The Institutionalization of DeFi: Bridging the Gap Between Traditional Finance and Crypto | KBW2023

[Music] great thanks everyone um let me start with uh a quick round of introduction and then I'll hand over to uh um Richard um oh sorry Stephen and sit to also introduce himself so my name is Kelvin co uh I am one of the co-founders of spa group and um also CIO for our asset management business um and prior to starting Spartan um I spent 20 years in trfi um I was uh with Goldman for 18 years um and uh led the firm's uh research business in Asia and thereafter spent about 3 years working with a US based hedge fund um that was based out of New York and uh started by two former uh managers that came out of Soros so um I'm quite uh well acquainted with the uh world of institutional Finance um and at Spartan um we have three business lines um so I mentioned our asset management business which consists of three funds so we run a long short fundamental hedge fund strategy that was our earliest fund which now uh has been running for 5 years um and is up over 500% um since Inception and uh we also have two Venture fund one focused on um the defi vertical and another one focused on um gaming and the metav US so in aggregate we manage about $350 million in capital today our second business is our advisory business um which helps crypto startups to raise capital and uh do m&a and restructuring and um we um were early backers of projects like Solana um and the flow blockchain as well as um blockstack uh we help many of these projects raise funding during the last crypto winter um that subsequently allowed them to thrive and and and become what they are today um we have also worked with other large ecosystem players like um uh bit exchange to create uh bit Dow and then mental um and also are working with uh bitgo um as well as uh a few other major crypto projects um so that's uh my background I'm happy to pass over to Stephen um to introduce himself yep so my name is Steve Richardson uh I'm managing director for our financial markets business at fireblock uh fireblocks is a institutional uh digital asset infrastructure company uh we really focus on providing best-in class wallet infrastructure uh and other tooling for institutions to be able to offer digital asset products um we work with large Banks like uh bny melon ABN Amro uh NAB A&Z Etc but also work with payments companies in the likes like visa and worldpay and and others to basically enable uh really interesting use cases is along the lines of digital assets so very happy to be here today I'm Sid I'm the co-founder and CEO of maple Finance we're an Institutional Capital Market so what the way to think of what we do is it's like a platform to lend to uh institutional borrowers which could include trading firms uh fintech Originators but it broadly covers digital assets and real world assets my background prior to entering crypto was working at a bank actually worked at NAB in Australia which is one of your clients now uh stepen and so I saw the institutional perspective on debt markets and this was helping large lending companies to borrow Maple's tried to recreate this on chain and we've done about $2.2 billion in origination since we launched in May of 2021 increasingly this year we've kind of Diversified The Lending vertical so we do tokenized T bills we do loans to trading firms that are collateralized and then we do real world asset lending so this is like loans to small businesses in the real world but it's all in the efforts of having an impact on the real world using def rails so very happy to be here great thanks for that introduction so the last uh 12 to 18 months obviously has been quite a trying you know period for the industry um and it's kind of crazy to think that uh you know FTX was less than a year ago um but not withstanding all of everything that's happened um it's great to see the interest in the space in general um especially um also seeing that uh you know the institutional interest in particular has not been significantly dented by everything that's going on in the space in the last few months we saw announcements from some of the largest asset managers in the world you know the likes of Black Rock and vesco Fidelity and others um to create ETF products um what do you think is behind this um surge of Interest I think the space has come a long way and this you know this this is how capitalism should work where these large ETF providers have seen that the space has grown large enough and that their clients want this type of product and previously they were B from offering it to them or or they didn't have the internal processes set up for it so I think it's largely profit motive uh and you know just doing what they should do which is serving their clients interests I think the the interesting part is these are you know these are spot uh BTC ETFs that are proposed so it's it's very it's very much kind of like entry level for crypto and so the question for for those of us in this in the space is how do we then progress that interest so that it invol you know so that we could soon see black rock or Blackstone you know a very large very reputable firm working with defi rails whether it's credit on chain or whether it's using other Financial products but settling it on top of the blockchain and actually interacting with smart contracts which is you know probably a phase two or phase three in that kind kind of institutional adoption and I think what we have to do to uh to get that interest is to show that it can be lower cost so really drive the go almost appeal to their client base um through lower costs liquidity transparency instant settlement and so I think that's that's kind of what we need to emphasize yeah look I I think it's it's been a journey for sure right I mean obviously regulation is uh coming to a place where people feel uh they can kind of operate in this space I think secondarily a lot of the kind of the operational elements of operating within digital assets have slowly been figured out over a period of time right the broader ability to uh acquire the underlying asset the ability to reconcile that asset the ability to then offer products that allow folks to be able to use it so for institutional folks to come into a space right if you think about uh why you use uh Prime broker you think about why you go to a large bank right a lot of the middle office and back office and the reconciliation work that's required to be able to to do that is done quite efficiently right uh if you think about really operating in the digital asset space as it's a norm uh you know you talk to people they have to find the right folks to basically enable accounting uh tax implications middle and back office implications it's a it's a whole journey right and so you're now seeing like a more comprehensive product Suite come into the space that I think makes it easier for folks to be able to jump in and then to your point to the money is there right that that now allows it to to make sense uh I think in order for things to then progress into defi you basically need to have some level of harmonization that allows what happens on chain to be translated into the type of regulatory and and Reporting requirements that they have offchain right and once that's solved in a in a real way I think you'll start to then see this transition and more interoperability between centralized finance and decentralized finance really happening got it and you talked about some of the things that these institutions need to come on board in your mind are there certain impediments today um you know besides sort of this um you know reconciliation and sort of you know all the back office um uh settlement that needs to to be done are there other impediments in your mind that is preventing these institutions from coming into the space look I I think from a Maybe from an infrastructure side uh obviously understanding wallet infrastructure and all those components is relatively complex right so when we went through the Journey with like folks like bny Mel melon or NAB or A&Z right there's a a huge process that goes in place to be able for them to offer that infrastructure as a whole um I think you have great custodians out there that are making it much more seamless for folks to be able to operate and and that's one methodology of going about things there's self- custodial infrastructure and and really for that it's building the stack together right if you're a crypto OG I think you probably remember the fact that you have to figure out your wallet then you have to connect to different exchanges and venues then you maybe need to figure out where you go to tax bit or someone else uh then you need to figure out who's going to do your auditing and Report like there's just this massive stack of basically external factors that if you think about traditional Finance you go and your on board with City or JP Morgan and it's all taken care of and you figure out that eron young is your auditor right I mean it's not a very complex stack so I think basically there's a lot of let's say broader integration that we're doing on the infrastructure side to find best-in-class providers that do these different things and seamlessly integrate their services into our wallet stack to them be able to make it easier for folks to be able to operate um but you're seeing custodians also take this tack of providing a kind of a wallet infrastructure in a box right that enables them to then more seamlessly be able to to get out of the out of the gates yeah I think Stephen M Stephen makes some great points around the the infrastructure side of things I think wallets and Key Management is is certainly one that's that's going to be obvious and and also will take these firms a long time to kind of get around so I think whether a solution is you know fire blocks or or an NPC like that or whether you start to see applications building wallets internally like inbuilt into the app I think is another way of improving the user experience and potentially Outsourcing the security away from your institutional partner and more to you know you as a as a vendor or service provider so I'm pretty interested in that I think we've seen some interesting developments there with kind of account abstraction and and inbuilt wallets as well as authentication we're we're actually just building in third party authentication from Maple now so instead of just connect your wallet which is kind of the standby for the last couple of years when you use defi you can log in with an email get reporting uh get account management but I uh I want to also shift and focus on the kind of the commercial aspect so ultimately there has to be a big profit Motif as well for these firms to come in and I think since last year a lot of the returns aside from you know just having a a Bitcoin spot ETF and and AUM management fees the returns from actively participating in in defire and other sub sectors of the space have kind of gone away and so we need to see we need to see kind of profitable activity entice these firms to come back and whether that begins with you know real world assets you know run from maker was here before talking about that and I think if uh if you see firms that uh can see the ability to do whether it's private credit on chain and get maybe 13 or 14% versus what they could get in traditional debt products that's one way that we look at trying to entice them to come on chain but that's ultimately going to be one of the strongest motifs to get them to invest the work in setting up that infrastructure if we don't have the profit motive it's very hard to get them to to invest in the the operations Stephen I think your point about sort of you know the operational setup you know and and how to get that you know uh the onboarding process was right on point I I remember when we started our first fund five years ago and we were one of the earliest sort of liquid funds out there um we couldn't find a custodian that could customize the range of assets we wanted to trade um the fund administrators had no clue about how to administrate uh you know crypto assets and um so it's just a pain you know trying to assemble different uh groups but eventually we managed to find something that worked at least for a while until uh the the industry evolved so um I think it's a lot easier today but it's still nowhere close to what the traditional experience is where if you're launching a fund you go to a Gman or a city and then bang everything sort of gets set up for you right um I think we'll get there in time one one of the interesting ones that I think often kind of goes a bit on noticed is as well Fe it on an off ramps so if you're a Goldman currently you can't hold a stable coin to actually do anything in in or onchain so the you know once we have kind of I guess guidance and permission for banks to participate in the space which I think is probably Leaps and Bounds ahead in in the APAC region then you'll you'll be able to see more institutions come in because they won't have to worry about you know what if the stable coin deegs yeah so um speaking of sort of interactions um on chain um to your point earlier said um you know I guess you know as a as a um uh Crypton native fund you know spoten you know we sort of use these defi protocols right for for for risk management purposes uh to enhance our yields and so on and so forth so to us it's pretty second nature now because we've been doing that for the better part of the last three years but for some of these other tradire institutions that are coming into the space you know how well acquainted with um defi are they and um and and also how acquainted with with the risk you know of sort of um trading and and and managing assets on on D5 protocols do you think hu huge variation is what I would say um there are some who are quite far ahead because they have you know individual teams who would be aware of some of the large dii protocols which I think is something that you couldn't have said a couple of years ago but you know I see Folks at uh City uh Goldman who have like a very comprehensive quite advanc knowledge of Def protocols so whether it's a compound Maple maker um Unis Swap and so I think there there are folks there who kind of conceptually understand it but then it's another step from being able to kind of theoretically talk about it to either having used it yourself in a personal capacity and I think some of them have but then being able to propose a framework for an institution to use it and I think um I think you know from 2020 we were left with this kind of baggage that a lot of the space has kind of perceived as a vehicle for a speculation speculation is important in all new Financial Innovation dating right back to like Railway bonds and and Railway equities in in the 18 mid 1800s but what we I guess what what we need to be able to show is that their clients want to use these products in a safe way so you know an immediate Catalyst might be that if cities private wealth clients were asking to be able to trade assets um on you know Unis swap or acquire some of these alt coins then it's going to prompt these institutions to start to develop more of that expertise but from the research rep research reports that I often see coming out of these institutions I would say they they do have generally a pretty comprehensive knowledge look I mean you can look at uh project guardian that happened in Singapore right I mean they they leverage there's a difference between uh in my mind the the underlying technology right the ability to leverage tools and uh tooling and kind of how it operates in the space today uh at which point they have to think about regulatorily how they can they can interact right so when we sit with The Regulators the first question they ask is who how do you know who you're settling with right I mean in general in traditional Finance the idea of knowing who you settle with and who owns like the final settlement risk right to make sure that a trade goes through uh and who do you go to in the case of a trade break or Recon ilation issues all of these different things are concerns that banks have I think onchain identity is is the biggest concern that a regulator has right in terms of uh who are you interacting with who are you settling with and how do you know uh that they're not operating in a licit basis right those are just generalized questions right the underlying technology though I think they think is interesting right the the idea that you can get rid of intermediaries the idea that you can settle point to point the idea of onchain DVP of assets happening you're seeing that experimentation happening with in bis you're seeing that experimentation happening uh within Singapore uh and Mas and what they did in project guardian you're seeing it happening uh you know within different Innovation centers across the globe and so they are relatively familiar with the underlying technology I think they think the technology is interesting they think the technology has an opportunity to really uh create more efficiencies reduce costs all those different things I think they have to make the mental hurdle in their mind from a regulatory perspective right and I think there are a lot of firms in the defi space that are doing things the right way that are operating uh consistently that are thinking about broader regulation and what it means but for banks right uh crypto as an asset class is a small portion of their overall portfolio they're not going to risk uh you know the broader business that they have to enter into a space that they don't know or is undefined in the ways that Regulators think it's undefined so I think the more uh Regulators are able to understand and grasp the more we see to tools and Technology like onchain identity come into play uh we've seen things like AAR and others where they're creating different pools that are for or permission pools uh based for you know different institutional participants to solve uh that in effect who you knowing who you interact with basis uh I think then we'll start to see some some trajectory there in my mind yeah I I think that's interesting um I mean unfortunately like aveat that that experiment didn't didn't really end up succeeding but the over overall it's a pretty large mental leap to go from kind of the traditional Financial system it's when you when you break it down it's largely based on just the acceptance of counterparty risk you either settle with a person or you take the counterparty risk of the Clearing House and accept their balance sheet risk that they will enforce the trade but either way you're you're relying on somebody's balance sheet to absorb the risk defi is more akin to having terms of service with like an email provider you don't you don't enter a contract with Google to make sure that your email reaches your the person that you're sending it to you just accept terms of service um and so that would be like a mental model shift for traditional firms to uh to undertake but you can already see that in some of the case law like the last Unis swap case from a couple of weeks ago where a class action was dismissed on the basis that it's like holding the creator of a self-driving car responsible for its misuse and I think so I think it's starting to come through in um in some of these judicial decisions I think I'm interested I think one of the most interesting things happening in the space today is what's what's happening with the stable coin providers profits you know you saw the other day um tether announced you know that they're I think now a top 22 debt holder for the US government and so if I'm a bank I've got to be looking across at that and going that's a deposit product where they pay zero interest to depositors and keep the entirety of the returns from investing those assets in pretty lowrisk you know low lowrisk government securities and so I think that's that's one thing that could drive Banks into the space and and and to adopt a more kind of progressive mindset to it yeah yeah I think for now at least the the banks are still I think more focused on trying to tokenize um traditional assets and sort of bring it onchain right but speaking of uh you know going back to your point about Goldman you know they do obviously have a pretty large you know digital assets team that you know we in conversations with but you know even going back as far back as 3 years ago um I had a call from somebody very very senior in Gan on the um uh management committee and he had learned through some of our investors who government partners and MDS that um you know we exist and uh gave me a call and said hey you know we love what you guys are doing in the space and you know want to learn more and when I asked him you know when I probed what his interest uh really was he said uh well I know I know you guys are investing actively in Defi and we have a team of of of people um developers and researchers that are looking into things like synthetics and a and compound and chain link and so on and we think it's fascinating you know so they obviously have done the research not to say that they're going to use it anytime soon but they clearly are monitoring everything that's going on and eventually they wrote a check into our fund and said you know we want to know everything about all of these other new protocols that are going to come right and we we think we'll get that three or fun um so it's interesting uh to see that level of knowledge but yeah besides the bank I mean what are some of the other sort of institutional investors that you guys are seeing interest you know from um to coming to Define crypto it's uh it's a mix and I think one one of the interesting aspects is the important role that funds like Spartan play in helping to educate the larger traditional funds uh not traditional funds but traditional institutional allocators and investors so a large p fund or endowment or you know somebody like TC is not necessarily directly going to go into a def protocol they're not going to deposit liquidity or own the token but they might commit LP checks to funds like Spartan who are who are very Progressive and forward on the defi side of things and then that helps kind of you know that's an investment in education because then they then they attend the meetings they they start to ask questions and um and get really thoughtful about about how the d space is involved is evolving we talk a bit to large endowments and Pension funds ultimately in you know my ideal State 5 10 years from now they would be direct participants in dii protocols like Maple they are the biggest fixed income investors in the world but in the near term I think where we see the most institutional interest is coming from smaller hedge funds who might have some of those large players as LPS and they have flexible mandates and they also don't have a reputation that they need to to protect and I don't mean that in a cynical way but I mean if you're a $40 billion asset manager defi is going to be a tiny part defi or or web 3 is going to be a tiny part of your revenues um but a huge contingent liability on your reputation so it's these smaller hedge funds and Breakaway asset managers who I think we try and focus the most time on on you know getting them onite and getting them educated and then uh I would say also family officers because they have flexibility in their mandates and you know typically there is one or two decision makers there's maybe a portfolio manager or there's the the principal themselves um who represents the uh the family money and so we've started to see some activity from them whether it's holding tokens directly or whether it's putting money in pools like Maple or like RV and um you know trying to earn a yield for a lot of these firms a lot of the focus is they've already made their money and so they're not necessarily looking to shoot the lights out with 20% returns um they're looking for Capital protection and steady steady yield income and so I think that's where that's where you can entice them with this idea that maybe there's some extra yield pickup in defi there's transparency auditability they can they can trace what's going on and also maybe more liquidity because of the tokenization factor got it anything that Ste yeah look I I think from from my perspective right we're seeing a lot of activity on the broader tokenization side right so obviously people were quite interested after Franklin and Templeton tokenized that money market fund um and we're broadly seeing a lot more institutional players think about tokenization on on a on a larger basis I think for us it's been interesting to look at places uh when we started like the Journey of offering tokenization of fire blocks we started with banks right we said okay look uh go to bank a build tokenization in a box uh enable asset managers and others uh providers to come to uh tokenize assets within your bank the banks were like we're not ready for that uh then the asset manager the themselves right if you look at what folks like KKR have done uh they started the exploration of tokenization as a whole and we've seen more interest in that way right we've seen actually the asset owners start to think about unique mechanisms for tokenizing assets and expanding the markets that are available to them and I think that's become a very interesting play right and I think the the really unique thing is uh if you think about what's happening in Korea from an stto perspective whether or not you're going to see uh more tokenization of funds and how that gets eventually offered into retail uh whether you're not going to see more tokenization of other real world assets like real estate and other things that start to happen and whether that then starts to make itself available uh within the broader defi space so if you think about it really uh the dii protocols are the ones that basically determine what can be used as collateral in any basis which then drives uh the utilization of that in in in an alternative market so I I think really um this idea of real world tokenization of assets and and really the asset owners then driving those assets into the this ecosystem and then proliferating that into retail and other institutional players I think is is a really interesting Dynamic to watch over the next year shifting gear slightly um to talk about sort of regulatory landscape you know because that's topical um uh you know so far we've got uh Micah sort of roll out in uh Europe um we've got regulations now in Hong Kong um Korea sort of also advancing on that front and not withstanding the SEC sort of crusade um you know there are serious regulatory discussions going on in Congress um so how do you think the regulatory landscape is going to evolve and how will that affect crypto and defi in the coming years look I think it's it's been interesting right so you have uh what's going on in Hong Kong with sfc uh you have Vara in in in the Middle East um you obviously have MAA and and that I think there's a difference between uh the underlying asset itself right so if you look at what's happening on the real world asset side of things we're seeing more of a play towards if the asset exists today uh its tokenized form will be treated in a very similar way right I think that's a very easy process to understand for folks and and banks are understanding like the broader risk management and what that means I think on the pure crypto side of things or maybe on the defi side of things uh I think The Regulators are still wrapping their heads around what it means and the underlying uh the broader systemic risk that potentially exists I think um you know there are more Progressive Regulators in my mind right I I think uh sfc is trying to be Progressive uh Singapore is trying to be Progressive and then Vara obviously that's fully focused on digital assets uh is also trying to be Progressive uh I think um you know they are worried about basically uh exposure to retail they're worried about uh who do they hold accountable at the end of the day I think that's what I hear from The Regulators all the time is we want to understand who to hold accountable uh and until they really figure that out right there's still a little bit of uh work to do on their side to to create comprehensive legislation their enforcement actions at least suggest they have some idea who's accountable um no I think uh you know regul regulations very um it's a bit of a mixed bag at the moment certainly varies a lot across jurisdictions uh I'm perhaps optimistic in my view that the US will get it right eventually I think Micah has shown you know Europe is willing to take an early lead there um and we still have period of time before that comes into effect and it does treat decentralized protocols and infrastructure differently from digital asset service providers which have much more onerous obligations but I think what I'm also APAC definitely uh notably has uh has taken an early lead there and and and has been really good to see um you know the willingness of Banks and and other institutions in Hong Kong to uh to support crypto companies I think as I look at the US uh it's it's been good to see I guess the the three-pronged approach where you have the legisl leg legislative body the administrative or executive body which is of course the SEC and then you have the judicial bodies the courts and the balance between the three so really over the past 12 months we've kind of been relying on the court system and the legislative body to to support crypto whilst the executive has been a bit on the um on the aggressive side and I think what we're seeing come through in the way of legislation is encouraging uh and you know makes me think that we will get there eventually in the US and of course that is the the world's largest Capital Market so it's one where we do want to want to make sure we get a good result it's prompted us to you know we we still um try and do business with clients in the US albeit we have to do it in more of a way of uh working around um you know exemptions and sticking to accredited investors or institutional clients it's not something that can be made available to retail um but you know part of the reason we're here is we are trying to do build our presence in the APAC region because of how far ahead they are on the regulatory front and so I think Singapore Hong Kong Korea Japan are all very exciting markets from that perspective got it well I think we've uh we're running out of time but um yeah um to wrap up the panel you know I'd say that um you know 5 years ago when we started our journey you know with Spartan um a lot of our friends from trfi sort of looked at us um as though we were crazy um to put it nicely um but today you know I think individual investors have accepted as a uh crypto as an asset class and we're on the verge of institutional adoption so I'm pretty excited about you know what the next two to three years you know holds for the industry thanks everyone thank