Tokenization Unfolding: the Merge of TradFi and DeFi - Pietro Rossetto

before starting a magnificent location I would have never thought to H the speech in in a church on crypto so well done guys and hello everyone my name is pet ret I am a training lawyer at a low firm called John and origoni I am part of the financial markets department so we assist Bank credit institution financial institutions and investment funds for all their operations on financial markets today I would like to talk to you about the merge that's happening right now between traditional finance and decentralized finance uh with the aim of discovering what institutional Defy is so how big Banks and uh players in the credit institution uh environment are approaching their uh uh defi so let's just uh say that at least um thanks to the merer classification we now have a the meika regulation sorry we now have a more um a clearer framework to operate within we know that uh there are some tokens that can be issued and can can be classified as not crypto assets we know that thanks to the merer um we have tokens like electronic money tokens and asset reference tokens that are they have to follow and be authorized uh under merik and the last part the one we are going to be focused on today is tokens that share the um that are qualified as financial instruments so typically these tokens have a series of requisites to to follow which is which are displayed actually in the uh in the uh slide so starting from uh this point um let's see how traditional Finance actually is is uh build so traditional Finance as the goal of maintaining Financial stability throughout the region and protect investors in doing so traditional Finance operates under the control of central authorities uses intermediaries and uh um not every Financial product product is available to everyone this is because of investor protection and there is the classification between professional investors ver versus retail investors um so all this this goal is also achieved thanks to a really heavy regulation uh and uh you know that uh Foster trust in the financial in the financial system what we have with the defi on the other hand is decentralization at its uh at its core so we remove Central authorities smart contracts are the pillars of uh defi they can be they can act as a custodian of digital assets and enforcer of agreements even uh being um dispenser of rewards and dividends when we are talking about financial products thei is of course borderless so it can be multi-jurisdiction and it's its main benefit in terms of efficiency are instant settlement 24/7 availability on trades and lower fees of course thanks to the elimination of intermediaries another main um feature that differentiates defy Andi is the custody so in in traditional Finance we have authorized entities that can that can act as custodians while in defi we have selfhosted wallets I just say that for example in the uh when we're talking about settlement so efficiency one of the there's a new regulation that's taking in place next year that will uh will have all the payment service providers comply with um 24/7 365 asset tradability so one of the main feature with the of defi right now which is instant settlement uh is going to be performed by also traditional Finance so the bridge between Defi and traditional Finance is based on tokenization specifically real world asset tokenization I'm not going to focus on what is real world asset tokenization right now because our our our main focus is um tokenize the financial assets so bonds stocks investment funds so this is this is the the an overview of what traditional finance and in centralized Finance is let's see now how uh these firms are entering the defi so basically we can safely say that when if I was born fin fincial intermediaries and traditional institutions have been uh experimenting soon uh often on permissioned blockchains so they started a lot of pilot projects on permission blockchains and only now or at least one year ago we see these um traditional firms entering the space and what they've been doing basically is deploying for example I think uh we all know bid the um Black Rock liquidity fund deployed on the evm ecosystem which has just surpassed 500 millions in market cap last last month what we see right now is that traditional um firms are tokenizing asset they they that they already know what they are so mainly what we see here is the tokenization of the US treasury bills we focused on uh deposit tokens stable coin and investment funds as uh the well some assets that traditional Finance is focusing on so deposit tokens is a financial product whose function is to manage savings and provides a return on the sums on the sum that are deposited traditional Finance is uh willing to um tokenize deposit tokens uh basically because in terms of the differences with between deposit tokens and stable coins it allows them to free more capital in terms of the reserves that the banks have to have in order to issue this product this is because while stable coins reserves um have to be really high being a new product deposit tokens since are just basically tokenized uh deposit accounts um uh see um they they see um less reserves to be uh to be implied in the activity so for example if the bank has to loan $100 million doing it in stable coins will cost 20 million in reserves doing it in deposit tokens is going to cost 15 million so you have a 5 million of capital to be fre and invest in other products in terms of uh stable coins the uh well traditional institution and banks have team up in creating well in exploring how stable coins can work together U mainly the um the most um the most common feature is being here you can see the project pack for example it's a Consortium of three Japanese banks that uses stable coins essentially to cut the intermediaries at its Center so there is an integration with the Swift ecosystem and it's possible to trade without intermediaries essentially lowering the fees in terms of investment funds on the other hand we have the possibility to tokenize exchange traded funds uh so token that represent fund shares or go fully on chain with for example bid and Franklin templon fobs um so these uh the tokenized investment funds can be deployed in in different ways and they share different characteristics in terms of for example the use of intermediaries and the uh transparency uh requirements in the EU uh if uh an alternative investment fund manager wants to tokenize assets and um invest in these assets it has to obtain a double license one under the afmd directive which regulates the deployment of alternative investment funds and the rules of concentration among funds and um concentration among funds and and the investment activity and the other one because of the issuing of financial of crypto assets under under mik so this um these um projects this pilot project that we have seen on deposit token investment funds and stable coins essentially sum up as something that uh creating the traditional Finance institution are been calling institutional defi which is basically uh the entrance of large Financial groups in decentralized decentralized finance it's based on real world asset tokenization so the representation of the traditional Finance assets on a blockchain it needs to have an announced and security compliance in terms of differences with defi so there is the the the needs to uh enforce kyc and AML regulation and the goal is to offer the benefits of the FI in terms of efficiency and Automation and transparency to the traditional Financial um system so let's end with the the to to wrap up the the this pitch let's end with the differences between traditional Finance this centralized finance and what is called institutional defy so institutional defy can trade both Fiat and tokens versus tokenized Financial products the infrastructure is decentralized with the um possibility of multi-jurisdiction and cooperation among states we have we are seeing right now also layer 3es that are becoming gdpr compliant for the usage only on European soil in terms of management we have centralized entities and a supervisory Authority is present one of the main uh issue and uh uh challenges for the institutional defy to happen is the the link of digital of um um addresses to a digital identity so kyc can be performed safely the custody is do is is done by authorized entities and the the one the main benefit of institutional Defy is on settlements efficiency so we have instant settlement 247 availability also um of of um work outside of working hours and uh should be low but uh can be higher transaction transaction costs so what we see right here is uh an expression institutional defy created by Financial institutions uh since though the main features of defi are abandoned in what is called institutional defi because you have kyc because you have centralization the decentralization of defi is not present anymore so I I would argue I don't know if you agree with me on this one but what is called institutional defy right now is probably something more of tokenized traditional Finance because we are actually losing the main features of uh decentralized Finance so this is it I think I hope I um introduced you to the word of um how big firms are entering the the um the space in uh in Defi and uh if you have any questions I'm here available for you or you or you can come to our offices and you know just have a chat and so thank you for your attention and if you have any questions I'm here thank you thank you Petro so we have a few minutes for a few questions so please feel free raise your hand and we will reply to them okay okay first of all you are the first lawyer really understand real work do it thank cuz usually I mean um what's your thought about the the main emerging Trends which are the monetary Market funds actually in the institutional defi space so uh how do you see the evolution of monetary Market funds as a way of let's say investment in other tokens so what are the regulatory constraints to match a native tokenized funds with a classical one because we know that there are many different things with respect to an interest bearing stable coin and a monetary Market funds when we see a lot of things in the in the industry right so yeah so the point I mean thank you for your question uh what we see is that uh of course the regulatory constraints depends on what uh the underlying assets are and in terms of investment funds for example we have the difference between uet investment fund and the afmd ones uh and uh as I said before for example if uh if we actually work more with alternative investment funds and uh when an afmd um AFM operator wants to tokenize these these kind of assets you you need to have for example a double um a double authorization coming from two different authorities so in terms of uh F in terms of what's going to happen in the future I'm I'm I'm not going to well actually I I don't know of course uh but uh what we see is uh an a growing interest of course of these traditional Finance institution to understand the defy but not to embrace it completely so still right now I mean the the main featur that are that are being embraced by traditional Finance are the one focusing on efficiency of settlements so yeah that's hope answered your questions yes we have another question hi um very quick question you mentioned earlier that we're losing some parts of the defi aspects how do you feel institutional um aspects getting into defi will pan out in the near future will we be losing defi in itself and uh it will be faced out by trfi getting into blockchain or do you envision something different so I'll answer with my Yes actually it's it's a really important question youve asked the point is also already with Mar with the m regulation we are seeing D5 being pushed to the edges so point is when these big actors come into the defi space as as of these days they don't have the interest as far as my experience goes to embrace uh defi so I I I don't want to be uh uh to to make a wrongful comparison here but I think that defi can be what telegram now is for social media right so it's uh it's the only difference is you don't have a pav to arrest here you know so that's uh that's my opinion as far as I have seen with the attitude of traditional Finance firms coming into the coming into defi defi will be of course free freed and uh it's accessible to everyone but uh in terms of a user experience and trust with um authorities and financial operators I think tokenize the traditional Finance is going to to have a big impact on what is defi right now thank you very much Petro thanks again wonderful and uh yeah let's bring a big Applause