BBW24 – Day 2 – The DeFi Revolution: Rewiring the Global Financial System

um big name for the topic rewiring the Global Financial system um but it's really at its core it's what we're all here to do uh and so uh let's get this going real quick um super brief introduction by myself I'm Steve Ley I amvp for a company called Kiln we are one of the Enterprise staking service providers I spent the last previous three and a half years over at Circle heading up strategy and relationships for the capital markets group there um and with that what I would really like to do is um ask each of you to give just a brief bio of yourself you've already been on stage once but maybe a short cap yes hello I'm Caitlyn uh I'm the Chief Information Security Officer for Robin Hood um I'm Anna dusa I'm CEO of AIO ratings we are a VC back rating agency focused on high growth emerging Industries right now 100% focused on rating default risk uh we're rating risk in 45 exchanges soon to expand to custodians Banks uh Brokers prior to that I was a crypto risk lead at the Federal Reserve um so be kind um and I prior to the Federal Reserve I was employee number three in head of hops of Falcon X which is now a major crypto Burr awesome hi guys my name is Jesse uh longtime bitcoiner crypto nerd um 2017 through about 2019 started in the mining space that's where I kind of built my chops moved over to binance uh ran the pool for them um then got really interested in defi uh left to a place called rain uh which is kind of like the coinbase of the Middle East and then now I am CEO of trustar uh we're a cross chain uh peer-to-peer payments platform um send anything to a single username and manage it all in the back end with uh your own self- custody so really happy to be here awesome here we go um so we do have a pretty broad panel I love the fact that um Anna has spent time as part of a regulatory supervisory position which she's had um so I'm just going to outline real quick what we're going to talk about here we've got 27 minutes and 13 seconds left um first up we are going to talk about disrupting centuries old Financial models um we've all talked about in our our prep call that there's a lot of things we're doing on chain that actually is really just kind of like the back end there but there's actually opportunity to completely disrupt the financial models meaning revenue streams types of interaction with customers that Financial Service players have been doing the next topic we're going to cover is going to be the future of lending defi lending and yield farming at the end we're going to take a couple of minutes talking about balancing Innovation and regulation uh and then we'll have a quick wrap up there so with that being said I'm actually going to ask to hand off to um to my left Caitlyn we had talked about in the prep call that you were going to give kind of a brief history of trafy fintech and some of the issues that remain unsolved can you walk us for just a moment or so I will do my best um yeah so I think the the relationship goes back to when technology was first introduced to even Financial Services um and I think from 08 and 09 you saw the relationship with that te technology played between the interconnectivity of the mortgage crisis um and then I think going into now uh we see a lot of the same things but what we're trying to solve differently is the intermediary Rel relationship that occurs um and that kind of that single point of failure or that centralized uh entity that can cause you know kind of like Havoc or mass destruction if one thing goes wrong and then how all because of Technology actually more of those intermediaries are more interconnected than we even think to begin with and then that's why you tend to see some of the crisis that you've seen either 08 or N9 even in crypto what we saw like two summers ago um everything is just like interconnected and related and I think that's kind of where we start and then you know moving into defi is what we're we're trying to solve with yep and she mentioned um centralization which one of the terms to use so before we even go any further I'm going to go from The Far Side towards me Jesse two to three sentences what's defi defi to me is ownership um it is also kind of what I'm wearing right now which is privacy um and it's inclusion it's the idea that it doesn't matter where you are uh who your mom and dad were what you studied whatever it is this is an open permissionless system um that affords a lot of the same kind of money Legos that I think you know traditional finances gated from a lot of people um and it's a place to experiment so yeah Anna what's defi I think it's a range of financial services that are accessible to anyone but via permissionless and transparent intermediaries and I can't emphasize that word enough a lot of people are like you know there are no intermediaries in defi there are you need to think of them like that um but you also probably need a regulatory system that accounts for the differences between Defi and non defi intermediaries I agree with that we're going to dig into it what's def to you I guess democratization of financial Assets in a more advanced technological way I think that makes sense um okay so noting that we've now got some different but primarily similar definitions of what defi actually is and noting that seemingly like the not the V villain but maybe we call it the foil of this story is going to be the centralization in the last 50 plus years of moving towards centralized systems um I was going to share briefly I started at State Street Bank long enough ago that we were getting Excel files downloaded from sub custodians around the globe and literally running functions to try to match um trades looking for out trades and try to settle these mistakes that were made uh which sounds like crazy to be doing now but it really wasn't that long ago that we were doing this so with that being said um thinking about um permissionless Defi and um I'm actually going to start off with Jesse here what is the opportunity what what's the easiest opportunity for def5 noting that your role with trust Weare what's the opportunity for defi to solve what where can you make the most impact the fastest um I think it's payments right now um but I think that the ball moves uh apparent I mean according to total value locked um right now I'm focused on payments because I think it's the product Market fit killer use case um you know just looking at kind of of also bare Market bull market uh I know a lot of us from the preall we've been in this long enough to see multiple Cycles doesn't really matter in terms of payments uh you know stable coins are on Pace to out uh out transact Visa Mastercard Etc so um I look at that kind of as first and foremost and I'm going to jump to Caitlyn for a moment but I don't want to forget Anna please with your background jump in as you see fit um Caitlyn is working for Robin Hood Chief Information Security Officer and so you've got both a centralized Financial Services you've got decentralized Financial Services you've got wallets that you're creating right where do you see where do you see the opportunity for your dii offerings to gain the most traction the fastest probably I think it's going to have to be through our like web three wallet offerings and being able to offer more connectivity uh more protocol compatibility probably a better wallet product to be able to use in conjunction with all of this I think we'd probably have to gain traction better there and more technology focused honestly custodia wallets or non-custodial wallets noting that you spend time in a position of a regulator where is the regulatory apparatus leaning is the regulatory apparatus saying to themselves we'll figure out how to deal with non-custodial wallets or is the regulatory apparatus saying oh crap we have to find a way to nudge cajo choke point whatever you want to do people into using some form of custodial wallet even if it's in this world of defi that's supposedly permissionless look at I want to sit here and be an apologist for Regulators because I can you know they can be quite my opic like a lot of them you cannot be in that regulatory agency in any capacity and own any amount of crypto for example I think that makes it hard for Regulators at all levels to really engage with some of the emerging technology but I understand why that rules in place but at the same time we have to remember that Regulators are separate from legislators and they have to follow the laws right that are put in place right or the um you know guidance uh that in the US is issued through Congress they have to interpret non-consuming wallets within the regulations that are in place to today and I get it that it's a very clumsy you know kind of ju supposition between uh I mean e even the the concept of of wallets that are issued directly to Consumers and then controlled by consumers is a little bit difficult um but I would say they're they're doing their very best to at least from the efforts that I've seen to try to figure out how to operate within existing regulations and allow for some degree of activity even if it's experimental Innovative not mass adoption scale kind of activity so is the end result in defi um and again the seat I sat at at Circle I talked to a lot of the major financial institutions who are all building but not everyone's gone live with stuff yet it's the question often came down to are we going to build in a permissioned network or are we going to build on a truly open network which therefore necessitates some form of valid identification standard that are accepted across the board any thoughts any comments from this panel here as to do we end up having permission networks do we end up having much better digital um validation of kyc and AML sanctions is there going to be both I can go and you guys can jump in wherever but I think we're starting to see some of that with travel Rule and how that's taken place in in the US and then what has what is required in Europe as well there it's starting so it's gone from what it used to be I don't know like five or six years ago where it's like you just need to know where you're sending it and you want your user to attest that they own it or something like it was very like basic and rudimentary now it's like we want to verify that they actually own that wallet or can like sign something that says they own that wallet so I think that's growing and expanding um you know I don't know that I don't know if it's a Jesse you might have thoughts on this too I don't know if it's appropriate to tie identities to wallets in that way um but to just attest that you actually own it through like Pub Key derivation or something I think could be appropriate but yeah I think we're starting to see some of that are going towards that direction now yeah I mean we I think that's a really good question um it's something we've thought about a lot I look at this as like there's going to be kind of the more centralized side in terms of identification and then there's probably going to be more uh ID standards on the decentralized side um we've looked at things like for example multisig where you tie different pieces or MPC where you tie different pieces of real world identification to keys and for example you need to reach a threshold signature to prove that you are that person there's other ways of doing this but I think that fundamentally we're going to go into a world where you can still maintain privacy um and yet still have kind of omni chain identification and that will solve a lot of these issues I do not think that we enter a world where um where it's as kind of private as it used to be and and you know snooping software whatever you call it is just too far along to really have that ever take place again so that's my thoughts at some point a regulator going to say we no longer need to instruct these financial institutions to send us this type of report in that format at this time of day and will the regular just say you know what I'll just pull it it's out there public information are the regular is just going to say fine I'll get it myself I mean I would say that Regulators would love to be able to get it themselves in real time um I think one of the challenges that the industry is having is that the regulatory apparatus not only in the US but broadly spent decades you know kind of figuring out how KC was going to work right for the purposes of uh preventing money laundering financing of illicit activities and the system is far from perfect right there are a lot of leaks but it does give them information and what we're offering them is a system that does not give them information as well or better right and expecting them to embrace it and I think that that's going to be a challenge right if there is a way that we can coales around a vision of like okay here we want you to be able to you know investigate and prosecute criminal activity um we're going to give you some of the tools to do that in a way that's privacy preserving that would be the the Holy Grail I don't know how far we are from from that Vision you make a good point because I know for me personally I've been in the camp like why can't The Regulators just take it but to your point if you're not giving them something better or at least equal to what they're used to they have no incentive to really take it themselves right okay I'm going to change up focus a little bit here while sticking still to the idea of the business models and financial services one thing that we talked about in the prep call is the ability with digital assets do these Atomic swaps between almost like a hot wallet and a yield function mistaking function whatever that may be um it's one of the reasons I've I've made a move recently from my former employer to my new employer um let's talk about what changes that can enable for consumers when you have this ability rather than to move my money from my checking account to my savings account where I have to lock up for a CD for six months to get any money or where if it takes a day and a half to move even from a savings account to a checking account what's the change that consumers can expect when you're able to instantly swap Assets in hyper real time I can take this and I'm going to preface it with a little monologue I'm from Brazil I still have a lot of family there I've spent a lot of time in the US and a couple years ago I moved to Canada and now I'm like really violating all the you know prescriptive suggestions that uh Caitlyn gave and my company's actually headquarter in the UK I spend a lot of time traveling and navigating across Financial systems that are you know very much rooted in their jurisdictions the Canadian system as it turned out when I found out you know it's the banking system is controlled by six Banks right when I moved I got un banked from VMO not accessible when I go to Brazil they have an excellent pick system not accessible to me I would love as a consumer to have some sort of supernational access right to to payment rails and that's really all would like from defi I do not think that democratizing complexity is a good goal I I I agree with that honestly yeah it it it is I mean you know talking about moving from checking C the CD that's seamless even RBC has managed to do that and I you know they're great people but I I often tear my hair out with the experience at at the Royal Bank of Canada um I think if we could just figure out how to make a very simple use case work for a lot of people that would be great but if we don't want to do that recognize that this is a complex possibly a luxury product right move away from thinking that all of dii has to be D to C and and start considering the possibility that it should just be B2B however you define the B's Dows llc's whatever you want make complex products for experts you know with with specialized knowledge and the ability to grow that knowledge don't make complex products for people who no matter you know how much information we give them and kayin give a lot of information like it's just going to be very very hard for them to was talkinging about earlier right that um you know the goal is not to make something more complex for people yeah I I think these are these are complex things to begin with and I think you know the goal should not not be to gamify it to make it look easy so that more people put money into it and they don't know what they're doing I like I agree we should solve simple use cases to start with and give people what they actually need or would want I think to speak from an Institutional standpoint also to build what you described I was like running through it in my head I'm like if consumers were able to do this this I'm like I would need to then build this this this and this and I I'd probably need four new vendors and then something else like that's the other thing a lot of crypto you're in institutions are using four five and six vendors to offer you one product because it is so complex there's no way like One bank or One Financial Services Company can actually build all of that and have enough people to run all of that it would cost a billion dollars like yeah so that that's the other thing to keep in mind is to make these types of more advanced product offerings for what is really a smaller group of people um it's a lot of money and a lot of time and energy and I don't know that that many people are would actually be using it at this stage yeah valid point I I think like you're touching on something that we think about all the time and I I read a tweet recently which is that there's three different types of crypto consumers there's your crypto natives that want like these ridiculous dashboards they want to be able to do everything right then you've got kind of retail users which are more like you kind of need to uh uh provide for them easier tools and then you got people like unbanked right that's like a very big promise of defi where you actually need to learn how to use the product by using the product and so if you don't know who you're building for you end up in a situation where you're in this kind of like wishy-washy Purgatory of I have no idea who's actually going to use this it's probably one of the hardest things about building here um but I do think that interoperability as you guys describe it is like kind of the Holy Grail and the reason for it is Market um like when I was at binance we did a lot of one-click solutions and that brought in a lot of people where they're willing to give up a portion of the staking or the yield because they don't want to go through all of these different steps and there are also companies that want to provide that to people that want don't like you're saying don't want to go through all those steps so there's a lot of room for apis there's a lot of room for a kind of Boutique Solutions and customers we've already seen are willing to pay for it um but fundamentally like the unification of chains I believe is because tvl is down across the board that's total value locked right same ball of money rotating around we have yet to to succeed at least this cycle and bringing more people in uniting the chains I think does that that's my take so let me just um maybe a slight counter point if I may to toss it back to you guys uh you were mentioning Anna how we don't necessarily need to create complex solution more complex Solutions we have a core set of users now for whom as Caitlyn mentioned some are super sophisticated we can make something more complex some are less that being said you know no one thought we needed a iPhone until Steve Jobs put all that complex behind a simple interface and so is that really the end goal where this goes is that there will be a whole lot of complex stuff that's hidden behind some super app or some super Hardware technology is that the end result I like your comparison I think it's good but I almost think it's apples to oranges in a way because think I I do I do like it though I did like it like you put all the hard stuff behind a screen and made it tough cuz he he kind of did um but I also think it's apples to oranges because you're talking about something that's it's much simpler you're talking about an app um versus an entire ecosystem of money and complex Financial products and traditional assets you have I told Anna this earlier I was like at one point I had to because I know crypto better than I know tradice I had to chat GPT the trafy equivalent to a crypto product it's like there there's the inverse of that and then there's people who don't know either so um I think I would probably disagree yeah I know no problem with disagreeing all right I'm going to switch up a little bit here um and I'm going to we're going to switch a little bit to um talking a little bit about the use of stable coins in D5 and again going back to our prep call which was a fantastic call in meeting these guys and having this great conversation um couple things that we brought up on this on this prep call was that um is defi or onchain risk management really any better than traditional risk management is that one of the benefits or not necessarily in defi if you've got these intermediaries making credit um making decisions on lending do we need the ratings agencies like Anna is running right now and finally I'd love for as we talk about this um if the panels can each kind of what are the aspects of earning yield in this defi world that are good that are bad that are useful that are useless um break out any little parts of it right so I'd start by saying has what we've seen in defi so far is it really that different than non defi lending well one aspect that I think is pretty different is the prevalence of over collateralization in lending right and that's one of the reasons why IG ratings get it start we recognize that no Financial Market grows without credit there's a stealing right and for credit to exist you need to you take some borrower risk right you can't over collateralize everything and while I think it's this has been like a genuinely cool thing to watch um you know the the techniques and the systems to enable you know these yield farming and uh other configurations of lending we need to evolve from that system right and we probably need to figure out how to take some borrower risk where I see that going is you know with rwas because now you're probably going to have to do a little bit of borrow underwriting but then you're really you know kind of glom on you know credit risk on top of like protocol risk and government risk and everything like that and those need to be decomposed and understood really well and the decomposition has happened really well there are a lot of people and firms that focus on it the understanding has not been done to the level of rigor that I would hope to see right in the near term Jesse you want to add that yeah I think one of the things you touched on in the very beginning it's really interesting which is overcollateralization as a very different um thing and I think that identity actually or like kind of omni chain identity actually solves a lot of this because right now it's it's 0x5 j 923 whatever it is H you know the only way that I can recoup is either via kind of insuring it or via having it over collateralized and essentially the smart contract calls it back with some sort of kind of unified identity you start to be able to tie this back and have like a reputation score and and and start looking at Credit in that way I think that's really interesting and I really don't think we have yet or I think we have yet to see that um but I'm very interested in that part um and I do think that there's a place for both though I don't think that a lot of the tokenization like wacky things LPS governance tokens are going away um but I the last thing is I do see big organizations like un swap Blue Chips right Unis swap a going more kind of towards the client or app layer in terms of as close to the user as possible Right Unis swap wallet battling through the Apple thing because I think we've kind of exhausted a lot of the the stuff that we can actually do with dii on the you know protocol layer Etc infrastructure layer gotcha um back to stable coins I'm going to throw it out there yes there's a lot of different types of stable coins different versions being that have been created that are still to be created um what what ends up if if stable coins are the core value or the core medium of defi are we going to see 10 different types of stable coins out there and and you know when I say type I do mean type is there going to be crypto-backed is there going to be delta neutral or are a lot of these merely thought experiments that are expensive to the VCS who back them I mean I think you might I I think you might see certain Stables backed by other cryptos I you might see other cryptos backed by other cryptos um I don't know if there's really I feel like you could do any of the above you could back it to a dollar you could do any of the above but um if it gets too complex for that end user to understand yeah does it end up does the market end up moving away from it I think the market would tell you because it would fail I think people would want to make money and they'll make money any way you provide that to them whether it's the right way to do it or not actually yeah I think one thing that I don't know about the audience but I've learned over the course of the last five years is that um users will use anything that you put in front of them if you have a positive yield number that and that's part of the big reason why Regulators are concerned because you know consumer and investor protection uh is is something that they see as a risk in D5 I will say I think that stable coins are subject to the same forces of capitalism as everyone else right every other industry um tether is getting the lineon share of usage for a reason it's just been you know around a lot very resilient um I've heard some really interesting use cases uh in a previous conference around the way that you know like uh oil producers in Africa and the Middle East are using tether you know to really like get the payments going because if they have to go through the Fiat reals it just takes too much time um so I think if there is a stable coin that is stable uh focuses on one use case right and can deliver value it will win awesome um guys we are out of time and so I'd love to offer to answer some questions but we're not going to at the moment so um thank you all we're all available to chitchat with afterwards thanks