SAP's Digital Currency Hub Eases Pain of Enterprise Crypto Payment Record-Keeping and Compliance

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Full-text transcript of David Berlind's Interview with Bernhard Schweizer, Vice President of Product Management Innovation at SAP

David Berlind: Today is November 16th, 2023. This is the Blockchain Journal podcast. I am your host, David Berlind.

When you think about all of the different enterprises and businesses out there that have to somehow account for when they are taking cryptocurrency payments or even making cryptocurrency payments, one of the biggest challenges is how you make a record of all those payments on the back end and comply with all the regulations in terms of reporting that information, paying taxes. There are not very many platforms out there that help businesses get that done and you end up being stuck using something like spreadsheets, working with this information in a way that's separate from all of the other information and your other accounting systems in order to... just make all of those records in one place. There's no single source of truth these days when it comes to accepting or using cryptocurrency payments.

However, SAP, the German software giant is looking to change that. And joining me today to talk about that is Bernard Schweitzer. He's the Vice President of Product Management Innovation at SAP. Bernard, thank you very much for joining us here on the Blockchain Journal podcast.

Bernhard Schweizer: Great, David. It's a great pleasure being here with you today on the podcast and sharing the exciting news, the exciting developments that we are currently doing. Most of your listeners...

Berlind: Yeah, so, go ahead, go ahead, you can keep going.

Schweizer: I guess most of your listeners know SAP, for those who do not know us well enough, we are an enterprise application software company, basically the enterprise application software company. And of course, we always do look into innovations and blockchain is [at] the top of our mind, especially helping mid-market enterprises. And I'm very much coming from the mid-market business unit, helping mid-market enterprises to make their business processes better, smarter, faster, more efficiently, and cheaper.

And when we started our project, we very much came across that notion of cross-border payments. And then, certainly, we will go a little deeper today and see how blockchain technology can really facilitate cross-border payments in an enterprise-grade manner. And that's what we are basically doing here.

Berlind: Yeah, well, so to your point about whether or not people know about SAP, it would be difficult not to know about SAP, one of the largest enterprise software companies on the planet, obviously very successful in a variety of other features and applications that they offer across their entire platform. And anybody who doesn't know SAP, hopefully they will know SAP [now].

And it's great to hear that SAP is actually looking at blockchain a little ahead of some of the other enterprise software vendors out there because you don't really hear a lot about that. So it does sound like you're doing what you're supposed to be doing if you're in product management innovation you're looking at the latest – [the] newest – technologies and trying to figure out how you can leverage them for your customers.

So, let's talk a little bit about the SAP [Digital] Currency Hub because that is the thing that caught my attention one day, came across my radar and as you know I tracked you down, [and] tried to find out more about it. So, why don't you tell us a little bit about what that product [is] or what that platform is?

Schweizer: Absolutely. So the Digital Currency Hub basically enables our customers to make payments and to receive payments in digital currencies, most notably stable coins. So when we went onto that journey, we actually had an interesting discussion with a Web3 startup that basically asked us, you have great ERP solutions, we want to do our business model fully on Ether. And apparently, it's not as easy as just adding another currency to your ERP system.

And that basically put us off to [onto] the journey for the Digital Currency Hub. When you then discuss with the breadth of our customers, we basically saw, except for the web three startups, not so many are interested in kind of native cryptocurrency payments, but when they basically understood what the blockchain technology can do, namely: fast settlements, very cheap transaction fees, being fully transparent, then they said, "Wow! That really solves a problem that I'm having today," and that is cross-border payments.

So, cross-border payments is a very, very painful process for any enterprise, and most notably for the smaller enterprises that cannot negotiate better conditions with banks. So in today's world...

Berlind: So... I just want to go back there for a second. You mentioned Ether. So these businesses were interested in what a lot of people refer to as ETH or the primary protocol token of Ethereum. It's a form of payment that a lot of companies will take when they're taking cryptocurrency. That is one of the major cryptocurrencies out there, probably the second most popular after Bitcoin. But then I think what you're saying is, is that the pain point for those mid-market companies and those startups is essentially that if you set up with SAP's existing platform there was no way to easily plug cryptocurrency into it as a form of payment. Is that correct?

Schweizer: Yeah, absolutely. I mean, that was the starting point, right? So, ETH has 18 digits and the typical ERP system cannot handle the 18 digits. So, therefore, it's not just an option to add it like any other currency like a US dollar or Singapore dollar or whatsoever. So, this is why we have to be a bit creative. That's why we have to build our own platform for handling those digital currencies. And of course, if you look a little deeper, you also need to account for them in a different manner. You need to interface them into a different manner into the general ledger. And this is basically what the Digital Currency Hub is up. It's basically connecting the enterprise applications well, the very traditional one, like any ERP system, like our ERP systems, with more forward-thinking innovation topics like Web Street Develop.

Berlind: Now, you talked about some of the pain points and we hear this on a regular basis here at Blockchain Journal, which is the one thing that you get with blockchain that you don't get with traditional financial rails is the 24-7 nature. Payments can be made at any time on blockchain, whereas traditional financial rails operate during business hours, sometimes, and not on weekends. That's one problem.

Another problem we hear about is, of course, the fees that are associated with any sort of exchange of fiat currencies from one nation's fiat currency to another nation's fiat currency. Typically the fees that happen when you're doing cross-border payments can be very high. And so that's a problem. And then of course, just the sheer performance. Sometimes those same payments take two or three days to clear, whereas on blockchain, it's relatively instantaneous.

And so, there are a lot of efficiencies that I think we hear about that can be gained when you use blockchain to optimize those payments so that they're 24-7, so that they're cheap, and they're fast. Are those the pain points that you talked about those pain points, but I just wanna make sure those are the ones that you are after primarily.

Schweizer: No, exactly. These are the pain points the customers tell us, and these are the pain points that we are going to solve with our solution. Very genuine to the blockchain technology, but it's just the one side of it. Now, if you just take a plain blockchain technology solution, you just get that value proposition. But you also would like to tie it into your enterprise system, right? You would like to issue an invoice that can settle with a blockchain, with a stablecoin or with a token.

Once you receive the token, you would of course like to reconcile it against your receivables. So you really would like to tightly integrate it into the payment process of the enterprise. And this is exactly what the Digital Currency Hub is all about. So it's about a tight integration into business processes. One, it's making sure that you account for it properly and that you fulfill regularatory requirements such as taxation and some statutory reporting requirements when it comes to cross-border payments.

Berlind: So how many customers... you talked about your mid-market customers, so I'm assuming that... So just give me an idea, how many mid-market customers does SAP have? That some of them of course may not be interested in it today, because they're just not looking at cryptocurrency right now, but in the bigger picture – think about strategically five, 10 years out – how many customers are in the addressable market where they're using your existing receivables, invoice platform, and everything and would wanna eventually tie this capability into what they're already using? How big is that market?

Schweizer: I mean, we do have a huge customer base, but it's not only our own customers that we can address with such a solution. We can basically address any customer out there in the market because we will build it on open APIs. There was one interesting study from J.P. Morgan Onyx out there specifying that the cross-border payment markets just in terms of banking fees and process costs is 120 billion. And that is huge. That is an incredible, huge amount. And we can believe that we can generate about 90% savings. So imagine out in the market, 120 billion spent just for moving money from one place to another place, cross-border. And imagine if you can take 90% of that 120 million out of the equation, which is basically [a] waste for everyone. So this is basically the value that we see in that market. And of course, we are the biggest enterprise application vendor, so we do address a huge portion of that market.

Of course, not every mid-market customer is one of ours, but we make very, very easy onboarding possibilities to our Digital Currency Hub that also non-SAP customers can use our solution.

Berlind: It's different for you and me when we take one of these, [and] use one of these wallets like Metamask to engage with cryptocurrency payments. With an enterprise, there's all sorts of security concerns that don't necessarily relate to the personal usage of wallets, where you have different people with different roles. Some people are allowed to spend a certain amount of cryptocurrency, other people are allowed to get in there and make large deposits, small deposits. There's so many different types of controls, the same sorts of controls that exist, [in] your typical bank accounts that an enterprise would have. So when you are rolling this solution out for one of your customers, how do you deal with that enterprise wallet concern?

Schweizer: So we've basically built our own enterprise wallet that comes as part of the solution, which is a self-custodial wallet solution that you basically get as part of the Digital Currency H Hub. So that is one. Second, SAP is a very strict authorization concept as part of the ERP system. So as part of the ERP system, you basically ensure that only the right transactions hit the Digital Currency Hub, and there you have the next authorization layer where you can basically specify who finally signs the transaction moving forward.

So that's the starting point. So it's a product that is currently still under development. So we are still piloting it as we speak. We have the first customers using it as part of a pilot. And based on the results of that pilot, we will decide whether we will make it a generally available product. Now, moving forward, we are also looking...

Berlind: I just want to pause you there for one second. You said self-custodial wallet. And there are a lot of different definitions out there for the same thing. So I want to make sure we're aligned on what you mean by self-custodial wallet.

What you mean is that you're offering a wallet technology. It's not necessarily self-custodial. Custodial, in our world, at least in our definition, custodial wallet means that you are offering the wallet technology to the customer as opposed to them holding the cryptocurrency themselves in a technology that's separate. In other words, the customer... you may hold the keys, SAP as the provider of that wallet technology as opposed to the customer holding the keys. So which one is it? I just wanna make sure we're clear on what that is.

Schweizer: It's the customer really holding the key. So we do not have access at all to the customer's key. So we provide as part of the Digital Currency Hub software as a service solution, which basically does all the nice enterprise features, integrates into the ERP, does the money movement. Plus that software as a service solution, Digital Currency Hub is accompanied by a small solution, which is basically our proprietary wallet technology that holds the private keys and that runs under the full control of the customer on infrastructure of the customer's choice. So, by that, private keys are always under [the] full control of our customers.

Berlind: I see. Okay, very interesting. That's an interesting architecture that I haven't seen before. How about a demo? I mean, can we get a look at what this looks like?

Schweizer: Oh, absolutely! A pleasure.

Now, what you see here is basically SAP Digital Currency Hub. That's a typical SAP user interface. And it pretty much looks like a little bit like an online banking system. What you see here right at the top, are basically three accounts as a test USDC account running on the GERDI test network. I also have linked a EURC account [which is] also on the GERDI test network to my system. Plus, I do have a little bit of Ether. I have the Ether holdings in order to pay the gas fee. It's all under the full control of the customer. And as we have just discussed before, the private keys reside with the customer. The customer also pays that transaction fee to the network. So this is why you need to hold also a little of the native currency.

Now, if I just jump into that account, you see something which is pretty similar to a bank statement and these are the concluded business transactions. So you see a number of outgoing payments in my example, to Green Star Mountains, one of our suppliers. You see incoming payments from OEC computer, one of our customers, and if I scroll down a little.

I also see something which is noted as [an] incoming transfer or outgoing transfer. And these are basically... You see here, an incoming transfer of 12,354 test USDC. It's that line. And that incoming transfer basically describes what we call on and off-ramping to an exchange. So basically getting the tokens into your self-custodial wallet. Now, once you have seen how we represent the holdings, let's quickly make a payment.

And moving forward, that of course will be tightly integrated into the ERP system and come straight from the ERP system. One part which makes it business-grade, enterprise-grade, is that we always rely on business partners. And you saw once I have entered the business partner, immediately the pay-to address appears. We do that for security reasons so that you cannot enter a fraudulent pay-to address. Or, in other words, our customers independently verify the pay-to-address tied to the business partners to avoid fraud.

Now, I can enter a reference, which could be, for instance, the invoice number. And if both sides use the SAP Digital Currency Hub, we message that off-chain for an easy reconciliation. The system also is picked based on Oracle, an estimated network fee. If I hit the create button, the system basically generates the blockchain transactions, picks the private key, signs the transaction, and forwards it to the blockchain for execution. That takes a little moment and once I then have the transaction formatted and signed and sent off to the blockchain, I see it here in a couple of seconds confirmed here on the screen.

So now the transaction is on the blockchain. I can go back into my account statement. We are on GERDI Testnet, so it probably takes a minute or so to settle. And as long as it's not settled, you see here noted as an outgoing payment that is open.

Now, if you wanna receive payments, we also have what we call the request payment functionality that is basically mirroring your receivables on the Digital Currency Hub stack. So I take a business partner, for instance, I take again OEC computer to whom I send an invoice. Let's make the invoice $3.45. Again, I can enter the reference number which we use for off-chain messaging, [and] hit create. And with that creation, we basically let the crypto stack – the Digital Currency Hub – know that there's an expected incoming payment from OEC computer. So you see that also, of course, being open business and transaction as a so-called forecasted income.

Whenever we receive a payment from [the] OEC computer, we have basically specified on the business partner level the wallet address with which [the] OEC computer will pay, [and] then we can use that to reconcile any incoming payment.

And that, in a very quick demo, shows us the power of the Digital Currency Hub and of course, later on, that will run tightly integrated into our ERP business solutions. So David...

Berlind: I think it's...

Schweizer: That was the demo.

Berlind: Right, thank you very much, Bernard.

I saw a few things in there that I thought were quite brilliant, and then I have some questions. One of them, of course, was you get to specify the transaction in terms of fiat currency, and then, as you said, you rely on Oracle to figure out what the conversion rate is for the cryptocurrency. And I'm assuming that at some point in the future, there'll be other choices for cryptocurrencies besides ETH.

The second thing that I thought was really interesting is the way you're tying it into your existing ERP system. So for example, I really like the fact that you can't just kind of code a random payment to some random person into the system, you're relying on the existing system where you have a record of the partners, the customers, the purveyors that you're already doing business with and you can only pick one of those. If that's not, if you don't have somebody officially in the system, then you can't just send money out to some random address, which is very important from a security perspective. I think that's brilliant. And of course, now you can see why and how the Digital Currency Hub ties into the existing systems that SAP is already providing. I think those two things were quite brilliant.

One of the questions I have though has to do with reloading. For example, you mentioned that it's one thing to pay people let's say in USDC, in a stablecoin, but if you're doing business and you're using Ethereum, you still have to pay the gas fees and therefore you have to maintain a certain balance of Ethereum in order to cover those gas fees.

So you're acquiring cryptocurrency on a regular basis. You don't want to hold too much because obviously, the volatility of the cryptocurrency could be problematic to your balance sheet. But let's say you're acquiring just enough ETH to cover your gas fees. Where does that happen? Because you mentioned the word exchange, but there are a lot of exchanges out there. Where exactly do your customers or anybody who's using the Digital Currency Hub end up exchanging their fiat for ETH?

Schweizer: Absolutely. It's a multitude of exchanges, right? So basically we have a good two handful of customers currently piloting it and they basically use any kind of exchange out there in the world, be it a Coinbase, be it a Kraken. So they are basically on any kind of exchange. And literally, you just need to withdraw the money into your wallet that you host or that runs on the Digital Currency Hub and basically it automatically is there instantaneously and then you can use it.

Berlind: So that's not built in? That's not built into your functionality? In other words – when you're ready to go out and you need to get some new, reload your account with ETH, that has to be done out of band. You have to separately go to an exchange, get that ETH, and essentially send it to the address that's associated with your Digital Currency Hub wallet?

Schweizer: Exactly. That's how we have at least done it in the first round. It's a very, very young product. We just got started.

Berlind: Sure.

Schweizer: We just want to test the market, whether it's appealing or not. And I guess most of the listeners also have heard about Paymaster getting quite popular, a pretty new ERC standard. And we, of course, also looking very much into that and moving forward. We hope that we can abstract the gas fee in terms of native tokens away from our customers especially if they want to settle stablecoins so that you just have the stablecoin currency.

Berlind: Just for clarification, I want to point out to our audience what Bernard's talking about there. There is a relatively new specification out called ERC 4337. It's widely regarded known as account abstraction, but one of the features of account abstraction is this ability to designate some other account as the paymaster, the company, or the wallet address that ends up covering the gas fees or the cost of the transaction itself.

And, it's a relatively new specification and a lot of different organizations are experimenting with it, but it's very cool for enterprises where the enterprise may want to cover the cost of – let's say a gas fee – instead of forcing that upon a customer who is initiating a transaction. So I can imagine for example let's say I'm a customer of one of your customers, a customer that's using Digital Currency Hub, and I want to pay that company 2 ETH for a car part. All right, so I send them 2 ETH, but the problem is because I'm the initiator of the transaction, traditionally I have to cover the gas fee.

What Paymaster allows you to do is take a look at that transaction and make sure that the recipient of the ETH, the 2 ETH, the car part manufacturer is the one who pays. That's what Paymaster – that's what that feature – does and that is a big revolution when it comes to how blockchain works.

Schweizer: Exactly, and probably important to note whatever we built is very extensible. You were just noting also that I entered the fiat currency, the system was automatically suggesting test USDC as the means of settlement. We very much believe in stablecoins as [a] means of settlement. That's what we're hearing from our customers, that they do not want to see the volatility of a Bitcoin or an ETH. So I think this is the starting point. Now, if you would like to settle, for instance, in Bitcoin, you can take our solution and easily extend it for other networks. So we are currently running on the Ethereum mainnet in the pilot. We are also looking for secondary layers.

So if you would like to see any other network, any other coin, you could easily extend it. You can take that as a kind of, and this is also why David, you said it's a kind of platform, right? So it's on the one end supporting the end-to-end process, but it's the platform appeal that allows you to enter further networks, further coins, [and] further business processes as to your needs. And this flexibility, I think, is great news.

Berlind: You mentioned the cross-border payment nature of things. And I would agree with you. USDC or another stablecoin is a good way to work because you don't have a lot of the volatility. I'll accept payment in USDC or I'll pay you in USDC. But in that cross-border scenario, stablecoins really come in handy because it becomes sort of a lingua franca to get from one cryptocurrency to another from one fiat to another fiat using cryptocurrency as the middle layer is that something that you guys are looking at?

Schweizer: Yeah, exactly. Now, looking a little bit at how we envision our solution being used, it's not that you basically have to make a payment, then you on-ramp the fiat to crypto, and the counterparty immediately off-ramps it from crypto.

So we rather believe customers will basically stay at least a little while in the crypto world, in the stablecoin world, and receive payments in stablecoins, make payments in stablecoins. So basically just take it like any other currency that they have in their treasury accounts, right? Whether this is [the] US dollar, whether this is euro, and this is why we believe stable coins are really revolutionizing the way people do business. And we see lots of appeal in this with a small enterprise that say[s], "Yes, this is a huge asset to us."

Berlind: What's next? Obviously, you're testing this with some customers, and it may go GA – generally available – to the rest of your customers. But what else is SAP thinking about in terms of the sorts of things they can offer their customers when it comes to blockchain and some of the unique value propositions of it?

Schweizer: I mean, I'm from the mid-market, so digital currency is dear to my heart. It's my product. Of course, as a company, we have a very, very huge engineering department. We also look into other topics. One topic my colleagues can talk about is NFTs, non-fungible tokens as part of the customer experience journey, and of course, an area which we tackle also from a research perspective is self-sufficiency.

Berlind: Well, I would definitely love to talk to your colleagues, maybe interview them at the point that they have something to show, but our research does show here at Blockchain Journal that the number one application right now, based on [the] number of deployments, not based on transaction volume or anything like that, right now across enterprises, globally speaking, and global brands happens to be NFT based customer engagement and loyalty. That seems to be the first toe they're dipping in the water when it comes to cryptocurrency or blockchain. And the number two application is accepting or paying with cryptocurrency with a bunch of other ones behind.

But I do believe there are some sleeper technologies because as you pointed out, I think you were talking about J.P. Morgan and what they're doing with their coin systems offering part of their Onyx portfolio. And did you say that they could save up north of 120 billion dollars if they do this using blockchain versus the traditional finance rails that they're using today is that what you said?

Schweizer: I mean that was mentioned in an article they were publishing. And it's not just them, it's the entire market for consumer payments, right, that's what they were referring to.

Berlind: Right, but what we're talking about is at scale, right? Like when you think about the number of payments that are happening every day over traditional financial rails and the fees that go with those payments and the way blockchain and particularly stablecoins can be used to drop that level of of cost to all of those organizations that are contributing to that $120 billion pot – yeah, that's a huge number and an opportunity to bring down the cost of doing business. And that's why I say it's kind of like the sleeper application because at the end of the day, every business just cares about the bottom line. That's their top priority.

And, launching some new program[s] like an NFT program to drive new revenue. Yeah, that's great That's one way to improve the bottom line [and] drive new revenue But another way and a big way to drive a better bottom line is just to reduce your costs and that's the promise there.

Okay, Bernard, so thank you very much for joining us here on the Blockchain Journal podcast. It was great to have you. Thanks very much for the demo. Where can people find out more information about the Digital Currency Hub?

Schweizer: So we're just piloting it. We have a blog out there on our SAP.com site. And of course, stay tuned. Once we go GA, you certainly will hear lots more from us. And then, of course, we also encourage you to really, really try it out, test it out, and enjoy the benefits of fast, cheap, and transparent cross-border payments.

Berlind: Okay, Bernard, thank you very much for joining us.

We've been talking to Bernard Schweitzer. He is the Vice President of Product Management Innovation at SAP, the German software giant. They're tying in cryptocurrency payments into their existing ERP systems. We just got the demo, [it] looks pretty cool. That product will be coming out – maybe soon – is based on the feedback they're getting from their customers.

For more videos like this about blockchain as a platform in the enterprise, come back to our YouTube channel at youtube.com/@blockchainjournal or you can come to blockchainjournal.com [where] all of the videos get posted there along with the full-text transcripts of these interviews and you can read them if you don't want to listen to them.

Thanks very much for joining us. We'll see you on the next podcast.