Collateral Infrastructure Building the Rails for Tokenized Leverage

Good morning everyone and thank you for your time. My name is Melvin. Uh I'm the CEO of QCP. We trade a lot of Bitcoin options, Ethereum options. And this is why this topic is really interesting for all of us.

Why? Because if you were to think about institutionalization of the digital asset world and in for it to become a financial instrument tokenizing leveraging these are very fundamental things and today on the panel we have a very diverse group because I think across this topic uh it will cut across a few industries. So it'll be very interesting uh for us to hear from from from all of them. So without further ado let's let's get let's get cracking. Helen, I'm just going to ask you, you know, when you look at an asset, what makes it truly a good collateral in your world, in the world of insurance, and how close are crypto and digital assets to that standard?

Um, thanks, Melvin. It's a very good question. My name is Helen Y. I'm the CEO of Cubid Underwriting. Um, Cubit is the first and only lawy cover holder in Asia Pacific and our underwriting authority also covers Middle East including Dubai and Abuab Dhabi.

Uh, 99% of our business is to uh provide professional indemnity DN all these financial line um insurance policies actually to uh digital assets players or anybody deploying blockchain technology. So this topic is very dear to my heart for two reasons. One is we are the true bridge between the traditional finance which representing insurance but at the same time we're providing the the coverage or we are the risk taker of a new economy which is digital assets. So for many years um insurance industry is constantly looking for new capital to support the uh the risk takingaking and we are very we we consider ourselves very experienced in gathering that capacity. So at the moment globally speaking for the reinsurance industry for example we leverage about what do we say um nearly 300 billion uh you know in terms of fiat money as collateral.

Um how much do we use bitcoin at the moment? My best guess is probably around maybe couple hundred million US dollars and that is again uh playing in the gray area which is unregulated. So why is that so? uh the reason is coming back to the question you asked Melvin is what is considered a good collateral in a regulate highly regulated financial industry like insurance. So the first and foremost is actually stability.

So we need the the underlying assets to be as less volatile as possible. The second reason is we need it to be have um we need the assets to have very clear legal certainty who can claim it, who owns it, who guards it and when we actually call for the assets and who can release it, who can sell it. Um the third one obviously is we need to have transparency. We need to have a transparency both in terms of where the assets are, how safe it is, but also in terms of valuation. Who does the valuation?

Is the valuation um accepted by the regulators world worldwide? And the fourth one I think is regulation. Unfortunately is uh in a lot of jurisdictions including you know we operate in Hong Kong um the Hong Kong insurance authority has a very clear guidance for any regulated insurance um entities not to touch anything crypto. So that actually possesses a lot of barriers for the insurance industry to leverage and to use um the vast you know the availability of the very liquid assets that we have at the moment.

Thank you for your for your response. I'm a trader. Um I I I have tension with what Helen said because if if the asset doesn't have volatility, I don't have work. But going over to you, Sabrina, from your perspective, what what type of tokenized assets are realistically eligible for for central counterparty clearing and how how should risk models adapt considering that I like volatility?

Big question. Little time to answer it, but uh thank you. And um just to frame the question, we are operating an exchange currently in the UK derivatives exchange and setting up a derivatives exchange as well as a CCP um under ADGM at the moment. So the question that you're asking around collateral is really at the core of a C central clearing counterparty and clearing house. So and I would even say you use the word risk management in your sentence.

The problematic of a clearing house is really a riskmanagement uh problematic. So, traditionally and and I'm going to use a lot of the points that Helen has used because collateral has got certain virtues, right? It needs to be valuable. It needs to be something that you can value easily. It needs to be liquid.

You need to be able to partition it to each of the clients. So, there are certain attributes that you're using in insurance that we also are using in the world of clearing. So, some of the the aspects that you described are very uh commonly used in our world as well. Traditionally CCPs have been using cash and securities. But we see that that world is changing.

And why is it changing is because also you have the movement of monies around the clearing ecosystem that increasingly institutions want to use 247. And if you're looking at the crypto markets, the markets are already 247. So you need banking rails that really enable that 247 movement. But you also have now tokenized forms of collateral that can operate on blockchain 247. that's really changing the way that we're thinking about collateral at the clearing house level.

So what assets? Obviously digital assets are there natively, but we're seeing increasingly tokenized forms of securities. We're seeing of course the use of stable coins. You would have seen from the CFTC some announcements this week in terms of expanding the permissible level of the permissible types of collateral that they will consider for derivative CCPs. So all of this is changing gradually and it's underpinned by the need to be much more fluent and um rapid in the settlement cycles as well rather than waiting for T+1 and building a lot of risk in the system.

It's also heavily influenced by the needs for 247. It's also heavily influenced by the progression in payment technology as well. So I'm sure all of this we will unpack but I would summarize liquid uh something that has legal certainty is very very important that you can really a portion it per client account or principal accounts and make sure that you tag the assets properly and all of those things are really relevant in a 247 world and in a world of proper risk management.

Well thank you for that. I think when we look at uh digital assets and we think about it be becoming you know acceptable collateral from a CFTC perspective. I recently put in an application to will u submit that Pokemon cards should be considered as trading collateral. Okay.

Um but then if you think about it from a from being a custodian of the uh Pokemon cards that's a real big issue. But over to you Andre. How are regulated custodians really thinking about tokenized collateral and enforcibility especially in multi-jurisdictional issues?

Um I can yeah my name is Andre Mitson. I'm a group CEO and co-founder of Bitcoin Swiss which is the oldest crypto financial institution in Switzerland. So I mean you asked a couple of different elements in that question and I think we need to unpack it a little bit and I can relate to what has previously been said. So uh first of all I mean what is a tokenized asset? So you usually have like an issuer of a tokenized asset and there it already starts that you need to know I mean what is the underlying asset?

How is it backed? Who is the issue? So you need to do some sort of proper due diligence when it comes to that. So if you for example have $100 worth of stable coin is it really backed with $100? Is there some sort of an audit process?

How is it working with the redemption and and and all of those kind of processes? So understanding what is really the asset in itself then of course accept accepting it as collateral. Um one thing is the legal certainty and that has already been mentioned. The other one is in crypto there's a saying not your keys not your coins right. So if you do not really control the private keys uh of a of a tokenized asset you don't really control it.

So you might have the legal um clarity that this is your asset but at the end of the day if you cannot really control it it's not really a good collateral because uh and you also touched the topic of of pricing itself um how is the tokenized asset priced I think that's extremely relevant um what is the pricing sources of it because one thing is you have the control then the pricing and the other one is the enforcability to to do a trade execution so if for example you accept a tokenized asset as a collateral price drops instantly and that might not be with US dollar or so on. I mean maybe in the longer term but uh in the short term uh other assets are more volatile and the more exotic they are. So you need to be able to access those funds instantly. So if you just rely on a third party custodian or if you have a multisig setup and all those things, it doesn't really work like that, right? So you need to be able to execute a trade in the moment where the price drops.

And if you're not able to do that because you don't have a fully redundant 24/7 available kind of trading setup then yeah that could be uh of course very dangerous and you would uh incur losses in those kind of scenarios. So I think it's really a combination of different factors that are relevant uh if you really want to pledge tokenized assets or accept them uh as collateral in this kind of ecosystem and you need to have the proper infrastructure uh in place for that. Yeah, I I think I think we've kind of hit the nail on the head on a few fronts. We're talking about risk in general. There's counterparty risk and that's all the forms.

I think one way to take this away is really trying to connect Trafi and DeFi um and and the collateral system. So, Red, what do you think are the interoperability standards that have been emerging that that allows these worlds to to merge?

Thank you very much. Um so, I'm I'm Redwan Meslam. the executive director of the enterprise alliance. We are a trade organization focused on facilitating adoption of Ethereum for large enterprise and institutions. So we have members like span for large stratfi to also high growth Ethereum startups and um we've done some work around standards uh either technically also education and so to answer your question uh I think what I love to say to more financial crowd is like there's no technical problem that we cannot solve.

Um now a day in term of interperability which means you know if you tokenize an asset that's going to live on one exchange how you going to make sure like this can continue to be living and and communicating with other systems because if we tokenize everything but create silos it's useless and what we want is having capital velocity and that's where we see especially you know in clearing and in collateral management some pretty good use cases nowaday we see like few standard emerging around like tokenization And actually we're going to publish a paper in a couple of couple of weeks on on that to really provide some clarity of those different technical technical standard. You have ER3643 that's been like getting a lot of traction. Um there is some other standards in the works that have like different design. I think what is going to be very important is to make sure like we keep having those conversation with different participant in the ecosystem. I'm from the Ethereum world.

I've been doing some trafire at certain point also like a manufacturing everything but I think in the Ethereum and web3 ecosystem we sometime too much of an engineering conversation when actually it needs to be a business conversation and and the more we have those the better we can serve actually you know like you were different like companies or institution to make sure like those assets and what we do are going to still being very interoperable because that's the key of every efficiency you know

fantastic now we've covered everyone's uh specialty topic because that's what we try to give you. What is the most underrated regulatory or legal change that could accelerate adoption tomorrow in your mind? [laughter]

I'm [snorts] happy to kick off less and you go ahead.

Um underrated change. I I think what's important and I'm I'm really going to be a little bit myopic about our world of clearing and exchanges and regulated exchanges and clearing the foundational aspect of why those markets are global is equivalence between the various regimes. So what we are seeing especially as we are talking about today the tokenization aspect of collateral the mobility of collateral 247 I think the equivalence regime between the various jurisdictions is terribly important if you want to create a global ecosystem having parity and recognizable equivalent regimes I think is very paramount so often this is sort of implied in the conversation but I'd like to call it as an explicit piece because it is very very foundational for all of the global cleared markets the global exchanges that connect you know members from and participants from across the world and equivalence is that rock bedrock and foundation for them to be able to do so. So it's a bit of a technical point but I think it's also to your point an underrated point

right

um

from my perspective I I think um tokenized collaterals has a lot of a technical superiority as we sitting here we can understand of course that technology is not perfect yet and is still actually changing so from our perspective from a very highly regulated you know industry perspective one thing I think will actually make a lot of difference is whether that we can have that equivalency but not across geographics but across financial institutions. So if we think about how currently the collaterals work at least for the insurance industry is we put a lot of that fiduciary duties and a lot of that regulatory burdens to the banks because we believe banks are as equivalently or if if not more so regulated than the insurance industry. So if the banks gives us a letter of credit we're thinking it's good right? Of course there are you know scams and a lot of the cases u happened in the past but fundamentally I think insurance regulators believe the banking regulators are as good however when we are talking about tokenized collaterals the first question and what we cannot answer all the time is who is going to be the custody it's not the banks banks are not doing it right they don't have the infrastructure they don't have the experience they don't want to do it so how can we actually have the equivalently regulated entity as credible as banks But they are digital as a native you know custodians they can actually resolve all the technical questions and they can assume the same level of fiduciary duties the KYC the travel rules everything all the regulators will say yes we actually accept that I think that is the biggest challenge if that can be resolved next year that opens the door to a lot of trade financial institution to use the tokenized the collaterals

Andre I try to keep it short it's um to answer your question I would say the mikar framework because everybody's focus focusing these days on on the clarity act and so on. But uh I mean coming from where we came from like starting uh a business in the industry 12 13 years ago soon um I mean having regulatory certainty across different jurisdictions and in Europe with all the uh member states I think this is quite a major step in the right direction. And of course it's being attacked now from all different angles because they tend to already start with different finishes in the different jurisdictions. But overall the idea I think is a great step in the right direction and I think this regulatory certainty needs to be done across different jurisdictions in order to have this clarity.

Thank you.

I think we need to look at everything in form of risk management and counterparty risk. uh and I think uh I could quote like Nadin Shakard. I was saying that at Cyos recently that you know in defy in code we trust is not sufficient uh when you go into into the into the the real world I would say and I would say to the crowd here that is more like you know financial um financial crowd that the ecosystem especially Ethereum like really opening the door like never and having conversation to answer your needs and see how we can integrate that and I think for the last couple of years I love to say like we've been taking care of the baby. But now that the teenager, they're able to go to the world and they have really like the the maturity and I see a lot of very exciting works either around privacy standards because that's something we haven't touched but that's a reality for especially for you. You don't want to expose all your position and so there is a lot of work being done right now by the community and so we're really willing to have more dialogue and I think that's what's going to really help the next at the end.

really breaking the walls. You know, we can the more we discuss and the more we have conversation and the better like the regulation is going to be.

All right. Fantastic. Lightning round. We'll start with you Red One. But if we fast forward to 2030, will tokenized collateral just be another tool inside banks or is this going to change the way we do leverage, credit, and liquidity?

Red.

Okay. So the dream in five years um you could tokenize almost everything. You know, your your maybe your you have affordable housing in in New York City or you have uh you have some um the equity of your home or the equity of your car and you can really like tokenize all of this. I think that could be some pretty exciting exciting topics in the in the future.

Fantastic. Andre, a lot of things can happen in five years, but usually they also tend to take longer. So I think it still takes some time but uh it will certainly be another like tool in the toolkit and most banks will play around with it for sure.

Fantastic Sabrina.

Yeah. No very uh very quick parting words. Um absolutely I think by 2030 we will see a lot more tokenized forms of collateral and we haven't spoken at all about the risk reducing factor of the collateral velocity the quicker settlement and I'm not talking instant settlement because that's probably some years away but a swifter settlement cycle and the counterparty risk reduction that can result from that in the system is also a very important dimension. So perhaps in another time we'll have a chance to talk about that but I think absolutely we're on March to see a lot of this

right and finally Helen

um I think in five years of time we will have more sophisticated understanding and the products in terms of tokenized assets today we're talking about um you know the tokenization as if everything is the same but in five years of time we will understand what are the liquidities what are the the qualities and how can different assets once tokenized to be used differently. So in five years time if there is any achievement what what I wanted to see is at least the first tier very quality assets being tokenized and being used very widely by the traditional institutions as tokenized um as collateral.

Well with that I bid you a good day and then thank you to the panelists. Thank you.