Capital Efficiency & Counterparty Risk

Transcript

[Applause] [Music] um mean of introduction i'm boris i'm one of the founding partners of the chief revenue office of copper what we're going to talk about today is custody and the solutions in and around this um on the infrastructure layer we're going to have a look maybe some of you have been in the master class yesterday already so we'll be a little bit of a repeat in terms of what we're looking at when when trying to service this market um what we can expect because there has been a lot of movement over the course of the last year specifically and the main drivers in and around this and hence of course the solutions that

you need to come in um no worries just come in don't worry don't worry and the key topic of course is the increased institutionalization of this space which we all want now for when we started the business end of 17 in the three years following of this we've been sitting a load of panel discussions around the globe and everybody has been talking about institutions coming into this space which was absolutely not the case now it kind of feels a little bit different the reason why that is the case is because you're able in order to supply them with the relevant infrastructure to do that business but if we're looking at how this has been evolving over time

especially like over the course of the last three years three four years you see a couple of those big names popping up that have been popped up some of them that you see here you know of course of tesla and spacex our good friend elon musk i said this yesterday he's done a lot of good things for bitcoin and unfortunately also for doge and also a couple of bad things you see you know guggenheim bny our friends at fireblocks have done a good job there and you know many others that are basically moving into this space but in and around those names you will very quickly realize microstrategy of course you will realize that those are mainly corporate treasurers now corporate treasurer is on one side is of

course a very very lucrative business if you can capture their auc but on the other side of course those are not the ones that are going to be driving this going forward the ones that are going to be driving this forward are ultimately the institutions that are currently the big players in the industry and just as an example of course you have the equity markets the the fixed income markets equities as an example i mean currently we have around i think it's 127 or 130 trillion dollar market globally the us is currently sitting at around 47 to 50 trillion and over the course from 1940 to 220 you basically see how the split between institutional and retail has kind of

changed currently on the on the institutional side the ones that actually run the whole show we currently look at about 75 retail of course is still there and it's supposed to be there but if we try to transition this over in terms of how quickly the market has evolved in and around the institutions that are currently playing in that space and how we split this out between retail and institutions in the crypto in the digital asset industry the picture of course looks vastly different currently we look at about four or five percent uh but if you look at the speed at which it has and the data that we see from like especially 2017 onwards you can give it about a factor 15 which means that by

2030 uh we should be looking at roughly the same split due to the fact of how everything is more interconnected and certain things in and around optionality and liquidity which i'm going to come into now on that front of course the infrastructure is crucial especially the custody layer is crucial because that underpins a lot of things um three distinct points that of course need to be addressed uh when talking to or trying to convince legacy finance firms to start getting into this space and there are a lot of them but those are three key risks that are being that are being addressed consistently on the one side of course the operational risk internal fraud all this kind of stuff i

mean if we look at crypto funds for example what do they have to deal with you potentially have heard of um the latest i think was virgil is a very good example it's a mixture of all sorts of stuff that went wrong but ultimately it included like a chinese loan shark and the fund basically went bust which is not the way that you should be able to do your business mainly driven in and around one major infrastructure problem which are exchanges that are also acting as custodians but i'm going to come to that point specifically counterparty risk i kind of mentioned this a little bit already counterparty risk if especially when it comes to exchanges in terms of access you have major major risks that you occur and there is only so much operational risk due diligence that you can do

which means that at some point you relatively give up especially if you are the blackrock citadels and and millenniums of this world because your your compliance department will not allow you to pre-fund an exchange that is situated and or regulated on the island of barbuda so um which basically comes down also the third point the fragment in an evolving landscape of course we look at digital assets not only as a singular singular point of investment there is a many many different protocols many different use cases i'm not going to go into d5 because in my opinion we will have to sort out c5 first centralized finance before we go decentralized in any shape or form but that ultimately comes to the point of like what can the future look

like and there are a couple of key points that are very very important to address on the one side of course what can blockchain do for you automatic reconciliation is an absolutely massive point the regulators are starting to kind of get a little bit of a grip on this what i mean there is if they actually switch around and understand that everything is just in front of their nose the record is immutable this is how you could theoretically use the blockchain and it will ultimately come to that point transparency and immutability of records that's basically coming to the point that i just mentioned and on the other side of course the programmability but especially the last point is extremely important the optionality that this space offers um

and when i talk about optionality um we're talking about the creation of new assets now we can have a massive debate in and around especially with myself because i'm quite a i'm quite firm on this if if i look at it right now i'm not interested in bitcoin ethereum cardano whatever it is and the whole lists that are there the interesting part is when you think about how this will transform traditional finance now what i mean there is we go of course into the topic of tokenization when it comes to the tokenization piece there will be just a couple and this is what we see right now the alts are like fighting quite a lot and you will see maybe solana will come out on top ethereum might not make it god knows so there are all sorts of discussions in and around this but none of this would

work if you don't have the base layer of an infrastructure in place that allows you to do your business in the way that we have been doing this for the last couple of decades and it has to be said that there are a lot of things in traditional finance which are extremely efficient on the execution side extremely efficient on the settlement part thereafter extremely inefficient and and i'm sure that a couple of you come from the traditional finance backgrounds yourself just like myself been in that for 15 years and if somebody punches in the trade on the third floor on a wednesday you may be lucky if that trade settled on a friday because people are running around in back office trying to chase mt500 messages in order to settle that trade that happened two days before which is mind-blowingly stupid i have to say because technology nowadays would

allow you to do this much more efficient now when it comes to access and i just need to look of how much time i have there we go um when it comes to access we basically took a very very clear approach in order to solve uh problems which were a major uphill battle we very very much took the different a very difficult approach here and clear loop is one of the products that i want to talk about here because it solves a lot of those issues um [Music] just as a quick overview in terms of what copper does i mean we are a custodian as a base layer npc enabled segregation multiple temperatures cold

warm hot and from that base layer over the last four years we have built quite a lot of different use cases and products in and around access might that be for exchanges might that be on any sort of yield play staking defy and when it comes to this we always incurred especially like two and a half years ago it was a very specific problem that we thought why are exchanges acting as custodians now due to the absence of regulation and the fact that the industry the industry the very very you know the very first ones are pure tech players tech people have

a limited understanding of finance and finance people have a limited understanding of tech but how you want to bridge this in order to create that infrastructure to give access is a very very difficult task and it's an uphill battle and what we have done over the course of the last well it basically started about three years ago but we only released that product last year in may and currently it's ramping up extremely quickly is clear loop and clear loop in a nutshell is the ability for you to hold your assets in segregated mpc custody and all that you do is ping tradable balances to the venue but the assets are not moving there is no shebang happening in and around tokenizing something digital asset receipts and all this kind of hocus pocus none of this it is very simple

collateral that is being held at a third party custodian outside of the infrastructure of an exchange but i still have the ability to trade on the venue just like i would have done beforehand without having to pre-fund it though so this solves this solves basically two key problems on the one side counterparty risk so coming back to the point that i said earlier if you're in a traditional in a in a in any sense in a traditional finance world your compliance department will tell you in no time that you will not be able to pre-fund an exchange and it doesn't really matter which one coinbase might be possible most of them are having to trade on the cme but liquidity is crap to a certain

extent because on the option side for example you have they try to compete on that front but therabid is basically completely vacuuming the market there ninety percent of the global volume is running through there reason being is because everybody can be a maker and everybody can be a taker and they will continue to have this lead when it comes to for example certain derivatives and of course when you talk about traditional finance players it's not about just trading spot it's about how i'm hedging the position what kind of trading uh strategies i'm implementing and when it comes to this of course how you want to do this from an infrastructure layer is pretty pretty straightforward and in terms of what the problem that is being solved here is best comparable of how you would for example buy an apple share nowadays it's

not going to happen by you having to open an exchange account on a new york stock exchange and then send money there in order to buy apple shares that's just not how it works so clear loop basically solves that problem whereas you have certain benefits and that on the apart from the counterparty risk perspective with the custody that underpins it all you have capital efficiency that suddenly starts flying through the roof and what i mean there is that you now have the ability to move assets from one venue to the other in milliseconds granted this is where i say in traditional finance when it comes to execution we're talking about nanoseconds much better and we will have to collectively do much more on that front but milliseconds in our case about 70 to 80 milliseconds is already vastly

better than a second never mind 5. never mind 10 minutes never mind 15. and if you're unlucky and you send ethereum from one menu to the other you might pay a thousand bucks and it's still not there at the end of the day so when it comes to this you basically can utilize your capital more efficient and when i mean using your capital more efficient is if you run any sort of complex trading strategy you will always have to have a dead risk bucket of capital sitting on the venue in case that the market is extremely volatile and you run at risk of being liquidated so if you have that because you don't have the time and to wait 15 minutes to send your funds from coinbase over to derabit because in that meantime you would

already been stopped out you need to be liquidated stop that is the wrong way but liquidated so if you want to keep your positions open you want to utilize that capital efficiently so if you have to do this on an arbitrage strategies across 15 menus there is a lot of capital sitting there which is sitting there unutilized so what this does here is basically allows you to unlock delegate move funds from one menu to the other in milliseconds um in a nutshell the way that it looks right now it's not the best array of exchanges i'm granted because it's a very very hard topic of convincing those venues to hold balances outside of their balance sheet outside of their custody and the reason for that is pretty pretty straightforward is because they make a

truckload of money with that the funds that you pre-fund on those venues are being rehypothecated it's not necessarily the right word but basically it means that you are those assets of generating yield for that exchange and quite a dramatic one that's a big income stream on the retail side we don't try to touch this because we are not retail but on the institutional side those are the first questions that are being asked now what you have right now it's therabit is definitely being used the most bitfenix coinflexbit.com you potentially have seen on bloomberg we've signed we've agreed everything with ftx is coming on okex is coming on right now um okay coin uh by bit and kucoin so mainly on the derivative side this is where you see

clearly working the best spot venues and bitstem by the way as well but i would come to this like spot venues are less of an interest because the big institutions are mainly doing the spot trading otc anyway directly with the liquidity providers and market makers so ultimately of course when it comes to being able to offer those services and the infrastructure to those providers to those to those market participants we basically have it covered from many different angles i'm not saying that we figured it out to the absolute best but in terms of what you can currently access in terms of infrastructure on the market we are by far the best um and just as an overview um that should

actually be in the first slide um you know we've been around now for four years um we have that's actually out of date about 450 clients we have way north of right now way north of 20 billion of assets sitting with us um the split between the client base may be interesting for you to hear 60 crypto funds 20 market makers hfts and prop shops and then the last bucket are payment processes neobanks coin foundations um and a couple of lucky people that have been in bitcoin very early on and not just sitting there looking and logging in to see their balance that is very very sizable um offices we're located we're headquartered in london um we've got an office in new york one

in singapore but also here in switzerland if you need to speak somebody in switzerland marcos is the guy please come and find him and uh yeah in terms of exchange access walled garden i didn't even touch but currently over 45 venues that you can interact with with our infrastructure i think i'm perfectly on time thank you very much guys