Vasily Kudrin, Director at Lybrion, Partner of Advisory department AO HLB Vneshaudit, spoke at a banking conference about “Prospects of Digital Financial Assets Transforming Banking Industry” (08/2020).

Coherent exposition of the presentation

1. Introduction, importance of the topic. Vasily Kudrin‘s presentation focuses on the transformation of banks and the financial sector using blockchain technology and digital financial assets (DFAs). The speaker emphasizes that this large-scale shift, occurring alongside the development of AI and biometrics, is only visible from a “macro, 30,000-foot view,” and that ignoring this trend threatens banks with significant business erosion.

2. Motivation for transformation. Mr. Kudrin says that DFA/blockchain-driven transformation lies at the intersection of three core bank motives: the drive for growth, the need to defend against fintech disruption, and the pursuit of business process optimization. A key driver for DFA development has been the excessive rigidity and over-regulation of traditional financial relationships.

3. Problems solved. Decentralized ledger technology addresses fundamental issues: it enhances interaction and control among participants, serves as a store of value, and creates the foundation for the complete digitization of assets and capital.

4. Blockchain’s broader potential. The speaker notes that the potential of blockchain extends beyond finance and can positively disrupt any business activity based on transactions and corporate databases with multiple participants, shifting it to peer-to-peer networks.

5. Historical analogy. Modern banks are compared to 19th-century theater, while the emerging blockchain-based industry is likened to the film industry. Banks face a strategic choice: to remain a “legacy theater” or to venture into the more scalable and promising “film industry.”

6. Regulatory development. DFA (crypto/Web3) legislation is evolving in a contradictory manner: while governments slow progress to protect traditional institutions, they are simultaneously testing central bank digital currencies (CBDCs). A core unresolved issue remains participant identification (KYC/AML).

7. Prospects for regulators. For harmonious development, regulators must address conflicts of interest, refine terminology and blockchain-based DFA classification, and define hybrid assets that already exist in the market, while also accounting for the trend toward Decentralized Finance (De-Fi).

8. The need for Classification of DFAs. To understand the transformation, it is necessary to classify the multitude of existing security tokens. The author proposes a four-category framework: underlying technology, target banking service, type of network participants, and the nature of partnerships formed around the asset.

9. Decentralized autonomous organizations (DAOs). Blockchan-based DFAs enable the formation of Decentralized Autonomous Organizations (DAOs), which can operate without formal state registration by uniting various entities on a blockchain.

10. Key areas of change. Vasily Kudrin notes that the transformation will impact all traditional banking services. The current focus is on Decentralized Finance (De-Fi), particularly lending, payments, custodial services, and trade finance.

11. Process re-engineering. Implementing DFAs causes core and supporting bank processes to merge and combine, as the technology simultaneously solves for record-keeping and participant interaction. This necessitates their fundamental re-evaluation.

12. Recommendation for banks on how to enter this area. Banks are advised to engage more actively, for instance, by providing services to venture projects funded through digital assets. It is crucial to study the accumulated global experience of successes and failures rather than “reinventing the wheel.”

13. Transformation approach. A structured approach to launching a transformation is proposed, beginning with a planning phase. At this stage, it is critical to understand the impact chain of DFAs on the industry and the bank’s future, and to realistically assess existing market practices.

14. Internal benefits. Transformation delivers benefits not only in client-facing services but also in internal processes: streamlining and reducing operational costs through decentralization, disintermediation, and optimized expenditures (e.g., on remote work infrastructure).

15. Benefit of geographic distribution. The technology enables banks to source talent, capital, and clients globally, reducing dependency on local markets and expanding the institution’s potential reach.

16. Risk categories. The transformation process carries four main risk categories: during the blockchain-based DFA research and prioritization phase, the planning phase, the team and competency-building phase, and the implementation phase (managing investor relations, IT effectiveness, and community governance).

17. Combining competencies. Vasily Kudrin notes a key challenge to be the gap between technological and financial expertise. Success requires teams that combine both skill sets, complemented by strong project and change management capabilities for rapid adaptation.

18. Key recommendations. For a successful transformation, a bank must: understand the impact of DFAs, have a clear blockchain-based digital financial asset (DFA) strategy, be able to classify and prioritize assets, and develop a detailed yet flexible transformation plan that accounts for risks and incorporates ongoing monitoring.

19. Final strategic choice. Despite the possibility of maintaining the status quo with regulatory support, the core recommendation is to take transformation seriously. The bank’s ultimate choice is to remain a “legacy theater” at risk of obsolescence or to become a leader in the new “film industry” with its substantial rewards.

20. Examples, warning for specific markets. Global examples already exist (e.g., JPMorgan’s initiatives, CBDCs), with the best practice being the creation of proprietary ecosystems. The speaker cautions against complacency; a current lead in banking technology can be lost due to regulatory delays, while other jurisdictions use DFAs to build competitive advantage.

Cryptoassets for the banking sector

In addition, later, in September 2022, Vasily Kudrin delivered a speech at the round table on the impact of blockchain on banking.

The crypto industry brings with it both clear risks and entirely unprecedented opportunities for the banking sector. A shift of financial eras is underway. Much of what has happened recently, and what is happening now, is essentially a repetition of the history of banking development, only based on more advanced technology. The mistakes and the sequence of events are roughly the same.

The crypto industry is transforming and replacing traditional monetary relationships. It has introduced many digital services and solutions that displace banks from their roles in the economy — such as value storage and transfer, decentralized finance services, and custodial services.

Blockchain technology truly helps address a number of long-standing issues by enabling effective interaction among market participants and improving management of traditional processes. On one hand, it ensures transparency and stronger control, but at the same time, it also limits the entrepreneurial opportunities of both large traditional banks and smaller players.

The competition between the crypto industry and the banking sector will eventually push banking organizations to “blockchain” themselves. The portion of their business connected to cryptocurrencies and blockchain ecosystems will increase substantially. Many banks will likely acquire centralized services within the crypto market. Others will attempt to launch decentralized projects where they can serve as forward initials — in other words, active founders (“initials” are key stakeholders, typically the original founders of an ecosystem who hold a significant share within the PoS ecosystem). Some banks may transition into decentralized business models by establishing decentralized autonomous organizations (DAOs). However, most of them will simply cease to exist.

According to my estimates, significant changes may occur in the next cycle of the crypto industry, namely in 2024–2026. This is supported by the continued growth of the crypto assets market. The turnover of the crypto market in 2021 reached USD 500 billion per day, which indicates a rather high share compared to the forex market. In the next cycle, the capitalization value of the crypto industry could reach 12–15 trillion dollars at its peak, while the turnover could amount to 25–30% of the size of the forex market.

Kudrin, Vasily Vladimirovich.

HLB Vneshaudit Advisory Practice Partner; audit and risk management and business consulting. Professional in finance and business with over 20 years of experience in real sector, finance and advisory. From 2018 also a Co-founder and Director of Lybrion, an international digital asset development, investment and advisory company.

More than 300 professional projects and educational events in process organization, risk management, internal control, transformation of corporate systems.

Experience in internal audit, corporate governance and internal control in accordance with international and generally recognized standards and recommended practices since 2002 (largest oil company, investment company, retail group, international consulting).

Participated in the boards and working groups of a number of professional public organizations, such as Institute of Internal Auditors, Association of Certified Fraud Examiners. Member of organizations in the field of corporate governance and internal control (Association of Professional Directors, Institute of Directors (RID), IIA), participates in the coordination council of “Debates Club” that deals with innovations in corporate governance, risk management and control.