Fintech Opportunities in Cental Bank Digital Currency — Part 1

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At the Federal Reserve in New York I simulated attacks on critical infrastructure on the back of the 9/11 attacks.
Kimmo Soramäki, Founder and CEO of FNA

Executive Summary

This episode is part of our Subject Matter Expert Interviews. It will be one in a series over time, keeping up with the development of the central banks and their digital currency. This episode is just the start. We talk to Kimmo, a regtech entrepreneur, who formerly worked at the central banks of Finland, Norway, the Bank of England, ECB, and the Fed in New York City. This episode is a starting point for us, from which we will dive deeper, keeping up with the developments on CBDC.

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When the financial crisis 2008 came, we realized that we don’t need an outside attack on the system to destabilize it.
Kimmo Soramäki, Founder and CEO of FNA

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The Video Interview is set to go live on Thursday, September 22nd, 2022

The Audio Interview

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We work with a lof of clients with three letter acronyms. So we decided to name our company financial network analytics, FNA.
Kimmo Soramäki, Founder and CEO of FNA

The Expert

This episode is part of our Subject Matter Expert Interviews. It will be one in a series over time, keeping up with the development of the central banks and their digital currency. We talk to Kimmo, a regtech entrepreneur, who founded FNA a company that helps banks, central banks, and financial institutions. He has already advised the central banks of Finland and Norway, been a visiting researcher at the Bank of England, and expert at the ECB. He also spent a year as a research economist at the Fed in New York City. His first software simulated for Finnish banks the impact of joining the eurozone.

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FNA’s reference clients include CME Group, the Department of Treasury, Ripple, and the Department of Defense. You can learn more about them here:

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Central Bank Digital Currency makes moving money around so much faster.
Kimmo Soramäki, Founder and CEO of FNA

Further Readings / Additional Resources


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The Interviewer

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



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Automated Transcript

[0:00] Music.

[0:19] Hello and welcome everybody this is Joe from your startup podcast and you to block from Germany today I do have another little bit unusual guest joining me from London hey Kimmo how you doing.

[0:33] Very good great to be here.

[0:36] Chuckling my pleasure everybody can tell from his name who’s watching this on YouTube Kima how do you pronounce your family so her Max yeah ceramic in finish sewing Mikey yeah I did
terribly sorry if I butchered your name and you.
Originally from Finland and you are currently in London but we talk because you are a subject matter expert to us and we will talk a little bit about.
Impact of Central Bank digital currencies especially where.

[1:13] It there are opportunities for fintech see out there and I have been digging a little bit through your CD will soon get to that there are some very interesting positions first I would like to.
Thank our sponsor today cam the easiest and most efficient way to connect with
investors and cooperation partners and today’s interviews also in cooperation with the digital your Association who actually hook tons up thanks to the guys layers and
talking about digital Euro central banks and all that stuff I have seen in your CV on LinkedIn,
as always we link it down here in the show notes a lot of positions you usually don’t see with a startup founders
for example I found norges Bank the Central Bank of Norway for all the Americans that very up in in Europe.
Bank of England European Central Bank.
It’s very fascinating the Federal Reserve Bank of New York which is very important in the US Federal Reserve System because they implement the actual interest rate policy and of course
the bank of Finland so jealous.
What on Earth did you do there how did it lead to your startup and why we’re talking Central Bank digital currencies right now.

[2:34] Maybe I was a little bit of an intrapreneur in the central bank’s so so I started the bank of Finland and the the first.
First task that was given to us to build a simulator when Finland was turning the European Union and the Finnish Banks wanted to know what will happen to that the quotidian payments when they become part of the Euro area and don’t just circulate Martha and Finland.
And I think I maybe overdid it a little bit
probably they were thinking of a sort of as Excel spreadsheet but I build a software to do the simulations
and that because the the very first think about when you said about I built a simulator the very first
pink I had in mind was a flight simulator I always go use building a flight simulator in the central bank no dang it.
Mary was in a way similar you know I build a software to do a simulations of diamond systems and how banks operate in Dosa and what kind of mechanisms those have and,
guy was invited to the New York fed and the bank of Japan to do simulations about their systems after a couple of Publications.
So that I think took me on this sort of assimilation path it was always something that I was interested in.

[3:44] From there I went to the European Central Bank I was during the Euro change over there.
Mostly overseeing Payment Systems again at that point of time also doing doing Imani and I’ve always told my friends and I’m working in payments and it was very unsexy,
that’s what why why do you do such a boring topic,
and now with this fintech sand crypto in like it’s become one of the most exciting places to be.

[4:12] But I was there when it was very boring and other people’s minds so from there I went to New York Phelps research Department.

[4:20] And there are really encounter the literature Network science and network Theory and I said hey this is a great way to understand how many moves within the economy within the banking system.
And we did some research on that and that caught the eye of the National Laboratories in the US and.
And we started to build software again together now on simulating attacks on critical infrastructures,
so this was at the back of the 9/11 terrorist attacks and then then my plan will assume you.

[4:52] Your focus would have been more like a tax on
um central payment processors like exactly actually yes or something like this yeah after the 9/11 terrorist attacks have been there was a lot of worries that I may be the next attack will be on.
Different critical infrastructures that could be banking Systems payment systems Road networks which is,
I’m so we were building models and and simulation models and how these are attacks on this payment systems would have play out and how we’ve been able to protect the payment systems from,
from that tax now it’s of course very relevant with all these cyberattacks against the against the infrastructures.
And that would deal with war in Ukraine going on as well.

[5:33] So I’m so that sort of took the other side when the first it was about making the system’s better this was about how can we,
I disrupt them or how can they be disrupted by others and seeing so proceedings about the infrastructure sir.
And yeah my plan was to do they plan to put that software into open source but they never got around it so then I decided that I’m just going to start building from scratch something similar.

[6:02] And then that that was staying away the birth of the of the FNA software that we have today and now you have to solve a big riddle for me
what does FNA mean are I could not find it on your website yes it is so funny we work with a lot of other like three letter acronym organizations some of the most of our clients are also three or four letter acronyms like.
Like ECB or or or IMF like somebody anybody even a means is financial Network Analytics.
So that was the root of what we what we went out to do is to build a platform for.
Understanding this complex Financial networks map the financial networks and then do simulations how to make those systems more efficient or to do stress testing on them.

[6:48] Though
first a little little smile here because when you said oh a lot of our clients have been using three letter acronyms I was wondering
did he seriously considered to name his company TLA three letters back said generic a company
set that aside my understanding is right now you are doing simulations meaning not the very small ones but the very big months you generate
maps of how money is
flowing and that’s why we are talking today here because we will be talking a little bit about the potential impact of Central Bank digital currencies you always
way ahead of the curfew with us.

[7:42] When do you believe seriously that the European Central Bank and or the Federal Reserve will have real Central Bank.
Digital currencies CB decease I think it’s four to five years down the road.

[8:01] Really usable progress on sounds right that maybe just go back to sleep when we people speak about that CBD sees there so many.
So many different varieties and ideas for the CBC is so for me Central Bank digital currencies.
Yes so they can be two versions of it that they can be something that is used by normal people like they do cash.
Add today which is something that is issued by the central Banker but there can also be a wholesale Central Bank digital currencies which is the what.
Let’s say the banks that would exchange with each other.
And I think the more interesting part is the is the what is called the retail CDC so which is a cash like payment instrument that is in a digital form so instead of giving someone banknotes I would be able to attack,
my phone or transfer you some Central Bank tokens that that Central Bankers should token so that that digital.

[9:00] And I think they’ll come I think when I was at the European Central Bank and the bank of Finland maybe 20 years ago,
the thinking was always that them central banks won’t issue digital currency because
there is this risk data if the system gets compromised then we lose all money like we can’t trust the money and it was too important of the topic,
at the B2B lost them because we have without money where.
We are quite down a handicapped in that all economic activity area economic and activity needs attainment.

[9:37] But now with the rise of the crypto so and and sort of cryptographic techniques and other techniques I think the technology has gotten much better they’ve been out there for a while already people have gotten more comfortable with the idea,
so I think now in a way is the.
Is it in the environment is ripe for Central Bank digital currencies and the fact is that the cash is declining as a means of instrument.
Means of payment and and I think central banks need to keep Pace with the technology and provide.
Provide new means of payments into the digital.
Into this new digital space that is web spending more time we’re spending more money in on the internet and online doing more.
None in one person on in-person payments at so there needs to be a commitment to see my provided by central banks for that.

[10:30] Before we get into that you’re not only a consultant to very important central banks you’re not only startup founder but you have been working in the past
for example during the Lehman Brothers collapse in the aftermath doing some interesting work there that’s why we’re talking about here before we get into the real discussion can you share a little bit about
what you did in the aftermath of Lehman.

[10:58] Yes so so this will continuation of the of the innovate the work that we started to.
To do to simulate that attacks on critical infrastructures and the banking system,
and then when they when the financial crisis came like we realized that well actually we don’t need anyone to attack the system it can dissolve and destroy itself
but a lot of questions that that came out from that we’re related to the interconnected nature of the financial system everyone was asking your hey who is connected to Lehman who is connected to the people who are do they could be who is Sir
connected to Lehman and who is connected to the,
banks that have lent to Liam and so forth so everyone understood there’s certain stuff in the large network of interdependencies,
and then some of the work and we’ve had been developing this network maps of the financial system in the USA.
Everyone started to find those much more interesting than before before let’s say classical economists were saying that the things don’t matter it’s a market we are facing the market they were sort of more sort of like purest and class.

[12:11] Economists and and after the financial crisis there was really this realization that.
It’s a network all these connections exposures and matter and the how risks Cascade in these networks and we need to understand much more granular level these.
These in the interdependencies within financial institutions and corporates and others.

[12:32] So some of the work that I had done research was used in Congressional hearings for example to argue that The Regulators need to get that
more information about that
what is going on in the financial systems of pre-financial Crisis there was very little information that was provided and that information came late about the exposures and and about risks
so I’m so there was this drive to The Regulators need to get all this information and that’s that’s been happening now all the last set of 10–15 years,
and that today it’s called Super Tech or supervisory technology so it’s a spinoff from reg Tech which is the regulatory technology which is spin-off of fintech with his financial technology and I think fintech probably most people know about that there are these subcategories that,
so it’s technology used by by central banks and supervisors to make.
Better sense of what is going on going on in the financial system and to identify systemic risk sir and and that’s sort of a.
Keep Bolero for the FNA today does is to provide technology for for these types of network analysis and understanding and simulating financial systems.

[13:45] I see so how we had lined this today fintech opportunities in Central Bank digital currencies let us
talk a little bit about the potential impact of cdc’s,
first I do believe at one point down the road you.

[14:07] Be able to transfer almost instantaneously money from.
Every place in the world to every other place including from one cell phone in Japan to another cell phone in Brazil like that.

[14:23] That should be possible
in the future that is one of the main reasons why you have Central Bank digital currencies but that will also change quite a lot because there are a lot a lot a lot a lot of different intermediaries
you have there for example.
You have your Android phone you have your Google pay then you have a MasterCard behind it then there’s the master can Network then it goes into your bank account there’s the Central Bank it works with another Central Bank it works with a commercial bank which then in turn.
Sent it somehow to your cell phone and a lot of this will be cut out so can you tell us a little bit can you give us a broad
overview of what I’m absolutely sure that a lot of it will be cut out there because all those intermediaries emerged for a reason that is to say they could be cut out right yes
yeah give us a little bit of an overview yeah yeah so.
I think this this is idea with this decentralized finance and kryptos that part of the intermediaries kind of be cut out but I think the reality is that as things get bigger all these intermediaries that we see today in,
really much because they serve a key role.

[15:41] The other point of it if we don’t have intermediaries for that example with black sending money from your phone to someone in Japan what kind of money are you sending they are you sending you a rose.
But that means that the Japanese counterpart it may be.
Hustle can hold your Euros in Japan and I think that’s one of the key drivers for this conversation around Central Bank digital currencies is that is that whose money is it going is it.
Going to be that we’re going to be using globally is it going to be in the Euros or the currently it’s a dollar banknotes that.
We talked about dollarization and you can go to many countries and pay with dollars.
But in the future when we are in a digital environment whose currency are we going to use for this digital transactions it is going to be dollars the digital dollars resident with the digital euros.

[16:29] Yeah we may go back a little bit into history here because after Bretton Woods after the second World War
de facto the leading currency of the western world became the US dollar in for quite some time.
Even today you cannot just exchange one currency for another just say euro into
into some Brazilian real for most of them you first have to trade them in u.s. dollar and then into this currency because everything is measured against the US dollar that’s why
you’re referring to the you as dollar there and maybe there’s even an opportunity to go into something.
Even more Central like nailing it shooter special drawing rights that’s the currency of the international monetary font so there is a lot of uncertainty here and that’s why we are talking.

[17:22] That was just a little detour people who are listening to me know that I love to do teachers into the history and why the your why do you ask all that is there so important and why you still need to have in mind the exchange rate euro US dollar sorry go ahead.
Yeah I thought so but I think that’s one of the key drivers is that they’re said this in a way.
People also there’s quite a lot of in the news around the Chinese digital Chinese currency does it become a world currency so maybe that’s a threat like a two-dollar all the web stuff.
But I think you know like a lot of the thinking around this digital currencies because in the digital world everything everything can stretch so much quicker.
And that’s why we saw this crypto spread so quickly around the world because it’s much faster to move digital tokens around than it is to move cash and no it’s around,
so I’m so I didn’t have been when we have a central bank digital currencies.
I think there’s a little bit of a race between the different countries to do at least not be.
Later than others to launch their own digital,
currency because otherwise it might be that if you were still a launch is a digital currency and then it proves very popular and everyone in Europe starts to using it instead of euros.

[18:42] For transactions in the sort of online and in the digital word making payments to each other.
So I’m so there are no the borders are not so clear within digital currencies as they are with the National Cash sort of Bank notes based currencies.

[19:00] I see and we recording this end of June 20 22 and we’ve just seen
in the last days at the collapse of the chera US dollar stable coin so it currently looks like you need a reliable a trusted,
Institution organization group that issues stable coins at do belief the collapse of the Tara use the,
maybe the nail in the coffin of the stable coins out there at least the privately issued at least the ones issued from nature I’m just Regulators like see ya there,
yeah regulated like any other sort of financial institution that is issuing.
Securities or holding your balances of money.
Which has not been the case so far but that but I’m sure it will be in the future they’ll be getting in the normal regulatory fold hmm.

[20:05] Possible and so basically I’m you’ve been saying.
Central banks will have digital currencies is faster to move around what intern does this mean because when you’re doing something via Paypal via especially within PayPal you can have,
money send around within hours we’re actually it takes a lot because.
Going back it’s the idea that basically Q Banks they have to settle the cash with each other and instead of
at the time they still had to transfer cash instead of sending 50 50 million u.s. dollars there and getting back 51 million u.s. dollars the bank will only send.
1 million u.s. dollar and then you just
then you just do the transfers internally so only the ones you really the Delta you need to you need to transfer data something you go back from because you can only make a cut at the end of the day and
so we get more real time
more faster what what will be other implications there because I do believe also to transfer between central banks between Banks and central banks it will all be
much faster.

[21:19] Yes I think in the like I’m in this sort of modern economies we already have very well functioning payment systems that are very fast.
And most use cases that we can think of you can already already be done very easily and that doesn’t cost a lot of money so I don’t think the Central Bank digital currencies are so much of a.
Of a.

[21:45] Competition for existing use cases I think there will be a new use cases might be smarter money for may be related to some government subsidies,
and other types of new use cases that we can’t think of yet
that we can do with the with the Central Bank digital currency and I think will be it will be used for this new use cases more than may be replacing the existing ones will continue to use our cards and,
debit cards and credit cards for for daily transactions but I think there will be more Niche roles for the Central Bank digital currencies where they can,
provide additional benefits for example,
limits on what you can spend it spend those monies in sort of me for example this covid checks that like a lot of countries had that giving money to people during covid to cope with things,
I could have been said that how you can use them for grocery shopping or you can use them for whatever things that the government thinks that people should be spending the money because they want to promote that area of the economy.

[22:44] Or other types of sort of smarter smarter sort of foreign aid for example is you more tractable instead of like that giving.
Country is a lot of cash or or or money and a lot of it then something corruption and maybe Central Bank digital currencies we can limit the recipients of those Monies to those,
and this we want the money to be spent to be able to track it better so I think that’s quite a number of new use cases that will be,
it’ll be interesting for the central bank is low currencies and the vision think that it’s going to compete with their their daily they,
things that we already find very comfortable and are very cheap I actually just felt
the moment when he said you can limit on what when and how you spend Central Bank digital currency I felt the moment when some Libertarians
who are embracing digital currency because it frees you from the state oversight
that was the moment they were very close to stroke when they realize oh you can
abused crypto in that way of making the Euro only spendable on necessary and unnecessary stuff for example even social payment limit them on what you can do with them,
maybe 4 B online gambling yeah.

[24:07] And I already found a pretty pretty good use case for this for a startup that actually can help you circumvent those limitations sorry
reading you can always circumvent things are but in most cases you know like you.
Eighty ninety percent of the people who of the usage would be cut by that these types of as I think they’re surely there are ways always to circumvent but I think.
It still can provide benefits for those use cases and if you think they have benefits depending on your stance on what the government should be doing.

[24:44] What one more question because you may have seen this here in the background there is a drum she won’t guide it’s actually a little experiment that was done after the second world war and basically they had money,
like physical money like notes and they had a stem body used before.
It’s also something you could do with Central Bank currency because there are several things you can do to jump-start an economy one of them is just giving it more money and the other one is two.
Let’s increase the circulation of it and say guys you need to spend this within a year otherwise.

[25:26] Yeah yes of course we don’t we have a couple of Central Bank digital currencies out there like in the smaller sort of like economies but we don’t have one yet here so we can only imagine what sort of like it could have but I think it’s also ready
providing a lot of thinking for Innovation like what kind of fuse uses it or limits or what kind of features it could have.
And that’s one of the of course like that is this used by data,
so what we’ve done is we’ve build AI Simulator for the Central Bank digital currencies where you can test all sorts of different features and configurations and limits on usage can I use it for person-to-person payments
once a business receives its can you pay other businesses.
Baby it’s its employees every day give them a little bit Central Bank digital currency instead of monthly payment for you know for a bank transfer.
What kind of fuse is will this Central Bank this digital hair currency have,
are they going to be caps up so I can only hold 3,000 because maybe the picture of the Central Bank digital currencies that it’s actually on my wallet so if I lose my wallet I lose the money.
Or how does it work do I need to actually.

[26:35] Bring those tokens in the storage at the bank so I think there are so many so many moving parameters around the design and features of the Central Bank official currency and it’s a very hard too.
I understand how all these different parameters interact with each other so that’s why we built this like simulator to where you can,
I look and assimilate and change the assumptions and see how,
five things fold with the different configurations of Central Bank digital currency in competition with the existing payment instruments and are offering That central banks and Banks who want to understand how the new world might look like.

[27:16] How could our audience our.
Fintech entrepreneurs investors out there who are listening to this right now how could they get access to it so I’ll get in touch with them myself for example I think maybe there’s a my email somewhere chemo FNA today fine,
down here in the show notes that will be your LinkedIn profile link as always and people can directly reach out to you.

[27:41] Great so we already know a lot that is possible with cbc’s and guys now you can
think about all the opportunities yes of course the most obvious way is to circumvent the the limitations you can put into your Central Bank digital currency but I totally do believe
you can do more with that came on it was just a pleasure having you here.
Thank you very much and I’m totally sure we’ll have you back pretty soon like in a year or a year and a half and two talk about more recent developments.
Yeah hopefully we have what we have more experience already from existing cvtc’s by then.

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