Pelle Braendgaard on the Notabene Flow payments platform (EP.674)

They're also big players in the stablecoin category, and they've launched a new product called Flow, which is simplifying payments and compliance for stable coins. I think you'll enjoy this one. So without further ado, here is my conversation with Pele at NotaBene.

including a lot of the basics like decentralized identifiers, verifiable credentials that's now embedded in seemingly even Apple products, Swiss identity, European identity, a whole bunch of different areas around the world now. It's just core tech.

The reason we found it in Odabena was when the first hints at regulatory clarity came in twenty nineteen, BADEF released their guidance or the first draft guidance of essentially a roadmap for regulatory clarity and For those who don't know, FATAF is the financial action task force and what they do is they set recommendations for global regulators and sometimes regulators take them up on it, sometimes they implement it eagerly. But the interesting thing is

This particular guidelines was actually set in place by Trump during the first reign, whatever. But

And that set things in motion that also led us to found Noda Bena, because one of the requirements there was that crypto companies and stable coins, which are very emergent back then, companies are required to implement payment regulation, which is known as the travel rules. So we set out, then Alice and I and my other co founders to build this and we said, sure, clarity is here. Within a year, it's there, it's great, fantastic.

And we started building the network and we were very clear it was the network that has to be built and these things don't happen overnight. But we were still probably a little bit too optimistic about the regulatory clarity. But it's there now and it's pretty much global. Took some time, but it's giving so many opportunities for companies and for the technology right now. So it's very exciting to be part of it.

So I had a prepared mind for when we met and you started talking about the travel rule. So maybe a little bit of background on just what that rule is and how to be in compliance with it.

Or through Visa or MasterCard or any of these existing payment networks, they all implement the travel rule and then it goes into companies' existing transaction monitoring framework. So people don't know about it and people think it's this new thing for crypto. No, it's something that's been around. I think it's been part of the VSA in the US.

Since the nineties. And really Swift implemented it before then anyway. So the requirements just basically said, Well, transmit the stuff that's part of a regular payment message, just make sure it's accurate, and then transmit that along. And that's really what the travel rule does is that it requires

And I can just imagine the collective eyes rolling over when they hear what the travel means in it. But it's that the information about the originating customer and the beneficiary customer travels along with the payment as it's That's what it comes from. And starting a company during COVID, focused on travel rule.

It was definitely not great for SEO, but you've still managed to do it at that particular point. But essentially the only requirement is that you transmit the same information that is part of a regular payment message along with it. And crypto didn't have a good way of doing it. There wasn't a messaging layer for it. There's a ledger and ledgers are very different than messaging layers. The public ledgers are public.

And this is private information. So you need a messaging layer to do it. And some of the early initiatives we're trying to do this in public blockchains and we were coming from decentralized identity and privacy preserving technology, we were horrified by this and we said, No, this is gonna be so bad. We have to keep pushing. We need a swift like messaging layer or it would be really bad for the whole industry.

Curious what you thought of those and then maybe talk a little bit more about how you guys implemented it.

because they don't realize that's actually what's happening. So what we do is we implement a messaging layer and it's all built really behind the scenes using decentralized identity technology. So for a institution like a crypto exchange or a bank,

We help them create a decentralized identity and we help them send messages between each other. So that something that we built first as an in-house temporary solution while we were waiting for surely the industry will build an open messaging system for this. And it didn't happen. And then Fadaf kept saying, Can you help push something? And we said, We don't want to go in and implement a public standard, but in the end we had to.

So what we do now is we've rolled out a new open public domain messaging protocol. It's public domain like the internet, it's public domain like Ethereum or Bitcoin, is that it's implemented through improvement proposals and this solves this. way where institutions or individuals can go in and send messages around crypto transactions before they happen.

Is it fair to say it's an implementation that the VASP, the centralized companies are really tasked with?

Now you have to essentially ask for the same information that you ask for on a wire transfer form. So you have to ask who are you sending it to? And it's a complicated thing for people to start implementing, both from a technical and product side, but also from a compliance. What do I not do with it?

information. So typically something that the institution do, but it also does provide that information and that step that if it's implemented correctly, end users do need to be part of the situation.

And one of the reasons I think this is actually good is because you shouldn't want a company to transmit stuff that you don't know is happening. You should be brought into that situation if you are the end customer. And you can also use it to make sure that you're sending the money to the right address. I've been involved with Bitcoin since twenty ten and early financial crypto projects since the nineties, so

I am fully aware of what happens when you sign a transaction and it still scares me entering in the Bitcoin address. And I know what's happening. I'm perfectly capable of managing my keys and all of that. I try to avoid doing it as much as possible because copying and pasting a blockchain address, a Bitcoin address, it's scary.

that you can do that, but people sometimes try to hide it away behind our users aren't used to it. But it's a benefit. It's a superpower for customers. It's also superpower for institutions because it gives them a lot of capabilities that they aren't able to do without the charlable.

It is scary in the beginning. But it leads us to a whole bunch of new opportunities for the industry and that's something that we're very focused on and actually something that of the whole reason we did this was we decided five years ago we wanted to build Swift for crypto. And now that's been implemented. We have two hundred and fifty plus institutions with compliance teams that have operationalized this built into the product. They're doing real time authorization.

they built trusted networks, they perform due diligence on each other. It's integrated in back ends, whether they're trading firms, whether they're retail. And that is Amazing. I mean, it's just really amazing to see the enthusiasm, the way people have to implement it. And yes, the rules, and as you said, There's a reason why people are implementing it, but people are actually starting to see the benefits of this now. And we're starting to hear that a lot more from customers who came in.

from traditional payments or traditional finance is saying, oh, finally we can actually do this now because we can actually implement payments using the travel rule rather than having to KYC our customers counterparts, which is what you have to do without the travel rule. So it becomes again like a superpower for the companies.

Swift like system for the cryptocurrency ecosystem.

It's interesting. The first administration of Trump's push to Fadav has really created regulatory clarity almost everywhere in the world already. So whether it's from the UK, EU, Switzerland, Singapore, Hong Kong, Korea, most places they have have really good guidelines now for companies who do it and we've seen already a lot of companies there who are processing significant payment transaction volume that they just wouldn't have been able to do in the past. But it's very exciting to see. Except

We were founded to create Swift for crypto. So now we realize with stablecoins, with the ecosystem, with all the fantastic infrastructure providers that are there, we actually can do one better. We can now actually build the better Swift. And no, I did not say the better SWIFT just for stablecoins. No, I'm saying the better SWIFT. And stablecoins is part of what makes it better. And everyone agrees that stable coins solves so many issues with correspondent banking, but it still needs

this additional layer to be able to operationalise it. And that's really what we've launched here Monday at our second annual summit in New York. We launched Notavena Flow, which is a new payment product that sits on top of our existing Notavena network. And we've been working with a lot of great design partners who in many cases are existing customers and partners such as Bitzo, who've been a longtime customer and are leaders in stablecoins in Mexico and Brazil, for example. And Orbital

And also custody players like Zodia and wallet providers like Defense. It's been great to get everyone together, talk about how do we make this work? Because it's not something a single company can do. You have to make sure the economics work.

compliance work, the trust work, the different workflows work. Just like all of this was built for Swift over actually probably hundreds of years. And then every decade or so there was a new optimization that happened. And we've been trying to do all of this.

over the summer get all of these companies involved and get them going and integrated. And people are so enthusiastic. They immediately see the benefit of this. So what no de flow is is very different from other stablecoin payment networks that you might have heard of, or stablecoin focused blockchains as well. It's a B2B focused payment network.

So when I say B to B focus, it's designed to be able to request payment of an invoice, for example, and have the payment come in and be immediately reconciled. So it's designed using all of these bus mechanisms and real time authorization tools that companies are already using at scale globally, taking them in and essentially creating this

payment network to just basically take the underlying stablecoin movement and operationalize it within businesses at scale. And this brings a ton of opportunities. Well, say we're going after the Swift market. We're going after this hundred and twenty trillion dollar B to B Swift market. And it's available for us because we can do things like tie payments into the workflow way better than Swift can because we offer pull payments.

And that's a unique thing that no one's really been able to solve before, crypto or stable coins. There's been some experiments trying to get it working with smart contracts. But they're not really gonna work at scale because you need to create something that works across blockchains, across stablecoins, handle fiat conversion, forex conversion, all of these different aspects of it. app permissioning, risk management, fraud management, all of these things have to happen.

And that's what we built is this network that allowed companies that are already doing all of these different parts, giving them the opportunity and possibilities to then authorize a transaction in real time. And these pull transactions can then be tied directly into business workflows.

the risks that you fat finger something and send stable coins into a black hole. So it seems like this is solving not only a compliance challenge, but a operational challenge of just sending a payment. Is that a fair way to think about it?

And we have done it a little bit in the past, but it's very, very difficult to tie these transactions into our account receivables flow. It would be great if we could also perform payments with it, but it's also difficult to tie stablecoin transactions into account payable flow. So all of these business reconciliations it's It's a giant headache. And honestly, Swift doesn't necessarily do it particularly well, but at least Swift Masters has contact.

And that context is essentially the travel rule information, which is the who, and then it has a memo field, I think it's an eighty character memo field which provides context, and that's all you could fit in an old telex. back in the day, so that's all you have. And it's funny seeing several of the new stablecoin blockchains they are saying, Oh, we'll have a memo field and I'm like, say, first of all, that better be encrypted.

Secondly, a single data field is not enough. So we actually, for the first time, allow companies to embed a full invoice using the global standard for e-invoice, which is UBL, that can be embedded directly within the payment request. So the business who's receiving it, they can forward directly to the accounts payable department. It can be handled by them, authorized by them. Then when it gets paid, it ties directly to the counts receivable.

So everything gets automatically reconciled. This is why pull payments are so powerful. Visa and MasterCard, they do a great job at this. This is why everyone says credit cards are expensive and the interchange fee is expensive. But you know what, for a merchant? It solves a massive issue. It solves that reconciliation issue. It solves being tied directly into the fulfillment process.

And if we can do that for larger scale transactions and transactions that may not be economical to do using Visa or MasterCard Rails. That is a great market for the industry to go for. And that's actually how I think we can really go for this large market.

But it feels very balkanized both on the blockchain level with these new L1s launching that are just doing stable coins. And also at the issuer level. So how are you seeing that unfolding in terms of just the cast of characters that are issuing these stable coins and the underlying databases that are transmitting the stable coins?

circle and tether is bad for industry and people are scared to just rely on either of these two. So having some more diversity in there is going to be great. There's still issues there, but one of the largest issues I see is liquidity for smaller stablecoins. But that's one thing that

Strite's been working on as part of this framework that there's always gonna be direct one to one liquidity between all of the stable coins as part of the open issue. So that's a way of doing it. And I'm sure we'll see many other interesting ways of handling it. And when it comes to the layer ones that are stablecoin focused.

It may initially seem silly if you come from a crypto background, why can't you just use Ethereum or Solana? And they're not actually the first by the way. Those the Gnosis chain would use a dye as its underlying fee mechanism as well. And the fee mechanism is really one of the important parts of it.'Cause we've heard for a long time that companies can't pay gas in East. They want to pay it in dollars.

I'm sure people can figure that out eventually and it wouldn't necessarily be that easy, but it's certainly easier that you could do it in a stablecoin. So we'll see how that plays out. On the performance side, that's also fine, but I'm not hundred percent bought into Folana is pretty performant and there are ways for them to localize and optimize payments for optimize transactions for payment purposes as well. So I don't know, but let's see, it's an interesting market.

I'm all for free markets and all for competition, so it's it's great to see the diversity.

So I think you'll also just see new categories of stable coins that pop up and some are more focused on B2B use cases, some might be just industrial scale, huge money movement overnight transactions between banks or things like that.

correspondent banking networks because that's how they have to do to connect a fiat connection. Every fiat connection requires essentially a correspondent banking account for them with serious amounts of prefunding. And that It's a very, very big issue. It's very expensive to manage all of that, not just the prefunding part of it, the technical integrations and legal requirements. And what we actually hear from them is that they're seeing this advent of stablecoins.

many, many stable coins and many, many blockchains. There's not necessarily a legal agreement, a bilateral agreement that they have to do to do that, but they still have the additional technical integration and prefunding. So some of them are quite worried about that.

But one thing that we are trying to do with flow, we build it in a way to actually solve a lot of these issues that they have and all of them take this are some of the largest issues that they face, so these operational burdens of having bilateral agreements and pre funding. So with not abandoned flow, we've built it in a way that they can just focus on their particular market.

So if they want to own a fiat component, they can do so, but they can focus on maybe their locality, just where they are, rather than having to build these agreements around the world. Because the flow network automatically handles that. So that at least eliminates some of the pre funding part of it.

But I ultimately I think the market will probably handle the rest of this. But it was interesting to hear hear that from our partners that they are actually seeing all of these new blockchains as the equivalent of prefunding that they have to do for liquidity purposes.

So there's no reason for this somewhat artificial separation or historical separation of credit and debit cards today. We can actually handle that. It's something that someone can just start offering companies within our network or start doing themselves.

But to actually get that deferred settlement I think would be huge. Maybe we could talk a little bit about just how you guys have thought about crafting the financial incentives to be a member of this network and to actually participate. Because I think there's

Some very obvious cost savings opportunities on the reconciliation front. Obviously you're in compliance with the travel rule, which is a big win, but how do you see this evolving in terms of just the revenue opportunities for some of the folks that are in the network?

the payment transaction. They said, Well, we already have a business model. Don't mess with our business model. We're quite happy with what we're doing. So we said, Oh, okay, that simplifies things a little bit. And then we're realizing if someone needs to do a Forex step, like a liquidity provider, they already have a business model.

wallet providers, they already have business models. So what we've actually ended up with is a somewhat a variant of the interchange fee, the much maligned interchange fee, even though it's

My line by a lot of people is actually provides a lot of value. This is what's allowed companies like Ramp and many other very innovative companies start building incredible businesses. So we've essentially built a model. It's not as large of an interchange fee, but we built a fair model around that where essentially the equivalent of the card issuers, which could be crypto wallet providers, exchanges, they can start earning revenue

Because they are number one, they KYC their customers. They make sure that this is a good, safe customer and they can verify the identity to the merchant. That's a real value. Also, they're keeping the fund safe. So they've earned that part, similar to that interchange fee, but it's going to be a lot more transparent. What the actual pricing settles up to, we're still

working on, but we're getting there. And companies really like it because it protects their existing business model, provides them additional revenue, eliminates again these complex bilateral agreements that everyone hates. And that you have to do if you're working with a partner.

Even in stablecoins, you're working with a partner who's doing fiat on the other side. Now you have to do commercial negotiation. This just provides transparency all along and it's a win for end customers, for the business customers, but also to the businesses within it. It provides I think also a lot of opportunity for new innovation in the space.

Is it oversimplifying to say that this feels a lot like that? Where you're you have this balkanized liquidity landscape and stable coins. You have all these cast of characters that need to engage, and you guys are following a similar network playbook here.

I believe it was when they were doing they had a two week design session where they really built the Visa network as it is today. They designed all the processors in Sausolito and Is that the first thing that they realize is the primary function of the card was to identify the buyer to seller and seller to buyer.

And you brought that up. And that's really the function of the travel rule. And that's what we've been doing over the last five years. When I read that a couple of years ago I was like, We're along the right path here. This is basically what we're doing on this.

That's not what you do. If you actually want to build a real network, you need an open loop network. And we can argue whether these are fully open loop, but they essentially built a great de facto open loop network because they were able to really bring people into the governance build agreement on it and build something that worked for everyone. And that's also what we're trying to do here. I'm an old school crypto guy. For me the open loop is

part of crypto is incredibly important. And you see a lot of companies in the space who are trying to build closed networks. And people who come from the industry who should know better are building these closed loop networks. And it's

very frustrating to me that okay now you've achieved a certain market power and now let's just close it in and I'm like that's not what you build your business on. You build your business on an open loop network and everyone's seeing what's happening and no one wants to be part of these closed loop networks.

So that's really one of our strength is that we built everything we do around open loop. You know, obviously as a business, we have limitations where we can do business, but we build it on top of open protocols that anyone can be part of and at a core rebuild the tools to allow companies to manage their own risk appetite. Because that's also I think a misunderstanding that a lot of crypto libertarians

And I am such a crypto libertarian, but a lot of crypto libertarians make the mistake that you should be able to transact with whoever you want to transact with. Absolutely true. You should also be able to not transact with the people that you don't want to transact with.

That's also a foundational right of the libertarian argument, but people forget that part of it. And we provide people the tools to be able to decide who they want to transact with, who they don't want to transact with. That's equally important. Because otherwise we're essentially in communism and I don't think that's actually what we want.

It's impossible for me to imagine that working, just as it would be impossible to imagine a stablecoin issuer owning the network and just creating the industry standard on top of their own stablecoin. But I do think we'll probably see attempts like that. I'm curious if you agree that it'll be messy here for a while before the open system wins.

And then there have been a few attempts at creating public domain open protocols and none of them have really quite worked. And then we've been trying to build an open network, but build a tooling to allow people to actually implement. this because open loop network requires a special set of tooling and we saw that with the internet as well.

in I used to run my own email service. I did it for a long time until I just gave up and said, Okay, Google here. I'm with you. It's fine. On that point. But it is something that we're still gonna see happening. And I think on the travel rule part of it, it's mostly settled. now that open networks work and we have significant transaction volume. I think we have much more transaction volume, I believe, than the closed networks, unless you count

inter entity volume between the sponsor institution of said closed network. So I think open works, but there will always be these attempts. Always be attempts at building these closed networks. The temptation is so strong. Oh yeah, we're gonna use a market position, we're gonna control it, we're gonna set the price, we're gonna prioritize our stablecoin, et cetera, et cetera. And people see what it is. And sometimes people wanna join just

Do I have to join? But everyone knows about it and knows what's happening and they knows the risk of that, which is also why it's been a very different sales process bringing design partners on than in the early days of trying to sell travel rules. People hundred percent want to be part of this and see the value of it.

If you think about the promise of owning your own data, owning your own identity, and some of what the world will probably look like in 20 to 30 years around not being a contributor to social networks that just monetize your eyeballs and being able to port your social graph from service to service and really the consumer being in power with his or her digital identity. Where are we in that journey and curious just around the general blockchain identity space, what you're excited about right now?

And I'm not necessarily a fan of that either because I think people need to own their identity, but there's so many miss opportunities that have been here. And I think a lot of it is also this idea that, oh, we need one identity. But the reality is there's no such thing as one identity. We all have many different identities.

out there. There's a work identity. There's a lot of people in crypto have multiple Twitter identities or ex identities. And there's so many different identities in your everyday, do you really want them all in a centralized profile that maybe you control, maybe you don't? also libertarian ideal that I control all interactions, all data I have. But the reality is most of the data you have is related to interactions you have with others. So now do you also control their versions of that data?

So it starts becoming very tricky and most people are not really looking at that. Blockchains provide some interesting ways of doing it where you can prove certain parts of it. But I think it's gonna be a while before we see a system and I don't actually think we necessarily want a system. It's quite interesting to see I live in Switzerland and Switzerland has been several votes

to the country to approve digital identity over the years and most of them have failed. It actually was just passed a week ago. And I was interested to see that the reason why it passed was the past versions were centralized.

is now based on decentralized identities, like the same identifiers that we built at Dewport. I haven't looked into the technology, but okay, that's kind of cool. That for government purposes, that's also a great thing in Switzerland. They are going to be very, very clear because it's really probably one of the most libertarian countries in the world. It's gonna be used for just specific purposes, like government purposes, and not for getting a bank account or anything like that.

So that's great to see. I will say one thing that does worry me constantly is the idea that CK starts or CK proofs is the solution. And I think we need to look at these as they're just technologies. But in most cases the reason why identity is important is that you want to correlate a person to an activity. And that's true whether it's an identity between you and Nick.

For example, you're correlating your relationship, being partners and working together. It wouldn't work if you couldn't correlate your day-to-day interaction. You need that correlation part of it. So the idea of building a non-correlatable identity system, it removes the overall point of identity because the point of identity is not to prove that you're not on a sanctioned list. That's not actually the point.

And that's not the point of KYC either. The point of KYC is that someone needs to be able to correlate you with your transactions so they can make decisions on it. So if you're now building a non correlatable identity, It doesn't quite work. And unfortunately I see a lot of super smart people fall into the trap that this technology is so cool.

And we can solve everything with it. But then I tend to point out the idea. And I've actually seen companies that say, Oh, we're C K K Y C and I'm like, You do know the C K negates the second K. And people don't quite realize it. And it's sad because it's very cool technology. It's very, very cool technology. It has tons of applications, including applications to tie permissioning applications.

But it's not identity. Provisioning is different than identity. And I think they're great applications for it. And once we learn to use it for that, I think it's gonna be a lot better. And to say once we learn to use it, CK roll ups is already used at scale. That's a fantastic use case for it.

Tele, this has been great. Super excited about what you're doing with Notabene and Flow, the new product. Where can we send folks to learn more?