The Tipping Point: The Day Banks Become HODLers

Transcript

hello everyone let me just start by taking a quick survey to actually uh get to know you a bit better when we're in this room actually work for blockchain startup cryptoscale up crypto startup okay anybody from the traditional space financial institutions banking okay anybody selling to financial institutions ah all right okay so let me just take that so i'm claris ceo of defense we basically provide a security for crypto and we've designed an api that is a brain grade api that we

sell to crypto scalers crypto startups and banks one year ago when i told people that banks would actually start adopting crypto this is the reaction i had nobody would know i would actually spend 30 minutes telling them why it was going to transition why blockchain mass education was coming this year oops sorry this year it's totally different everybody is super excited you can actually read in the news that banks beats uh jp morgan goldman sachs have already opened desk to provide crypto to their to their

customers the eib this year actually issued a bond on blockchain that has been structured by goldman sachs society general sargent and santander that's a big first so not only at the crypto on the crypto asset space but also on the security tokens banks are moving fast central banks are talking more and more about stable coins so definitely there's been quite some change this year but let's take a step back not long ago a few years ago i would say maybe even last year again you had the the way people would see crypto and blockchain was as

scary blockchain and crypto was seen as a way to actually launder money to uh to actually uh it was a it was a technology that for those institutions were um was completely uh completely seen as unproactive unpractical and absolutely not fit for regulation basically for the past 10 years creature has been looking like that like the youngster dubbed that was absolutely not fit for the institutional world and also like this just basically throwing money everywhere and finally completely roughly so obviously banks were not going to actually move to

crypto in that type of situation why because banks are animals of trust it's their business first and foremost banks monetize trust that's what they do they can be associated with a technology with an asset class that doesn't provide the sense of trust what do they need they need security they are heavily conservatist they need con regulations and there are also institutions that put a lot of controls a lot of controls in place volts that's actually the basic and the first uh i'd say the primary

purpose of a bank originally it was just a vault and someone actually safekeeping your money for you they have a lot of routines in place so when you work in a bank actually spend 10 years in investment banking before before launching defense you have extremely heavy processed it's designed to create a culture of control a lot of rules whether there are internal rules but also rules you need to comply to in order to be regulated audits audits all the time audits of your processes audits in order to remain compliant so the question is what changed in 2021 why banks were suddenly all decided and

whole welcoming the transition to crypto nothing happened overnight absolutely nothing first it became it come it came with blockchain technology a few years ago five years ago six years ago when you were working in a bank everybody was extremely excited about blockchain technology they were saying blockchain as a way to enhance their process the number of products that had been designed already five six years ago ago in order to actually enhance trade finance is huge blockchain had been seen as a way to actually also enhance a payment industry that is very very outdated so it all started with blockchain then especially in 2019 crypto

regulations started to be a bit more mainstream in 2019 around 40 countries launched regulation and that started putting bank and institutions financial institutions hedge funds asset managers at ease it defined a frame in which they could work in which they could start having clients in which they could start actually commercializing their offer market alternatives five years ago there were one provider you had you wanted to do the custody of your of your digital assets you had ledger you had a few other hsm but not much mac and alternative are extremely important for banks when they actually run their rfp process

they can't have only one provider on that they need to run their due diligence and without market alternative to support their choice in choosing the right technology well it's impossible for them to move to the to the to the space they are extremely risk adverse growth if you had put a hundred dollars on the snp in 2011 you would get you would have today 353 dollars if you had put a hundred dollars in bitcoin well you would have much more than three million uh three million dollars so those type of growth rates have absolutely excited banks another thing we're in a in a state where interest rates are extremely low

and they have been low for the past years when you put your money in a bank you don't earn anything i remember as a banker a few years ago i actually asked our client please don't deposit money with us it cost us too much money so the graph rates that defy offers is was definitely very attractive for hedge funds for any any financial institutions the community love that is super important what is currency currency is a very personal thing it's a trust it's a trust you put in in an asset right and without this culture raising gathering

around that community you don't have trust trust again so the community is starting actually praising bitcoin praising ethereum praising crypto assets started to make a bubble effect and that community love expanded to the traditional space corporate adoption was a big move at the end of the day banks have clients if their clients don't ask if they're clearing sorry don't ask them to actually custody their phones they won't issue new products if their clients don't ask them to operate in the defy government why would they you know tesla moving to the crypto space microstrategy the corporate adoption was extremely big

and was the key factor for i would say now 10 of the largest bank to issue rfp this year to be able at the end of the year to provide custodial offer of digital assets and this is happening now last year there were absolutely no rfp from large institutions to start looking for providers that would enable them to build crypto setup market liquidity of course once again banks being extremely risk adverse without market liquidity impossible to operate they need to edge themselves it's the basics is the 101 of actually the the risk risk policy if the market is not liquid enough then

impossible to operate and of course fomo we talked about the growth rates it's it's the institutions missed on a lot of growth for the past 10 years fomo was big and all that unveils in 2021. so basically it took 10 years for banks to start adopting trito and when i'm talking about starting adopting crypto is really starting about thinking what type of crypto assets what type of digital assets am i going to uh offer my to my clients when we talk about financial institutions it's a very very wide space you have the payment industry that was suffering heavily from actually an infrastructure that was completely

outdated they saw in blockchain a huge painkiller you have private banking private banking see in digital asset space a way to provide to their clients new asset classes being you know any financial asset being tokenized real estate art being tokenized open and develop new products and get access to a younger customer base you guys corporate investment bank corporate investment banks are trying to transform their capital markets why in order to gain operations efficiency they can issue directly now bonds uh equity but also in order to

reach and distribute themselves and reach your new client base goldman sachs when the head of global the global head of digital assets of goldman sachs said that in 10 years the old financial industry will actually be built on blockchain it shows you that we are moving there but we're not there yet why there are basically sorry there are basically a few points that are still holding banks from going all in the first thing is security as we're building our digital economy for the next decades to come

the security the custody and trusted custody of your digital assets is an absolute necessity and let's face it it was impossible to build an infrastructural solution with products that were designed for the retail markets blockchain was adopted by consumer first retail first not designed for institutions at all so what is missing private key management in the context of crypto trading is a risk banks really don't understand they know how to authenticate their clients they're very good with it they've been doing that now for the past you know uh 10 years 15 years on in a digital way but managing your private key is a risk

they don't know market data all you read about the security of oracles for instance this is also something that is preventing banks from moving to a completely device setup smart contracts i don't know about you but i've actually spent now two days here the number of security companies have seen auditing smart contract is huge smart contracts are still vulnerable controverty risk counterparty risk is something banks don't like they've been knowing their they've designed the whole industry in order to manage this competitive risk it's called snps it's called the all the

the the sorry i'm missing the word but all the organization that actually evaluating the credit risk of the counterparty this doesn't exist in crypto byzantine faults how do you know that when you're actually operating on the public blockchain all the nodes won't compromise and you know uh fork the blockchain and last post quantum postquantum is far but it's a reality if we decide to transition to a blockchain setup what happened today quantum threats becomes a reality the second thing is regulation obviously banks needs a framework so first the

standards banks have spent 30 years 40 years developing standards such as swift ebx i mean they've invested so much in efforts to actually comply with these standards collectively the problem is blockchain and the problem with blockchain today is that there's absolutely no standards who know what technology will win and that is something that is really holding up uh banks from actually moving uh to to to going all in i talked with um architects in banks and so they're very very worried about the security holes but also all the training you need to develop for people to actually be able

to comply to understand the the new framework that blockchain is bringing custody custody is of course one of the cornerstone of what a bank is today but what is a custody in a decentralized environment if you actually just give your private key back to the bank it seems that we've invented the most beautiful technology in the past decades in order to have the irony to recreate a third party so what custody needs to look like and what is and what does the regulator understand of custody let's say something like multipatty computation what is custody in a keyless environment those are questions that really make

banks anxious exchanges and data in order to provide to your client a necessary value a net asset value at the end of the day you need the data that is regulated these are started for the past years now we have a few new uh uh data provider but it's not enough ownership what is ownership in a crypto world you've seen that when you look at revolut what they did they decided to first expose their client to crypto by pulling assets in an omnibus account you were exposed to bitcoin for instance with you you were buying bitcoin but you didn't own the bitcoin they've moved

now a year later to a model that looks like all the wallet where you actually have access to your private key banks don't know how to deal with that do they give access to the private key do they pull the crypto assets of their clients these are things that remain unanswered sovereignty this is a big issue i mean you remember the whole crisis when when the facebook started libra of sovereignty who actually who actually keeps the sovereignty over a currency these are questions that are absolutely huge and last collateral obviously collateral is the basis of banking when you think of landing collateral in a crypto space is still very difficult

to manage finally operations integrations it is quite easy it is doable today for our banks to open bitcoin custody for their clients but what happens if they want to operate defy space do they need to integrate with metams to give access to their clients through ethereum what if they want to give access to solena well integration is a big issue and banks won't move to d5 fully until the roads are clear and easy for them to navigate usability is a huge thing i mean if you talk to your parents about actually buying bitcoin once or crypto even actually even

creating an account on balance is extremely scary for someone that is not was not born in that in that in that world so usability is a big one improving ux insurance this is also a big one until now things were reversed reversible meaning that if banks were act it was possible to move back and to discuss where the the problem happened in the context of blockchain insurance become extremely important the performance obviously everybody talks about moving payment industry into blockchain but in order to match what you do for instance the performance you have with a stack like the the visa has you need

to improve the performance that blockchain are um are delivering today the cost you're well aware of that operates on on the codes that you can't actually master like the gas you can't control sorry actually uh like gas cost it's very difficult they lack predictability we're far from having that model yet the environment i mean it's all became a big thing with with with uh with elon musk right but environment is also super important today they all need to have in their yearly statements a proof that they're start complying with environment requirements so unless until

we have a very clear view of what is the environmental impact of the blockchain that banks institutions will use this is going to be something that it will be for for them very difficult to address and they won't take the reputation the reputational risk of uh being seen as uh as as as players that don't comply on that side liquidity i touched a bit on that as well compliance of course they and i mean for those who were in the talk previously banks are heavily regulated they need to be compliant since 2007 compliance departments have actually been multiplied by tens it's actually extremely heavy and and understanding

compliance from a blockchain environment is difficult now companies like chain analysis are doing a great uh great products for bank that uh help them actually assessing that risk but it's still not mature enough and last cryptography at the end of the day banks are not made are not the the workforce in banks even developers are not you know phd in cryptography and at the end of the day if you want to structure product to structure smart contracts you need now new competence that is not easy to find which is cryptographer of course the culture it's two different world

the blockchain space the traditional space not the same mindset this is something that will take some time to bridge the authority who controls what was the ownership of what this is something i touch based on the jobs as i told you there's definitely new jobs for them to actually for the banks to actually put forward very difficult to recruit it's a space they don't know the sanctions it was extremely easy to operate in a world we where they actually knew very well the sanctions like fatca now what happened if a country ban for instance ripple they operate in a global basis

and the absence of clear rule on sanctions are very difficult the tools uh they are not there yet as well they need they need uh the banks don't know how to use the tool that the blockchain space is developing and last time they operate on very very different time stream time frame three months in a crypto startup is two years in a traditional bank and that's that is something that is very very easy to very very hard sorry to actually uh turn around so as a conclusion what we need for banks to become actually authors is passion patience because it's going

to take a long time they are getting there there will get there because it's a it's a huge financial opportunity because it will uh help them actually um get control over their costs question is are they going to go there just as service provider also our custodian players balance is super is is also uh what we need to define it is impossible to go back to a model where banks are the third party and at their central and are sorry uh the the centralized uh um institutions pulling crypto assets this doesn't make any sense and last

resilience because the road is going to be long thank you [Applause] does anyone have any questions sure my understanding is about u.s banks the ones that will propose crypto will most likely all uh use for custody something like ny dig or another company do you know for french banks if they have any plans or at all you mean on what to use to do the case study yes yes so the the french regulator has been

quite clear with the definition of what is a custodian it's the entity that owns the private key from their clients now what banks prefer actually in france it's hsm because there's clarity over what is ownership technology like multi-party computing computation sorry that actually break down the private key and create keyless solution are difficult to represent it looks like from what the amf is positioning itself it's gonna be it's gonna if the custodian so if the bank has access to the recovery plan even in an mpc solution they can actually become custodian

but at the end of the day they need to have ownership of the private key um when uh banks will join the party do you think it's going to be with cbdc or crypto assets as we know it now so it's an interesting question i we can to me there's different asset class and there's going to be different timing and there's different banks different institutions so custodians are actually already extremely um

worried about the disruption that a coin base is doing in the market a gemini a bit go they are actually moving this year to the to the space with offer on the most uh the most traded asset it's bitcoin and ethereum basically and developing by the end of the year you will see by bny maryland we'll see by being ppe you will see by you know i would say half of the largest custodian you'll see them developing custody and custodial offer for their clients that are asset manager that are hedge funds because today they are saying their clients moving to once again jamini and jimi and i encourage etc so that's for the custodian corporate investment bank

is going to take some time because what they are doing is completely disrupting the model they have today corporate investment bank will be built on blockchain and they will issue directly bonds shares regulation is absolutely nowhere here it's very difficult to have a framework on what type of security tokens do you need to do the custody do your clients need to do the custody do you need to use a regulated custodian it's already it's it's uh there's there's a lot of uncertainty around that so we are at the proof of concept stage you have the proof of concept with the eab bond involving goldman sachs society general et cetera et cetera other banks general actually had already done proof of concept a few years ago

it's gonna take time because it's it's a heavy change in term of organization but once it changes that's where the most of the growth will come on the on the digital asset space for the banks uh it enables them to actually directly distribute to new people before when you were issuing a bond you had to you you would sell them to a very specific class of investors with tokenization husband what it enables you is to actually directly access the retail market so the opportunity for them is big there's no doubt that it will reduce their operating cost but the change is actually very deep private banks will move actually quite uh quite uh

quite soon a bit like the custodian so next year the year after we'll see that private banks are seeing um their clients going to swissbar going to binance going to coinbase because they want to be exposed to this new asset class and for them it's uh it's a huge a huge loss and so they're still not sure whether to start with crypto assets and bitcoin or directly start with tokenized assets and offer them offer their clients on usa class that will uh to me from what i see yeah private banking are transitioning next year the year after a bit after the first custodians and then after retail well retail i

move move always always after new banks will move before i've moved before and so i believe that on the reserve side it will come mostly from from crypto crypto new banks and new banks that are much more agile than the retail banks hi thank you for the talk my question is about taxation a lot of taxation in your understanding modified the way banks interact with cryptography and g5 mostly and is there some for a protocol a g5 protocol is there is this something to consider

like giving some taxation facility as a competitive advantage over other protocols and is it even a blocker for the banks they don't understand anything so yes the answer is absolutely yes and you see it as well with the we've we've we've actually uh on the payment industry i mean companies like requests for from no for the people who actually know no request they they provide request payments but what really made them jump from from a startup to to a scaling startup is the fact that they were providing the accounting that goes with it everybody is extremely lost and especially if you if you operate in a global environment yeah that's definitely a point that is

that is also of concern and i would definitely you're absolutely right this is a huge differentiating factor for them enabling them to automatically deal with their with their uh tax tax requirements definitely they are not there yet at all for them it's even a problem that is big but that further technology and and then there hi clary that was an interesting talk i have a question um what what what's your perspective on new banks like revolut um getting into crypto because now we're

seeing a lot of these digital banks right um and they're providing services and a lot of younger generation are opting to use digital banks like revolut n26 instead of the traditional ones right because it's easier and these banks themselves are starting to get into crypto and on top of that we're also seeing kind of new crypto banks like nexo for example so what's your opinion on this trend and are they giving the traditional banks a run for their money so um revolut has been a huge trendsetter in that space i mean most of the growth of revolut in 2019 is to be attributed to the fact that

they could exposed crypto to their to their customer they they attribute to about i think it was three million and a half the number of users that came to revolut because of their uh their their ability to easily get exposed to crypto so absolutely neobanks are moving first we'll move first now the question is how are they going to move uh i like i like it i like personally i like what revolut did which is first getting getting exposed but with the always the the the id in mind to actually enable the consumer to move their private key the way they want it so to be a sort of

new banks and wallet at the same time we see as well some crypto wallets moving to fiat as well because because it it also enabled them to have easier settlements uh so so yes to me as i was telling on the retail side new banks is def are definitely driving the trends you see as well as some new broker dealers such as bucks for the people who knows them robin hood of course i mean all their growth is attributed to the fact that they were able to expose very easily usability again ux again consumers to the crypto space any more questions from anybody

no okay brilliant thank you very much you