Institutional Integration: Bridging Traditional Finance to Crypto

[Music] hi everyone thank you for joining us this afternoon the topic of today's panel is one that's been continually front of mine for the industry and for those of us up here the focus of our work for several years institutional integration bridging traditional Finance into crypto I'm Diana bigs one of the partners at early stage crypto Venture firm 1kx and I'm delighted to be joined on stage today by an impressive panel all of whom began their careers in traditional Finance before themselves making the move over to crypto so to start I'll ask the panel to please introduce themselves their roles in organizations Josh uh hey everyone pleasure to be here um my name is Joshua Lim I co-founded a firm called aralo markets um it's probably one you have not heard about but we just got started um most of of Us come from a derivatives trading background mostly options trading in traditional markets um and we spent the last uh I guess like 8 to 10 years of Our Lives trading um crypto as it's evolved from a very retail oriented asset class to a much more institutional facing one um so we come from backgrounds like Circle and Galaxy and Genesis and Ledger Prime um we kind of help like spin up the bilateral trading market for crypto derivatives um so yeah Eva hi everyone U my name is Eva Lawrence I am head of Amia for figment we are the leading institutional staking provider we help everyone from asset managers hedge funds to exchanges and custodians stake their proof of stake tokens or assist their clients in doing so um covering everything from ethereum salana poka dot Avalanche uh I started my career as Diana said in in additional Finance I was at Morgan Stanley for 8 and a half years I ran their a Mia flow trading desk for Securities lending and then about five five and a half years ago now I came came to the Light Side uh joined crypto hi my name is Jun gong I joined the calan drw in the middle of 2018 uh before that I have about 30 years of experience at inv banking area for uh for example I ran Capital Market division of lion Brothers in in Asia um I worked for uh UBS Investment Bank I work for um nura Securities International uh worked for uh Solomon Brothers various and W stre companies and I'm disclosing my age when I say 30 years of experience but I'm I'm I'm happy to be here thank you great so you've all been working in this industry already across several several years been through a number of Market Cycles I think it's without a doubt that the events of last year slowed the pace of institutional adoption but we're beginning to see more positive signs of late we have black rock filing for an ETF we have deuts Bank bny stat stre others moving into custody from each of your Vantage points where are we now in terms of institutional adoption and integration and how are you seeing that evolve yeah I think um the one thing we can take away from the last cycle is that um you know crypto got very big very fast um and uh in a lot of ways like we tried to import um the the leverage and the capital efficiency from trfi without implementing a lot of the controls um the safety measures uh and the back stops right so and in some ways crypto is not amenable to those types of things you can't Implement like a Central Bank in crypto but um yeah I think you know what we've seen I think through living through a couple of these Cycles is that like we've removed in a lot of ways like the existential left tail of crypto like crypto is always going to exist there's always going to be CME Futures listed on crypto I hope um but that means that it's like a viable uh investable asset class for most portfolio managers macro portfolio managers so there's always going to be some I think reason for it to exist people are going to allocate into it I think we've all heard the macro speakers in this conference talk about how it's um this inflation hedge uh this this sort of fixed Supply asset that has you know scarcity and some monetary um uh value to people people's portfolios so I think that's the main takeway from the last cycle is that we we are all in it to kind of see this asset um become a global investable asset class for for most macro managers out there yeah yeah and I think we kind of just want it to become just another asset class right so something that doesn't necessarily grab headlines all the time because it's just considered you know another an asset class next to Commodities or equities um but I think that the institutions are still very much here they've not left they've not left the building but there maybe a little bit less vocal about what they're doing um you know they're they're more private now um they're they're either building developing growing teams in private um that being said you know we have had some you announcements uh in the space as you mentioned I know our custody also Structured Products is another area that we've seen um growth of late uh new firms offering uh etps and ETFs uh we've seen that particularly um in Europe there's been a growth in that side of the space so I think it's you know continuing to build continuing to grow and and and develop the maturity in the space with the right risk parameters and since I joined comberland uh in 2018 from the traditional Finance I always expected um kind of full adaptation of um crypto currency and crypto assets by the by the institutional investors because um because they have to right the whole asset management is built on the theory called modern portfolio Theory and according to that if you add another asset which is not correlated with your current portfolio the return is additive but the risk is not additive it's always less than the audition additional uh asset so the goal of the asset manager is always try to find alternative asset with low correlation to the current portfolio and and the cryptocurrency provides that right so so you know global global uh Asset Management size is about1 trillion dollar always um course you know you know up and down but um even if these institutional investors uh allocate 1% into the crypto space you're talking about new one bil1 trillion dollars of new money coming into crypto space compared to uh I think that's the size of the whole crypto uh assets um today and and for example twice as big as a as a Bitcoin market cap of 500 billion so that's the kind of um adaptation uh I'm looking for uh if you look at all the surveys done I think Fidelity who will be also speaking I think soon uh uh in this event Fidelity always um annually they do survey of institutional investors the latest one came out uh published in October 2022 and you can follow every year their survey and you can see the nice continuous growth of the institutional adoption uh because they they survey about thousand insti tion investors globally e uh had a a survey done as well uh some surprising uh uh results something like uh they they survey 250 institutions uh about about those with more than $500 billion doar of AUM about 45% of them already invest into digital assets so it's a surprising number from compellent experience we see Goldman and numra trade with us right so Is Well published that they trade with um with Cumberland so you can see the all these institutions coming in as I expected that because they have to and their clients um are demanded as well I think we've been hearing for for quite some time that they are coming in and we're still waiting you know we're 13 14 years in why haven't we seen more what are you guys seeing as the gaps that still exist is it a lack of systemization sophistication or or what's needed to to actually get more players making meaningful um engagement with the space um so I I think the the collapse of the last cycle kind of exposed a couple things right it exposed that um in traditional markets um there's a lot of structure to that market that doesn't exist in crypto which includes like regulatory oversight and sort of like force transparency um in the form of like public disclosures and filings and those types of things don't exist in crypto but can and should exist in crypto in fact they can leverage a lot of The Primitives that already exist in blockchains that are inherent to blockchains so um I think that's the one thing that I hope is the takea away from this cycle I think a lot of firms are building it I think we're we're building it ourselves internally just to service our counterparties people who are lending to us providing balance sheet to us um trading derivatives with us where um it's very easy to give people people a full accounting of where our assets are and our our liabilities are um we can sort of remove One Trust assumption by letting people see like what we're doing with our balance sheet um in a not completely sort of like zero knowledge way but in a way that preserves our privacy and our client privacy but um if we do that and if other firms do do adopt that same level of transparency then you can have an entire Market that operates very different than trafi where um you can get realtime sort of risk readouts of your counterparty's Health uh and I think that's one thing I I think we should all strive for in in crypto yeah I think transparency is key definitely would agree with that um also I would say liquidity is a another another area where we need to see development both breadth and depth of liquidity in the market um I think this will come with maturity of the market in general but I think that that having kind of increased liquidity um and more optionality around trading would would would help um and then I think data uh is another area that institutions could see the benefit uh of improved growth in the industry so if we had more reliable and robust data uh in the industry that would help um firms to to build products to uh Market investors it would help you know uh asset managers to stress test you know the the um variability of the environment of those assets so I think that there's definitely something to be said for for data and and as a firm it's something that that we've looked at internally um we've recently partnered with Market Vector to launch a uh staking rewards rate index so think of it similar to a a risk-free rate in the traditional markets um to to figure out or to provide the data for someone to figure out what is the annualized reward rate for staking eth and with with this data what firms can do is then build U an ETP uh build a crypto TRS product so I think having that data uh not only provides kind of comfort and Clarity for the industry but it will also help institutions to build and and grow I think there are two types of um adoption by institutional investors one is um value position so getting exposure to digital asset value uh the other one is actually investing into spot crypto so there are two different things I think it's a stage right um currently if you look at the institutional investors who have to have a for example both fiduciary duty to their clients as well as regulatory duties for their reporting they have a infrastructure which they will they have to um for example manage the risk management they have to do legal and compliance work they have to produce reporting uh to The Regulators they have a lot of um uh infrastructure necessary uh but they cannot they obviously they cannot connect that into the cryptocurrency for example wallet uh or cryptocurrency spot so instead they're looking for familiar security type that's why um you know Black Rock Fidelity in go everybody in traditional Finance they want spot ETF because they can get exposure to cryptocurrency Value without unfamiliarity of um actual technology so they can they can use the familiar security of ETF and and it fits right into their reporting their internal risk management uh whatever they need to do and they are doing currently they can do it using ETF so that's the entry point uh adoption second full adoption is actually like a black rock and Goldman and all all these guys actually going into actual spot cryptocurrency that requires infrastructure techn technological infrastructure of a wallet infrastructure key infrastructure uh before our panel discussion there was a wallet discussion going on you you know how complicated and difficult it can be and and and and very diff difficult uh actually for uh Financial companies to to master at at these things so so that part the full adoption will take some time for them to learn about the technology and adop into technology and juki um I would also love to hear from you being based here in Korea how has the local environment been in order for institutions to engage and and how do you see that progressing oh yes um uh I'm based in Korea for Cumberland Cumberland as I said is one of the largest um OTC Trading Company uh but if you look at Korean market for example Bitcoin to Korean one uh fiat currency that product is actually quite different from Bitcoin to US dollar right people will say oh it's a Bitcoin isn't it saying Bitcoin can you trade Bitcoin but Bitcoin Korean one based it's quite different from Bitcoin US dollar bases especially because of the heavy crossb Capital control Korea Korea heads so for us to do our proper uh liity provider work and and help the ecosystem get access to cryptocurrency we need to be able to hedge our position in Korea that requires us to for example be able to trade on the platform like upit uh uh uh cryptocurrency platform which is like like a second largest uh Fiat based um uh cryptocurrency C exchange globally for example we cannot get on body that there in trade because current regulation does not allow any legal entities or institutions to to trade in in Korea so so clearly compared to what's happening globally all this um you know Black Rock and Fidelity and everybody is coming in and developing uh uh their infrastructure uh for digital assets Korea is completely missing out because uh Korean uh institutions cannot cannot join so I like to make sure that um you know hopefully we can open up the marketing Korea soon so that institutions can can trade in Korea thank you um just to further expand also Josh on your last point with regards to the need for at this simultaneously transparency and privacy how do you see that that working and where are the the needs and the opportunities there yeah um I think it's you're kind of seeing see it play out in multiple ways within uh crypto Market structure there's a migration towards trust and sort of like venues that are either highly regulated or highly transparent right and they're kind of on opposite sides of the spectrum one side is something that looks like a CME future you know like an upcoming Bitcoin ETF where there's a lot of um reporting around it so it's sort of like enforc transparency by uh mandate from the government um and on the other side it's sort of like the ethos of crypto where it's um decentralized and onchain so things like dydx um the these sort of like onchain per Dees where you kind of know where the collateral sits you know that everyone's um abiding by the same margining rules and liquidation rules which obviously that was the big cause of some of the um you know larger bankruptcies in the in the 2022 cycle was that you know people weren't some uh Market participants were not subject to the same liquidation rules as others so um I think if you think about that it's a pretty obvious trend you're seeing a lot more volume head to defi or to kind of CM um from institutional Market participants so just extrapolating from there like next cycle we kind of think that more activity will happen uh in those two markets and they're going to be pretty um disparate like I think it's like different customer bases for both um Crypton native firms may not be able to get access to CME because you have to have um CME is like a large uh regulated Futures Exchange in the US uh Chicago merchantile Exchange so you might not be able to access that because you don't have um the right regulatory setup uh to do so or you can't find a um an intermediary to to sort of like open an account for you uh and then similarly like if you're a Fidelity or something you're probably not going to be able to participate in defi uh for many reasons but um there's going to be a need for firms that sit in between that are somewhat Crypton native like they can speak the language they understand how to use the technology but also have a lot of liquidity and pricing expertise like to understand you know how to sort of um refactor liquidity between centralized and decentralized venues I wonder if we've found the right balance between transparency and privacy is when kind of those two areas start to converge where we kind of see the less of that separation where we kind of have struck the right balance between the two I'm not sure how long that will take for sure so on the topic um when we're looking at um institutions actually engaging in the space by and large at least for the larger ones this has been on permission networks but it feels like there's a growing consensus that the future is on chain do you agree and and how are you seeing this play out Eva let's start with you um I do agree uh I think kind of how we're seeing that play out seems to continue to change and continually evolve um one one way that is is coming up recently with institutions has been tokenization uh and back when I heard this word come up maybe six months ago again I thought oh God not this again I haven't we done tokenization hav we' been through this part of the cycle why why are making people wanting to talk about tokenization again um but I think it wasn't from the point of view of you know blockchain not Bitcoin let's tokenize the world uh it was from the the Viewpoint from institutions perspective that having kind of fractionalized ownership of uh of real world assets was useful especially assets where they would traditionally be a liquid um so having this kind of entryway this access point to these uh uh fractionalized ownership of these these assets could be beneficial so I would say you know moving things on chain to allow for partial ownership of traditionally a liquid assets is uh is happening is a benefit um and then also you the other area that we've seen is um everything that you banks have been looking at around settlement right that's another movement on chain so you've got the assets themselves and then you've got all of the uh areas that surround how uh settlements Works clearing Works uh execution of of Trades so that the process piece um you see more of a more more and more of a move to bring that on chain um so I think both are relevant and both are interesting it's just which um the banks are going to move quickest on we know how slow they are and you could lump large asset managers large pension fund hedge funds into that same same bracket um but I think both both from a product perspective and a process perspective uh the future is on chain I I absolutely agree the future is is is on chain it might look confusing uh at the moment uh there was a crisis um uh lunar Tera uh crisis there was a Fallout of the FTX and things like that which can confuse um uh all of us but um but being trained as an engineer I do what I call boundary condition analysis which is like you look at the boundary let's say in the in the futuristic boundary I don't know like 50 years from now or 100 years from now I cannot imagine 100 years from now all these asset classes are not organized right because it's a pure Commercial Drive and the availability of technology to fulfill those Commercial Drive is more efficient uh is um 24/7 365 days uh instantaneous settlement uh tzero settlement uh who would not want that kind of Technology right so um if hopefully it will not take um 100 years but my boundary or 50 years but my boundary condition analysis of um happening everything being talized all the equity Market uh and bond market everything asset class being totalized 50 to 100 years from now we can interpolate into today and sometime in the future uh when Global regulatory things will will be hashed out and all that uh it'll it'll happen so absolutely agree yeah I mean I I think those are all good points I think another reason to think about you know this inevitable Arc towards onchain activity is that we all want the world to become more composable uh and um a lot of financial infrastructure in the US and elsewhere in Korea also is uh predicated on sort of like these wall Gardens right every company has an incentive to sort of like keep assets within their own uh four walls and um I think it's pretty clear just from the growth of defi in the last cycle and how how easier how much easier it was for retail Market participants to do the typ of um you know speculation Financial activities borrowing lending on chain that ux was very very good it was almost too good right it was so good that um it caused a lot of Leverage issues but um it's clear that people want that uh and you know it it's also better for these types of um the power of these types of apps to be sort of like uh competed out to multiple providers so that it's not sort of like centralized by one one specific provider and I think that's what you get when you put something on chain is you just have a lot more competition and I think people can sort of like migrate to the point of the um stack where they can add the most value right so it's like if you are really good at pricing things you can be a liquidity provider on Unis swap if you're really good at settlements like you're handling you're building the smart contract for sort of like transferring those assets and it doesn't require one company to be monolithically good at everything yeah and so when you're seeing institutions coming to you now what is it that they're most interested in or where are they seeing like potentially the most positive benefits what's the the current interest uh Me Maybe yeah I can go yeah so I mean for for us um you know we have definitely seen um and of course I'm slightly biased on this uh we we've seen more of an interest in in in proof of stake um someone who you know has been involved primarily in Bitcoin coin for for a long time um I've definitely seen over over the last few years a lot of interest in growth of proof of State networks and in particular um you know the growth that we've seen on ethereum especially post Shanghai um what institutions are looking at there is okay well if I hold this asset already sitting on my balance sheet how can I um utilize it to earn a return without exposing myself to counterparty risk without uh lending out my assets um without you know entering into some funky swap what is you know the simplest way um I can I can do that and that is of course staking non-custodial protocol staking to be precise and so I think that we're seeing firms who they've got over the first hurdle they hold assets whether it's Bitcoin whether it's ethereum or whether it's others um they they've reached that hurdle and they're like okay I hold the asset so what's next um I think risk appetites will grow over time but but one area that that we are seeing interest in is a is of course staking and that's you know from everyone to you hedge fund small Bank asset manager uh exchange offering to their clients uh and everyone in between so I would say slowly but surely those firms are looking at how they these assets these proof of stake assets can be utilized to to ear a return do you have a take on what the size of that market could be say five years god um I mean I think for for ethereum that that's that's the one that everyone's watching right that that's where we're really seeing the trajectory you know go through the roof uh I wouldn't like to make any predictions I don't want to jinx anything um especially when it uh could impact our bread and butter but I would say that you know we're we're seeing more and more firms um looking to stake assets ones that haven't even considered it in the past so if we continue to see that upward trajectory um more clarity more data in the market and more farms uh being able to to stake staking etps as well added to the mix um I think the potential is huge I'll go ahead I was going to talk about the Korea with a Korea perspective um for the institutions coming in now as I said um institutions cannot play in crypto however they know it's coming so everybody's getting prepared so when government announced that um they will allow stto it was the stto guideline by Korean regulator everybody jumped in so as if like flood gate is open every major uh Securities firms and banks are are coming up and announcing that they plan for um uh how to um uh build a a infrastructure for security token so that's one allowed blockchain uh uh based um uh institutional play they can do so uh those are the areas government uh the reason for government allowing is um it fits into what they want to um develop which is which is um investment contract type security like um in the in the international market is is it's like a fractionalization so fractionalization of the fin out for the real estate all these things is not well defined or well managed in career so so Regulators um uh found out that it's a very good area for blockchain technology to crack it so that's why um uh St Market uh is um opening up in Korea and and already uh more than 200 250 uh proposals coming coming into government Regulators about what kind of um security token people want to do so that's something uh I think all the global audience should um should look for this would be one of the interesting case of um uh stto uh development uh from Korea fantastic okay we're we're out of time thank you every everyone for joining us thank you to our panelists thank you