EBC22 | Volatility vs. Stability: Indexes in Crypto

three two one [Music] hello everybody and because the topic of the of the of the panel today's volatility i just hope we're going to manage to wake up a bit a bit the audience my name is andrei burse i'm a partner with deloitte but i'm also a lawyer and in a previous life between 97 and 2000 i was a stock broker and i discovered crypto space 2018 and uh both personally but also working with clients i'm absolutely delighted to be here with uh a very uh eclectic audience and i think that's representative for the for the crypto space uh because it's something that used to be for just rebels and bleeding hard libertarianitarians yeah and now we're seeing a lot of institutional movement in the industry in spite i would say of what what is called uh the bear market where we're you know in which we are um but i'm not sure it's correct to say in spite of the volatility and we're going to talk about about that um maybe an unusual way i mean you know we we have from left to side we have coinbase london stock exchange fire blocks and imperium um i would actually ask you guys to introduce yourself not by reference to where you work today but what you have done before james thank you um so before i joined coinbase i was at blackrock uh for about 11 years running an institutional sales team there for the liquidity business um but what got me interested in crypto there from the trad fire space was not only the client interest that i saw but also i was part of the dlt steer co we was i was project lead on a tokenization project of a money fund that you might have seen was posted on the onyx platform and i could see the sort of transformation there so that's what led me to coinbase but i joined coinbase only two months ago so it's excellent excellent so we just checked coinbase and blackrock great yeah next and they they keep asking when is blackrock coming to to digital markets or digital asset markets it's here already guys uh dutton thank you so uh my background has been largely in technology and cut my cloth in the video games industry spent um some time in the capital markets and then cto's um two consecutive blockchain startups over about three and a half years prior to joining the lscg okay so even also in this case it's not just london stock exchange sitting with us in the panel anna good morning everyone and thank you for having me here so um i joined fire blogs about a year and a half ago and before fire blocks i used to work at morgan stanley and i work in probably the opposite asset class to crypto assets which is a fixed income so very low volatility a macroeconomic intensive asset class and i joined because i was attracted by the growth the volatility and the level of innovation uh in digital assets and that's been a fantastic journey ever since excellent so fireblocks and morgan stanley checked leave you i am a construction a real estate entrepreneur and i am enthusiastic about crypto i started in 2017 and now i'm the ceo and co-founder of imperium right building building uh an index right for the crypto assets okay so quite uh quite a diverse audience just to kick off the the discussion uh volatility you know i mean a lot of people say digital assets are highly volatile therefore highly risky therefore you can lose all your money therefore be careful and have proper risk management i think all of them are are true but on the other hand if you're on the trading side maybe you'd say you know i like a market to be velocity volatile that's where i have what to trade on right um how do we how do we position or how do you do you guys see the market positioning vis-a-vis volatility in digital assets in you know crypto assets in general i use digital assets because in europe that seems to be the term that was coined by the regulators if for those of you who are familiar with mica um the european regulation that's going to come soon and regulate this space they speak about digital assets which includes pretty much every everything you can think of in terms of uh you know cryptocurrencies stable coins there's even a debate whether to include nfts or not there um so you know how how do you see the the the market participants reacting to the to the current let's say volatility of the markets do we start absolutely um i think it's well documented that some of the some of the uh active players the more systematica systematic sorry uh funds are doing very well so they're loving the volatility and i think they're making huge returns so i think uh we see that uh from a trading perspective um and so but on the flip side we see a lot of institutional investors wanting to uh on board or engage and get ready and prepared for the future and i think that that sort of broader adoption will then improve um improve volatility and what do i mean by that i think there's going to be more products that are going to be out there more etps more etfs if regulation allows in the us and i think more structured products will come to the market and that in itself will create some some more stable volatility if i want to call it that um so i think that's what we sort of see we're encouraged by the engagement i think obviously high volatility does put pause on some projects but it hasn't stopped them so i think they've just slowed down but everyone is uh excited to see that that sort of level of engagement oh i mean i mean that's very relevant coming from coinbase obviously a crypto exchange let's call it like that i don't know if that's the brand your your branding uh we're well for the institutional space we're more a prime broker so we combine the exchange with the custody uh and everything that goes with that in terms of financing staking lending etc right well maybe in opposition or not it's probably just complimentary uh how how would uh um i use the word legacy but you said you don't like the idea that should be legacy heritage exchange looks into into the same topic of volatility yeah i i mean largely i would agree i think you know volatility from a trading perspective is obviously you know it's it creates lots of opportunities for professional and sophisticated investors who understand how to how to you know take advantage of that um but equally you know there's there's risk associated with volatility too so one needs to manage that carefully i think on the other side um when we look at some of our clients and some of the larger ibs and institutionals who are looking at this space obviously there's the investment angle to that which is obviously it's you know it's a slow roll there are you know larger considerations when you're a highly regulated entity in terms of getting into this space that maybe prohibit you to move very very quickly in terms of being able to to achieve that but i think the intent is there the aspiration is there you're seeing a lot of movement on some of the fringes around some of these institutions whereby they're looking to offer wealth management solutions on crypto and you know other services in their kind of private banking divisions too but i think um equally many of these institutions are looking at sort of public chain technologies as a means to facilitate tokenization but you know that's a that's a double edged sword of volatility too because in that context when you're looking at for example protocol tokens that are required in order to pay gas fees in order to facilitate the operations of some of these services from an integration standpoint many of these institutions just aren't cut out to be able to deal with that level of volatility from an operational cost perspective so you know there's a lot of work that needs to be done to manage that again largely focusing on the risk side and then i think you know on the other side when we look at you know the investment angle once you start to see some of these institutional flows come into the crypto space um you know we'll likely see a gradual decline of volatility as the scale of capital starts to increase and by probably an order of magnitude or two so yeah and to me to me it's really amazing um you know as as advisor that you have two sides of the same story that are talked about in the in the media if you look at you know some of very respectable publications you'd see a lot of what the crypto space would call fud right uh basically you know it's all a scam it's all uh fraud uh it's just pump and dump and so on on the other hand you see very serious institutions and you know i could make a very very long list of uh very serious institutions in the space i mean even yesterday i saw a few names i think bbva was here and others that are actually more and more involved in the space so it's like it's like a confrontation and probably ev everybody has its own bits of the of the truth right because on one hand i mean market abuse uh as i said i was stock broker 97 to 2000. i mean market abuse was not invented you know in in the crypto space i mean uh let's let's be serious yeah inside the dealing and market manipulation are are you know they probably existed since stock stock stock markets existed and there are a lot associated with this this new asset classes and so on and probably rightfully again because i don't see any reason why this asset class would be exempted it's definitely not but on the other hand there seems to be more about it yeah because otherwise you know why would very reliable uh very solid institutions with a very solid reputation continue to work on entering into this space even today yeah being conscious about all these things so clearly that's that's well clearly that's investor demand because otherwise there probably would be would have been that much but it's probably more than that now we talked about you know dealing with volatility more from a financial risk management perspective right and maybe market infrastructure perspective but you know usually people associate volatility with risk as i said some are many actually associated also with opportunity but you say volatility risk and then a question twelve two questions on a few one is you know um because if i say risk you know besides the volatility risk i mean are there any other risks that maybe uh people who want to take a chance and invest money in this space should consider and i you know kind of the answer i guess it's obvious asking the question to you to to fire blocks representative but even more can i assuming i would be uh wanting to use an index because we also have to come to to one of the key points of the today panel depending on how often that impacts index has to be rebalanced yeah would i still be able in the same time to have my assets in safe custody depending on the frequency of the rebalancing that is a very good question we have seen a trend of clients and institutional customers going from cold wallets based on hsm technology and requesting more and more the ability to have best-in-class technology and security when it comes to worm wallets or hot wallets and i think today the best practice for most of the established financial institutions in crypto and digital assets is mpc mpcs stands for multi-party computation which is the safest standard these days for protecting digital wallets and signing transactions and it is a field that fire blocks help pioneered and that is where we are helping a lot of our clients um and when i look at what questions you should be asking your providers when you're looking at the infrastructure that is going to be underpinning your operations you need to be asking questions about multi-layer security you need to be asking questions about compliance about governance about leveraging international standards or certifications your sock tools your iso certifications and once you have answers to those questions you will have a full picture of the level of operational excellence that you're looking to achieve in your business that will allow you to build the trust to launch your index to build your financial services on top of that best-in-class technology foundation many thanks and i guess regulation was mentioned also yesterday i'm sure even today people will speak about that um you know for years people in crypto space said institutions are coming well guess what institutions are coming but they come in hand-in-hand with regulation and rightfully so because they have fiduciary duties to their investors their supervised entities and so on so they're not really comfortable to operate in an unregulated space which means pretty much all the all the players in the in the industry okay with you know there could be a lot of differences whether it's us it's europe and so on but they will have to be aware about the regulations and that could mean specific regulations like you know in europe we're going to see a you know a lot of resemblance between how digital assets are regulated and how capital markets are regulated uh how stable coins are regulated how and how are e-money-regulated yeah so a lot of let's say uh mirroring existing legislation in in different areas yeah but you could see also legislation going towards you know applicability of me feed or miffed type of requirements in terms of what can you recommend to to retail investors and generally speaking consumer protection regulation now on the other hand yes regulation is coming yeah so on one hand regulation is coming and i think it's good that it's coming on one hand because you know we want people to be protected from from frauds to the extent possible there's no such thing as perfect enforcement of the law yeah but to the extent possible we should we should aim for that on the other hand the innovation in in the in the crypto asset space clearly outpaced the regulators for many years now yeah so people innovated and launched products of all sorts of types you know years before regulators could could react or you know in some countries could even decide which regulator should be in charge and we're discussing a bit before before coming here and one of the the elements of innovation is the idea of allowing investors you know whether they're retail or professional investors or institutional that's that's maybe a different discussion but allowing investors to allocate their assets based on an index type of methodology even so we don't have currently an etf percent right so leave you i know this is what what you guys are working on and i'm interested to hear like you know your your angle on this how you guys consider to do that yeah so when you think about an index it's a way for you to optimize the returns also if the volatilities or the market is going up or also if the market is going down and it's also a way you can mitigate the risk so this is very important from for the usual crypto investor and what we are doing here at imperium we are uh launching a set of indices market cap weighted and uh difference between an etf and an indexing crypto is that for any investment we are really buying the underlying assets we are giving our users custody with the best player in the crypto space we want to work with fire blocks and user infrastructure to build upon it and give the users custody and being very safe for them to to use imperium if you don't say openly that you're going to work with fire blocks otherwise the organizers of euro you know european blockchain convention will ask for a fee right because they they facilitate you guys met here so keep it discreet yeah yeah sorry and um yeah what the index offers as i said it's a way to optimize the return and mitigate the risk so okay i'm gonna i'm gonna challenge you with with a question here yeah um there's a lot of discussion and people can observe that that currently the entire crypto market is highly correlated with bitcoin well there are people saying that bitcoin is highly correlated with sap 500 or you know various various uh the types of correlations that people people uh have spoke about but my question would be okay if if the altcoins are actually highly correlated with bitcoin you know then why would i bother to use an an index because i can just put money in bitcoin and that's my index of the of the whole market for now because bitcoin has a very big dominance in the crypto space yeah short term it looks like all the market is following bitcoin but my perspective is that with further development of the crypto market and further development of the altcoins i think at one moment they will separate and they will not follow the way they follow now bitcoin evolution yeah so this is my perspective about that well and i think history confirms you i mean as they say history is no guarantee for for the future but there could be similarities yeah i think just on that point i think you will see more sector based indices come the demand for that and again that might be led then by regulation in the first instance providing more stability and confidence right and you know that's why we certainly believe at coinbase is that we're advocating for more regulation as a result of that and then we'll see further adoption uh obviously that gives you security it's an investor but also just gives confidence that you can launch products and then demand different types of uh indices as a result how would you see the sector uh we were talking about this earlier right you know we could even go as far as uh seeing sectors in nfts certainly smart contracts um and just this could be a whole plethora of of uh indices that we're not even thinking about just yet if we go into uh deep into d5 web 3. so look i think we we see that evolution is not there yet for sure um but we see you know certainly demand uh coming i don't know if don't i don't know if you've got any comments on that yeah i i mean happy to add i mean this is an area obviously of interest to us um uh as lcg obviously we own ftse russell and as part of the group we've done some explorations and actually launched some index products on the crypto space um you know i i think there's there's lots of room for innovation in this area and i agree with you i think the sort of sectorization of indices moving forward will will be a kind of clear segmentation of some of the products that will evolve i think equally you know much of the work that we've done has been focused on the kind of reference pricing and really getting that kind of straight and we've worked really closely with the regulators both kind of in the u.s and in the in in the uk and across europe um to ensure you know that we've got a really kind of gold standard um for reference pricing um and and and i think that's really core to really driving um the evolution of some of these things largely for institutionals who you know have very high expectations around how these things are managed and governed but um again i think as i said there's lots of scope for evolution i suspect there'll be an interesting growth in some private indices are not unlisted and specifically in the context of blockchain technology i think there's a lot you can do there fundamentally in terms of providing sort of tokenized private indices that can be transferable and tradable otc potentially so we'll see how this all evolves but um yeah you certainly need good quality data that's for sure uh and you need to make sure it's from multiple venues uh that you can trust so i think that will in itself drive the demand as well well it just struck me that we're talking volatility and we have representatives of coinbase coinbase and london stock exchange and i think it was a few days ago where the chair of sec mentioned amongst others that adoption of innovation is a must for the traditional let's say uh financial markets amongst others in order to expedite the settlement right we have the famous t plus two t plus three settlement yeah and well the hint is that dlt broadly probably blockchain i mean the the the purists make these kind of distinctions would be part of solving that solution which would mean you know faster settlement and i'm just thinking you know could faster settlement mean you know obviously means higher you know increased velocity of money but could also mean increased volatility if we're looking at the tradition this is interesting um because we've done some explorations around this specifically so for context we i mean because just to complete if that would translate to the traditional markets here i mean it's not just how it happens in the crypto markets but in the traditional markets yeah so um in um we we entered into the fda's innovation sandbox um five um to deliver post-trade settlement infrastructure for uk equities uh so we tested the infrastructure we built the infrastructure we tested the infrastructure and what was interesting actually as part of those explorations is you know there's a lot of narrative in the capital market space around this specifically this area post resettlement with respect to dlt and how it can solve for providing instant settlement as the holy grail now i think our view is very much that it's not the holy grail if you look at kind of um kind of large cap settlement and listed markets today it's largely credit driven and if you look at the advantages that that provides for member firms whereby you can capitalize on opportunities in the market without having to worry about effectively how much assets you have in custody and in depository and making sure that those assets are available in order to be able to settle uh your obligations in real time so i think in that instance when you look at services that are offered to these to these clients in terms of prime brokerage solutions in terms of lending facilities and leverage equally on the on the on the csd side there are facilities and credit facilities that are made available to member firms it that actually increases liquidity and velocity of trading in the markets because it is largely decoupled in terms of trading and settlement in the institutional markets today um for the types of assets that we would typically deal with which again is very different model to what you see in the crypto markets today in terms of and it's fully consolidated market in terms of post trade and trading all in a single uh venue but yeah we'll have to see how that evolves i suspect you'll see innovation in this area where there will be maybe for sort of mid capital small cap instant settlement or let's say t plus end of day t plus one etc but i think having variability in that space leveraging technologies like blockchain to facilitate that having real time um position management and position view for member firms largely kind of obviates a lot of the costs around reconciliation which for for large members today is literally in the billions right um so i think there are significant efficiencies and the technology can bring to bear but i think there will be there will absolutely be variation in terms of how the kind of setup windows are managed with respect to that i don't know that instant settlement is the holy grail across the board i think when you look at some of the stresses in the market when you get high vol it's you know it's around the collateral right and if you can move that collateral instantaneously and if you've got digital cash via sablecoin or something else then that does create efficiencies in terms of being able to reconcile very quickly in a sort of highly stressed market so i think maybe that then does uh stop all the sort of increased margining uh with finger in the air percentage percentages and you know you can become a lot more dynamic with that so i think that for me would actually help when you've got real stressed uh moments but that's not always the case that's not always what's driving volatility i would agree with that i will also add that there's a huge amount of conversations right now with all the traditional financial institutions coming into the crypto space and helping define the new standards it's really instant settlement the holy grail probably no do you want to be settling once a day twice a day what is the standard that we want to be moving towards and i think there's a lot of interesting conversations right now to manage and to create that financial market infrastructure that we will be using in the decades to come yeah i guess i guess uh all over the world the institutions are looking for a standard it's i wonder if it's going to be one standard or multiple standards that's this to be discussed because you mentioned dotton about uh being part of some sandbox in us in uk okay now uh in eu uh which sadly does not include uk anymore but uh in in in eu we have uh recently there was there was legislation passed basically allowing for creation of sandboxes uh specifically for utilizing uh dlt uh for the purpose of market infrastructure the pilot regime yeah yeah it's it's not yet finalized but i think they're they're they're entering into kind of early stage consultations to really kind of roll that out so it's it's it's preliminary but um yeah no it's very it's really interesting and equally in the uk side um uh that there's exploration to do something similar so and i would imagine equally in other jurisdictions too but i mean i think i think ultimately this is about innovation in capital markets fundamentally right it's about looking at the existing regulations and rules around settlements around market infrastructure and seeing how you know in this new world whereby you know in the past regulation it was largely driven or executed through centralization of those controls and those governance mechanisms in order to regulate the markets efficiently because that was the most efficient way to do it you know today we live in an age whereby these technologies can actually solve for these things without the need for centralized intermediaries and so the real question is you know can you define new market structures and market models whereby many of the protections that are acquired the controls and the governance that needs to be in place in these markets can be facilitated by technology and automation so i think that's really where you know much of this exploration is going fundamentally um but it will be it will be a slow burn rate this is going to take decades yeah well well for for years has been said and it's still being said that uh blockchain is uh you know what they call it a solution in search for a problem right uh well it it you know i i don't know you know if that's the case since if i look both in us and eu and across the world actually um blockchain definitely steered up the discussion for a number of very macro super important things like cbdc is one of them and market infrastructure is clearly the other one yeah and and by the way i think they're interrelated and uh there's more to be said last last question uh from the entrepreneur's perspective i mean you see us talking about institutions and standards and regulations and how should how do you guys as entrepreneurs in this spacing to position yourself because you'll have to interact with all this infrastructure and exchanges and so on yeah we're very glad that the technology is moving forward and we know the pace is i think the biggest out of the all the markets and we are very happy to be able to cooperate with all these institutional prayers and all the regulators because i think this is the way the right way to move the space further yeah so i embrace it thank you i think the whole industry embraces it uh i i haven't really heard many people in the crypto spaces saying they hate regulations what people don't want is regulation that kills the industry yeah and and that is also possible by the way so uh there's a there's a there's a fine balance to be to be kept there um look i'm afraid that the time allocated toward discussion about volatility and uh indexes and market infrastructure and custody i mean these are pretty much the topics we've addressed today expired so i'll take the opportunity to thank then send the panelists um i don't know if there is time for any any questions or if there are questions from the audience they must be outside yeah okay we talked too much thank you thank you everybody thank you very much [Applause]