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Jessica Galang: Hi everyone and welcome to Bridging Web3. I'm your host and Georgian's content editor, Jessica Galang. In this series, we focus each conversation on just one technology or concept that is part of the infrastructure for building Web3. Our goal is to highlight the building blocks that make Web3 more usable and understand the real world opportunities in the long term. Our guest today is Pelle Braendgaard, CEO of Notabene. Notabene, a company in Georgian's CoLab Program is on a mission to make crypto transactions a part of the everyday economy. To do that, they're focused on tackling the crypto travel rule. The travel rule, which is recommended by the G7's Financial Action Task Force, states that financial institutions must pass on certain information to the next financial institution that they're working with. In 2019, this so- called travel rule was updated to include virtual assets including crypto. Countries around the world, including Canada and the US have adopted or introduced legislation that follows these obligations. What could this mean for crypto startups in the long term? How does this affect scaling Web3? We're looking forward to diving into all these things and more with Pelle. Welcome Pelle.

Pelle Braendgaard: Great, thanks a lot.

Jessica Galang: Just to kick off, I want to hear your story because I think Notabene has an interesting background where you and some of your co- founders actually ran into some challenges with compliance when you were first starting out.

Pelle Braendgaard: Both me and my CTO, Andrés, we both separately, but many years ago, we were both early, very early Bitcoiners, so early crypto enthusiasts. Both of us started very early businesses in the Bitcoin space. Andrés founded one of the first crypto exchanges in South America in Chile, and I founded one of the first consumer crypto companies targeting Sub- Saharan Africa, which is a way of turning Bitcoin into mobile money. And both of us faced issues that weren't really that much to do with compliance because there were no rules for us to comply with at that particular point, but it was really more about building trust with financial intermediaries that we had to interact with. Andrés and his exchange, they needed to have bank accounts to be able to accept Chilean pesos so they can then sell Bitcoin and the bank accounts kept getting closed down. On my side, we had a integration with M- Pesa in Kenya where anyone with an M- Pesa mobile wallet in Africa could go in and buy and sell Bitcoin. And in both cases the companies cut off our connections. It wasn't really even regulation, but it was just there's no way for a Safaricom, who operates M- Pesa in Kenya, to know who we were, manage that risk, and also understand who their customers were sending funds to. The same in Chile, Andrés' business, the banks, they didn't really know how to deal with this as such a new technology, so they didn't understand what this business was and where these transactions were going. And ironically, this is exactly the problem that the travel rule when it was first introduced to crypto companies in 2019, it's literally the problem that this is set up to solve. We were of course very excited by this because we think this is something that can actually help the current batch of crypto and Web3 companies really start integrating into the more traditional finance system and indirectly via the traditional finance system into just general commerce, general be more part of our everyday lives.

Jessica Galang: I definitely want to dive into this idea of building trust, not just in financial institutions, but with the people that you're working with. Before we do that, let's talk about how Notabene works. On your site, it's mentioned that you're building a trusted data layer in blockchain transactions for protocol agnostic communication. Can you talk about what that means and how this works?

Pelle Braendgaard: I think you came up with a very good explanation of what the travel rule is before, and the travel rule applies for bank payments as well. It's currently implemented through most international payment systems such as SWIFT it's handled natively within that, but crypto doesn't really have a way of doing that. When you're sending funds to an Ethereum address, there's no way of you identifying who that Ethereum address belongs to, and there's no way for you to identify that. And this is even more complicated if you're using a crypto exchange like Binance Canada or Kraken or someone like that where they need to understand who's on the other side of a transaction. The first thing we do is we attempt to identify is there an institution at the other side? There's no hard fast way of doing this. In some cases we actually ask the user for it. Just like when you go to a bank and you're doing an international wire transfer, they may ask you information about where the fund's going. Once we have this information, if we don't know already, then we literally send a message to the other institution at the other side, so to Kraken for example, and Kraken will respond and say, " Yes, this is actually our Ethereum address and you are sending to the correct customer." There's a fairly convoluted set of steps behind the scenes, but really it's designed to happen fairly instantly. Once companies are set up, it should just create a safer way of sending crypto transactions. With this setup for example, it's going to be very difficult for you to send funds to the wrong recipient, for example. And I think everyone who's been in crypto long enough has lost funds by sending it to the wrong recipient or have been defrauded by sending funds to the wrong recipient. We really think it can help build a lot of trust in the system.

Jessica Galang: Is there an intersection here between what we're talking about, which is compliance and Web3 adoption generally? A lot of people working in Web3 have advocated for the fact that blockchain is trustless, meaning that blockchain is so reliable that users don't have to rely on a bank or a third party to make crypto transactions, but it feels like there's more to this idea of trust and compliance practices that we've often seen in traditional finance could be a part of that. I'd love to hear your thoughts on that.

Pelle Braendgaard: There is this saying in the crypto industry, and I've also said it a lot, not your keys, not your crypto. And this has always been a problem because it leaves crypto as something that only very sophisticated people can use and it makes it very difficult to use. But even very, very sophisticated, technically sophisticated people such as there was one of the very early Bitcoin developers who I would argue is probably one of the most sophisticated people ever, unfortunately had his wallet hacked. It was his own keys and he was managing it, and I would argue he probably managed them very well, but somehow this slipped up. To get this next generation of Web3 users and whether it's for NFTs, whether it's for stablecoin payments or earning yields or whatever kind of use cases you look at, if you want to get this next generation and it has to be done safer, and I do believe there's absolutely, there'll always be in need for you to manage your own funds on your MetaMask or these kinds of things in many cases, particularly for sophisticated users who know what they're doing. However, we also need a way out, a way for helping this next generation. I mean, if you have crypto famously, there's not a customer support number you can call if you've forgotten your keys, if you lose them, there's no one to call. But maybe there's kind of hybrid solutions for key management going forward where crypto exchanges can be really good members of creating these hybrid models. You still control your keys, but they provide a way out to make sure you don't lose it on the other side to be able to create the level of service that you're used to. Today, for example, if you send money with PayPal or Venmo or TransferWise, there's a customer support mechanism that you can reach out if something went wrong. First of all, they will attempt because they understand that you're trying to send to Bob at some exchange. There is some checks that they're able to do. Now, travel rule allows you to eliminate many of the kind of error cases and even a lot of fraud. But we also think once this building block is set up, businesses will be able to start building way better customer support. Like, " Oh, I sent this money to the wrong account. Can you help see if you can reverse it?" And I think well- regulated institutions who are very focused on customer service will definitely do their best to be able to do that. And with the travel rule it kind of gives them the tools to be able to do that. I think we're opening it up to a lot of tools for institutions to build much better products for the next generation of crypto and Web3 users.

Jessica Galang: Interesting. And I think you did touch on a bit of a hot topic in Web3 and crypto, which is regulation. When working with popular FinTech apps, I feel like there's expectations from consumers that their data is protected thanks to clear regulations in the space. In Web3, this has been a bit of a contentious topic. What do you think about the role of regulation in moving Web3 forward?

Pelle Braendgaard: In some respects, we designed Ethereum and Bitcoin in the early days to not need regulation. But again, this is for a very limited set of use cases, but if we really want to get crypto out, if I'm going to my local supermarket, I'm in Switzerland, if I go to my local co- op supermarket here, I'd love to be able to pay with a stablecoin version of the Swiss Franc without any kind of problem just using my phone. There's no way I'll be able to do any of these kinds of things without, first of all, a large supermarket like the co- op in Switzerland. First of all, they need to be able to tie it into a regulated financial institution because they're not in the business of doing financial innovation. They're just a supermarket. They just want to be paid. They need their records, they need to present things to their accountants who then audit them. They're not trying to deal with financial regulation, but if you want to get crypto into these use cases, we need to deal with these regulated institutions. There's also a little bit of a myth I have to say, and I believed it as well in the past because I have been in crypto for a long time, and in the early days we definitely thought, " Oh, banks are trying to... They don't like the competition that we are bringing. We're creating this bankless society, no need for banks anymore." But the fact of the matter is banks are not out to kill Bitcoin or crypto or any of these kinds of things. Banks, they essentially just do business with money. They exchange money for money, have different kinds of financial services, and if a kind of financial technology infrastructure is better for them, provides lower risk for them and is able to make them more money, they'll happily switch to it. And we are seeing that already that many banks are very actively developing new products for the next couple years to be able to do this. If we really want what we've always said we wanted, Bitcoin and Ethereum, DeFi into everyday use cases, we need regulation and most regulators are actually out to build a safer space. I had a very interesting conversation when we were working with the European Union on the new money transfer regulation for crypto or value transfer regulation that's coming out. And one of the members of the European Parliament who was behind this new regulation, he said that he doesn't understand why crypto people are so much against this regulation because he says he's just trying to make crypto safe. He said he literally wants 80% of his constituents to be able to use crypto safely. To me, that doesn't sound like someone who's out to ban crypto. It sounds like someone who's out to enable crypto. It's just a very different way of looking at it when you actually start talking with the regulators. Obviously there's still the US, there's still a lot of issues around SEC who regulates different kind of things. There's still a lot of unknowns, but there are also now a lot of knowns. The travel rule is one of those things. It's no longer an unknown. There's a lot of clarity pretty much everywhere around the world around this now. You have to do KYC, you have to sanction screen both your customers and your customers' counterparties, basically who your customers send funds to. There's a complete clarity around, there's no one saying, " I don't know what this means," because it's very, very clear and it's been clear for a long time about that. And travel will is part one of those. Hopefully we'll get some clarity in the US around the SEC issues here in Europe, both the new MiCA, and also here in Switzerland. There's a lot of clarity that's coming out and this is going to help the industry grow a lot here and I really hope the same is going to be true in the US soon enough as well on those issues. It's all about building safer infrastructure for people if you really want to get the next couple billion crypto users or Web3 users on.

Jessica Galang: Did you actually talk to an MP in the EU Parliament about this issue? You mentioned that there was someone working on the legislation who seemed confused at the hesitation from people working in crypto on regulation.

Pelle Braendgaard: There was a conversation that we had, we did a lot of work with them. There was a lot of controversy around this role if you looked at crypto Twitter during this period, and very few people had actually directly reached out to improve the rules. They reached out to us and we had a very long dialogue with them over several months and we think it arrived at a fairly good place for the industry. And we've been really working on some of the major issues involved with the travel rule, which really all involved trust, and I think generally everything's around trust. But for example, who can you trust to perform a travel rule transaction with? We did a lot of work with them. Can you trust your customer's own MetaMask wallet? We did a lot of work with them and all these kinds of things. We had great conversation. This was part of a private conversation. We also brought our customers into conversation directly with the authors of the EU rule as well. And we had some really, really great conversations directly where we shut up and we just had the regulators and compliance officers talk together, which was also fantastic. And I haven't been part of the actual in the parliament itself on it, but behind the scenes. Yeah.

Jessica Galang: Okay. And a lot of what you're talking about is around making it easier for people to send transactions and interact with the blockchain system. Just generally in Web3, I find a lot of the challenge in getting more people using blockchain isn't the fact that there's a high barrier to entry to actually interact with it. It's not like a Web2 experience where it's very easy to just get on your browser or app. I'm just curious, is there an intersection here between making Web3's UX easier to use and complying with regulation as well?

Pelle Braendgaard: I like to think blockchains are trustless, but when we talk about blockchains, we are talking about a layer. If we use Ethereum as an example, Ethereum is very wide. There's a large amount of stakers on it. It means that the base layer itself is definitely trustless, at least under my definition I would call it that. But then we get into cases where people deploy smart contracts on top of it. Well, smart contracts are typically developed by a developer or a startup. In this case now you actually have to trust them that they haven't gone in and made any mistakes or done something bad within that code. Now the minute you have a smart contract, it's no longer trustless. Now you have to start understanding and building trust. It's so important to build trust in these particular smart contracts. Then there's the case with who are you actually interacting with within a smart contract. I think a great example that we saw recently is the famous or now infamous FTT token from FTX. They were using as a way of paying for equity in a lot of these different cases, and it was built under the trustless framework, but it was a token that was issued by a business. Now you actually have an issuer involved. And for that issuer it's a liability. If you want to trust the FTT token, because it's not really designed to just be run on its own, you have to trust that company that's issued it, FTX. Trust is definitely an issue even in a trustless base layer. It's a very, very important thing to think through. And if you start digging deeper, there are so many different cases here, everything about who issued a token or even if it's a trustless token, who has the largest amount of that token? Who could all of a sudden go dump that token and then all of a sudden you're sitting there with a token that's worth a lot less? All of these are scenarios that have happened repeatedly, particularly in last year. There's nothing here that should really be controversial. How do we go in and manage that? And really the way of managing is start actually thinking about trust and counterparty risk. And this is where I think because we really like this ideal of a trustless infrastructure, it feels like crypto doesn't need to manage counterparty risk. Counterparty risk is essentially in traditional business or traditional finance, you need to understand when you are in a contract, will the counterparty to you go actually comply with what they're supposed to as part of this? This is kind of the traditional view of counterparty risk. There's other kinds of counterparty risk like regulatory risk, sanction risk, a lot of different kinds of risk involved with it. But we all have to start thinking about these things now. And I think if we learn anything from'22, it's'23 and'24 is going to be the period of trust and actually rebuilding trust. And to do that, we need to actively perform counterparty risk. We need to actively do things as the industry to help rebuild trust. We can't just assume because we have a cool website that people are just going to trust us. We have to actively do things to build trust. And luckily, as part of the travel rule, the core part of the travel rule is that you have to trust the counterparty to an exchange. We've been able to build up a lot of these mechanisms to be very quick in there, but we think besides just two companies trusting each other, I think it's also time to actually give these tools to end users. End users should also understand if they're about to send funds to a really risky exchange or onto a really risky product or DeFi token, they should also understand that maybe there's some risk involved and then maybe they want to take those risks and that's fine if they perform that analysis around it. If we can build up these tools, I think we're just going to have a better ecosystem. But it does mean that when we talk about trustless, we start defining what the trustless part of it is and for sure, Ethereum, Bitcoin, trustless ecosystems. Well, I wouldn't say the ecosystem's trustless. It's a trusted transaction layer, everything on top of that, you still need to perform counterparty risk and manage trust there.

Jessica Galang: I want to dive into something within travel rules. Notabene has talked at length about the sunrise issue, which is the period when the travel rule is not an effect across jurisdictions. This can make it hard for companies to comply with travel rules. I'm wondering if this inconsistency in regulation can affect innovation and maybe how startups have responded.

Pelle Braendgaard: Yeah, it's definitely been an issue for the industry. For example, some of the first countries to implement the travel rule a few years ago, Singapore and Switzerland in particular were very worried that they had these very complex, difficult to implement regulation, but they had no one to implement it with because the travel was really something that requires you to interact with your counterparties to implement it correctly. To be able to do that, we've done various things to help solve that. I mean, first I think one of the most important things is to do a lot of education of regulators, that it's not something that can be implemented fully and correctly until most of the world is implementing it. And most regulators understand that, are helping to push things forward. And we've always talked about phased rollout to help solve this, and a lot of the regulators specifically talk about this now. That's great, but at the same time, you have to look at the travel rule as from a business point of view. Maybe your regulator's not actively enforcing it or are not telling you to do it yet, but your main counterparties might have the requirement. What you have to do is as part of this building trust, exchanges in the future, they may not actually want to transact with you anymore if you don't start solving the travel rule. This is one aspect where you have to look at the travel rule as kind of a business risk if you don't update it. We are trying to get people to understand and there are light ways of doing it. We actually have a freemium version of our product called the Sunrise Plan, which helps companies to do this for free if they're not actively implementing it. But we help them go in and set up a active way of responding to their important counterparties who are sending them a transaction. And that's actually been quite successful. We have very high reachability right now. We have for our customers, they can now reach, I believe something like the high 80%, like something like 87, 88% of their counterparties, for the transactions reach their counterparty through this mechanism. It's quite successful, which means that companies can actually do it today and start implementing these procedures. Then as part of the phased rollout of the travel rule, they can talk with their regulators and say, " Look, we're doing the best that we can right now." Then later we hope to get more and better responses from our counterparties. And we are actually seeing those numbers go up all the time. Just from this time last year to now, and we've had an incredible growth in transactions, I think there's 80 times the amount of transactions from'21 to'22 that we've seen on our platform. People are really actively implementing it now and it's really moving and the actual amount of company that are successfully collaborating is really, really going up as well.

Jessica Galang: I also wanted to talk about the balance between innovating and trying to navigate unclear spaces in regulation. I feel like the temptation could be to move towards innovation and maybe ask for forgiveness later for building things, but can you talk about some concerns that could come up?

Pelle Braendgaard: You can do a lot of things where you can really mess up things a lot. I think privacy is one aspect where as an industry, we in crypto, we like to talk about ownership of our data, but really we don't own any of our data when it comes to crypto transactions because it all lives publicly on a blockchain. We own our keys and we may own the tokens and then the keys that are on it, but we don't own our data. And this is something that the crypto industry, because they've moved very, very rapidly and iterating, they've kind of ignored these aspects of it. And this is where implementing the travel rule is also something that can, if you just move very quickly on it, there can be massive privacy issues involved with it because you literally have to exchange private information between two exchanges. Why it's really important, again, to trust the counterparty on this system. We build up a really state- of- the art system called SafePII to help companies do this where companies can combine the idea of sending encrypted method but still have a whole bunch of rules involved where you can apply rules and risk- based rules to actually decide whether you finally exchange that encrypted information to a counterparty. It's really important to do that. But generally speaking, as an industry, we are mainly focused with travel rule and dealing with the identification of inaudible wallet for companies and for there the privacy issues, I think we have really, really good solutions for it, but as an industry we need more ways and better ways and better ways of using multiple accounts. For example, there's been a trend over the last few years in the Ethereum world, you use ENS names and post them on your Twitter bio and crypto regulatory people often get blockchain analytics companies like Chainalysis, Elliptic, et cetera, sometimes get a bad rap on crypto Twitter. But we've actually done more bad things around privacy by encouraging people to go in and post their Ethereum addresses through an ENS name to their Twitter profile. And I think there's a lot of things we can do better there. I also think that there's definitely need for more on- chain privacy solutions. And again, having transactions private on- chain does not eliminate the need to trusting who a counterparty is on the other side. There still needs to be a privacy preserving way of figuring out am I actually sending to the correct person through this private channel? And I still need records for my books, if I'm a business, I need to be able to do my taxes, all of these kind of things. And if I'm a crypto exchange, I still have to do sanction screening of a counterparty. And this is where we actually think travel rule can help provide a lot of these solutions to de- risk these privacy preserving on- chain use cases because you can actually go in and lower the risk of dealing with a privacy preserving coin or transaction method going forward. We think there's a lot that can be done. Everyone says crypto winter is the time to build, and I completely agree with it. Now it's time for us to build these next generation solutions that are needed to get this next generation of crypto users on. And I think this is where privacy, trust, compliance, all of these kind of really are needed to be able to scale out the use cases and get out into the real world with crypto and Web3.

Jessica Galang: You mentioned earlier in this podcast that 2023 and 2024 is really about building trust with consumers. Are there any regulatory or compliance trends that you're tracking this year or next year? Are there any developments of the space that are exciting you or really interesting to you?

Pelle Braendgaard: Obviously last year a lot of people lost a lot of money. Regulators are very interested in helping build up more trusted ways of dealing with that. And again, I think the European regulators have probably taken the lead on some of these solutions before FTX even happened. I think a lot of good things are going to happen here and I hope, but I'm a little bit skeptical we are going to see things in the US in the immediate future around it, but generally we should start thinking about what's the best thing for customers rather than what's the best thing to avoid us getting the regulators angry about us? And if we do what's best for customers, generally speaking, many of the regulators and politicians who are just worried about the safety of their constituents, if we can do that, I think we're going to be okay. But there's definitely DeFi is something that I think is going to be just become even more important because again, it starts building, it's not a trustless, but it's starting to build a more trustless kind of layer for exchange, which is important. I think that's a very important thing to do, but we also have to realize regulators are actively looking at that. Once we are building these tools, we have to make a decision. Do we actually want to take on the risk of being a regulated institution or do we want to figure out how do we work with regulated institutions when we're building this? And if companies don't make that decision very early on, sometimes the decision will be made for them and they may not always be happy around the decisions. It's best to think through these kinds of use cases going forward, but I'm quite excited to see what happens over the next two years.

Jessica Galang: That's all the questions on my end. Was there anything that you want to add that we might have missed?

Pelle Braendgaard: I'm as excited as ever around crypto and Web3. I've been involved way before Bitcoin and some of the early uses of cryptography in FinTech, and I'm really excited by what's moving forward. It was scary and frustrating last year seeing what was happening, but I actually, I think this is a really exciting time for the industry. And as part of Notabene, we're obviously working very hard at activating the crypto industry. And when I say activating the crypto industry, getting them to understand what the travel rule is and how to implement. That doesn't necessarily mean we're trying to sell to them, but having the industry understand what this actually does to help them build trust with each other and with their customers, I think is really big focus for us right now here in'23. It's generally an important thing. We started building a tool because the regulators want companies to do it, but it's always been within the Notabene vision and vision that this is about getting crypto into everyday use cases. And yes, being compliant with regulation is important, but it's even more important to be able to build trust to get more transactions out there, more people transacting, more small and large businesses using this crypto technology. And that's now more evident than ever that our vision and mission around this is important for us to drive. This is really what we are focused on.

Jessica Galang: Awesome. Sounds good. There was a lot to dive into today. Thanks Pelle, for making such a complex topic easy to understand and thanks for taking the time to chat with us.

Pelle Braendgaard: Thank you very much. Great conversation.