Imagine if you could own part of a bank. Imagine if that bank kept its deposits in a highly liquid form. Imagine no more: Mt Pelerin is here.
It’s only at the very end of our ninety-minute interview that Arnaud asks if he has explained the genesis of the name of his bank. No, I tell him. My head is hurting a bit and I feel as though I need to go and lie down in a dark room for a number of hours. It’s not that the conversation has been tough, it has been unrelenting, or rather Arnaud’s spoken progression from childhood to starting a bank is so relentless in its trajectory that it would be impossible for him to do or be anything or anyone else at this time.
This question is the easiest part of the conversation. The Mont Pelerin Society’s (MPS) name was taken from a Swiss mountain overlooking Lake Geneva. It is an international classical liberal organization composed of economists, philosophers, historians, intellectuals and business leaders.[ The members see the MPS as an effort to interpret, in modern terms, the fundamental principles of economic society as expressed by classical Western economists, political scientists, and philosophers. Its founders included Friedrich Hayek, Frank Knight, Karl Popper, Ludwig von Mises, George Stigler and Milton Friedman. The society advocates freedom of expression, free market economic policies and the political values of an open society. Go look it up on Wikipedia, from where I lifted this explanation. The first meeting was held in April 1947 at Mont Pelerin after World War II, when the think tank wanted to put control back in the hands of the people and away from the state.
This think tank provided Arnaud with the eponymous naming inspiration for his banking project, ie Mt Pelerin. That makes sense, but to explain how, I must start at the beginning. For everything of portent must have a beginning, even and perhaps especially, a bank must have a beginning.
Arnaud travelled a lot as a child with his family. His father worked for a multinational company and they changed countries the same way others might change their cars. Instead of feeling upset at having to leave friends and schools behind, Arnaud relished travel and the new adventures. He remembers returning to Cannes aged six when he had been away for a year and felt he had grown up by a decade. “It was the international schools, the international kids, everything.”
He remembers, in particular, one time travelling to a new country and his mother filling his pockets with cash before they boarded the plane. “I was only a boy and my mother was not money laundering, but it was so slow, expensive and cumbersome to wire money and it was easier to carry it in person. This made an impression on me.”
However, I am not attempting to emulate the Irish writer Lawrence Sterne where he only reaches the hero’s birth in volume three of his nine-volume opus (there is much to describe in these voluminous and bawdy comic novels) and will quickly traverse to our own hero’s coming of age.
Seventeen years of age and Arnaud is now settled in Switzerland where he attended the Ecole Polytechnique Fédérale de Lausanne for both his primary degree in engineering and a masters in engineering and communications. From there he secured his first work experience with the investment bank UBS in Switzerland.
He then worked as a commodities trader during one of the most chaotic and lucrative times of the financial crisis in 2008. He was in control of a huge portfolio, yet he was constantly questioning the nature of money, how interest rates impact on money and why is inflation considered a normal occurrence.
He turned to the theory of economics and educated me on the three dominant variants, which I shall pass onto you in shorthand. You may skip the next paragraph if you are a keen student of economics, or enjoy a short explanation of each way of thinking if not.
Keynesian economics favours a centralised system with a central bank controlling money. Monetarians, or Chicago Boys, prefer a middle ground. Led by Milton Freeman (also of Mont Pelerin fame) they are against centralised decision making for money supplies and control, but not as extreme a libertarian as the Austrianists who favoured a totally decentralised view of the world with no central planner.
Arnaud, as might be guessed, falls into the latter category. “It’s not as extreme as first appearances might suggest. Consider the traditional role of church and state: at one point in history that relationship would have been inalienable. Now, in most countries, this is sundered. The same is needed for money and state.”
Arnaud is also quick to point to the discrepancies in wealth division in our post-modernist world. “Most rich people do not have money on account but instead are highly leveraged. If they have $20 million in the bank, they are not going to buy just two $10 million properties; they would leverage up and buy 20. This is the Keynesian experience. Money is now, to all extents and purposes, free. Why would they not do that?”
Beginning his career in 2008 as a commodity trader, Arnaud experienced the boom in the flight of money to the hard stuff, as he calls it: food, energy, and petroleum. “Things that humanity needs in the financial crisis jumped in value by three, five, and even seven times. Wheat, cotton, and petroleum climbed the opposite and upward curve in value to everything financial.
“2008 was a really interesting time for me. I had my ‘ah-ha’ moment. I was watching the increase in price of commodities and began to question the value of money. At heart I am an engineer which means I ask a lot of questions, I try to understand what is happening and I won’t accept BS.”
Arnaud began to question the motives and logic of traders. “I wanted to demystify this profession. What were the traders doing and why?”
Arnaud came to the conclusion that traders do not know what they are doing. They ride their gut and, moreover, they seek to confuse non-traders with lots of technical financial jargon. “Trading is very simple, most traders work by gut but to cover this most instinctive of occupations they invent a lot of graphs, charts and other fancy spreadsheets.”
Despite working in the commodity marketplace, Arnaud has a special fondness for FX. At this stage, the Swiss Franc started off weak, at 1.55 to the Euro, but began to climb rapidly. Soon it reached a much stronger 1.4 to the Euro.
“This is when I witnessed the ‘mean reverting’ attitude of the trading world. Just because it had gone up, they now reckoned it would go back and began taking positions that reflected this opinion.”
Horrified at this innate and fundamentally flawed trading viewpoint, Arnaud wrote to the CEO and head of FX. He pointed out that since the EU was a conglomerate of multiple countries, some with real difficulties (he cited Greece at this point), and all labouring with a single currency that was not used outside the EU, the reverting of the Euro was not a given.
Arnaud compares the Euro to the US Dollar, and here find another financial lesson. “Post the Bretton Woods agreement the dollar assumed a dominant global position. Everything could be and frequently was quoted against the dollar. The dollar was essentially treated as the new gold.
“During the Vietnam world, as Nixon was engaging in some serious quantitative easing, the French president Charles de Gaulle recognised that there was not enough gold in Fort Knox to honour the bearer of US Dollars in the world. He sent warships to exchange his country’s dollars for gold. This was when, of course, Nixon decoupled the dollar from the gold standard and it was the end of the Bretton Woods agreement.”
This letter resulted in Arnaud being promoted to head of FX for RWE.
Now enter the dragon: Arnaud met with Bitcoin in 2012. “This was a mind-blowing experience for me,” he remembers. “All my questions with regard to money were answered in one fell swoop. I had been looking at gold as a true money and indeed both share similar values. Both are divisible as a means of transaction and both are finite so can act as a store of value. They are also both rare and indestructible – although either can be lost.”
Moving away from the Bretton Woods experience and into free-floating sovereign currency has seen the value of money decrease. “After the second world war, the Swiss Pension fund, AVS, allowed that a pensioner on CHF65 could enjoy a modest living. Today, a sum of CHF 2000 would only allow the same standard of living.”
“So for me, Bitcoin is gold 2.0. It is a game changer. Bitcoin is naturally deflationary; it rewards good behaviour not reckless borrowing. I also identified strongly with the libertarian philosophy. I believe the state should have limited influence and control on its citizens.”
Here Arnaud gives me a civics lesson on Swiss governance. This lesson is prefaced by the law the EU brought in three years ago which forbids bailouts as witnessed during the crash (trust me, I’m Irish, I know all about that) but instead allows bail-ins. What is insidious about this law is that governments are allowed to raid their citizens’ deposit accounts. In fact, this is exactly what happened in Cyprus in 2013.
Back to my civics lesson. Switzerland is possibly the most decentralised nation state in the world. There is no single president (actually there are seven, which is why no one remembers their names), and the federal state only has one responsibility: the security of its citizens. There are three layers of authority: state, cantons, and municipalities. These layers are reflected in the tax paid by citizens with by far the most tax (some 70%) going to municipalities. “People want to pay for clean cities, good roads and schools not for some over-arching federal controller.”
Arnaud knew that now was the time to do something. “I wanted to create a new form of bank.” Just as Jonathan Nelson felt the drive to change the way in which venture capital funds are operated.
There are three pillars to the Mt Pelerin bank project.
First, it will be a 100% full reserve bank meaning that when deposits are received they are not lent out nor leveraged, but instead kept in high-quality liquid assets. “Previously, the cost of custody was high, now it is not, so we decided not to gamble our customers’ money. If all our clients wanted to withdraw their money at the same time, we could do that. Compare that with the gold run in 1917.”
Secondly, Mt Pelerin will put in practice a marketplace system where different third parties could also offer similar services such as FX or lending. “We will have our products but we will also list others. Robots will match bid and sell offers and people will be able to choose to wait until the right offer comes up or pay a premium for immediate settlement. Even in the premium category, the cost will be vastly cheaper than traditional banking, some 20 times cheaper in fact.”
Then, in a bold move, Arnaud is seeking to tokenise the entire bank’s balance sheet. “We will be entirely transparent so anyone can view the balance sheet. The customers will be anonymous but the value will be clear.
“How this works is that we look at each transaction which is essentially a contract between two parties. A mortgage, for example, is a contract between a homeowner and a bank, with a built-in yield. Banks find it hard to move these assets – there are issues in liquidity which gave rise to the packaged subprime loans of the crash (or today the sale of underperforming Irish loans to vulture funds). But when we take this contract and convert it into a smart contract with an ETH address for yields (or repayments) this is essentially a liquid asset.
“This also means that you don’t have to be a vulture fund to invest in an asset, you can be an individual. This gives economic opportunity to ordinary people.”
Arnaud’s view is more than just money. Mt Pelerin is attacking the thorny issue of compliance. The Mt Pelerin Bridge Protocol is a technical solution built up over the past three years on how to provide compliance for the lifetime of a token. Built on a deep understanding of tokens’ legal and technical intricacies, the code is open source and tackles the regulations surrounding financial compliance with great detail. “Banking licenses are 10% banking and 90% compliance.”
There is one more twist to the Mt Pelerin story. It is now seeking to sell 5% of the overall equity of the company that will build the bank, in the form of tokenised shares. “Unlike typical token sales, our tokens (MPS) are directly equivalent to shares of the company. So participants in our sale will simply become shareholders with full voting and dividend rights, regardless of what we might write in the smart contract. They are protected by Swiss law.”
It is interesting, this focus on counterparts. Arnaud smacks it home in a statement: “In Bitcoin there is no counterparty. You either own it or possibly lose it, but in Bitcoin you are your own bank. That’s why we are not a crypto bank but a bank built on blockchain.”
“With tokenisation, we will change the way we bank.”
Check out their website: https://www.mtpelerin.com