Capital Efficiency and Counterparty Risk - TOKEN2049 London 2021

morning everybody um i hope you're all well rested from yesterday's events and everything else that's going on i'm going to speak to you today about um capital efficiency and operational risk um i kind of mentioned yesterday in my opening keynote a little bit about what we do and why we do it ultimately everybody that's here is trying to drive institutional adoption with that of course come a lot of risks and problems what we're going to do today is going to have a look into the market state right now how it has been how institutional adoption was um driven in other asset classes that we deem as very very normal nowadays and we're going to look into solutions that need to be built in order to make sure that this adoption has enough legs in order to drive what we all want to see that this asset class ultimately grows um i'm not sure of how the presentation is going to be put up here but i've got a couple of slides for you so you don't have to constantly look at my face which you now have two of actually three um there we go um so before i start let me give you a quick uh intro in who we are um so we started about four years ago um we come from traditional finance we mainly have traditional finance backgrounds and then of course there is the other arm which is technology driven um towards the end of 17 uh myself and also my business partner dimitri um we got a lot of calls um in our asset management functions uh to go like look this crypto thing is happening and we would like to get some exposure um so we were looking into this we were looking into setting up a fund and subsequently looked into what infrastructure we can use in order to run a fund like you're very much used to in the traditional world and it was underwhelming to say the least so subsequently we took the decision um to start with the core problem in the industry at least at that time which was custody and it was solved by a couple of course already bitcoin was early in the game um zappo which was taking an approach of having you know a swiss mountain with dogs and guns and guards it's a little bit of a approach for anything actively traded where you where you don't really have an access to your funds the way that you want them now um with that of course we had to look into how the industry is going to hopefully evolve um what we've seen over the course of the last four or five years especially um is that we saw institutions coming in now when i say institutions you have to make a distinction between what kind of institutions we're looking at and if you look at the names that you see on this list here you see mainly corporate treasurers [Music] corporations were the first ones to kind of understand okay hold on and if you see the names of course you also see um they're quite cash rich um so ultimately they were figuring out where to put their money um and bought into the idea early on tesla elon and we can all agree that elon has done good things for bitcoin and unfortunately also for dodge coin um and subsequently of course also did bad things with his tweets but um that ultimately will not be holding up going forward and i'm gonna go into the reasons why being why melon announced that they're gonna start getting into the custody space um you have on the other side uh bank of america a lot of the um traditional big players are looking into how they can participate in this asset class because the the agreement like jamie dimon did a 180 degree turn as we all know um so those companies here paypal has bought curve um you guys potentially have seen that as well so ultimately what it comes down to is the fact of like when do bigger institutions bigger players get into the space and what does that ultimately do to the space at all and i mean the numbers are speaking for itself early investors in this space you guys are very happy of course by now um even though charlie says that it's overpriced but that's that's a debatable a a quite a debatable statement now if you look at the market and you change that to um the traditional world that we all know equities fixed income products all those i just kind of took an extract here from the equities market i mean the equities market nowadays has about a global market cap of around 110 120 trillion the u.s equities are sitting at around 46 to 47 trillion and since 1940 you basically see how the split has changed between retail and institutions um in the early days of course you know there was a lot of paperwork um on the exchanges you had pits with people screaming with paper in their hand until somebody said electronic trading might be a little bit more efficient and those paradigm shifts have happened throughout throughout the evolution of the financial market in any shape or form now if you take the speed at which the digital asset space is moving um you can mathematically have a look at this over the course of the data that we have since 2010 you especially since 2017 you basically can put a factor of four on it which ultimately kind of will derive on the fact that we will definitely grow in this space much faster than we've done in the equities market and subsequently we will see of course a a adoption rate over the course of the next 10 years which will which should and will ultimately end up with institutions being the driving force in this space when i see the driving when i say the driving forces the reason for that ultimately is what we live in every day uh we're much more connected um i said yes if you look on bloomberg if you look on cnbc uh bitcoin is everywhere it's in the newspapers social media etc people are slowly starting to agree to the fact and that's the wider public that this asset class is one in its own right now debatable is the fact um well are we talking about bitcoin are we talking about ethereum solana cardano are those going to be the ones that are going to be the way that you see them right now in the markets traded with its utility and and use cases the use cases are going to be very very important when it comes to the tokenization piece and the tokenization piece is going to be the one that is going to drive this industry forward um we are we are living in a in a world in the traditional finance world and i'm sure most of you have worked in that in that industry where you've got somebody on the third floor punching in a trade on a wednesday and on a friday you still have the back office running around chasing mt500 messages in order to settle the trades uh not necessary there's this build very very much legacy driven and ultimately inefficient which kind of brings you to the point of like what does this industry actually do for you do for us what does this space do for us what does the asset class do for us and there are several points here on the one side of course you've got the operational risk um there have been funds out there which you have seen the in in the press uh fraud has been a point you still have people nowadays going around and saying like everything's a fraud it's a scam we can all agree that that's not the case key management practices are absolutely important ultimately where the assets held how are they being secured that's why the custody piece is so crucial on the other side of course you've got the counterparty risk and that is inherently very very existent the industry has been built by tech players and tech players are extremely important in order to drive innovation but ultimately it comes to the fact of like how are you integrating and how are you cooperating with a industry that is built on segregation of duties which is going to be one of the key topics of one of the products that we have built over the course of the last year and a half which is a product called clear loop and i'm going to go into quite some depth there in order to kind of reduce counterparty risk when it comes to interacting with exchanges um when it comes to reducing counterparty risk even when oper when when interoperating with a custodian um and so on and so on and so on um fragmented and evolving landscape um you know the ability for you to connect multi multiple protocols we're talking about d5 we're talking about inter chain or pro operability um which is which is interesting and all of those topics need to be addressed from a security perspective which ultimately can only be done from a from an infrastructural angle now what does the long-term vision look like and we've heard about this now over the course of the yesterday and also today and we will hear more about this um the way that traditional finance is built reconciliation is an issue um like i said the settlement part is a is a problem t plus two t plus three you have the beauty of the technology itself which is going to be the key use case that is going to drive this forward um with immutable records that are stored forever and then of course the programmability but ultimately the very very important point is the last one the optionality in order to create new assets new types more liquidity you have banks that are sitting on illiquid assets [Music] and because of anything between bazel two to bazel four when it comes to capital requirements this asset class this technology allows you to tokenize this and take this off balance sheet that's that's that's mind-blowing to anybody who runs a big balance sheet or a big risk book in a bank and it will enable to make things that are currently relatively liquid very very liquid now if you ask me personally we will have to figure out the centralized all the c5 stuff first before we go defy um but smart contracts are going to be definitely the way forward but we talk about at least the time span of about five to ten years until we get to that point but it will ultimately mean that you potentially are sitting at the airport and you bought your ticket and you have a smart contract that is linked up between the delay of your plane and while you sit there have your coffee there is money coming into your account instantaneously because you've got an insurance contract on it things like this and you can spin this extremely you can go extremely deep into that rabbit hole ultimately it comes back down to infrastructure and the infrastructure piece that we have built is mainly built for it was originally built for actively traded strategies managers that are trying to raise capital from lps and subsequently manage that across various venues with all sorts of strategies market neutral arb is still is still a thing but you can go into any sort of multi-strats that are running across various venues and you encounter a lot of risk and a lot of problem with that and clear loop is one of the solutions that is built upon the custody piece which is basically taking the operational risk site the counterparty risk site as as its core and ultimately increases capital efficiency for the manager um or any sort of corporate treasurer that also wants to trade whatever it is um now three points here i mean the minimize of counterparty risk the operational risk and of course the increase of capital efficiency now what you basically are doing um and i'm going to come to that is that you i'm actually going to go straight to the next slide um we're linking up custody with your execution piece on exchanges that's basically it without over complicating it which means that you have a segregation of duties between the exchange being in charge of the best possible spread the best possible the best possible matching the execution piece while your assets your collateral is sitting securely within custody mpc-enabled custody there is no tokenization pollux none of this stuff it just sits there and you just ping tradable balances to the venue and subsequently trade and post trade there is a settlement instruction sent to a third party custodian in this case us and you settle within what does that mean and now in some cases like ocex for example is maybe the recent one that you've heard well that was last year the doj walked in and said guys party's over and suddenly your funds are locked for three months and you can't get them out now that's a problem if you're running a fund clearly we're solving those issues from a kycml perspective i don't want to bore you too much but we do everything on that front from the outset um we're mld5 regulated here in the uk there is there is there is a lot of conversation that we can have around this and regulation you heard a lot about here and please find us afterwards and we can go into absolute depth of the weeds but ultimately what this does is you have the ability to trade on all those venues um with your capital sitting centrally also that all happens off chain by the way so you don't so you don't need to move anything you save a ton of money in terms of network fees but it does one thing and it does one thing very very well it's being extremely capital efficient for you to the extent that when you run a market neutral arbitrage strategy across 15 venues the problem that you have is that you will have to have debt capital sitting on those exchanges that capital that you just have there in terms of the market being extremely volatile and you run at risk of being liquidated because moving the funds from one menu to the other will take time ethereum you might pay a thousand bucks and you still have to wait five hours later because it's not there um ethereum for example uh bitcoin yeah on average you wait about 15 minutes depends there is some quicker credits that are happening between venues as well they fetch the they fetch the transaction ids that have been broadcasted to the exchange and alt to the blockchain and ultimately they credit you but the problem still exists that you talk about minutes but even one second is too long if you want to do this efficiently now in this case what you can do is you can ramp it onto one exchange for example there a bit you can ramp it on you can take it off there ramp it onto bitfenix you can ramp it onto coinflex ftx you potentially have seen the announcement ftx is coming on now and many many others um ultimately what it what it comes down to is the fact that um you as a manager um or anybody that doesn't want to incur that counterparty risk and that operational risk you have the ability in order to run your business on a less crisp basis but much more efficient and that goes hand in hand with all the rest of the product suite that we have yield plays are massive you have staking capabilities on the platform just linking everything up with your secure mpc wallets npc stands for multi-party computation basically what it is it's there is never a private key uh there are only key fragments that are never coming together centrally um and it runs on a serial knowledge proof protocol but that's where we go into a little bit more of the weeds on top of it of course you have otc capabilities as well which all leverage off the custodial bit and this is where us as the custod us as custodians in that space are now starting to work together we need to create the network in order to be doing this just like there is in the traditional world except that it's not based on empty messages between the venues in order to move funds from boney to state street so um overall what it comes down to is that any sort of driver that we see or want to see in the space in order to get that mass adoption on the retail side done and and but what it comes down to the fact is you also need to realize of who's ultimately driving all those big institutions it's you and me and we've got our money there we are being able to call up our well if we're lucky enough to call up a private bank and say like place me that trade but ultimately it's our money that is sitting with those institutions and ultimately this is the important bit you need to have the infrastructure in order to do this what we're seeing right now is the big banks are moving at an insane speed if you ask me personally been in the industry for 15 years finance not crypto ultimately comes down to the fact of being surprised of how fast banks can move if they see the need in order to be part of that part of that market and part of that asset class us as a business please come and find us overall all right um so we just at a glance you've got a couple of data points here around 200 people now we've got 400 plus clients actually way above 15 billion but ultimately what it comes down to is the fact that um please come and find us in order to kind of learn more there is um a lot of things happening in that space which we're very very happy to see and i'm actually three minutes early um so i'm very happy to take a couple of questions if there are some anybody um so your plans for uh multi-chain defense yeah integration so we also have a d5 extension i didn't mention this um that basically hooks up your mpc wallets with all the different smart contracts um the plans are there the problem is the current use cases and not use cases the current usage um d5 is even more so retail driven than what we see currently in the cfi market um the it's it's not going to be left out that's that that's all i can tell you from an institutional perspective as you as you will appreciate currently it's about bitcoin and ethereum you know we're dipping our toes in but uh the d5 piece like i said earlier ultimately we will move towards smart contracts i don't see this happening for the next five years on the institutional side um but yes we already have that in place so you can so you can trade on the various you know uni swap compound whatever curve you can trade with your custody sitting at and a lot of the managers are doing is because i mean the the yields that they get on those on those venues is is is insane and there's a mix to whatever strategy you run on the multi-strat piece it's being used already quite extensively actually yeah over here so sorry the tokenization and the capital efficiency is really an amazing opportunity right that's the big one for traditional financial institutions but in order to realize the tokenization capital benefit you need not only to tokenize it you need to create some liquidity in order to move it up the so obviously you can help on the custody piece but what are you seeing on the other pieces of the puzzle on the liquidity side yeah um we've already seen santander and others you know trading trading tokenized bonds um and they were as expected not only surprised but very very happy yes coming um what it basically comes down to is the fact that i mean we won't be doing everything ultimately we are an infrastructure layer and at core as a custodian you know security is the key piece for us and of course the ability in order to drive at least what we have right now forward now on the liquidity side it's going to be pretty strict if you ask me that the nasdaq or the cme is going to be the ones that are going to be driving the liquidity piece in the future questionable it might be sam and ftx or it might be coinbase um but ultimately this is down to regulation this is down to liquidity is something that will be generated ultimately by the participants in the space and as long as they grow the liquidity will be there