The Case for Institutional Grade DeFi | European Blockchain Convention

foreign [Music] good morning everybody thank you so much for coming out relatively early on a Friday morning by Spanish standards when I'm sure you've all had an amazing night in Barcelona the night before so uh clearly we've got the the Titans here thank you very much my panelists for joining me this morning it's always a pleasure and a privilege to be joined by thought leaders in the space and today we're going to be talking about the institutional need for defy as you can see I am Stephanie I am from Gemini which is the regulated custodian and exchange which was founded by Tyler and Cameron Winklevoss in New York back in 2014. we are a spot exchange and we offer various types of custody in the US we also offer staking aside from the US offices we have London of which I'm the head of the UK we have Ireland where we've been passporting into 18 European countries and we're also live in Singapore so I will hand over to my panelists also to introduce themselves all right thanks uh um for having me guys um and thanks for introduction um so I'm Philip I'm the co-founder and CEO of Levi essentially the problem we are solving is abstraction right we're always talking about account exception and making things easier for users but who makes it easier for trackify tretify is facing a multi-chain environment and there's a huge risk of sun coasts and it's important for traffic to stay flexible and adaptive so for them we are abstracting away um core Financial cornerstones which is tax and Bridge aggregation relay and uh and data service aggregation so we're abstracting away the most important pillars for child fight to build in that multi-chair environment metamask is one of our clients sending 95 of their bridging volume through us for example um and yeah we are on 40 people and around 2 years old good morning everyone so I'm Henrik um co-founder and co-ceo of berlin-based finoa we are a qualified custodian and staking provider servicing institutional investors across the globe investors ranging from crypto VCS investing in in token portfolios hedge funds family offices and then on the other side we work a lot with the actual what we call the builders in the space so the actual protocol teams foundations running their layer one layer 2 protocols managing their treasury with our solution and incentivizing their ecosystem qualified custodian also means that just as Gemini we are regulated uh in Germany as a crypto asset custodian which of course in the latest discussions also coming from the US with the SEC seems to be one of the next big Topics in in regulation we as of today provide our customers with the custody layer we provide them with access to staking one can probably argue is taking now part of D5 or not I hear all different of opinions here um and when you for me the actual D5 piece or access to liquidity pools lending Etc is something we are now implementing but obviously and we're going to get to that it's something that from a regulatory perspective when you are regulated and qualified custodian definitely creates quite some headaches so we're happy to discuss how this is going to look like thanks Henrik I'm sure most people here are very sophisticated and the world of blockchain and crypto but just for any beginners out there can we just touch upon defy and what it actually is yeah of course I'll keep it short so essentially the blockchain allows us to reflect assets ownership and value flows um So based on that um within D5 we try to mimic and replicate existing Financial models and services right so the foundation for that are probably stable coins where we have just one instance that takes on Fiat and issues the asset that is packed to a fiat currency like the dollar most often the dollar so far and based on that we can lend that out and maybe get access to another stable coin um which is maybe packed to the euro so for that I'm generating yield I'm getting interest rate on that um so at the same time sometimes we want to maybe get access to another asset without changing our portfolio so we would turn to a lending protocol so Landing in borrowing is is a thing another thing is an exchange so sometimes we really want to swap and change our portfolio so we want to change exchange between euro and dollar so we would go to a decentralized exchange again here someone has to provide liquidity and gets interest rate and so we find to advise biggest business model interest rate swaps also on D5 so these things are involving pretty quickly we are figuring out new Financial Primitives we are Reinventing certain things but we also see existing Tech or existing mechanisms like the order book coming back to crypto so um yeah it's it's very interesting and the space is playing around with existing models tries out New Primitives and so we both D5 provide greater access to financial services for a greater majority of the population thank you so much uh let's play devil's advocate for a moment because I'm sure anyone in blockchain will talk about the the pros of decentralization but when it comes to institutions there's always the counter argument around centralization so let's maybe just talk about a little bit the pros and cons and see if we can balance that out a bit for the audience Henrik Johnson uh start us off there yeah of course happy to take that I mean of course especially after last year's event there was a whole discussion about you know C5 is all bad and uh C5 is kind of um the counter argument to to defy and I think um the what really is going to look like is we're going to always see a kind of a combination of the two right and if we just look at our customer base which is a lot of regulated institutional investors themselves and they are just looking for working with a a trustworthy counterparty which often means also a regulated counterparty and then they want to access the crypto space right and I mean a lot of the uh um early day ideas of crypto not your keys not your coins um of course I mean I was early in the space as well and I got the the whole idea but for an Institutional Investor who just doesn't want to manage the risk of managing their coins and the keys themselves um that whole argument just doesn't count they want to get access to the asset class they want to get access to D5 and the yield opportunities that you mentioned Philip and for that they they seek uh the support of a financial uh service partner that they can work with right so obviously what we need to see is a trust where the industry centralized or not centralized that kind of holds up security standards holds up risk management standards and just doesn't uh fall into into the holds of FTX or whatnot that we saw last year so I think that's uh the the truth is somewhere in the middle what we call ourselves is on-chain C5 right because I think there's a whole different differentiation to be made in the C5 spaces where because you have a lot of those providers that completely abstract what's actually happening on chain um you can somehow create some yield somehow get some access to to earn products but you have no idea what's actually happening on chain right and for us we fully segregate everything that we do with each customer and when the customer does any action with us you actually see it on chain you can always go on any blockchain Explorer and actually get the verifiability and transparency that blockchain holds right so this combination of centralized access but then have the actual on-chain decentralized transparency I think that's really um where I see yeah the right balance between the two words Philip do you have anything to add to that yeah I totally agree with uh with uh with you Eric um at the same time like I would say it's it is uh I have a general bottom line um but let's start with the pronounce cons the pros for me are greater Financial inclusion and access to financial services it can provide more security and transparency it can provide more autonomy and control to Consumers and to businesses at the same time it comes with greater risk for hex and fraud it comes with less consumer protection and Regulatory oversight so for me the bottom line is essentially we need to it's a matter of implementation um it's a matter of context and we before we further progress we need to find better standardization better interoperability and more abstraction for consumers as well as for traditional institutions to onboard the next billions not only of users but also in some of cash right so um so this is essentially my bottom line but we are on the right path it's a very fast moving space um I think it is foolish to uh to to sit out on these developments it's a learning curve we all have to make and it's just it's new paradigms that has to be manifested in all kinds of roles not only in the in the heads of developers so uh get your hands dirty um follow follow uh follow that path because it is happening and uh yeah we we see all kinds of financial institutions getting into it we also see people sitting out but uh I think that's risky thanks so much you're right it is happening and I think the people sitting out is very much there they're waiting they're watching it's this is now not a binary discussion anymore it's it's a question of timing so we've all been in the industry quite a while so what have you seen in terms of evolution in terms of the institutions the type of Institutions who are at least wanting to enter the defy space and why um I like to differentiate a bit on the institutional side between what what we call the the crypto native institutional investors and then the not so native uh institutional investors and I think on the native side of course um they're really at the edge of uh the crypto Innovation um I mean they uh from day one when they invest into a proof of stake protocol they want to get access to staking access to the inflation mechanism and generate rewards right whereas when you have a more uh let's say traditional Institutional Investor that just comes in for the first time into crypto maybe invests in Bitcoin ethereum to get started um the concept of of staking is something that they can't really uh grasp in terms of what's what's the risk profile of this what's the counterparty risk what's the smart contract risk behind it so there's a lot of education then than necessary and that also explains them very much what what the range of potential customers looks like right like that that we also serve and how we can kind of build the product for the actual natives in the space who are kind of three four maybe five plus years ahead of the more institutional uh traditional Institutional Investor space but at the same time let's say um serve the more uh risk-averse investor and I think that's really um what we spend a lot of time on to to find find the right balance so be very Innovative and keep the product attractive to the natives and that's I think I mentioned D5 as well because I mean look at Venture Capital investors uh Native in crypto suddenly a completely illiquid asset class when you invest in when you do token based Investments suddenly is completely liquid and suddenly you have the the possibility to participate in in D5 so actually not only wait for the uh for the actual principal investment uh to increase in value but actually do product or get access to productivity with your assets in the meanwhile participate in in in liquidity pools participate in in lending protocols um so that's kind of in the edge of venture capital investing in in D5 and crypto 2023 right whereas a traditional Venture Capital investor is just used to sit out uh until the next liquidity event which could be five seven ten years in the future so striking that balance uh is what we really observe very narrowly thanks so much I think it's very interesting from the the custodial point of view um and you'll feel this deeply I'm sure it's it's very much about how do we keep those tokens in custody right because a metric for a custodian is AUC which is the new AUM assets under custody so it's about finding the best solution especially in the institutional space where you have the interoperability to be able to move those tokens around the ecosystem and this is obviously what you are building Philip so do you want to just talk us through that um and how again the evolution of the institutions that you are having discussions with and seeing where you think maybe in 2023 there might be further Evolution different types of Institutions not necessarily the crypto natives but the non-natives which are obviously the ones we're always trying to convince yeah of course thank you um so custody the custodial Market has become much more competitive over the past two years we see in these custodians coming out everywhere and uh and uh I think as we just heard on the last panel is that all the banks are going into custody providers and try to offer these services to their clients from there on it's now important to create like to to keep AUC as high as possible but the customers are more and more risk friendly and are willing to to touch base on on D5 products right at least getting different asset exposures and in that process they are facing a multitude environment so um so uh what we do with le5 is essentially we would allow um so so what's happening is that these users leave custody in order to engage with D5 if if custodians can make that simpler and allow to like leave custody swap into the desired asset get the asset exposure that's desired and get back to custody um then then custodians can can keep their AUM or AUC as high as possible while giving that desired access to D5 while giving the sense of security and like mitigating risk that these assets are too long on hot wallets and whatever so we we have aggregated all the tax aggregators and taxes on all those chains and even the bridges in between so we are working closely with custodians nowadays to figuring out um in that regulatory environment what is doable what's not right like this is the only constraint here to leave custody find find that one particular asset we have a smart routing algorithm that figures out the best route the cheapest and and safest and yeah and then send these assets back into the custodian where it comes from doesn't matter if it changed the chain or not but this is one way how we aim to address all of that and of course we do a lot of risk assessments so we just released a risk assessment framework together with consensus over the past six seven months we worked on this and that allows us to educate our clients and custodians on on which risks are there in terms of infrastructure in terms of asset risks trust assumptions and all of that and the different types of bridges they're like five six different types most people are not even aware of that which is totally fine it's a complex space but we educate on that and then make sure that we have seek safe Pathways to certain assets or protocols and we even allow things like swap Bridge Swap and stake within one transaction so it's very seamless user experience that way and it allows to get exposure to all kinds of protocols or assets thank you you mentioned within the the regulatory environment which is always tricky of course because there isn't just one regulatory environment I mean my career is obviously giving a little bit more harmonization across Europe um but I'm just interested to know from both your perspectives you're both based in Germany I believe uh Germany obviously is you know quite at the Forefront of blockchain technology and adoption and regulation do you see Germany pulling forward and being sort of that Center of Europe I'm sure at people in the year you all have their own opinions of who will uh reign supreme in Europe when it comes to D5 or blockchain and crypto in general just as a big question I think first of all that was a bit too much praise for for Germany I think as a as a location for for blockchain I mean we did definitely some good steps forward already early on 2020 actually when for example the concert what you now uh here in in the US at the SEC as a qualified custodian in crypto was already put in place that's now three years ago right so um been there done this in in that kind of sense but I think in what we see as well is that the the the concept that was put in place um how to kind of forward crypto assets under a given Banking Act under given banking regulation that this this sees a lot of um reflection now in regulation across the globe but um I mean just look at Mika Mica uh for the for the European commission I mean it doesn't even touch defy just yet right so um it's it's really very stable coin Focus right and uh it would be great if it did touch defy um and if it would kind of create Clarity on on how to treat uh D5 because I mean you said it in the beginning um it's clear that D5 is gonna in one form or another needs to be provided to institutional investors traditional or native crypto it doesn't really make make a difference in the future anymore it's going to be all crypto native so as soon as possible we just need the clarity how to provide it how to do it and off we go right and the longer this takes um I think the more it's going to harm the Innovation space as well anything to add to that Philip uh no not much it's uh fast it's um like you can it can just tell from common experience I spent almost no days in Germany these days I'm just traveling um and that's for a reason despite being a German company uh we find our business everything for tax reasons exactly yeah staying in Germany to pay more tax yeah that's um that's the thing uh now South Korea um and other countries are much more risk friendly trying out new things but uh we're coming to land um so thank you so much both of you thank you very much being great panelists thank you very much to our audience 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