Solving Trust and Liquidity Challenges in Digital Asset Markets

Asalamu allayikum. Good morning everyone. Wow, what an exciting panel. I have the honor to moderate today. Thank you Michael Amar and Bushra for that.

So let's uh dive straight into the topic of institutional trust uh with you next to me. Michael, tell us a little bit how the evolution of prime services and um clearing has changed the institutional assessment uh of counterparty risk especially since the year 2022 and why 2022.

Sure. Uh 2022 was a tumultuous year actually. It started off with uh US Luna crashing then was followed by three arrows default and then the wild unsecured lending market blew up. the Celsius and the BlockFi and it ended pretty spectacular with the default of FDX. Um and so that was right as the time as we were establishing one of the first prime brokers and clearing firms in digital assets.

Um and at that time we were calling out really two issues. The first was that there was this inherent credit risk in the system that wasn't being valued or priced properly or really priced at all. And the second there was major challenges around the vertical integration of the exchanges and certain roles and responsibility. those lines were blurred. And so, um, really two observations over the last few years.

The first is that counterparties are are hyperfocused now on on, uh, managing that counterparty credit risk. They're doing that on the run, which is difficult to do. Um, but what do we know? We know that the price to hedge risk prefx was near zero as folks are willing to pay very little to to hedge that risk. We now know it's certainly not zero.

But the question is, you know, what is the right price? And it's hard to find proxies for that. The second observation is um when these early stage markets develop and mature um we've seen this in other markets and so the blowup reminds me of uh of 2008. If you ask folks in the room was it conceivable that Lehman Brothers, Beer Sterns, AIG, Wakovia would simultaneously default on a trillion dollars of net liabilities? I think the answer you get is not in my lifetime or or there thereabouts.

And so when this repricing of credit happens, it tends to happen suddenly and usually in the absence of any um of any good information. And so that's what's going on now. And and you know, prime brokers are there to really that they're experts in managing counterparty credit risk. The big gap that's still left is uh what we take for granted in traditional markets is financial transparency. Yes.

Uh getting audited financials. And to wrap with this point, um the definition in traditional markets is regular financial transparency on a monthly basis according to GAP and IFRS. And we're not just we're just not quite there. But the good news is I'm a glass half full guy and uh we're we're making progress.

So in a nutshell, would the panel say that there is more trust today than in 2022?

I I I think so. I think I think what we've seen in the three years since then uh is more trust and and the reason institutions are coming in is because I think there is a little bit more of an ethos of law is law rather than code is law right so we rely on code to be correct and to to work our technology but we also rely on contracts and agreements and relationships and that's a a very traditional finance kind of point of view and so when we we look at some of the things that have been developed at copper since then and and across this the the market is um a lot around counterparty credit risk and and to the credit of of what Michael was saying, you know, there's uh things that allow you now to pledge your assets from your custody account so that you can get the trading capacity you want without having to necessarily lose control of your assets. and that

putting that into a legal framework rather than a code framework, you know that it's going to survive bankruptcy and and the you know a court looking at it.

Would you agree with that Bushra at Galaxy and what are some of the remaining big trust issues that remain to be solved?

I think what's interesting here is we are in a still in a very emerging technology type asset and we're all still building. We're talking about trust but there's a lot of fragmentation as well. uh something that a lot of players in this space are adapting and working towards. For instance, um as you are investing or trading in the liquid asset space, you have to be comfortable going over centralized exchanges, OTC counterparties and being able to trade on chain. So the fragmentation itself is by design given how nent the space still is

and not a bug in the system. Uh the second layer to that is the liquidity itself and its portability. Uh and once we are past that stage we would have graduated to what I would call longer duration money um and much bigger plays in our space. For instance, uh as we're talking about margin in and counterparty risk, um I don't think it's sustainable for counterparties to put um margin in across 10 venues and once you're introducing prime and I have my colleagues here, you know, t touching on that uh coming specifically from a traditional finance background that used to trade rates before and the way we look at it, you look at a central place where prime basically basically like where your credit is centralized and you're able to trade in all these venues. So the trust is not really the problem anymore in a sense.

It's more being adapt adapting basically to the fragmented liquidity in the space that where we graduate from that we're going to be in a much better shape.

That brings us to the next topic of liquidity fragmentation versus consolidation. Michael, now from uh your point of view and uh you know in the trading space also um what are some of the biggest issues there? How can we improve liquidity mobility and make sure this happens at a very fast pace?

And just just to piggyback on on some of the comments made, I I sometimes think folks think fragmentation is is a negative thing. In fact, fragmentation um for prime brokers when that's a theme tend to do very well as the large trading firms as they thrive off fragmentation and global pricing. Um but I think you need to unpack it one layer below of what products perhaps fragmentation will happen and where there'll be consolidation. And so I kind of broadly break them into three groups. The spot market, one of the characteristics about spot is that it's fungeable.

And so the parallel I think of is the foreign exchange market. and I can buy euro dollar yen from the Deutsche Goldman or Barkclays and give up those positions to a prime where they where they net and settle. Um that's a that's a big um driver of that market and due to fragmentation you get more specific pricing. So I think digital assets follows that path. derivatives are different.

That characteristic doesn't have that fungeability, right? And so due to that, a futures contract on one exchange is not fungeable to the other. And so those tend to flock to central limit order books. Um, and I think those will the winners of those will be the ones that lean in on financial transparency, regulations, balance sheet, etc. Um and then on the the the last side of it um the security side broadly ETFs, ETPs and digital asset treasury companies those will be global across different exchanges.

But the key is as a institution you largely have a fidiciary responsibility to source best price and and as as mentioned through fragmentation one of the keys is to have credit to them and a lot of the ways you do that in traditional markets is through prime brokerage and

clearing. Amomar, let's talk about stable coins and tokenized cash here for a moment as well as you are one of the experts here on the panel now from an infrastructure and cost perspective. Um, how does the regulatory environment look like and how do you see tokenized cash develop and evolve from here?

Sure. I would never consider myself an expert in anything that but I appreciate that you you call me one. Um I think I think you know it sort of touches on the the topic of fragmentation. Right now we're in a early stage of of market development. And so you'll find that there are almost an infinite number of different ways of transferring cash what would be fiat currency on digital rails on on blockchain based rails.

And so some of the the unlocks I think that are needed there is a little bit either of consolidation and some some larger um some larger user bases that consolidate around five or six different uh different ones for different currencies or some fungeability between them and some mechanisms in which you can get that fungibility. So I think that that those are the things that right now are somewhat hampering the market and obviously regulations around can cash pay interest or does it have to pay rewards? How are those rewards paid? These are some of the still debates even in the US where the Genius Act tried to clarify uh what stable coins actually are. You still have a little bit of open questions as the rulem comes out.

So I think those those open points are still early stages for developing that marketplace and that product. Yeah, if we stay on the topic of stable coins, Bushra, a lot of institutions are using them now as a collateral settlement uh as well. What are some of the new rules, regulations, insuranceances uh that we need to really, you know, make sure that they are also um yeah um guaranteed?

Yes. Um, piggybacking on that, I think

stable coins will be treated as high quality cash once a few kind of data points come to the system. Number one, obviously the transparency on the reserves.

Yes.

Um, I don't think monthly audits cut it to treat basically stable coins as what we call high quality cash, which is basically cash, repo, treasuries, uh, in the traditional financial markets. And I think once we solve for that, that would be great graduation for stable coins. That's number one. Number two is the operational hurdle itself and how they're treated in balance sheets. Um there needs to be very specific clarity when you're treating collateral versus custody and what you're pledging against your you know margin in basically derivatives.

So a few operational hurdles that we go through but I think number one is the transparency on reserves and having these on real-time basis would make them high quality cash that will be treated pretty highly as you know this um I would call um high quality cash that we're all craving for to be able to trade 247 which is the north star of everyone sitting in this room.

Yeah. Um if we stick uh with liquidity for a moment, Michael, um what kind of changes do you think will be necessary to improve the situation in the market?

Sure. I think there's to draw a distinction between crypto trading and and tokenized finance. Those are largely different things. And I think kind of the next wave that we're really seeing is is tokenized financing. It might not be as exciting, but the unlock there is is pretty material.

And so I think you know zooming out um anything of value starts to get tokenized being put on chain perhaps in smart contracts better specifications in those and using that as good settlement or or margin. Um you know something like tokenized repo uh is incredible. In the US you have CFDC commissioner fam coming out with the formal announcement of of tokenized collateral and stable coins. this starts to move traditional markets to 247 uh makes those better marketplaces, more trading opportunities. So, we're at the very very early stage.

I'm a baseball guy. It's probably the second or third inning. So, we have a we have a long way to go, but exciting.

Yeah. If we zoom out for a moment and as we are all global citizens, one of the things that I'm worried about personally is the digital gap in the world, right? I mean we speak here about uh tokenization and stable coins and everything but there are a lot of countries in the world you know which don't have access to these tools. Um what is your outlook? Do you think that there will be more globalization um of these assets?

Uh do you think that the uh digital you know divide in in that sense will widen and what can we do about it?

Directed at anybody or

anyone? So I I I think I what we're seeing really with stable coins as a starting point, but I think moving on to other tokenized assets is that globalization, right? You you're one of the reasons I think the US government switched such a dramatic 180 on stable coins is that they're largely exporting the US dollar to be used as a reserve currency in many economies where they wouldn't have had access to the dollar if not for stable coins. And that obviously that helps the government fund itself. that helps use, you know, create creates a bit of political power in in the world.

And so I think the that globalization trend is going to continue as equities get tokenized. And now during the middle of the New York night,

somebody in Asia can trade stocks that are listed on the New York Stock Exchange in a tokenized form on some trading venue that has the approvals to do that. I think that that now has made a global stock market that can run 24/7, not just from the venue in its original location, but really having trading counterparties around the world.

Yeah. And a lot of uh digital asset companies like yours are also looking east, obviously expanding from New York and and London now more into Abu Dhabi and and and Asia, Singapore, Hong Kong. Um do you have any specific plans uh to yeah launch operations around the world? Today, [laughter] Galaxy announced the opening of its office in Abu Dhabi.

Navy GM uh if you guys have any questions, I will be leading the office there. Uh here, we're very excited. Uh it's not only an Abu Dhabi play, it will be a Mina play. Um very excited about the region and how we can partner with the region as well. Uh we see a lot of players keen into working together on making this space uh go much further where we want to see it.

So, thank you.

Fantastic news. Wow. We need to celebrate afterwards. Uh, Michael, for you and, uh, your new company, your new baby. Any plans to set up shop elsewhere?

Yeah, certainly. So, we're we're pretty global in nature already. I just did a trip in the in the Far East. And so, I spent some time in Korea and that market's pretty interesting. It looks like there'll be two uh ETFs that come out, Marray and Samsung, but there's more clarity around um institutions coming in there.

uh if you spend time in Tokyo, the the JFSA is changing the the regulatory uh leverage ratios and historically when those leverage ratios change, there's a pretty material impact kind of elasticity into into the the trading volumes that go through. Um, we've also set up shop here as well and the FSR is is is one of the uh the the better regulators that get it and I think just on a global basis the regulators do take a lot of cues from the US and and as Amara mentioned you know the US is kind of behind it and so we're starting to see um uh mo most major financial uh destinations get behind it. I'd say the one challenge of that is you still have ambiguity between each of these regions and so spending enormous amount of time and and resources and in in navigating and mapping those but overall broadly um exciting.

Yeah. any word from you in terms of

Yeah, I mean we we we have an existing entity here that we're expanding in terms of scope and uh and size and you know echo what what Michael said about how um the regulatory environment here probably even preceded the US in having a lot of of support for innovation and for uh expanding blockchain based asset trading and and uh and custody. And so I think we see we see this as a key part this area as a key part of our our strategy as you create a global business because we do have to cover 247.

Yeah.

Uh time zones.

Yeah. Um what are some of the uh new market participants that you see joining uh you know the digital assets market? I mean we have sovereign wealth funds, we have banks, insurers, private individuals, which are some of the uh untapped uh potential clients that you're looking out for.

So I wanted to uh take that one. So banks are mega selling machines and we're very excited to have banks in this space. Um it was the best thing that happened to us with better regulations coming into our space. Now banks are not shying away from building the rails that will bring what again I keep referring to as the long duration money. Uh sovereign want sovereign funds and uh mega managers want to participate in the space.

They got some regulatory clarity now they need the rails that work within their custody needs their regulatory frameworks that are going through and that could be adaptable across these platforms. So, we're very excited to have sovereign wealth funds coming through and mega managers and we're very excited to have in banks selling the product to the space because we just have two minutes to go now. I want to ask the uh crystal ball question. So, if we look through it um for 2026, what is your prediction in terms of market growth um and uh also opportunities for ladies first?

Sorry,

I do not have a clear ball. However, I'm very excited about generally bringing more tokenized treasuries into the space.

We think having that in place in clean proper rails that are potentially being used by the bigger players would create a lot of liquidity which means less volatility in our space. Um being able to have 247 immutable continuous collateral is huge to bring this space to another level of maturity.

Yeah. Less volatility that is important. No more 2022. Amar

I think volatility is actually good. Most market participants like volatility. It's the discontinu discontinuity with volatility that is not good. Right. FTX was a 100 to zero in the matter of minutes.

That's uh that's hard to hedge. Yeah. But I I I think 2026 is the inflection year for this not only this industry but for the technology because we're seeing all the incumbents from the financial markets really having spent the last three years or the three years prior to this year putting all of their projects in mothballs or ice now really re restart and announcing projects that are going to launch next year or you know resuming the services that they had been providing that they pulled back from under a different administration in the US or during crypto winter. And I think when you start using blockchain rails for all asset classes, that also has a knock-on effect on the crypto markets where crypto is valuable mostly because it is the gas that fuels the technology. It is how you pay for transactions to get recorded on a blockchain.

And so for most of these uh crypto assets, more use through the the spreading of the technology is going to mean more value to the underlying crypto. Last but not least, Michael,

best for last, I think. Right. Um, I I would say just kind of piggybacking on on on what was already said, but I I think again that tokenized finance side is is where we where we unlock from here. The tokenized finance has outpaced the connectivity tissue though. And so we really need to focus on the integrations between the modern blockchain technologies and some of the legacy systems to really uh to unlock again.

Uh but no doubt the the the resources are here, the regulators are behind the the the big capitals behind it and we're we're excited to be in regions like this that see the see the future. So exciting.

Fantastic. And of course 2026 will be the Chinese new year of the horse. So I hope that everybody's going to raise their head full power. Bushra Amar Michael give it up. Thank you so much.

Thank you.