Executive Summary

In this episode, our guest Kimmo discusses the concept and potential of Central Bank Digital Currencies (CBDCs) in part two of our series. We highlight the need for government control of the monetary system and the risks posed by private currencies. We explore various use cases and mechanisms that can encourage the adoption and success of CBDCs, including simplifying cross-border transactions and optimizing liquidity. We also dive into the idea of purpose-bound money and the importance of simplicity and convenience in utilizing CBDCs. As always we emphasize the role of entrepreneurs in developing new use cases and analyzing consumer behavior to drive CBDC adoption. Analytical approaches and network analysis play a crucial role in this process.

The Potential of Programmable Money: “I think these new use cases and thinking about new use cases of programmable money, for example, is definitely something that I think there’ll be loads of different opportunities for companies to start to provide new ideas, new services to people.” — Kimmo Soramäki

Three Key Developments in CBDC in The Last Year

We had our last update with Kimmo almost a year ago and since there have been three important developments:

• CBDC does not have to be on blockchain anymore, the discussion has shifted to other cryptographic means.
• The conversation has also shifted to tokenization for bank deposits and inter-bank lending for Central Bank Digital Currencies
• CBDCs have been launched in other countries, especially in China. We do not see a large-scale adoption there yet, since there is a real use case missing.

The Importance of CBDC for Financial Stability: “But the crypto showed that, hey. Actually, you can run this in a distributed multi multi-asset international environment relatively smoothly. So I think that was an enabler for the conversation.” — Kimmo Soramäki

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Central Bank Digital Currencies: “In many countries, the driver has, of course, also been, like, in the Euro system or in China, the sovereign control of money. So if you think of emperors, they always wanted to put their heads on the coins. So, like, that’s been a goal of the government or an objective for a long time to have control of the monetary system.”
— Kimmo Soramäki

Questions Discussed In This Interview:

1. How successful do you think the speaker’s experiment of living a cashless life has been so far?
2. Do you believe that Central Bank Digital Currencies (CBDCs) will become widely adopted in the future? Why or why not?
3. What are some potential advantages of using CBDCs over traditional payment methods like cash or credit cards?
4. How do you think purpose-bound money could simplify consumers’ lives and improve payment processes?
5. What are some potential use cases for CBDCs that have not yet been explored by entrepreneurs in the fintech industry?
6. How can CBDCs help drive financial inclusion, especially in countries with large unbanked populations?
7. What role do you think consumer behavior and payment networks play in the adoption of CBDCs?
8. How might the integration of distributed ledger technology (DLT) or other cryptographic methods impact the success of CBDCs?
9. What are some potential challenges that central banks and governments may face in implementing CBDCs?
10. How can network analysis and modeling of consumer behavior help guide the successful adoption of CBDCs?

The Future of Central Bank Digital Currency: “Even if there was a little bit of excitement in the Chinese CBDC, they haven’t become very widespread instruments used by the public to make payments.” — Kimmo Soramäki

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The Future of Payments: “There’s a lot of thinking around how foreign aid or aiding catastrophe areas could be done better with money that has better traceability.” — Kimmo Soramäki

The Video Interview is set to go live on Thursday, July 27th, 2023

The Future of Central Bank Digital Currencies: “I think many of the use cases will need to be some new ways of paying new transactions that didn’t take place before, new opportunities taking advantage of the programmability or the digital nature of it so you can tie it to different other transactions so better.” — Kimmo Soramäki

The Audio Interview

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Central Bank Digital Currency and the Path to Adoption: “I think the main adoption route is through new use cases and understanding, learning back from when you’re launching it, where do you get adoption and why that adoption takes place and then enforcing those routes into adoption.” — Kimmo Soramäki

The Expert

Kimmo Soramäki (https://www.linkedin.com/in/soramaki/) is a leading expert in financial networks and simulation technology. He is dedicated to making the financial system safer and more efficient, with a specific focus on central banks and global banks. His expertise lies in advising on subjects including Central Bank Digital Currency (CBDC) to financial institutions, including central banks. Previously, the main focus of conversation around CBDC was retail use, but Soramäki highlights three key developments since then. Firstly, CBDCs are not limited to blockchain technology, but could also utilize other cryptographic methods or tokens on chip cards. Secondly, there is now a growing conversation around the tokenization of bank deposits and how CBDCs can be used between banks. This has led to various pilot projects exploring domestic and cross-border use cases. Lastly, while some CBDCs have been launched, they have not gained widespread adoption, prompting the need to identify specific use cases and mechanisms to incentivize public adoption. Soramäki’s expertise and contribution in this field are invaluable to shaping the future of CBDCs.

CBDC and Liquidity Optimization: “So I think we need to get the velocity higher because we are now, again, the first time since 20 years, and And most people’s whole working careers, we are in an environment with positive interest rates, and that changes a lot of things. And I don’t think we’ve sort of figured out all the things that it changes, but those things are coming to us very quickly. And one of them is that you know, like, we don’t have free money anymore. Money costs now. We see apartment prices going down in many places. Banks getting more and corporates getting more conscious about the liquidity buffers that they have. So liquidity optimization across the whole chain, across corporates, across banks, across different economies. I think it’s going to be more important and will provide a lot of opportunities for a lot of entrepreneurs.” — Kimmo Soramäki

Episode Number One In The Series from 2022

You can find the interview from September 2022 here:

Supply Chain Disruptions and Financial Crime: “Here in the UK, the supermarkets are still empty because of supply chain problems… When everything is digital, they become easy targets for fraudsters to steal money from them… Better methods to detect fraud, stop fraud, and better ways to do that collectively on the network level and not only on an individual bank level. I think those are important areas where there’s a lot of opportunities to solve real problems.” — Kimmo Soramäki

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The Impact of Faster Payment Systems on Fraud: “What happens is that there’s a lot of account fraud taking place or, like, fraudulently sourced payments… I can very quickly, in a way, mask where the money then goes out of the system into cash or crypto. And but through this circulation of the money across several new accounts, I can lose everyone who is not algorithmically tracking it to avoid them being caught.” — Kimmo Soramäki

Further Readings / Additional Resources

• CBDC Tracker: https://www.atlanticcouncil.org/cbdctracker/
• CBDC Timeline: https://cbdctracker.org/timeline
• https://en.wikipedia.org/wiki/Central_bank_digital_currency

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The Interviewer

This interview was conducted by Jörn “Joe” Menninger, startup scout, founder, and host of Startuprad.io. Reach out to him:

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All Links and Show Notes

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Topics Discussed in this Interview

In this interview, we are talking about

cashless life, Google Pay, electronic payment methods, small vendors, market booths, China, Central Bank Digital Currency (CBDC), adoption, utility, Apple Pay, AliPay, digital payment methods, Hong Kong banknotes, HSBC, Standard Chartered, central bank, central bank money, society, Euro system, government control, monetary system, distributed ledger technology, bank accounts, public payment systems, foreign countries, purpose bound money, traceability, corruption, consumers, delivery of goods, central bank issued currency, blockchain, cryptocurrency, tokenization of bank deposits, adoption, success, private currencies, merchants, monetary policy, tokenizing accounts, digital way, correspondent banking networks, cross-border transactions, APIs, registries, programmable money, entrepreneurs, liquidity, positive interest rates, financial inclusion, unbanked populations, QR payment systems, user perspective, loyalty points, fintech ecosystem, non-central bank claims, government payments, simplicity, convenience, consumer behavior, payment networks, analytical approaches.

Automated Transcript

Jörn “Joe” Menninger [00:00:05]:

Welcome to Startupradio, your podcast, and YouTube blog covering the German start up scene with new interviews and live events.

Jörn “Joe” Menninger [00:00:20]:

Hello and welcome everybody. This is Joe from Startupradio. io. Your Startupradio podcast, YouTube log, newsletter, and Internet radio station on tech Entrepreneurship. covering mostly the GSA market except for our Internet radio station where we have everything for tech and partnership. Today, we do the recording first time that we know we crack Chartables Global Top 100 technology podcast. Thank you to all of our listeners who made this possible Since a lot of listeners have started listening to Startupradio radio. Since last year, September, I want to introduce our guest again, but first, welcoming. Hey, Kimo. How are you doing?

Kimmo Soramäki [00:00:59]:

Very good. Thank you. How are you?

Jörn “Joe” Menninger [00:01:02]:

I’m doing great. Thank you. You have been a guest. In the past, we published interview end of September

Jörn “Joe” Menninger [00:01:10]:

2022.

Jörn “Joe” Menninger [00:01:11]:

And that was the first episode. And as people can deduce, this is the 2nd episode of our series central bank digital currency, CBC, opportunities for Fintech entrepreneurs. But first, we want to go a little bit into the fit into you, then the development of CBDCs since then we want to talk about opportunities for fintech entrepreneurs, you’ve seen a few that actually no one does yet. And then we will close out with a few more links since your company FNA Financial Network Analytics does a lot of work, a lot of publication, and also a broadcast and there is a broadcast on Central Bank Digital Currency as of now, as of today, end of June with 18 episodes and there’ll be more to come. Great. So Kimo, I remember you’re an economist, and you’ve been an economist and or a researcher for many central banks. I seen in your LinkedIn CV, which is also, by the way, linked down here in the show notes on our Medium blog. You work for the Federal Reserve. for the Bank of England and the European Central Bank. I don’t think there are more bigger central banks out there. Your company also provided research that was used by US Congress in the Lehman Brothers hearings. And you founded the company Advising Financial Institutions, including but not limited to central banks called FN financial network analytics. We do a lot of network analytics and also a lot of agent based modeling. As I said, I’ll link the publication from September 2022 down here. Very important for me would be the update. There has been a lot going on in Central Bank digital currency since I actually read a few weeks ago, even an article in mainstream media about central bank digital currency where people can have a wallet on their cell phones. It it was something the auto going totally crazy about even though we talked about it almost a year ago. Well, we tried to be ahead of the curve. Can you give us little update on CBDC for everybody who’s not familiar with it yet? It’s basically a central bank issued currency on the blockchain. So it’s currency tokens, which are equal or almost equal to currency. Sorry. The field if you’re a skimo.

Kimmo Soramäki [00:03:57]:

Thanks, Emma. great. Great to be here again. It’s a real pleasure. And thanks for the introduction. So yeah. So like like you said, we work a lot lot around financial networks and around the simulation and providing a technology for not only central banks today, but also to a financial marketing structures and large global banks to make the financial system safer and more efficient, which is our mission. But but we do a lot of advice as well because of very specific subject matter expertise that we’ve been building over the years. So an update on the CBDC, so I think when we last time spoke, I think maybe the top conversations was around around retail CBDC. So — Mhmm. — Central Bank Digital Currency, like you said, being something that is issued by the Central Bank, like bank notes, but in a in a digital digital form. And and I think since then maybe for big 3 sort of main developments, the first one is that that It’s not necessarily on blockchain anymore. It could also be other type of cryptographic methods. It could be tokens that are on a chip card. So so it’s not necessary that and it’s not actually likely that many of the schemes, the Central Bank digital currency schemes that will be launched will be on blockchain. So other technologies could also be used I think the second is that the conversation has maybe last time, there wasn’t so much conversation around, let’s say, tokenization of bank deposits or how a central bank digital currency could be used for for between banks instead of between individuals. But I think since then that conversations has really picked up and The bank for international settlements. Innovation hubs have set up a lot of projects and pilots to to think about how that would look like in a domestic sense, but also on a cross border sensor, different different schemes that are looking into that. And then maybe the 3rd piece would be that we’ve had a few CBDs being launched, and this now have a little bit more experience looking at how did they do. And we’ve actually seen that they haven’t gotten a lot of adoption. So for example, the Chinese CBD or or others. So even if there was a little bit excitement in the Menninger, they haven’t become become very widespread instruments used by the public to to make payments. So I think the conversation has also then switched to switched a little bit to the, like, what are the particular use cases that the CBDC should serve? And what are the mechanisms that a central bank when issuing a CBDC would be able to encourage or incentivize adoption for for those to become more successful than the schemes that we’ve seen so far.

Jörn “Joe” Menninger [00:07:18]:

Sorry. I muted me because I was typing my crazy here.

Jörn “Joe” Menninger [00:07:25]:

I thought I caught here 3 main ideas. Let me quickly play them back to you in order to be sure that I and our audience have understood them because, basically, you wrap up almost a year with 3 topics, and

Jörn “Joe” Menninger [00:07:40]:

you should be sure that you get them right. CBC does not ask to be in blockchain anymore.

Jörn “Joe” Menninger [00:07:46]:

Other cryptographic means can be used, which means the start was doing a cryptocurrency kind of Bitcoin for central banks, and now they’re moving away from there. Can you give us a a little bit of background, a few reasons, maybe speed, maybe security?

Kimmo Soramäki [00:08:06]:

Yeah. I think this the the reasons are varied. And if if you think about, like, why did the whole conversation on CBBC start, it was really the the the crypto showing that, a, it will be technologically possible to run a payment system on a sort of a distributed ledger, which was, I think, very interesting when I was working at the central banks before, let’s say, 20 years ago, we always thought that it would not be possible to set up a CBDC because there would be a the risk of a single point of failure. what if, like, the system breaks down and and then the whole currency is compromised because like of some cyber attack or other types of of ways to compromise the system. But the crypto show that, hey. Actually, you can run this in a distributed multi multi asset international environment relatively smoothly. So I think that was an enabler for the conversation. And then the other piece was the perhaps the threat that maybe if central banks do not bring up their own digital currencies. The the private currencies would start to circulate, and then we would get into an environment that we had like a 150 years ago where we had a lot of private currencies circulating, and it was very difficult. And it was it was Very confusing for the consumers, and it was very, like, difficult for merchants to put prices on on goods. And there was a difficult to run monetary policy and so forth. So the central banks saw that it’s a risk.

Jörn “Joe” Menninger [00:09:40]:

Yeah. Can we just try to give the people a little bit of back because in the past currency was just basically very early on a letter that you have deficit I don’t know, a a a few bars of gold at the Banky of XYZ in Geneva. And then you went with this letter to another bank, and they could basically pay you out a little bit of that. And that was the beginning. then at one point, banks issued kind of their own currencies, not not supervised. Basically, it was It was the beginning of paper money there in the Western countries. China did it way before us. And at one point, the banks managed the currency of certain of certain countries, I do believe, in Hong Kong the Hong Kong dollar, for example, there’s still commercial banks pretty pretty deeply involved in getting this circulated. and keeping the system stable. Right?

Kimmo Soramäki [00:10:44]:

Yeah. In Hong Kong, the banknotes are still printed by the by the Hong Kong banks, HSBC standard chartered. But I think they put money to the central bank to back those those those issuance of those banknotes. But, yeah, it’s it’s a very complex Menninger. So and and you get into very deep philosophy question is about money very quickly, but maybe to sum it up, there was a concern that it would not be good for the society if if, you know, like, the current system of of central bank money would lose its standing. So that’s one driver. In many countries, the driver has, of course, also been, like, in the Euro system. It’s the is the or in China, the sovereign control of money. So if you think of emperors, they always wanted to put their heads on the coins. So, like, that’s been a goal of the government or an objective for a long time to have control of the monetary system. So So those were the drivers for the Central Bank Visual currencies, and then there was a technology for it available in DST, but likely as as we’ve sort of been progressing we found out that, hey. There are also other technologies that that could be applied. Maybe even, like, you could open up bank accounts for all individuals at the central bank. That would be one way providing a and a retail payment method and cards, you know, like so there’s lots lots of ways that the central bank could could offer directly a means of payment. I think it is mostly the discussion here to the public to keep the payment systems under control and not be threatened by foreign countries’ actions. I think that’s the — Mhmm. — that’s the bottom line there.

Jörn “Joe” Menninger [00:12:35]:

Also, you talked about the conversation has shifted to tokenization for bank deposits and interbank lending, which basically means that you have a utility token, which is worth, I don’t know, 1,000,000 in Citibank of New York, which which is a big, by the way, a big hop in currency trading. So you have, like, 1,000,000

Kimmo Soramäki [00:12:58]:

there on an account and you can tokenize this and then work with it in a digital way. Yeah. And I think those are quite often, like, I think, the idea is they are around distributed ledger because since international environment, you maybe can’t find a trusted relay trusted single party to keep the ledger. So you wanna have a then distributed ledger and be sure that all the lecture movements are are correct there. But yes, so and then the question is like, what does that help currently movements of money are done mostly by correspondent banking networks. Those can get very complicated and costly. So I think there’s been the the idea that, hey, can we simplify this by by having a coin circulate or other types of methods to to move money cross border. But then also, domestically, Does it need to like, what kind of new features could be built into into the payment system? For example, at the Bank of England, which is not considering a wholesale BDC, but they’re building they’re going to be building APIs to the to the RTG system, the real time gross settlement system used by the by the bank’s chaps here so that you could synchronize better, for example, movements of with the land registry or other types of registries. So you could do delivery versus payments. So you don’t have to put money into escrow when you buy an apartment or a house, but you could directly synchronize that the title moves at the same time as the money moves. in in the payment system or other types of, like, new opportunities for Menninger the the world a simpler and more efficient place. And I think one of the items that we wanted to discuss, what kind of opportunities there are for, like, entrepreneurs. And and I think these new use cases and thinking about new use cases of programmable money, for example. is is definitely something that I think there’ll be loads of different opportunities for for companies to start to provide new ideas, new services to people.

Jörn “Joe” Menninger [00:15:07]:

Mhmm. Programmable, Honey, you may not be able to see it in the background, but there was a experiment after the I do believe in Germany last century, and it was called. So, basically, You have a few methods how you get more the economy kick starter. One of them is just pumping more money that is what central banks have been doing for the past. and the other one is to increase the velocity. So that means you could theoretically not not saying any central bank is plan me that. But theoretically, you could get a central bank currency that is losing money when you don’t spend it that is losing value. For example, you get a 100 hero token on there. And if you don’t spend it in 1 month, it will be 99. If you don’t spend it in 2 months, it will be 98 and stuff like that is then possible.

Kimmo Soramäki [00:16:02]:

Yeah. Definitely. I can do those type of ideas. The other ones are purpose bound money so that you can use the money only for certain purposes. Maybe if only for a certain period of time, I think those ideas are, I think, quite advanced in Singapore. They’re thinking a lot about the purpose bound money as being the gateway. in a way to a central bank digital currency. Mhmm. Or I think there’s a lot of thinking around how foreign aid or aiding catastrophe areas could be done better with with money that is has better traceability. and better, like, restrictions on what it can be used for so that maybe we can cut up corruption or, like, some of problems that many of these aid programs to very troubled areas have areas have had in in the past. So lots of different IDs, but also, like, in normal circumstances, what kind of things that we can make life simpler for for consumers. A lot of people always talk about new verification of things. So, you know, like, in the taxi, we used to have to make the payment right. The taxi gives change, and it takes time. And maybe they don’t have the change and and and so forth. And the Uber in a way took that away by I had the payment happening in the background on the platform, you know, like, dependent on the, you know, like, services being delivered. So no one you, as a consumer, don’t have to care about that. I think there are lots of other opportunities to tie payments to the delivery of goods so that everything’s happened automatically. in the background, and you don’t have to have to think about it.

Jörn “Joe” Menninger [00:17:46]:

Mhmm. That could also be the case. For example, you pay out international aid money and make sure it cannot be used for guns or alcohol or stuff like this. You could pay out Social Security checks bigger than they are now, and you could also only use it for rent, food, and clothing, for example. Exactly. Yeah. Yep. Or you you could even theoretically, you can have an open account for children of Social Security Receivers. and they could go then and buy everything for the next school year. Yeah. Exactly. Betting the imagination

Kimmo Soramäki [00:18:20]:

is the the constraint here. But — I see see. But but and and and I really think that when we when we talk about CBD, that we won’t see, like, the current habits perhaps change so much immediately, so it will not replace necessarily how I pay by cards today or debit cards or or or other existing means of payments, Apple Bay, or Google Google Pay. I I don’t use a lot of cash anymore, so that’s already been replaced by electronic means of payments. But maybe some people do, and I think, especially in Germany, People still use large amounts of cash. So maybe the CBD would would replace cash, which is the intention in many countries because cash circulation is very expensive. If you are a island state and consisting of thousands of little islands, you have to ship the money to the right place all the time. very expensive. So that’s why we’ve seen many of, like, these CBC schemes kick off first at at places where the the the provision of the cash is very expensive in the economy.

Jörn “Joe” Menninger [00:19:28]:

should I tell you something? I’ve made an experiment this year. So far, we we are through half of the year. I got 5 100 years cash in January January 1st. and I still have some cash left because I do pay a lot with my cell phone, but I have to admit I’m using Sorry. Not sponsored by, but I use Google Pay and not all the banks, especially the bank where I have my main account, is not necessarily working with them. So theoretically, it’s possible to have an almost cashless life. For example, I don’t even pay groceries. Just if you go to the bakery doing very small For example, there’s some booth here where you can buy asparagus, where you can buy strawberries and stuff like that. There, it is not possible to pay electronically, but in almost everywhere else, you can pay non cash. Christmas markets also not possible to pay in electronic form so far, but it is getting way, way better over here. Despite all the advantages of CBTCs, You’ve you’ve said, for example, China, they have been very early. They launched their CBDC, but there is not a lot of a deptation yet. Can can you tell us a little bit what has been learned so far about CBDCs? Because I do believe if you don’t have, like, a big utility, a big use case for the people, there is actually for somebody who is using Apple Pay, Google Pay, AliPay, and so on and so forth, it didn’t make sense for them. But for the people who had never used it, there’s I would say almost no incentive to pay like that.

Kimmo Soramäki [00:21:12]:

Yeah, exactly. So that’s why I also said that I think many of the like the use cases pool will need to be some new new ways of paying new new transactions that didn’t take place before, new opportunities taking advantage of the programmability or the digital nature of it so you can tie it to different other transactions so better. I think during COVID, there was an idea that that especially, like, in in countries where you have a lot of unbanked people that didn’t have access to digital means of payment that that the CBC would would be something that then helps with this financial inclusion. and helps people who who are in their homes, you know, like, reliant on good delivery services but don’t have a card need to pay cash on delivery would would then benefit from a CBTC. But what happened in between was that they built normal QR payment based payment systems very quickly there. And even in most countries in Southeast Asia, like, you don’t need that. Need cash anymore. So so that’s sort of, like, happened already without CBDs. But I think CBDs will We’ll need to new entrepreneurs, so I need to think of new use cases that will then, over time, I think, become important as they as they grow. I think from a user perspective, I think it’s very important. It’s very easy.

Jörn “Joe” Menninger [00:22:48]:

Now we are at the important talk about the Central Bank digital currency use cases. And as we’ve already discussed, because I’m sorry. I’ve been drawing out this conversation quite a little bit for over 20 minutes because what I want to hammer down hammer a home is the point that They may or may not be central bank due to the currencies. They may or may not be on a blockchain, but the only but you need to have reasons to actually use this. And that’s why we’re talking here today.

Kimmo Soramäki [00:23:22]:

Indeed. Yeah. So and I think that’s where lot of fintech entrepreneurs can come in and they suggest new ways of prethinking how we buy things, how how different services are being delivered and how the payment for those services are are delivered. And, yeah, I think we already covered a couple of other use cases around the purpose bound man, money, the foreign aid, And, really, the imagination is the is the limit on on this different use case. Since in Australia, there was a a exercise by the digital finance CRC to to do and together with the Reserve Bank of Australia to to solicit different use case and pilot those use cases on a on a CBDC. And I think those types of exercises, we need we need much more and call on the innovators to start thinking about how does the money of the future look like.

Jörn “Joe” Menninger [00:24:26]:

Mhmm. When you’ve been talking, I was I was writing it down. And I also thought I just read a few days ago that billions of COVID relief money have been stranded somewhere in dark channels have disappeared even in the US, and I thought that would be quite a good case. But we’ve we’ve seen the purpose bound money We’ve seen financial aid or assistance disaster relief. Any purpose bound payment from government, even from companies could be used there.

Kimmo Soramäki [00:25:01]:

Are there other options you see for Fintech Entrepreneurs? Maybe that even nobody is doing it. Yeah. I think the purpose bound money very quickly then becomes something like loyalty points as well. So you get into that whole world of air miles different incentive programs that could be running in a way on the same same system. But then perhaps it’s not a central bank digital currency anymore, and it’s more using the sort of same technology for for different types of non central bank claims or or or or schemes. But I think in the central bank case, and, like, I think directing some of these payments by the government would be an easy way to to increase adoption. The problem with the current schemes has if they’ve even incentivized you to sign up to the CBDC, maybe saying that, hey. You get $10 or or something if you if you decided to create an account, and then you use that $10, and then you forget about it. So so you really need to have some some in a way, some payments. Like, the way with your why do you use cards on your bank account? It’s because you get your salary or other payments into your bank account, and you always get replenished and use the same instrument to to to use the funds that you get there. You know? If if if the CPDC was something that we always have to load, then it becomes, like, cash, and we’re getting away from cash because it’s inconvenient to go into the ATM to withdraw it. Right? So then it needs to be really simple for the users to be able to to to use it without having to have these complicated mechanisms to top up your wallets. And and and even then, it doesn’t necessary People are very habit driven. So it doesn’t necessarily change your habits how you make payments today. So, therefore, I think the main main adoption route is through through new use cases and understanding, learning back from when you’re launching it, where do you get adoption and why that adoption takes place and then enforcing those roots into adoption. So it’s it’s also a data analytics exercise of a of a simulating modeling, why would a consumer choose 1 of these payment instruments at the point of sale? Why would the he or she choose central bank digital currency over over cards. And I think a lot of these things so we started the conversation around around network analytics and simulation. So I believe a lot of the adoption will be helped by doing analysis of network analysis under and who is paying where? What kind of clusters do we find? Facebook started with 1 university, the very tight cluster. and then expand it to another university then between those universities. So how do we find those adaption paths? So network analysis of the actual payment networks in the real economy and then being able to simulate ground up, why would a consumer to a certain payment. I think those are the the the sort of analytical ways to think about how do we create a success story out of a CPDC, and it gets gets adaption from from consumers.

Jörn “Joe” Menninger [00:28:24]:

When you’ve been talking, I I instantly had in mind, there’s an international coffee chain with a green logo that already provides you with the ability to scan to pay with their app, with the points. And I do believe you can then load CBDC money or any money, basically. You would not need CBDC. On there, you get 5%, 10% more than what you originally paid in, and they already have the cash deposit there. I also can imagine this doing with some retailers. For example, there’s one here in Germany with a red logo. that is already going away from the loyalty programs that you have here in Germany. And starting to do everything in their own app, and that would be also an ecosystem in which this could work, but would have not seen yet is incentives to have something outside of a 1 economy system. I do believe a lot of companies tried their tried with some kind of token, their own digital currencies, and I have not seen a lot of adoption I I think even an international retailer from Seattle tried with their own currency points, whatever, and even that did not work. Do you also have some ideas in mind? Some some potential business ideas what people could do but are not doing yet?

Kimmo Soramäki [00:29:53]:

So we work mostly in in the in the interbank spacer. together with with the banks. So most of my ideas are re are related to to there, and also something that we work together on. with our clients. And I think we’ve phrased it a little bit differently. What are the big quick questions? that are there today, sort of, like, problems that need solving. On the CBDC, it’s adoption. How do we how does a CVDC system gets used by the users, so what are the use cases and those we discussed already? I think the 2 other big problems that we today have is the other is around liquidity. And with the working capital within the economy. You just talk about the velocity of money, so the working capital can go less if the velocity gets higher. So I think we need to get the velocity higher because we are now, again, first time since 20 years, and And most people’s whole working careers, we are in an environment with positive interest rates, and that changes a lot of things. And I don’t think we’ve sort of figured out all the things that it changes, but those things are coming to us very quickly. And one of them is that, you know, like, we don’t have free money anymore. Money costs now. We see the the apartment prices going down in many places. Banks getting more and corporates getting more conscious about the liquidity buffers that they have. So liquidity optimization across the whole chain, across corporates, across across banks, across different economies. I think it’s going to be more important and will provide a lot of opportunities for for a lot of entrepreneurs.

Jörn “Joe” Menninger [00:31:39]:

I think the other one is — When you said talking about Menninger money along the chain, what instantly came to mind is supply chains? yes, supply chains. That’s the other piece.

Kimmo Soramäki [00:31:49]:

I see it immediately after COVID hit, and I started to look at what is being written in the news. I I said that supply chains are gonna be the next big thing. There’s going to be similar legislation after COVID, like we had after the financial crisis of 2008

Jörn “Joe” Menninger [00:32:07]:

9

Kimmo Soramäki [00:32:08]:

to be able to get more visibility into the supply chains and to be able to analyze and model and help supply chain get less disrupted. They’re still disrupted the supply chains. Here in the UK, the supermarkets are still empty because of supply chain problems. And the third third piece is financial crime. With all these new payment methods, money being able to when you can move money easier and faster, it means that the criminals can also loan their money easier and faster. And when everything is digital, they can they can and people are unused to digital new methods. it means that they become easy targets for fraudsters to steal money from them. And I think that is becoming a be a visible large problem in the countries that were first in to launch these, let’s say, faster payments and instant payment systems for retail consumers. So they’re becoming fraud is becoming a large problem in those. So better methods to detect fraud, stop fraud, better better ways of to that collectively on the network level and not only on an individual bank level. I think those are important and areas where there’s a lot of opportunities. to solve real problems, sir.

Jörn “Joe” Menninger [00:33:43]:

Yeah. I also do believe when you’ve been talking about fraud, what also came to mind is anti money laundry. Basically, if you do have whatever bucket full of cash, from some kind of drug deal, you either have to use the cash all by yourself. But at one point, if you’re successful enough, Just depositing it in one of the rooms in your apartment is not enough. Also, if you’re already criminal, you should be afraid of the police in writing your apartment. So you have to get it into some kind of legal business, and that is the money laundry that he could also theoretically fight with that as well as terrorism financing. I would also say there are some opportunities here, but only from people who really understand the business because I do believe that it’s very difficult to do this properly.

Kimmo Soramäki [00:34:36]:

Yeah. So and and and especially in this CBDC or faster payment systems where you can move money quickly around between people, between corporations, What happens is that there’s a lot of account fraud taking place or, like, fraudulently sourced payments. So, for example, like, I would fraud you some money, move on to my account, or it’s actually not my account, but I can account that I control. But then because in the in the faster payment system, I can move it hundred times during the day across different accounts. So I can very quickly, in a way, mask the where the money then goes out of the system into cash or crypto. And but through this circulation of the money across this several new accounts, I can I can lose everyone who is not algorithmically tracking it to to avoid them being caught. So it creates new opportunities for these faster payment systems for for criminals that are quite often very quick to grasp on the opportunity, same that’s the same, like, Fintech Innovators. So it should be in creating new use cases for the new platforms and technologies that become available.

Jörn “Joe” Menninger [00:35:54]:

Sorry. I just had to smile here. We talk about opportunities and what what my guest says is, yeah, usually the scammers are the first and the fastest one to adopt here. So new technologies. Yes.

Jörn “Joe” Menninger [00:36:07]:

but I do understand it. Right? So we we have a lot of areas differently. First, you can do purpose bond money. You can do better tracking, and you could also or have to change the behavior at the point of, say, the point of usage of the money, and that it’ll be where entrepreneurs can really come up with great ideas, also all the criminal investigation area and and 10 money laundering, terrorism financing, and defrauding of 8 programs, scamming, and so on and so forth. that is also an area where fintech entrepreneurs can do a lot of business. Have you already seen somebody doing that?

Kimmo Soramäki [00:36:58]:

Yeah. Definitely. I think so if you so it was just 2 weeks ago in Monday 2020. So it’s pretty much it’s how many 7000 people, 8000 people all around payments or around fintech. So those type of we didn’t have 10 years ago. I don’t know why. Maybe it was just that it was a sleepy business, the payments business, but but now pretty much FinTech has become to me and mostly that it among payments. It’s around making faster, cheaper payments. Every economic activity that we have is associated with the with the payment. So it’s a huge infrastructure area the same way like anything that we purchase has some energy embedded into it. So energy is a big business, but so it’s the payments. Everything that we buy is also some kind of a payment embedded to and the payment costs money. So so, therefore, you know, like, these are huge, huge industries with a lot of different opportunities and parts that you can play in. A lot of innovation and take place.

Jörn “Joe” Menninger [00:38:07]:

would also come to mind when you’ve been talking about that because since our last conversation, I was talking to a lot of companies working in or around the secondhand market, especially for fashion, and I could see some large retailers When you pay money, they also give you some money back when you hand it in for secondhand. that would be also something you could do there. So we don’t necessarily need central bank digital currency, but that is also something that could be easier with CBDCs?

Kimmo Soramäki [00:38:41]:

Yes, exactly. To sort of like the upcycling and the circular economy, So how can money help in the circular economy and make it smoother? Interesting.

Jörn “Joe” Menninger [00:38:56]:

thoughts here. We don’t have hammered out FinTech Business Cases. as of now yet, but I’m very sure at the latest in the next few interviews, we will have something to tell you and I do believe you will be back sooner than a year. Hope so. It would be a pleasure to have you back. For now, it was a pleasure to have you. Thank you very much for your time, Kimo, we were running way longer than the usual interviews. Maybe we need to split this in 2, but nonetheless, It was a pleasure talking to you. Thank you very much. Likewise, son.

Narrator [00:39:43]:

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