Collateral 2.0: Crypto's Role in Modern Financial Systems

Transcript

next up we have a panel about collateral 2.0 crypto's role in modern Financial systems and for this panel I'm honored to welcome on stage Sky Salzman from sdx Frederick vper from binance Audrey coo from bitvavo and the panel will be moderated by Paulo guarnerio from be glinder Paulo has been actually a constant participant and constant part and constant moderator and Speaker of CV events in the past so the floor is yours collateral 2.0 please come on stage put your hands together for the our

panelists good morning everyone bno uh my name is Paul guio I'm ounder partner of berlinda we are an asset management firm uh based in Switzerland uh we are focused on bridging uh Bitcoin economy with traditional finance and we are also focus on uh Bitcoin Bank Landing as you probably know digital assets Bitcoin and cryptocurrency are reshaping the uh collateral framework especially for institutional players and uh uh it's in this panel we are trying to understand which are the technology which are the the risk

and the regulation that are shaping uh this industry um joining me today we have like fre expert on this topic we have Sky Salman from sdx uh Audrey s from bavo and Frederick Fulp from binance VIP and institutional let's maybe start with uh a quick introduction about yourself uh the organization that you represent and just like a couple of sentence uh about how you see uh digital asset uh reshaping the collateral framework Sky do you want to start yes happy to uh good morning everyone great

to be with you uh so Sky Salzman I work for sdx based in the London office and I head up our crypto Business Development service and product my background is uh Banking and Financial markets uh based in London um sdx is part of six group I imagine that most people in the room are familiar with six group but for those that aren't it's the financial Market infrastructure operator for Switzerland and Spain so uh six operates National stock exchanges derivatives exchanges csds Market data businesses Clearing Houses so on and so forth uh sdx is the business within six that is looking at uh enabling the digital transformation

of of the financial system in Switzerland through DLT and blockchain um and we really have uh two broad verticals or product lines one is uh looking at moving traditional assets into DLT um we have a regulated Exchange in CSD in Switzerland uh to advance this uh in presentations today already they've mentioned kind of the bond platform and uh sdx was was the first uh Exchange CSD globally to issue a digital native Bond and uh and today there've been over a billion Swiss Franks worth of bonds issued on the platform and it was also the first to settle uh bonds or any type of security transaction against the

cbdc um and then separately we have a web 3 business which is looking at new digital products uh that our members and Banks might want to support and uh and in that product line we really focused on the custody uh and C management side uh of things and services around that like staking and liquidity access and of course this is what we're going to focus on uh more today thanks K hi B everyone um I'm or I represent bavo so I lead the institutional Partnerships um business at vavo we are a uh top 10 Global leading crypto exchange our main focus and uh we rank at top of the charts in

terms of Euro denominated uh spot trading activity so that's where our dominance is uh based out in of the Netherlands uh we are regulated by the Dutch AFM uh and we cater for both uh retail and institutional uh clients alike in terms of uh where we see the position of collateral I know you know it's a topic We've joked a little bit about it that you know it's a it's can be as dull as dish water but uh I think it's an it's a very important part of the equation and the ecosystem uh we see collateral uh it's future around uh viability right seeing where cryptocurrencies act in terms of viability as a form of collateral and

viability I think comes in you know four main strains around liquidity the transparency of it the program programability of it and also more importantly the fungibility movement and the mobility but where we see uh bava's role really um centered around is is the liquidity aspect obviously we want to make sure that we uh operate a Market Center a place where investors are like both r or institutional level can come to a place where they can Source liquidity um they can rely on so the liquidity the transparency element is very huge and it lends all to the concept of what uh cryptocurrency can bring in terms of the form of collateral

security uh in the future fre hi everyone my name is freder I had the institutional sales team for for binance in Europe uh binance is mainly known as uh as a crypto exchange it was founded in 2017 and Rapid rapidly grow to to be the you know the largest Exchange in terms of trading volume uh as of today we have over 260 million users uh average trading volume a day is is 100 billion um it really grow to become more than an exchange as of today so it's more of an ecosystem we have uh several verticals from binance pay to binance charity binance academy uh we run the BNB chain we incorporate

projects uh we have binance Labs so it really you know grow to to be gone much more than than just the exchange which is still our you know a main source of of Revenue so it's still the main uh the main vertical um in terms of what we do on the VAP side we we mainly uh we mainly work to increase binance market share so um the main main users that we speak two is high frequency trading firms prop firms uh prop Traders but obviously that that has evolved with with time now that um crypto has become more mainstream we see more and more traditional players coming into the space uh so you know we've worked uh on putting out Innovative products to to cater for uh you know new forms of uh of

crypto collateral which we'll be uh covering today um so um in terms of how binance contributes obviously like like um like beo we we try to contribute to uh you know to to increase liquidity of this crypto collateral having Innovative products to uh to be more Capital efficient when when you trade and uh and now with crypto leveraging blockchain technology you know it's it's much more easy to um know for cross B transaction settlements uh so yeah the scope of of collateral now has completely changed all right I mean frederck I mean you work mainly with institutional clients like H how how are your clients seen uh uh uh um you know this shift for crypto

collateral and uh have you seen like a change in the way that they perceive uh crypto as a you know as a new collateral uh in the past few years and months yeah so on the exchange side we know we mainly speak to to Traders and when I say Traders is you know active Traders hfts so they the main concern is to be Capital deficient uh so on on the binance side um you know our main goal is to is to have Innovative products like portfolio margin that allows traders to leverage their collateral across different products including spot margin Futures options other derivatives um and uh and yeah that's um on our side

we we try to um to for Traders to use old crypto as collateral but obviously that comes with um you know it it involves many teams in order to Define find the right uh you know risk metrics the right haircut uh crypto is very volatile so obviously you you know as as the leading exchange you wanna you you don't want to to compromise Capital efficiency but you still want to to allow trailers to maximize their you know they collateral so it's uh it's it's it's hard to find the right balance and uh how it evolved over the last two years is that with more traditional ter coming in um crypto is not necessarily

the type of collateral they want to to hold uh so we're seeing now large Global asset manager not to like traditional um asset managers not to mention any names that are putting uh tokenize uh you know money market funds that can be used as uh collateral to trade and this is definitely a trend that that we're seeing uh coming from from the trfi guys so uh I think we're going to see more and more um uh tokenized um know traditional instruments being used as as collateral to to trade on Exchange but also also on chain and Audrey from your side I mean b of course uh serve both institutional clients and Retail do you believe this is like a topic that is

affecting all institutional client or do you see also demand from you know retail or maybe like fintech company uh for like collateral uh 2.0 solution um good question I think it comes both ways so we've got top down and bottom up I think top down of what Frederick mentioned a lot is around the capital allocation efficiency is capital preservation risk control uh this immense amount of regulatory pressure or the need for adherence for regulat pressure what that translate to from a w or demands point of view from the institutional side is definitely towards um multi-asset style of collateral you know the ability to work to allocate in

an efficient manner on balance both digital or crypto assets alongside some of the traditional rails so that's that's very important for them uh from a collateralization and and the feature enhancing elements also the ability for infrastructure to allow them to easily integrate and sit in the same vertical stack technical stack as traditional uh collateral rails today is very key because that also kind of lends them the approach of being you know regat comp client or having that regory grade uh style of of working so I think that's from a top down so it's slightly nuanced because there is still in in the end of

the day the the demand it's it's going to be met but it's through all these mechanisms whereas for the retailers um I that's the old Chinese saying and I'm going to lose this translate because it might sound a little bit crass or rude but lit literally like any any consumer or buyer what we want is we want it cheap good and fresh right when we turn up at in marketplace right from age all time and it hasn't changed so from a retail perspective they still want it cheap good and fresh what I mean by that is they want to have the ability to access and work their crypto Assets in efficient way so the ability for them to be able to use that as collateral and borrow without having to sell away the asset right so leverage and the ability

for them to work their crypto the same way so yield is also very important them and then in terms of the uh the good element or you know the fact that they still want to have this slightly lower barrier to entry so the entry to Market should be kept low so lower collateral requirements from a participation point of view but once they pass through that Magic Door what they expect is very high security so it's kind of low very quickly to that High um and you know we know we we humans are greedy so we want it all we also want it to be protected but also at the same time we want have autonomy someone in the previous panel said no trust is good but control is better so we see a lot of that happening as well so from a retail user point of

view not do they want that higher level protection yet they also want the ability to have that autonomy back so what that that mean is a lot of the time some of the collateralized features that retailers want is simple things like alerts and automation within their own workflow that they can control so they feel that they have the sense of understanding what's to come in terms of of the volatility that comes along with crypto so yeah thanks a lot interesting uh sky sdx is now trying to build a bridge between traditional finance and digital assets how close do you think we are to a true interoperability between these two

WS so to full interoperability I'd say quite a way away being totally H you know I think taking a step back um you know some people may have had the expectation that there was going to be a big bang moment right where suddenly everything on the traditional side moves over to digital but I think realistically given the complexity of the financial system you know it was always going to be a gradual process and and that's what it has been and will you know continue to be it'll be a gradual steady move um and the reality is that a lot of these infrastructures and ecosystems will will coexist for quite some time you'll have the traditional coexist with the digital and even within digital public chains private chains

depending on um on the asset classes and obviously sdx and six sees itself as a key enabler and facilitator of moving assets across all of these different infrastructures you know whether it be collateral or other assets uh that said I think that um there's really been significant progress made on the interop interoperability front and um I'll uh I'll call upon two examples uh where kind of sdx has played a role in pioneering some of these Solutions and I think looking at it from two perspectives so one is maybe moving traditional assets or offering traditional services in the crypto world and then the other way around so bringing crypto kind of into a

traditional uh infrastructure and ecosystem I think on the on the first um side you know uh it wasn't too long ago where I think for a lot of trading on crypto exchanges that had to be fully collateralized upfront collat was sent to the the crypto venue which of course on the traditional side is unheard of right um but you know I worked for a for a UK bank during the credit crisis I can remember when there was a time where even on the traditional side it wasn't standard to have trading and custody segregated right and there was a there was a crisis an event that led to changes in Market structures and new regulation right and and perhaps on the crypto side the FTX default was kind of that moment where everyone looked again

at the market structure and said okay actually need to split out have the trading separate from the custody and the post trade so now have a proliferation of offerings in the market where digital custodians um offer off exchange or off venue segregation in custody and so sdx has a solution where uh counterparties that want to trade on a venue can post crypto to SD X's custody and they can allocate this crypto for collateral for trading on external venues for instance on on rat which is a partner venue of our that's based in Switzerland uh and the the venue there's a mirroring of the assets onto the venue the assets can look into the account but they never actually leave sdx is called

storage right so this of course protects against and mitigates counterparty issues and and defaults on the trading side um now another example of crypto being brought maybe more into the traditional ecosystem because you know what we hear from our members and from Banks is that they don't actually want to deal with products in a different way right they want to access crypto the same way as they deal with Securities they want to be able to use the same Services you know whether it's Swift messaging or portfolio management they just see want to see everything the same way uh and so we've been working with the six tripartite collateral manager and so this is the the team and the product within six that manages collateral across all of the different

six Services everything from derivatives clearing to bilateral and OTC margin transactions to to uh exposure management and default management for ETP issuers um we have now been able to bring crypto into that product to use certain of the services and that means that certain of the services that have previously only been available for Securities are on collateral management uh like the ones I've mentioned will now also be available for crypto right so ETP issuers can use the exposure management function they can uh they can Avail themselves of the default management uh for trading on external venues the tripod collateral manager can

even structure more OTC and bilateral trades where let's say the collateral provider wants to be able to submit you know bonds and crypto collateral for the transaction so I think these are really huge steps forward but you know at the same time there's a long way to go right because this doesn't quite mean yet that crypto can be used as collateral for repo trading or for equities you know these are SE these are very tightly managed collateral baskets uh in cooperation with regulators and National Banks so I think we've made significant stries strides I think there's still a long way to go talking about that I mean clearly regulation is is an interesting topic right uh I mean here we have like kind of like sdx more focus on the Swiss

market be more on the European and binance like more Global player how do you see regulation affecting uh your uh activity your process uh again in the context of uh uh digital assets and crypto as a collateral maybe uh we start with freder like more on the global um yeah so regulation is is always a a hot topic for any crypto exchange uh but yeah I mean we obviously it has a massive impact uh on collateral when we look at Mika uh you know that's going to change the whole um you know the whole trading environment uh for crypto in Europe uh with you know now

we're looking at Mika Mika compliant uh stable coins so as of now usdt was you know was the reference in terms of stable coin and now now we have we have only a handful we have usdc and uh and a handful of of of Euro maika compliant uh stable coins um but again Euro stable coins there is pretty much no liquidity at the moment so it's um regulation has a massive impact um now on the on the binance side um and any other crypto exchange um in order to grow I think we need to go and Chase those uh those licenses those registration uh working with uh the local Regulators um you know

to find you know a good playground a good framework to uh to be able to to trade um because even even the local Regulators sometimes don't necessarily know what's the best solution so it's very important to have that that dialogue and and we do work very closely with for example other you know the AMF other uh local regulator in other jurisdiction and and I think that's with the dialogue that we can you know we can work you know for for a better future in terms how we manage collateral how um what type of assets uh you know are deemed secure and and compliant so yeah definitely a a big a big thing to watch Audy on the European side

how do you see the situation evolving um I'm I'm sure obviously we're not going to be speaking about maika at length today but um it's obviously shaped how our business plans have have evolved um a lot of the impact comes from the stable coin issues or where the clarification of um you know the definition of art versus EMT and and within you know Europe the asset referenced uh backed sort of uh tokens stable coins have now a much higher herdle right with in terms of its reserves its Redemption rates rights and also the governance structure behind it so a lot of that framework has been dotted out for us probably the last two three years in the making um that also

brings about I think from a regulatory point of view and Licensing we come to that in the second from regulatory point of view we've got regulated issuers that's um on the table now yes this case for it is we need to build a bigger case we um we got give them that room to run further that's why there hasn't been that sort of uptake for a Euro um equivalent over stable C offering since usdt has been sort of chased out of this jur temporarily I think um in terms of that it actually lends to hopefully well the whole intention I I'm sure the Regulators had that in mind is that is to provide clearer and cleaner collateral quality right that's the

whole point of regulated issue is and this same way with that having quality aspect it means that if all of us work in concert under the MAA guidelines we also be seeking uh very much uh licensed counterparties so you know mirror to mirror so if you're mirroring good behavior it's more likely outcome that you also are promoting and executing good behavior and so I think that's that's how the spirit of the adaption of of of MAA has evolved very much in our uh playground and finally it's a lot the transparency element transparency and standard so uh we see a lot of the disclosures coming out so risk

management policies uh documentation of governance standards which you know in some ways gives everyone good pause for reflection as to how truly is how they should operate and work I think one of the key problems or challenges that we've come uh across in in navigating the crypto World specifically is that a lot of people are still revising their business models you are one for everything or everything for everyone and that's got to it has to have that Clarity coming through I think the regulation as you know a lot people say we if we embrace it actually gives you that nice framework of okay I'm going to pick this corner this spot and then we're going to focus on that and be good at this area yeah thanks Sky I mean

clearly sdx is very close to this topic how do you see especially in in Switzerland uh the situation yeah I think I'll try to be brief because I know we don't have a lot of time I think the first thing to say is that you know we operate in a in a Global Financial system and most of our clients are Global businesses with officers around the world so I think the need for uniformity and standardization on the regulatory front is is crucial um focusing it on Switzerland uh and I think we're lucky in Switzerland because fmer was you know they really set a clear Regulatory and legal framework very early I think to the Envy of many other jurisdictions um um and you know F's always taken you know there isn't a crypto license per se it's more that you

can offer crypto services or services for crypto under other licenses so you know banks are able to offer custody and and trading for crypto for instance and fin has also introduced new digital licenses like the DT trading facility and fintech uh license um you know sdx and 6 is obviously in a bit of a unique position as a system mically important uh intermediary and Market infrastructure so we're always in close contact with finma about whether it's launching a new service or adding a product to an existing service you know what that should look like from inception through execution to onboarding uh the first clients um you know we initially set up a separate

legal entity for our crypto business which was an SRO a self-regulatory organization uh which was the right uh structure at the time think crypto has seen as quite a separate asset class but as i' as I've alluded to certainly from a member and a risk perspective clients just want um everything to to kind of be under the same service offering so we're also kind of you know it's a very fluid Market we're also now assessing uh the legal and the regulatory structure and actually looking at the option of offering crypto from our CSD in Switzerland and and I think this is to be able to offer the best uh asset protection for crypto that is equivalent to Securities and asset classes but really also to further and Advance this

this point around convergence and interoperability right we think we can best achieve that by having crypto under the same entity and license as uh Securities and all of the the associated functions all right unfortunately we run out of time uh thanks a lot and uh uh of course if you have any questions you will find uh all of them uh during the Symposium thanks a lot enjoy