaken Deutsche Bank, the industry leader, as the most valuable institution. What can the industry learn from this?

Jochen Werne: Laws and guidelines have a strong influence on the competitive situation. MIFID II and PSD II are prime examples of this. In the second case, industry experts predicted that the mere opening of the banking infrastructure to third parties would lead to a major shift in competition.
This is a big advantage for FinTechs, but also the FinTech industry, which is already in the process of market consolidation, has to make considerable investments and adjustments, even if the new regulations now also open up new market opportunities. Non-adaptable service providers without sustainable and a viable business models will be driven out of the market, as will banks whose offerings do not meet the needs of customers in a digital world.
The example shows not only the usefulness of cooperation, but also its necessity. The advantages of banks, such as routine handling of regulatory issues or cross-selling opportunities due to the existing customer base, will continue to exist even after the market consolidation of the FinTech industry and the introduction of new technological standards.

Springer Professional: In order to be a driver of innovation, a bank does not necessarily have to handle all tasks alone. Where and when do cooperations with Fintechs make sense from your point of view?

Jochen Werne: What some have, others lack. Banks have a solid customer base, greater financial resources and, most importantly, a banking licence and the necessary know-how to deal with the relevant regulatory authorities. In addition, traditional financial institutions with many years of market experience, expertise in customer business and their trust can score points. Fintechs, on the other hand, have business models that are geared precisely to bringing innovative, customer-centric digital tools to market in a short space of time. Strategic alliances make sense, because ultimately everyone benefits – especially the customers. Not only the young generation today has very high demands on innovative mobile banking, but all age groups have discovered the new mobile possibilities in a very short time. Personal access to customers, which has persisted despite all the financial crises to date, is a sign that banks have preserved their most important asset – the trust of their customers. In an increasingly transparent and open financial world, however, the extent to which the customer’s loyalty to his bank will remain, is open.