Programmable Financial Infrastructure: The Next Phase of Institutional Blockchain | EBC12

Thank you very much. My name is Ian Ellison, and I'm a reporter for CoinDesk. I have been working there since 2018. I'm the oldest, I'm the oldest person there, but the oldest of everyone who but the oldest of everyone who works here. And I'll just let the panelists introduce themselves one by one in the order in which they do so.

So let's start with you, Simone. Thank you, Ian. Hello everyone. Simone Pazello of Generali Investments. We are the asset management division of Generali Group, a major player in insurance and asset management with a global presence and over 190 years of history since our founding in 1831.

Hello everyone. My name is Lorenzo. I am the Director of Digital Asset Research at Arca Invest. We are the asset manager of TradFi. We have several ETFs that provide access to certain innovative areas.

We have a venture capital fund, so we invest in cryptocurrency both publicly and privately, and we also have various funds, regulated funds, related to cryptocurrency. Hello everyone. My name is Martin O'Yado. I work at NatWest and am the head of digital capital markets. What does this mean?

Potentially, I am looking specifically at tokenized securities and how they have been implemented in different markets, and supporting issuers as the market develops and tries to understand the effectiveness. Working with a diverse community of investors, working with the end-to-end financial market infrastructure to see how, essentially, we can reintroduce DLT into use cases use cases that are broader than initial coin offerings? When looking at secondary markets, you could apply utility, uh, to collateral or repo markets. Hello, I'm Simone Cortese. I am the Chief Product Officer of Fnality Group.

Fnality, as Miles envisioned in the previous panel, creates a set of regulated financial market infrastructure, uh , that regulates settlements in central bank money in every jurisdiction where we operate. We are based in the UK and expanding into Europe and the USA. It's nice to be here. So thank you all very much. Well, I was just going to start with the title of this panel.

What is the next stage of institutional infrastructure? I am considering institutional implementation. I'm not entirely sure what that is . Programmable, I mean, I thought we already did something like that. But I'll start with you at the end, Simon.

What do you think? What do think is the next step for instant adoption? I think that, from an institutional implementation perspective, there are, uh, two paths that should be considered. The first one is the traditional one that you see for any, uh, new technology, new approach, new implementation paradigm, which starts, uh, with specific business specific business problems, things that create problems in the modern financial market for the financial market, for financial markets, for modern banks, for modern, uh, tokenized and trading market participants. Likewise, the other way is that technology, operations, should support the should support the , uh, activities for the next iteration of financial market infrastructure.

Here we are talking about standardization. Often, uh, I hear the word "compatibility" thrown into the mix. I mean, what does it even mean? Is it just technology? Is this regulation?

Is this more than just a standard game? These are two directions I think. I think the market is maturing. We are seeing more conversations in this space. We are seeing more activity in this space, but it is a path that everyone has to take.

Perfectly. Martin, what's programmed in this programmed in this ? Good question. Hmm...That's the whole point...

I'm not going to just for clarity, I'm not a technologist. I do n't really think too much about technology. I think about what elements, you know, when I think about a securities transaction , when I issue bonds. That's what I look at first. You know look at first.

You know , you have assets. You have cash flow. The advantage of blockchain or using DLT is that things can be moved together sequentially. It's programmability that's extremely important. But it also has to do with how you can either know when things are moving at a certain time of day, or know instantaneous movements.

And so I think that's really the kind of person we're really interested in. But we also want to take a step back in terms of where we think implementation is headed. The reality is that we have many digital platforms. And we also have many existing players in the market and where traditional assets are located. We need to move towards a state where there will be some kind of hybrid future.

But at the same time, this cannot be the ultimate goal. We need to think much bigger and more expansively. Because now that we have essentially a 20-step process for, say, issuing bonds. When we think about institutional implementation of all the following stages, there is no point in these 20 identical DLT steps. This is not progress.

So, you know, we need to challenge ourselves to understand what we can actually take away from this process? Um, you know what we can, um, you know, take away from this process? How do we achieve such efficiency? And that's what , you know, I think that's what's really important for the next step–is to solve this problem. Perfectly.

Yeah, I mean, sometimes these things sound like pretty modest innovations, but I think they're really important for these huge institutions. And Lorenzo, you're an OG. You've seen all kinds of technologies come and go. What do you think when people say this is the next stage of institutional development? Hmm, yeah, I mean Hmm, yeah, I mean , it looks pretty early for us, doesn't it?

Eh, I think Katie put GBTC into the first ETF back in 2000-2015 . So we usually start pretty early, uh, watching for trends. Uh, digital assets and cryptocurrency have been mostly a retail phenomenon for the last 10 years, right? And I think for us, uh, a lot of the parts that, uh, weren't there yet, uh, you know, these tools, weren't scalable enough. There was no privacy, um, you know, not enough compliance, um, protective fencing.

Um, it's changing, you know it's changing, you know , very quickly. I mean, Circle, you know, it's, um, a public equity fund. They just launched their own first level. So, um, you know, the space was probably too small probably too small for us as an asset manager, right? For example, when you look at it now, it's a space of about 3 trillion, but Bitcoin is a bigger part of it.

And then you have about 300 billion stablecoins and about 30, 40 billion tokenized assets. So for us, when we look at it, it seems like it's interesting enough for us right now, right? And so, um, I think that wherever the next asset, the next bet or the next product comes from, it's definitely going to be institutional, right? That's where most of the money is. Um, and so, yeah, I think it's , you know, regardless of regulation.

I don't know if we'll talk about brilliant clarity and other regulation, but I think the next stage is definitely institutional. Perfectly. Simon, we talked earlier and you mentioned that this is the third kind of revolution that you've seen from an asset management perspective. The first is the democratization of mutual funds, then ETFs appeared, and now it's on the blockchain now it's on the blockchain . Everything happens on the blockchain, so what ?

What are the advantages? What are the advantages? Yes, indeed, in my opinion, this is the third revolution in the asset management industry. So, first mutual funds in the 30s, 40s, then ETFs in the 80s, 90s , and today it's the third revolution, essentially with tokenization. The move to digital assets, enabled by tokenization and DLT, effectively allows funds to be issued, stored, and transferred on the blockchain with near real- time settlements 24/7.

So, there is no need to adhere to any working hours with increased transparency. Also, better operational efficiency and a single shared ownership record. But in my opinion, this goes beyond the product. This revolution has an impact that will change how investments are actually issued, traded, settled, distributed, and how the client uses them. Moreover, it will create new forms of liquidity, new distribution channels, and provide a level of connectivity and programmability that we have not yet seen in the legacy system.

So, for asset managers, the important question is not whether an asset can be tokenized, since technically we know that a full range of assets can be tokenized, but rather: will a software- programmable financial infrastructure offer, on the one hand, a better financial system than the existing, outdated one, and on the other hand, a better customer experience? Very good. Um, and Lorenzo, it's a bad market. You know, we wouldn't say he's good. What institutions are there here ?

Are they still coming? I mention this because I interviewed you with Adam Beck, a famous cryptographer. I know it was a long time ago . And I said, "What's going on?" And he replied: "They, they are still going."

Morgan Stanley said they were going to do it, but it would take a long time to roll out, and so did BlackRock. So are they still coming, or are they already here? What is the score? Hmm, I mean, I think they're definitely going. I mean, if you look at today, I think the market that's growing the fastest is definitely tokenized funds and assets, uh, in digital assets.

Uh, and this is BlackRock, uh, Apollo, uh, Janus Henderson. Like, these are multi-hundred-billion dollar asset managers. Uh, and so they, they're definitely here. Look definitely here. Look , some of them are more, uh , some of them are more, uh , you know, they're willing to take a little more, uh, risk than others.

Uh, but I think it's , uh, just a matter of time. I-I think they're definitely here. I mean, this year, at least this year, at least , like, uh, retail, the market for retail has been tough, right? But, I think the conversation with RIAs and wealth management platforms like in the US, uh, they're extremely interested in technology, and I think from an inbound marketing and conversation perspective, it's never been more fruitful, honestly fruitful, honestly . Well, I hope so.

Uh, Martin and, uh, Simon, you're both focused on wholesale, really focused on that type of wholesale and how DLT will facilitate it. I mean, we'll start with you, Simon. What is Finality Explain? Maybe just for the audience, explain what you do, because I-uh, I've already looked into this, and it's quite complicated. There is central bank money, there is commercial bank money, there is both.

Uh, figure it out. I think that to answer this question, we need to go back to what Simone said. I agree that there is a revolution happening in capital markets in general , but a revolution in programming capabilities doesn't necessarily mean that the underlying difference in the asset you're using will actually change. What...Why am I saying this?

In the market, we hear a lot about the usefulness of stablecoins in a certain niche. In other cases, you hear about tokenized deposits. In others, you think about payment systems. We are an FMI, we do interbank settlements, and we do it differently, uh, for example, with each FMI in its jurisdiction in which we operate. Then there is talk of CBDC and so on.

Now the question at the heart of all this is what type of obligation is this and who do you have it against? Stablecoins, a great bearer instrument, can be moved across borders, despite the appropriate regulatory regime for this, but they carry some credit risk. The same applies to tokenized deposits. They're great, they're within the walls of the bank, they allow you to implement this programmability in the payments space, but then the question is what do you do when you need to adjust the exposures between them. I say this because programmability happens at different levels.

You have different levels. You have , if you will, M1, M2 in stablecoin, tokenized deposits, M0, the central bank money level. And I think in that sense, this is where the new capital market infrastructure will be headed. You will have multiple levels of different money interacting with each other, and this is the key to composability. I want to end with one.

Programmability provides this composability. Programmability gives each layer the ability to interact with each other, standardizing everything related to interoperability, not only from a technical perspective, but also from a regulatory perspective. The fact that you have it doesn't mean you can. The fact that you can move fast doesn't mean you need to. This means that each market participant has more control over when exactly they want to settle, when exactly they want to trade, when exactly they want to net their exposure.

And it is this control, in my opinion, that will really give these markets added value compared to the current one. Good. Hmm, I mean, I've talked a lot about enterprise blockchains before. Nobody cares about it that much right now , but one of the issues, and I'm not saying it's something that particularly concerns you, is the idea of isolation. You know, it's kind of private, and it's, uh, compatibility.

I mean, isn't there... mean, isn't there... Martin, you... you... you mentioned it here in the green room.

Do you know what compatibility is? What are you facing here? This is a very good question . I think compatibility seems to have already been mentioned on the panel. It means different things, but typically right now, if I look at the experience, you know, what we see in the tokenized bond market, you know, there have been a few different banking platforms banking platforms .

The reality is that they don't communicate with each other. You can take a step back. When I want to issue bonds, I want the investor to be able to hold them, use them, finance them, move them. With all these different silos, that doesn't happen. So you have fragmented liquidity and that has n't really changed.

So, you know, that kind of interoperability is really important, and that's something that, you know, you can think about something like, you know, we're trying to do this in Europe, where there's a kind of neutral infrastructure where assets could move around. The same can be seen in other jurisdictions. But creating that neutral layer with that neutral management, I think that's really important for scaling the market, because otherwise the utility of the asset is not the same as a traditional bond. So, again, if you're working as an investor, why would you invest in a digital asset, a digital version of a bond, if it doesn't have the same utility? So, compatibility is key and we obviously need to take a step forward.

You know, I live in London, and there's recent news from the UK that the Department of Finance and Cash Flow has set up a market working group to move forward with the implementation of tokenized assets, and part of that is about how we think about interoperability? How do we think about standards? And you know, in the UK we've had a lot of issues where we're thinking about LIBOR transitions. That's why you need to, you know, work on implementing...as you know, as the industry comes together, even though some of us are competing, competing, but the reality is that we need to work together to ensure that standardization so that we can move forward.

I mean, for me, you know, part of the cash part is solved with stablecoins. But I mean, you two, what's your take on...I mean, maybe Martin at the moment, stablecoins, which the banks don't like, I think like, I think ...I mean, what's your position on NatWest? And finally, you're not particularly into stablecoins either, are you?

I mean, go first, Oliver. I mean, I think we need to get back to the type of activity that you do as a customer. And actually, moving on to the interaction, I think if we take a step back and look at it from a customer perspective, if you look at a utility, does it really matter to you whether you issue your bonds there, whether you issue your other, like, convertible promissory notes there, etc.? You shouldn't, because what's important is that no matter where you do it, all of these systems can interact with each other. The picture you create, whether you have one giant network or multiple networks that can interact with each other, you end up in one place.

You have a virtual single network that allows values ​​to flow in a sense, in a set of regulated pillars, because regulation is what provides certainty to parties, institutions, especially relevant in the wholesale sector, to provide a guarantee that, for example, when something is regulated, it is finally regulated. And it's in our name. To move on to your question about stablecoins, uh, stablecoins, in my opinion, uh, are very useful in some markets where you have, for example, niche needs for stability of some currencies. You may have more applications outside of the G7 currencies, perhaps, uh, and/or where the corridors in the effects space may not be as liquid as you would like, say between euros and dollars, for discussion. Uh, at the same time, they are a form of money for commercial banks, which means that at some point later on, a settlement layer will be needed that allows the entities involved in clearing these exposures to settle these exposures.

Again , it's composability, maybe the old way, the TradFi way, to see, uh, how that risk is mitigated and liquidity can move and support all the activity in stablecoins and tokens as a deposit. I don't think they are against tokens as a deposit. I don't think they contradict the calculations. They are all building blocks for the next generation of financial infrastructure. If possible, please add a little bit about stablecoins.

Indeed, regulation and its development accelerate institutional implementation. Just imagine that in France and Luxembourg, some regulated funds accept MiCA-compliant stablecoins for their subscriptions. So, really, regulation, as my colleagues expected, provides more trust and clarity, and also gives financial institutions the confidence to enter these markets and to really move forward on this issue. And maybe your t-shirt is a warning or a reminder that this, of course, needs to be firmly tied to governance, sound risk management, and a regulatory framework. I wear it because I like it .

But, um, I was also going to take a step back and ask a philosophical question. Uh, you know, this market, this crypto industry was unusual, I think, because it was retail at first. Retailers were here first, and now institutions are coming later. And Lorenzo, I know you said this is a natural evolution and we are moving in the right direction right direction . All this is expected.

I guess my question is , have we missed something? I don't know, or, you know, you're the original author. What do you think? Um, I don't think so. I think after 10 years, I think there were a lot of things that were tested, like blockchain.

I think it's pretty clear at this point, at least for us, what blockchains are really good for, and have PMF, is for storing, trading, and transferring assets in general. They're really useful for that, are n't they? Um, and when you take that, then, um, obviously if it's a useful technology, then institutions will want to build on it. So I don't...I don't think, and maybe your question is about the values of cipherpunk and, you know, the initial values ​​of cryptocurrency...

I don't...I don't think we've lost that, have we? Bitcoin will still be that perfect kind of store of value. The same goes for Ether, Solana, and other tokens. But at the same time, they will, you know, interact with tradable assets, or assets that, you know, live off the blockchain and are tokenized, and I don't think that's a bad thing.

I think it's just a natural evolution. Like, if this is a useful technology, eventually we'll have, you know, trillions of assets on blockchain, rather than an industry like it is now, where it's still quite small and insignificant, right? So yeah, I don't think it's a bad thing. Uh, Martin, people were talking about unbanked people before. Nobody mentions it anymore , but it's obviously a concern for a big bank like yours, and maybe cryptocurrency is helping unbanked people, is that true, or is it just something that's not on the radar as often?

Hmm, that's a terrible question. This is a terrible question. In my opinion, there's nothing cryptocurrency that we're not actively looking at in my field as such, but generally, going back to some of these moments where we talked about different types of digital money, you know, ultimately, we were looking to support our customers. So if our clients are considering cryptocurrency, we will consider it as well. So, obviously, that's what we're interested in.

But, you know, I don't know, from my perspective, it's not that I do not that I do n't think you'll see tokenized bonds that convert to some kind of cryptocurrency in the near future. Maybe it can be done in Switzerland. I remember the early days of Finality, it was a utility settlement coin that was backed by UBS and such. So, you know, you guys are kind of like institutional OGs. You've been doing this for a very, very long time.

And for you, it was an evolution. It was the natural path you always took, I think. Yes. Yes, I agree. Although I think most people would probably be bored to death to think that this evolution actually means taking on something new, new, new possibilities, etc.

And just making sure they can work with existing systems, making sure they interact with each other. Again, interoperability at the deepest integration points in banks and financial infrastructures. This is truly the integration that this market needs. Do you have very effective integration effective integration , say in the DeFi space, composability, etc. DeFi space, composability, etc.

? But for that usability and scalability to happen, you also need integration into financial institutions with the ways they integrate with existing systems, because that's important. Important, perhaps less glamorous than the rest, but very, very important. Good. Good.

Good. Good things. And Lorenzo, we talked about new products before, and there's about new products before, and there's , you know, you realize the threat of disruption, and we're talking about things like computers and the asset class. This is quite an interesting topic. Oh, yes.

We communicate Oh, yes. We communicate . Um, I think that's something we talk about all the time within the company. Um, we see a lot of disruptions. Um, as far as we're concerned, for Arc, the ETF, we provide some access to certain, uh, certain arms of innovation for people, and we also have a venture fund.

Um, things are just moving really, really fast, uh, the way I see them, aren't they the way I see them, aren't they ? Um, we have a spot Bitcoin ETF, but now, as you see in a lot of these markets, uh, you can access Bitcoin, for example, on Kalshi or Polymarket, right? There are so many ways to access some of these assets. Uh, the same goes for private companies. For example, uh, you know For example, uh, you know , SpaceX went public about 3 months ago.

Uh, it's in our venture fund, but you could have traded SpaceX about 2 or 3 weeks ago before the IPO in some of these on-chain markets, for example, through synthetic exposure. So, I think a lot of the conversations we have internally are about what the ETF business will look like in 5-10 years? And I think there will be a lot of changes. There will likely be some new on-chain and more local players, but it's clear to us that people want fewer intermediary assets. They want to be able to, you know, hold and move their assets.

There are so many ways to do this right now. And some of the new asset classes that we mentioned, such as, for example, computing, right? Or, for example, prediction markets such as Polymarket are mainly built on crypto rails. Our thesis has always been that TradFi assets are the largest, have the most liquidity, and then you port them, tokenize them, and it takes a certain amount of time to have true liquidity on- chain. I think that's no longer the case for some of these asset classes, which may actually be more native and more liquid from the start.

So, yes. So for the people in the room, can you access AI-based computing now? Is this possible? Because we said it would be as important as as important as oil or gold. Is this an asset class you can get into now?

I think you can, or you will do it very quickly. I think with some of these forecasted markets, I think you probably can. We have invested in this area. So, I think you'll do it very quickly. This is probably more of an institutional use case use case , for example for some institutions to hedge compute hedge compute , or for hyperscalers or AI labs , but I think you'll get there very quickly.

And Simone, I know you're also considering ETFs. And I also know there's a limit to what you can say, but what's going on? No, really, we are traditional asset managers. So, of course, funds, ETFs are part of our business. And we also had some early efforts with digital assets starting in 2022 and 2023, when we bought digital bonds on the Ethereum blockchain.

Then we launched some initiatives and then stopped due to organizational changes. We had an important acquisition in the United States, so we had other priorities, and now we are back with some initiatives some initiatives . So, I mean, the message is clear. This is an area of ​​interest, and we are working on it. You stopped what you were doing because I exposed the FTX story.

Is that what you mean? That's what happened, isn't it? So, ETFs at the end of the year. Are you going to create a Bitcoin ETF? Report the news.

Well, there was a press release around August was a press release around August . Nothing secret. It is being announced quite publicly that we will be launching an active ETF very soon, and unofficially. If there are any more If there are any more ... Okay, okay, okay.

And Martin, what's happening in the UK? Uh, you mentioned that you touched on this earlier with the Ministry of Finance. I mean, the UK is horribly behind the rest of the world, it seems. I mean, I live there. You can't do this.

I'm trying to buy things on Coinbase. My bank tells me I can't do this. I mean, what's going on? Uh , a lot. Uh, I think I already mentioned the working group.

Uh, I don't know. It's just starting, but the impact of this...It's the Marcus campaign, Chris Woolard, his presence...I think you have something similar in the US where you have kind of tokenization or cryptocurrencies, uh, and David Sachs. I think we have our British equivalent, but we are looking at wholesale.

And I think that will be very influential very influential . Hmm, you'll see some results in the future, hmm, but yeah, I think one of the things we're doing there, hmm, NatWest, is collaborating with BlackRock, hmm, and providing a kind of tokenized repository usage scenario. We're trying, you know, basically, to do everything from start to finish. Hmm, basically, push it through. We are doing this for next year.

But the key here is that all market participants are uniting. And this is me, you know, repeating what I'm saying now, how important it is for us to implement change. So, I think we are aware of our position, because I see what is happening, for example, in Hong Kong for example, in Hong Kong . They do it beautifully, both in Japan and Singapore. Hmm, I think it's Singapore.

Hmm, I think it's obvious that when the Clarity Act is passed in the US, I think the UK will see us, we don't know, we're in a great position, being close to the US and close to Europe, to make this happen. Let's take a look at what we're doing now, where we are in the market now, what we're good at. There are a lot of opportunities for us, and a lot of opportunities for us, and , um. And then, the headlines, obviously on our side, are Digital Gilt, which is the first G7 country to issue a sovereign debt instrument on blockchain. There's obviously a lot of interest in this, and we're looking forward to, you know, hearing more when, you know, the security guys issue the bonds next year.

So, you know, this could be used to, you know, the benefits of blockchain to think about new investment investors. So, enjoy your day, locals are actually thinking about what you can say about a fully securitized asset, potentially a stablecoin issuer or anyone looking at reserve management, having a tokenized version as a reserve–it's very powerful. So, I think powerful. So, I think with all of this, I think the UK has a lot of potential to, you know, at least catch up and maybe catch up and maybe move ahead. The potential to catch up The potential to catch up is good.

We have very little time left. I mean, I wanted to ask about Clarity because it's in the news. Um, I mean, I guess the question that was turned upside down would be : who stands to gain from the failure of Clarity? I mean, who wants to ask about hot potato? Someone?

How hyperliquid is it, perhaps? Lorenzo, do you have an opinion? Um, who benefits from Clarity's failure? Um, that's a good question. Probably no one.

Listen, I think the reality is that a lot of work has been done on both sides. Um, I think that sides. Um, I think that , uh, we still have the SEC and the CFTC, which can regulate these markets and can do a great job. So I'm not too worried. I think at this point, over the last two or three months, it's been somewhat priced in that this isn't going to happen.

I personally am not surprised. These are probably collaborative banks, such as These are probably collaborative banks, such as smaller banks, collaborative banks that work with stablecoins and flashmob deposits, and that can distribute the income from stablecoins among users. That they are probably the biggest winners through clarity, not passing. They would probably say so. Okay, okay, okay, good conclusion.

Well, we're out of time. Thank you all for being so wonderful with my my random questions. Thank you for that. Give them a big round of applause. Thank you.

Thank you.