A very enlightening discussion took place during the 8th European Blockchain Convention with Maria Apogeni, CEO of BITMarkets, Serra Wei, Founder & CEO of Aegis Custody, and Clarisse Hagège, Founder & CEO of DFNS to discuss wallets, exchanges, and custody.
Not Your Keys, Not Your Crypto
Clarisse believes that owning your private keys is important for crypto ownership, but contrary to what people think, she argues that physical ownership is not necessary to keep assets secure.
In her opinion, key management is difficult and can easily lead to loss of funds, not to mention that many users still record their private keys on cloud service after purchasing a hardware device. With the advancement of technology, Clarisse envisions decentralized custody with a focus on recoverable proof of user signing power.
Segregation of Funds Is Important
Serra points out that qualified custodians in the United States now have to demonstrate that they hold private keys to customer funds while proving customers’ funds are segregated. Clarisse thinks that centralized exchanges were a response to the difficulty of interacting with blockchain technology, but technological advancements, such as multi-party computation (MPC), can help rebuild trust and increase security. She suggests that segregated wallet infrastructure is crucial to guarantee the safety of user funds in case of bankruptcy.
The Future of the Crypto Space
Serra thinks that the collapse of FTX highlights the need for better risk management and infrastructure in the crypto space. Companies are now focusing on differentiating themselves by providing institutional-level solutions and complying with regulations. In the long run, this will set a new standard for sustainability and growth in the industry.
Clarisse expresses optimism in the future of the crypto space despite the fact that the institutional U.S. market is currently facing regulatory uncertainty. She believes that decentralized finance (DeFi) will come up with new solutions to deal with the situation.
More EBC insights on crypto, regulations, and privacy:
BlackRock’s Bitcoin ETF launch and the participation of Charles Schwab, Fidelity, and Citadel Securities in EDX Markets have sparked investor interest. Enhancing institutional adoption and establishing trust require discussing infrastructure improvements for traditional finance players entering the crypto market.
This essential panel is moderated by Madeleine Boys, Head of Community at GBBC, who leads the discussion with Vincent Dulhoste, CTO of Kaiko, Glib Udovychenko, Founder and CEO of Whitepay, David Engel, Head of Business Development at StarkWare, and Rajiv Sainani, Head of European Business Development at MakerDAO.
Key Infrastructure Components To Scale the Institutional Adoption of Crypto
David emphasizes the need for regulatory clarity and the necessary technical infrastructure, including wallets, protocols, and liquidity. Rajiv echoes David, highlighting the importance of bridging the gap between on-chain and off-chain and improving the efficiency on and off-ramps.
In order to create a seamless off-chain experience, Vincent emphasizes the importance of interoperability and composability in DeFi to provide a better experience for institutional adoption.
Personal Experiences of Interacting With Institutions
Glib shares that during the war in Ukraine, Whitepay implemented crypto processing for President Zelenskyy’s website to collect over 12 million in crypto for funding. This experience led the team to work on similar crypto projects with other EU governments and develop projects related to state services that can be paid for with crypto. His experience demonstrates that governmental institutions can benefit from private companies integrating services to help with urgent needs.
From MakerDAO’s experience, Rajiv highlights three waves of institutional use cases for real-world assets in DeFi. The first wave involved working with young innovative companies. The second wave saw regulated financial entities, such as the U.S Commercial Bank, experimenting with DeF. The third wave involved deploying capital from on-chain protocols into the off-chain world. Rajiv also notes the importance of legal frameworks, the need to build more products natively on-chain, and the challenges of bridging traditional finance (TradFi) and DeFi.
Representing Starkware, David shares their experience with Visa. Visa built a proof of concept using account abstraction on StarkNet to turn a dumb wallet into a smart wallet, allowing for recurring payments. The innovation in wallet infrastructure and building web 2.0-like wallets is important for onboarding users and giving enterprises the tools to deliver better user experiences.
Vincent shares Kaiko’s experience with financial institutions on both the buy and sell sides. The company provides benchmarks and prices for investable products, supporting the investment life cycle, tokenizing real assets, and working with regulators to provide reliable data for market surveillance.
Challenges to Bridge TradFi with Web3 Infrastructure?
Rajiv identifies two main challenges: the lack of understanding of on-chain paradigms by large institutions, particularly in legal and compliance departments, and the trust issues in the industry due to the challenging conditions in 2022. As many institutions start to explore Web3, Rajiv thinks that conducting institutional finance on a public blockchain is probably one of the biggest barriers in terms of the effects of privacy and confidentiality.
David also points out two possible challenges for building blockchain solutions for institutional finance: the difficult business model due to smaller volumes and regulatory/legal challenges, and the challenge of creating a real business case for selling to institutional finance.
He thinks that replacing existing institutional infrastructure with blockchain will be slow and selective because it’s really challenging to disrupt a robust and strong system. He believes that it’s important for the industry to identify specific areas where blockchain can make a difference, such as B2B payments.
Vincent thinks education is essential to mitigate institutions’ concerns to move into Web3. He thinks it’s critical to let them understand that it’s possible to deliver secure services on blockchain. The reliability, security, and scalability of blockchain technology should be educated to build trust.
More EBC insight on institutional crypto adoption:
The panel about the opportunities and challenges of issuing digital assets for financial markets is moderated by Bernard Nicolay, Adjunct Professor of Finance at the Solvay Brussels School of Economics & Management. Panelists include Thomas Jeulin, Head of Sales at Flowdesk, Victor Busson, CMO at Taurus, Kasper Luyckx, Head of Product at the Crypto Finance Group, and Viktor Banh, Digital Assets Markets at DekaBank.
Benefits and Challenges of Digital Assets
There are three main types of digital assets: cryptocurrencies, tokenized assets, and digital currencies. Tokenized assets are digitized private assets, such as equity, debts, and real estate while CBDC and stablecoins are examples of digital currencies.
Tokenization can reduce costs and settlement time, increase liquidity, and provide access to different investors in the market. With DeFi, actors that didn’t have opportunities to engage in the traditional financial market, such as many small and medium-sized enterprises (SMEs), will be able to participate due to the reduction of the counterparty risks.
Kasper explains that blockchain technology enables direct peer-to-peer transfer of assets without the need for intermediaries, which fundamentally disrupts the security space as it eliminates intermediaries that charge fees for simple handovers. And as the networks grow and more assets are represented on the networks, we will be able to reap an even more significant impact on capital markets.
However, scalability, standardization, and interoperability need to be considered. Interoperability allows different networks to communicate with each other using shared protocols and standards, and it facilitates a more seamless and efficient system. On the other hand, a lack of standardization creates additional costs and complexities for banks and other institutions. Having different regulations in different countries makes it difficult to carry out new projects, and investigating local regulations is simply time-consuming and complicated.
Factors to Be Considered When Building a Business Case
Profitability, scalability, and security are the important factors to consider for a business case. Victor states that, when building a business case, the first step is to choose a technological provider and make sure the tokenization is profitable. However, once the proof of concept is proven to be profitable, it’s crucial to analyze whether profitability and security can be maintained when the model scales up.
A lot of businesses will have to ‘unlearn’ things they’re doing today and learn new things… We will see a lot of disruption and some of these companies will have to rethink how they can stay relevant in the future.
Kasper Luyckx, Head of Product at the Crypto Finance Group
What Roles Will Banks Play in the Future Financial Market?
Kasper thinks that as peer-to-peer transaction popularizes and transaction fees decrease, it will be unnecessary for a middleman to exist, and business models that rely on intermediaries will be significantly disrupted. Custodians, however, will still play an important role in the market because not everyone will be willing to maintain self-custody over their assets. The key for those centralized institutions is to open up their platforms and be willing to connect to the services and wallets that their clients want to use.
More EBC insights on traditional banks and cryptos:
The Needed Talents in the Market of Digital Assets
According to Thomas, the winners in the future financial market will be compliant firms that bridge the gap between traditional finance and crypto space, and firms that are agile, innovative, and strong in technology.
Apart from learning how technology works, Kasper emphasizes the importance of gaining hands-on experience. Only through doing and experimenting can we gain a true understanding of how the technology operates, where it adds value, and how it can make a real impact.
On the other hand, speaking from an individual perspective, Victor thinks that mastering the tech stack and possessing the ability to adapt to technical challenges are valued in the market. At Taurus, they are looking for talented developers that are positive, eager to learn, and agile in this fast-paced industry.
I’ve seen so many bankers who take expensive courses that teach DeFi while you can just get a wallet, connect to DeFi, and try it out yourself. I think it’s so important because you learn while you do. You interact with the technology and you see where it adds value and where it doesn’t.
Kasper Luyckx, Head of Product at the Crypto Finance Group
This panel is moderated by Mariano Giralt, Head of EMEA Digital at BNY Mellon. Prashant Malik, Senior Technology Lead – Digital Assets at HSBC, Joe Leung, VP of Blockchain & Digital Assets at JP Morgan, and Esther Teuber, Senior Legal Counsel at ABN AMRO provide their insights on digital asset tokenization.
What Are the Benefits of Digital Assets Tokenization?
The speakers acknowledged that tokenization and DLT can address barriers in capital markets. Esther highlights that cost reduction is one of the main advantages of tokenization, driven by the elimination of intermediaries, digitization, and automation.
Joe agrees with Esther and adds that tokenization can bring efficiency, liquidity, and new utility to financial systems and markets. He points out that the ability to instantaneously transfer value, fractionalize assets, and provide transparency are other key benefits.
From a client’s perspective, Prashant highlights that tokenization enables access to previously inaccessible assets and creates new, more efficient, and secure products. Tokenizing assets also fosters interconnectivity, and interoperability, and sparks creative conversations within organizations to explore new product offerings.
What Initiatives Are Banks Working On?
JP Morgan has initiated several projects on tokenization. The bank has issued on-chain bonds, built a cash-on-chain system called JPM Coin, and developed a digital financing app for intraday repo. They are working on building tokenized collateral networks (TCNs) to tokenize money market funds (MMFs) for use as collateral in derivative trades. In 2022, JP Morgan also conducted the first institutional DeFi trade in collaboration with other entities.
Esther mentions that ABN AMRO issued one of the first tokenized digital bonds on a public blockchain in the Netherlands. Prashant shares that HSBC has issued a £50 million blockchain bond on their bond tokenization platform Orion, which allows for native issuance, coupon payments, redemption, and secondary trading. They also issue commodity tokenization, where the platform integrates with the traditional trade life cycle to enable clients to benefit from fractionalized commodities.
What Are the Challenges of Tokenizing Digital Assets?
Prashant says that it’s difficult for digital tokenization platforms to integrate with traditional legacy systems. Managing expectations around delivery and release will be essential. Additionally, the diversity of digital assets across different platforms may pose challenges in terms of custody and standardization.
Speaking from a legal perspective, Esther thinks that fragmented regulatory frameworks across jurisdictions and the need for a robust regulatory framework for market infrastructure are the two main challenges of tokenization. Prashant states that the regulatory complexities are even more challenging than building technical infrastructure.
Working in a large corporation, Joe says that it’s important to coordinate and align various teams across different functions. He emphasizes the importance of staying focused on building, identifying suitable use cases, and partnering with partners in this busy and noisy crypto environment.
What Is the Future of Tokenization?
Esther states that the future of tokenization relies on achieving scale and interoperability in the market. Legal frameworks, such as the DLT pilot regime and Markets in Crypto-Assets (MiCA), are expected to pave the way for new business models and market growth.
In 2023, JP Morgan will keep identifying valuable use cases for tokenization and they aim to collaborate with internal and external groups, drawing inspiration from the public space. Prashant says that externally, it’s important to bring various participants together and work on standardization while internally, it’s essential to acquire adequate talents to execute innovative ideas.
More EBC insights on regulations, cryptos, and DeFi:
A very enlightening discussion took place during the 7th European Blockchain Convention with Andrew Howell, Director Of Blockchain Engineering at Blockdaemon, Ben Spiegelman, Head of Corporate Development at Figment, James Hume, Global Head of Sales at Huobi Global and Maria Eneva-Olms, CEO at Ekolance. The speakers gave an overview of the staking business, explained the Ethereum Merge, its impact on the markets, and analyzed how institutional investors can participate in staking and what are the challenges and risks along the way.