Banking in Web3.0 – Metaverse, DeFi, NFTs and beyond.

COMP 7412 Sem A, 2023-24

Banking in Web 3.0 –

Metaverse, DeFi, NFTs and beyond.
Lecture 01:
Elements of traditional finance (TradFi)

Dr. Juergen Rahmel, MBA

HSBC Hongkong / Germany

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Table of Contents
• Lecture Objectives Enable you to answer these
questions below

• What is Banking? What is a bank? What are the financial

products and services?
• Who are the customers?
• How do customers and banks interact?
• How do banks work?
• What are the risks in banking and finance?
• Who sets the rules? And why?
• … and one more thing …

• Summary
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What is Banking? What is a bank? What are the financial

products and services?
• Your turn: what is banking?

Discussion
and
sharing

MAS:
Money authority
of Singapor
(example)
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What is Banking? What is a bank? What are the financial

products and services?
• Is banking available for everyone?

MAS:
Money authority
of Singapor
(example)
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What is Banking? What is a bank? What are the financial

products and services?
• A bank is a financial institution - regulated by ‘domestic’ (and ‘global’)
financial authorities.
• The primary role of banks was/is to take deposits and make loans.

MAS:
Money authority
of Singapore
(example)
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What is Banking? What is a bank? What are the financial

products and services?
• There are various types of banks:
• Central banks
• Retail banks
• Commercial banks
• Investment banks
• Universal banks
• Shadow banks
• Savings and loan associations
• Credit unions
• Virtual banks

They differ in:

- Target Customers
- Products
- Domestic vs International
- Channels to interact
- Ownership structure
- …
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What is Banking? What is a bank? What are the financial

products and services?
• A bank is a financial institution – there are other financial institutions:
• Credit unions
• Savings and loan associations
• Small business investment companies
• Mortgage lenders
• Investment broker-dealers
• Credit card companies
• Insurance companies

• And how about …

• Coffee shops like Starbucks, Pacific Coffee?
• Car dealers like BMW / Mercedes ?
• Internet Platforms like eBay / Amazon?
• Payment systems like Octopus / Oyster ?
• Mobile Operators?
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What is Banking? What is a bank? What are the financial

products and services?
• In addition, banks can offer a wide range of products and services,
including:
• Deposit accounts (checking accounts, savings accounts, CDs, money market
accounts)
• Loans, including mortgage loans, auto loans and personal loans
• Credit cards
• Foreign Exchange
• Check-cashing services
• Wealth management services
• Insurance
• Business banking
Here mostly
products from
Retail banks…
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What is Banking? What is a bank? What are the financial

products and services?
How do products work?
• Example: transfer of money between customer accounts

Some important principles:

• Customers must be identified
• Instructions of customers must be verified
• Source of money must be identified
• Instruction by bank must be secure
• The transaction must be atomic
• The end-to-end flow must be auditable
• …… and many more

Account Account

Bank A Bank B
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What is Banking? What is a bank? What are the financial

products and services?
How do products work?
• Example: transfer of money between accounts in different countries
• Involves more participants as an additional cross-border step is involved
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Who are the customers?

We typically differentiate the following customer groups

• Personal Banking customers
Can we divide
• Retail customers
them differently?
• Wealthy customers
By which
• Ultra High net worth customers criteria?
• Corporate Banking customers
• ‘mom and pop’ shops
• Doctor’s / lawyer’s practices, local chain stores, factories, manufacturers, service
providers
• International / multinational corporates

• Institutional banking customers

• Insurances
• Investment fund managers
• Pension funds
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How do customers and banks interact?

• Banks offer various channels for customers to interact

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How do banks work?

• A very generic answer to a very generic question:

Risk Management

Deposits Loans
Invest
m ents
rs
Transfe
Transfers
Regulatory
Supervision
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How do banks work?

• A (slightly) simplified look at the balance sheet of a bank:

Make sure you

understand this
positioning

From banking From being a

operations ‘company’
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What are the risks in banking and finance?

• There a major categories of risks in banks

• Treated individually
• Aggregated for overview

What is
‘Operational
Risk’?

What are ‘other

risks’?

Source: HKMA
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What are the risks in banking and finance?

• Operational Risk – what are the sources of risks?

• Example: from HKMA Supervisory Policy manual (Link)

!
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What are the risks in banking and finance?

• The risk management life cycle

• Example: a very generic version, not even specialized for financial services

Source: NIST
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The following is based on the US

Who sets the rules? And why? financial regulatory framework.
Similarly setup in many countries.

The financial system and markets from regulator’s perspective

• Banking: accepting deposits and making loans to businesses and

households
• Insurance: collecting premiums from and making payouts to
policyholders triggered by a predetermined event
• Securities: issuing financial instruments that represent financial
claims on companies or assets
• Financial Market Infrastructure: the “plumbing” of the financial
system, such as trade data dissemination, payment, clearing, and
settlement systems, that underlies transactions
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Who sets the rules? And why?

The goals of regulation

• Market Efficiency and Integrity: Regulators are to ensure that markets
operate efficiently and that market participants have confidence in the
market’s integrity.
• Consumer and Investor Protection: Regulators are to ensure that
consumers or investors do not suffer from fraud, discrimination,
manipulation, and theft.
• Capital Formation and Access to Credit: Regulators are to ensure
that firms and consumers are able to access credit and capital to meet
their needs
• Illicit Activity Prevention: Regulators are to ensure that the financial
system cannot be used to support criminal and terrorist activity.
• Taxpayer Protection. Regulators are to ensure that losses or failures in
financial markets do not result in federal government payouts or the
assumption of liabilities that are ultimately borne by taxpayers.
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Who sets the rules? And why?

The regulatory powers

• Licensing, Chartering, or Registration: most activities cannot be

undertaken unless a firm, individual, or market has received the
proper credentials from the appropriate state or federal regulator.
• Rulemaking: Regulators issue rules (regulations) through the
rulemaking process to implement statutory mandates.
• Oversight and Supervision: Regulators ensure that their rules are
adhered to through oversight and supervision.
• Enforcement: Regulators can compel firms to modify their behavior
through enforcement powers
• Resolution: Some regulators have the power to resolve a failing firm
by taking control of the firm and initiating conservatorship or
receivership
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Who sets the rules? And why?

The types of regulation

• Prudential: The purpose of prudential regulation is to ensure an

institution’s safety and soundness.
• Disclosure and Reporting. Disclosure and reporting requirements are
meant to ensure that all relevant financial information is accurate and
available to the public and regulators
• Standard Setting. Regulators prescribe standards for products,
markets, and professional conduct.
• Competition: Regulators ensure that firms do not exercise undue
monopoly power, engage in collusion or price fixing, or dominate
specific markets
• Price and Rate Regulations: Regulators set maximum or minimum
prices, fees, premiums, or interest rates.
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For illustration purpose only. Please

Who sets the rules? And why? do not try to memorize this.
Except you want to head the US
Federal reserve

Who regulates whom? Example: US Market and Supervision

Source: crsreports
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… and one more thing …

What is this?

en
ec im
Sp
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What is money

Multiple functions:

• Money as a Medium of Exchange

• the ability of the money to be exchanged for goods or services in transactions

• Money as a Store of Value

• allows value to be transferred across time for trading in the future or deferred
consumption.

• Money as a Unit of Account

• allows for expanded trade given an agreed upon means to measure or value goods or
services
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What is money

Source: Forms and Functions of Money

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What is money

Source: Forms and Functions of Money

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What is money

related terms:

• Currency
• Currency is a medium of exchange for goods and services. In short, it's money, in the
form of paper and coins, usually issued by a government and generally accepted at its
face value as a method of payment.
• However, there are other things sometimes used as medium of exchange, e.g.
cigarettes, airline and credit card points and Disney Dollars. The latter are issued by
companies and are used only to pay for the products and services to which they are
tied
• legal tender
• money that is legally valid for the payment of debts and that must be accepted for that
purpose when offered
• However, as in all commercial transactions, both parties can determine the terms of
transaction on their own, including the means of payment
• Many common and safe payment methods such as cheques, debit cards and
contactless aren’t legal tender.
Source: Forms and Functions of Money
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What is money

Multiple forms:

• Central bank money

• is a liability of the central bank. Central bank money comes in the form of physical
currency issued by the Central Bank and digital balances held by commercial banks at
the Central Bank.
• Commercial bank money
• is the digital form of money that is most commonly used by the public. Commercial
bank money is held in accounts at commercial banks.
• Nonbank money
• is digital money held as balances at nonbank financial service providers. These firms
typically conduct balance transfers on their own books using a range of technologies,
including mobile apps.
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What is money

How to move Money:

Source: US Federal Reserve

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Summary

The important take-aways …

There are different types of money

… and Money has a variety of functions

There are different types of banks

… serving different customer groups with different demands

Banks need to follow rules

… to protect themselves, their customers, and the market

Banking is necessary
…Banks are not ?
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Readings
Pre-Reading:
• https://www.imf.org/external/pubs/ft/fandd/2012/03/basics.htm
• https://www.forbes.com/advisor/banking/how-do-banks-work/
• https://www.bcg.com/publications/2019/retail-banking-distribution-2025-up-close-personal

Sources from Slides (not all are fully relevant, please see for yourself if the content is
interesting/helpful to you):
• https://www.hkma.gov.hk/media/eng/img/key-functions/banking-stability/supervisory-policy-
manual/IC-1.pdf
• https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-
manual/OR-1.pdf
• https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/future-of-risk-in-
fsi.pdf
• https://nvlpubs.nist.gov/nistpubs/ir/2020/NIST.IR.8286.pdf
• https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf
• https://www.researchgate.net/publication/340828115_The_Forms_and_Functions_of_Money