Institutional Adoption of Crypto - Panel

[Applause] awesome yeah so i'm ben strack i'm a reporter for a media company called block works got a great panel today um so i'm just going to ask if vanessa teddy and raphael can just kind of introduce yourselves and your companies sure my name is vanessa gurley i'm the head of portfolio growth at coin fund coin fund is a multi-strategy asset manager we invest in liquid and early stage venture and prior to joining coin fund i worked for five years at consensus where i was executive director and spent also 15 years in traditional finance where i worked at the new york stock exchange and other institutions i'm teddy woodward i'm the co-founder of uh notional finance uh which is a fixed-rate lending protocol on ethereum uh so it's a fully on chain fully decentralized protocol it's a lot like compound but with fixed rates so that's notional and my personal background um i started my career as a interest rate swap trader at barclays investment bank i was there for four years or so and then traded crypto for a little while and then started notional uh the end of 2019. all right hi i'm rafael how y'all doing all right i hope you're enjoying all the snow i just came from san diego so i'm definitely not used to this kind of weather i'm the ceo of trust token and we are the makers of trufy which some of you may have heard of um it is a d5 protocol that does uncollateralized lending on the blockchain so i guess like teddy i could describe it as it's like compound but it doesn't take collateral instead it works with asset managers folks like vanessa and does actual underwriting on borrowers so it's this interesting combination of a d5 protocol but with certain centralized components on top of it we just passed 1.17 billion dollars of loans originated so it's been very successful and high growth so far and looking to grow it a lot more in the next coming years and ultimately bring all of lending or at least a huge fraction of global lending into d5 so great yeah and i'll start with a kind of a broad question before we dig in um just kind of each i'd love to hear from each of you how you've kind of seen institutional interests evolve among institutions in crypto that would last like 12 months or so start with there you want to kick off uh rafael sure i'm happy to so i assume everyone's here because they're interested in institutional adoption of crypto and institutional adoption of d5 um we've been seeing a ton happening in the last couple of years so my company actually has a lot of experience with this we work with silvergate and signature and prime trust a lot of banks work with a lot of traders and hedge funds and so on and what we've been seeing is you know you all have probably been seeing headlines about people making big moves into crypto people starting to play around with d5 what you all may not have been seeing is the amount that goes on behind the scenes in all the institutions that aren't publicly announcing their involvement in crypto a lot of them almost all of them know that crypto is coming and they need to start getting educated so we've been tapped on the shoulder and i've gotten on calls sometimes you know like with a big bank i'm not going to name names but you know they'll literally put like a hundred bankers on a call with us and just say teach us defy what is defy what does it mean for our business how are we going to take advantage of this and you know ultimately not be steamrolled by this when it does come along so we've been seeing that kind of thing happening behind the scenes and there's a huge education component that really all of us can be a part of of helping to get the knowledge that we've got here in this room here in this conference out into society to the many many companies and individuals that want to understand it know that it's coming but don't yet know enough to actually get involved yeah so i think the first thing i'd say is that uh you know when people say institutions that's that's that can mean a lot of different things um and i think that uh we've already seen so there's like you know you could call sort of crypto institutions you know people like coinfund uh the crypto institutions are already doing stuff with d5 protocols they're already using d5 protocols directly and have been for for a while uh now the sort of more traditional financial institutions um i think my personal opinion is that like uh traditional financial institutions using defy is still kind of a ways away so i think that like you know maybe something like a trufy uh would be sort of a closer step for them because you guys have the centralized component which sort of like it it mirrors the the traditional experience right because they have like a legal entity that they're sort of working with right but like a a pure on-chain d5 protocol you know we have not seen sort of really traditional institutions start using those yet at least from our side and i think that like ultimately you know the real reason for that uh is just because like if you're if you're talking about using a real on-chain like fully decentralized protocol it's just an entirely different way of doing things because ultimately you don't have a human on the other end of the line who's the ultimate arbiter of what has happened that you can kind of call and if you think something's gone wrong right like if everything is is codified then there's there's nothing that like a human contact at the protocol can really do for you and that's like a completely different way of doing things so i think that like traditional financial institutions using purely on-chain protocols like especially lending protocols like i think that that's still a little bit of ways away i i could be wrong but but that's at least from what i've seen yeah do you agree with that raphael yeah so i want to let vanessa chime in here in a minute but teddy so i disagree with that way of of seeing it because i think these institutions are already using these totally decentralized protocols but the model that we're seeing emerge is decentralized protocols with layers of centralized actors on top of it that help to provide an adapter for institutions to come in and play so i think a great example of this is what compound's doing with compound treasury what ave is doing with ave arc and we're following a similar model with trufi where i totally agree with you you know jp morgan when they start putting money into g5 protocols it's not going to be someone at jp morgan downloading metamask and signing a transaction i think it's going to be jp morgan working with someone like a compound treasury an ave arc a trust token to get access to these truly decentralized protocols so that's the model that we're seeing emerge it's really like the core protocol can be completely decentralized but then it can have a whole bunch of different you know on-ramps and off-ramps and service providers around it that can help get the institutions on board and get them comfortable yeah i agree all the institutions we've been speaking to are wanting to use metamask institutional power swap institutional ave arc and all these projects that are giving them kyc'd access because the the really the stumbling block is compliance for them and they cannot just be putting assets into pools that are not kyc'd so we'll see the emergence of these business models and uh market makers and traditional finance are already in those pools and already trading so that's that's a given that's the first way of how institutions engage the other interest that we've seen in the past year is pension funds and large asset allocators who are really trying to get into either crypto funds or other ways to have access to yields um and so you see them investing in either traditional vcs whether it be an a16z that has you know a large allocation to crypto or trying to come into um institutions like us to have access to uh to deal fluent to uh returns um yeah so i'll uh just just uh kind of follow on that a little bit so you know i i think that there there have been this sort of like the compound treasury thing in the in the ave arc um i would be interested to see sort of like usage statistics uh because i think you know if you look at compound right now um there's something like uh 6.9 billion on that platform and i could be wrong here but i think the majority of that is not coming from like the compound treasury thing totally totally um and so i think it remains to be seen how successful this model is going to be i think this is the model that our protocol compound ave metamask many others are moving towards but i completely agree with you it's still largely unproven these are absolutely early days and it might be the case that this model doesn't work it might be the case that five ten years from now the vast majority of the liquidity going into these protocols is coming through some of these more regulated more compliant on-ramps and off-ramps um i don't know it it is a bet that i think is worth taking and that my company is personally investing in but you know whether it's the ultimate strategy i don't know we'll we'll see yeah and rafael if you could just maybe elaborate a little bit on on how you know trufy is kind of trying to bridge that gap to involve more institutions in your offering totally and so i think vanessa hit on the head when she said it's really about compliance and i think vanessa your background is really interesting because you spent 15 years working in tradify and then somehow we pulled you over here into the crypto world so that's that education piece you know bringing more people in um so i'm also a recovering lawyer unfortunately oh okay all right well you know interesting backgrounds lead to interesting perspectives so i think that's great um you know so that compliance piece is is really a core piece here that you know let's imagine an institution that wants the traditional bank from tradfi wants to borrow some capital from a compound or an ave or a true fi or a notional right they're not they're unlikely to want to just go into a lending pool and just take out a loan not knowing who any of those lenders are right their compliance team is probably not gonna be comfortable with that and so that means that you know what ave and trufy and many protocols are doing is looking into solutions like building kyc only pools that can run alongside completely open unpermissioned pools where anyone can go in and you can have pools that are kyc only you could have pools that are accredited only you could have pools that are non-us you can have a whole variety of different pools in a protocol like an ave or a trufy that borrowers with different levels of risk tolerance could decide that they want to go into so that's one of the ways that we're working on this type of thing but there's a lot of different components you know beyond just compliance institutions care about reporting they want to be able to send something to their regulator about hey you know what kind of transactions are you doing how do we know that these are sufficiently low risk given that you're a bank or that you're another sort of regulated institution um all these sorts of features are things that are important for a regulated company or an institution to come and play in d5 and it requires a lot of stuff that is difficult to build directly into a d5 protocol so you end up needing a bunch of software around it and that's what folks like metamask institutional and so on are working on yeah vanessa i did just want to kind of ask you obviously coin fund is investing in these crypto and blockchain companies in the early stages looking to grow them just wondering from your perspective some of the companies in in coin funds portfolio how much they're depending on institutions to come in and and maybe some of the tools they're working on for institutions so i don't think we some of the companies we invested in had enterprises as their target clients or trade fire but we did invest in regulated exchanges and things like that so they've been very successful in bringing in those institutions in so for example we invested in ledger x who was qui acquired by ftx we invested in other exchanges and so what i see right now is the companies are heavily involved in defy there is a demand from institutions to have access to what they offer us for example paris swap is a is a is an aggregator and is is currently testing uh solutions for institutions to trade on power on on paris swap and giving them access to these segregated kyc'd pools and aggregation layers so i think it will be part of the future we have to be realistic as to how institutions can engage with these protocols and these these companies i think there's always a threat that the sec may take action although we haven't seen anything that's really you know massive at this stage so i i think it's more about opportunities with the institutions than anything else vanessa that sounds like a great portfolio you've got we should talk about getting involved in trufy absolutely i actually have the same question um for teddy as well um you know given that notional is doing fixed rate uh you know fixed interest rate um investments right on the protocol uh is that seems to me like something that actually could be really appealing for some more traditional investors that may not want the sort of interest rate volatility that compound ave and many other protocols have how much is notional focused on the institutional investment side and institutional borrowers and what's notional's approach for how to be able to bring them in thanks for that question man yeah so i would agree i mean you're selling notional for us uh it's uh yeah we we offer you know fixed rates so people that don't want the interest rate volatility they don't have to have that if they use notional um and and what we've seen so far is that uh you know notional is a pretty pretty new protocol so we've been live on mainnet for for about three and a half months now um and the first kind of institutional-ish interest i would say that we've gotten has been from sort of family offices right so like these are you know people that are very familiar with crypto our experience with crypto but are basically just like um you know they're individuals they're high net worth individuals and so like these these are people that can sort of do something that's maybe a little bit more new and like don't have the sort of like uh you know the kind of procedural burden of uh a more developed institution and so we've seen like for sure a lot of interest from them because for exactly the reasons that you stated right like they want the fixed rate of return um so that's like the initial interest and then as for kind of the borrowing uh you know we already have some of the kind of crypto lending desks uh i imagine guys that are using you as well uh using notional and uh you know because basically the product that we offer is is quite similar to the uh the product that they trade in centralized uh crypto lending markets it's it's really quite similar right it's like the the crypto lending markets that are sort of the c5 crypto lending markets are all fixed rate so like notion offers something which looks a lot like what they what they already do right and so we've we've already got them using notional and you know that's why i said like the the crypto institutions are definitely comfortable using d5 protocols already and and they are you know they are yeah totally yeah and um just kind of curious how how you feel regulation might play a role in the continued institutional adoption of crypto in 2022 well you might be kind of monitoring from a regulation standpoint um yep vanessa you want to take this one probably your favorite question um i think let's let's focus on maybe on the u.s regulation and and maybe general aml kyc um i think we'll see more and more um companies and protocols that will need to have sort of this layer centralized layer and and regulators will want to see an entity that they can hold accountable for kyc and aml so i think that's that's the the major issue that i see in terms of adoption and maybe just new opportunities too for to create new new companies on top of protocols i don't think the protocols themselves are at risk it's really the access to it so we'll see if there's major enforcement but i don't see the regulation or the legislation changing dramatically in the coming year i might be wrong um and and i think we're just going to wait until you know the the political divide on on what we should be doing is really really high and so i don't think there's a place where regulators and legislators can really come together in order to take action when you when you think about the last time the regulators really took action there was a major you know global meltdown and there is nothing here to trigger that uh at this stage in crypto so that it prompts action to want to protect the investor public or the public at large or see that there's systemic risk so it's kind of hard to see where they would want to take action is my bias well what do you think about like uh protocols that are protocols slash companies that are completely on the other side of the spectrum where it's like there is no legal entity at all like something like like maker right like how how do you think that the gov like the government is going to handle that or even the trend of nowadays protocols with anonymous teams i don't know when you became like the designated representative i'm a decentralization maxi so no problem um consensus i think exactly um i think you do need to there's two things there's the enforcement side and then there's the legal side so on the enforcement side if you look at the current decentralized protocols even the ones that have gotten random foundations in essence like the key stakeholders still have legal entities where regulators can find them and i think there's an illusion to say that oh we have no identity no no entity and nothing can happen to us that's that's just not true it's actually unlimited liability that you have you know over your head as a contributor so um i don't think there's going to be anyone or any regulator or any legislator that's going to say oh we find a decentralized protocol and we're going to regulate them that's just not happening i think the sec is on the other side is like if you're sufficiently decentralized you're just a utility basically and everyone can use use the utility and it's an open source protocol and so i haven't seen regulators come after open source protocols um separately from from crypto so i i don't see why they would need to take action here yeah i think that's a valid point and um you know to add on to that the i think the strategy that my company you know with trufy and i think many of the protocols are taking is you know those access points are very important especially institutions which is the topic of this particular conversation you know really care about knowing hey if i'm going to be borrowing from a lending pool if i'm going to be investing in a d5 protocol you know is this 100 legit is this regulated in all the right ways and so we really treat it as a competitive differentiator so it's been something that we've been investing in for over five years of really being super buttoned up on the regulatory and the legal side and even when the regulation is not completely clear like it isn't today we are looking over the horizon and saying okay what's going to be coming down the road do we need to get a broker dealer's license do we need to get other sorts of regulated entities to be a part of this to help provide some of those on-ramps that institutions are going to need great and there's a couple more things we could touch on but i did promise that we would have a few minutes for a q a with the audience so we'd love to uh hear what you all have to ask so even though these instruments look like a traditional income producing instrument since they fall into digital assets oftentimes they fall into a different asset class and people just say well i can't invest in that asset class hey great it's six eight percent per year lovely but it's digital i gotta stay away from it how do you how do you bridge that and wait maybe by the way for these questions we'll do one person answers it and then we'll go to someone else so what's your name by the way jeff okay thanks for the question jeff um so i think it's inevitable that institutions are going to be investing in digital assets regardless of what they say today um it's you know think of it like you know what the internet did to finance like if you said well i'm not going to use online banking right that's a digital asset already when you're using you know you're you used to have cash in a vault now it's just bits in a computer somewhere imagine someone saying well hey i don't trust bits in the computer i only want to hold paper cash right what kind of institution could run like that today you know you would be completely shut out of how finance works globally so that's where we think things are going that it's really it's a technology more than an asset class and there's a whole variety of asset classes that can all work on this one technology um so first of all thank you very much for this presentation really really uh educational uh my name is jason schwartz uh crypto tax guy eth and i recently wrote an article on the taxation of d5 solely really as a an enthusiast uh who also practices law in the traditional space i'm sort of of the view that we as a community have to sort of get together and and try to you know lobby the regulators do you guys agree and if so what do you think is the best way to sort of organize so there are several organizations already that lobby at different levels and if you think of taxation there's this proof of stake alliance that has been very active and even prompting the regulator to make a decision on staking then there's a blockchain alliance there's there's several organizations um that represent large institutions and actors in the space that have been very active in dc and in state also with state regulators in order to you know help them understand we're still at the education level with politicians at least i would say and then just trying to make everyone understand the implications and the opportunity of digital assets for this country and and for the world and um so if you want to get involved i would encourage you to sort of reach out to these organizations and understand their perspective and and what they're doing and and how you can get involved but i think you know regulation uh on the hill and the way it's done you know we're not we're not gonna tweet it away it's not we need to also you know use meet people where they are so that they understand what we're doing yeah hi my name is davis um i was just curious as the uncertainty around regulation risk etc as that resolves do you expect the hurdle rates that institutions are looking for in d5 do you think that'll come down and will that ever look like what we're seeing in c5 today yeah definitely um i i think that like you know uh kind of as we've been talking about here today uh regulatory uncertainty is is one of the largest uh reasons why people aren't using d5 protocols now it's not like the full thing but like it's it's a really really big part of it so i think that as that clarity you know as we get that clarity i mean absolutely i think there's gonna be like just just a uh a massive amount of capital that comes in um and i think you know it's not gonna be it's not going to be a binary thing it will happen it will happen on a drip basis as it has been happening i think what what you've seen now or what you are seeing now is that you know you have these institutions that are sort of hamstrung and unable to access defy and the sort of yields that they offer and so what you've got is you've got like uh certain defined native funds and you've got new definitive funds that are being started and they're raising money from people like from the actual limited partners right and like that money these new funds that are explicitly defined native like that is how a lot of the capital is currently coming into the space yeah the other thing i wanted to mention is um you know exposure to bitcoin and ether i think this is where a lot of the institutions are they're not even into d5 they're just like okay can i invest in bitcoin can i have bitcoin on my balance sheet what are the products that can give me access or exposure to bitcoin um so trusts uh we're still waiting for etf so i think there's some maturity uh there uh but for them it's really the so bitcoin is a little bit of a beta at this stage um but their entry point into getting into digital assets yeah we're seeing exactly the same thing first it's bitcoin then it's ether then it's defined other tokens and actually even before an institution invests in bitcoin usually the principals at that institution you know the the partners and the management and so on they're personally investing in things getting comfortable with it personally and then they make an organizational decision vanessa do you expect we could see a bitcoin etf in the u.

s this year tbd i i don't think so all right well let's let's see a poll here as we close out who how many think there'll be a an etf by the end of the year let's see the wisdom of the crowds listen to the crowds okay pretty bullish all right wisdom of the crowds or stupidity of herds we're not sure there but anyway let's give a very very resounding applause for this brilliant panel