Fireside Chat: Settlement, Trust and Tokenization with Tom Zschach and Aryan Sheikhalian

Transcript

[applause] >> Hello. And uh thank you for having us. Um I'm going to start with just a brief introduction on myself and I'll pass it over to Tom to introduce himself as well before we dive in. Um my name's Aryan. I'm at CMT Digital. We're a Chicago-based venture firm and we invest in blockchain companies. Uh we're on our fourth fund and we've been investing in the space since 2017. Um yeah, so if you want to raise money and looking for investors, please let me know. >> Hi, I'm Tom Schack. I'm um just finished up six little bit of a six years as the chief innovation officer for Swift. And um kind of looking to for what to do next. Uh love events like this cuz I get lots of feedback and lots

of people tell me their ideas and uh really really looking forward to the conversation today. >> Yeah, thank you for joining us, Tom. Um so real quick, crypto's pitched to institutions for many, many years has always been that we're faster and we're cheaper. Um and and you sat in quite an important role at the settlement layer this whole time. Um was speed, in your opinion, ever the thing holding institutions back? >> So this is a really good place to start um because of course speed matters and of course cost matters, right? Nobody in payments or or cross-border transactions would argue with that. But but one thing that's that's really different in the institutional space compared to retail

um is that you need certainty. And so, you know, I I like to say that, you know, $50 is not 50 million or 500 million or 5 billion. When you're sending that kind of amount, you know, across border or you're settling a security or settling a FX transaction, all of which those transactions went over the Swift network, you know, what a corporate treasurer want to is security. And and and and and they want it they want to be they want the certainty that goes along with that. Right? So, if you said to the if you said to the treasurer, "Hey, this is going to take 5 seconds longer, but we know exactly what's going to happen, you know, if you have a problem. We know exactly what's going to happen if you need recourse."

You know, that certainty is what they actually need. If you say it's going to take a little bit longer to do that, every single one of them will take that. And so, the the speed speed and cost matter, um but there's more to it in in the institutional space. >> So, and and this is a quite an important time for crypto because many people are saying that it's our growing up phase. Uh institutions are getting involved. TradFi and uh DeFi are converging in a way that we haven't really seen before. Um and so, it might be a good time to ask, what does the crypto crowd misunderstand about Swift?

>> I think I think I should write a book on that. Um because in a in a lot of ways, um I I always would make the assumption that people understand what Swift is and what it does and and and kind of how important it is for for for financial trade and and international commerce and that sort of thing. Um but in in really simple terms, it's a network. It's a messaging network. And and I'm not making the argument that it that doesn't need to be modernized or or messaging is is the future. Not at all. There's plenty of improvements that could be made both today and and as digital assets make their way into banks and regulated um financial institutions, but but it's it it might be easy to explain what Swift is when you explain and understand what it's not. So, you don't you don't um issue value on the

Swift network. Swift doesn't do settlement. Swift's not a custodian. Right? There's none of those services. All the people that are on the network, um they they perform those services and others. The corresponding banking business model is a model that runs on the Swift network. So, if you go right down to the really basics of it, networks become more valuable, Metcalfe's law, in two ways. You add more end points or nodes, and you add more density or traffic. And the work that we did and announced at the end of last year with the Swift Ledger, which will go live this year, um was really to add density and and endpoints to the network. And that's that's really where the value of the network's at. Um I think the other thing that's really important to mention is is Swift is a coordination network. Um it coordinates

trust. Right? It's based on standards. Um it it it it has a rule book. There's bilateral agreements between the participants participants on the networks. And again, I'm not saying there's not room for open networks. I'm not saying that that that shouldn't be expanded. Just but but you need to understand what the starting point is before you can figure out where to take it and where the opportunities are. >> Yeah, and I mean, blockchains natively are coordination mechanisms. I think that's something that blockchains do uniquely well is coordinate. And when you think about blockchains moving into Swift's offering, there are some things that blockchains do natively super well, like coordination, but there are things that Swift does that blockchains can't today do. So, what do you think blockchains need to do to be

able to fully replicate Swift's offering or expand upon it? >> So so, blockchains can't replicate what Swift do does. Um Swift doesn't do what blockchains do, which is settlement. Um and and and blockchain and and and blockchains can't do what Swift does, which is cut across um different networks, different blockchains, and and and and coordinate trust. So, they're actually two different things. And sometimes when I when I speak to um kind of more native builders in in Web3, I and I get a good reaction or some people, you know, seek me out on on LinkedIn or X or something to make a comment. But I said, "If you think about it, Swift's over 50 years old, and Swift's like the original DAO."

But the governance was with humans. Right? Cuz what it really did is standardize messaging across a bunch of dis- uh disparate payment systems cross-border. And it actually was able to hang those together. So, if you didn't have a relationship in a different country, you can still instruct, including the foreign exchange, the the payment to be made, which is the corresponding banking business model. So um So, I I just think they just do different things. Now, in terms of the Swift ledger, nothing on the Swift network changes. And again, it it's a network. And what we did is we put a blockchain on top of that. So, there's no mandates, nobody's forced to use it.

And the first use case it that's going to be used on the network is is basically for banks to to make cross-border payments between themselves and the interbank market, probably on behalf of their customers, right? But do that with deposit tokens. Instead of the the instead of how they do it today as an alternative with nostro vostro accounts and and the way things are settled through either instant payment systems or RTGS systems that connect into central banks. And so, it's really just offering um the banks and and the regulated financial institutions another way to do cross-border payments using digital assets.

>> Yeah, I think those uh alternative approaches, so alternative methods of doing things are super important when it comes to expanding crypto's offering. Um but trust in a crypto-native setting and in a traditional finance setting have very different definitions, almost. Um counterparty risk, identity. Uh what do you think trust means in this sort of context? >> And it's such a broad um It's such a broad question, right? It's like it's such an emotive word, it means, you know, you ask kind of 10 people what it means and they'll give you or 11 different answers, right? So, >> Which is the hardest to reproduce on chain? Which is the hardest for blockchains to actually be able to tackle?

>> So, what works really well on blockchains are things that actually just work in that network or on that blockchain. Right? So, digital exchanges, for example Uniswap. There's no kind of connection outside of the network, you just swap tokens. Staking's the same way. It all happens on Ethereum or in the in the ecosystem, right? So, where it gets where it gets more complicated um is when you have to rely on something external to the blockchain. That could be the source of data that you bring in. Can you trust it? Is it clean? Is it valid? You know, is it is it signed, for example?

Or you or what you have on the blockchain refers to something that's external. And you might end up on court with. All right, if you think about what a we think about what a stable coin is, right? It's actually a representation, digital representation that points to reserves, you know, the kind of where it is Let's just say like genius act. It points to reserves or cash or or treasuries in audited account. So so where it gets really complicated or more complicated is when it represents something outside of the blockchain or you have to rely on something coming into the blockchain.

Right? So when you talk about the kind of the It's really a it's really a boundary issue is what it is. >> Yeah. Can we use that to map out I mean, tokenization is a huge topic right now. There's there's a lot of people building in tokenization and a lot of traction occurring in the space generally. Um when you think about the incremental steps of adoption, do you think there are certain things that are going to be first to be tokenized? Perhaps certain things that are going to be further out and and later and is that a function of trust or something else?

I I think it's a function of of trust and I think we're already seeing that, right? If you just look at the you know, stable coins and the volumes I heard a number earlier today that said there's $3 billion a month a month that's that's that's transacting, right? So there's definitely demand for digital money. There's no question about that and that's only going up, right? So I think we we already see we already see that that demand's there. We already see that happening. I think that the things are going to be teed up and and where what you're going to see or what might take longer to get on chain or the liquid [snorts] products. So I very much expect that the announcements you see from DTCC or Euroclear, Clearstream, the reports they've been publishing, you know, tokenized bonds is a liquid market. I think there's $15 trillion in

euro bonds alone. DTCC said they're going to tokenize up to $100 trillion of treasuries. Um, and they'll have a they'll have a way to do that. We'll kind of skip past the, you know, whether it's a wrapper or entitlement or actually, you know, issued on chain. But but it's it's all it's all moving, right? So, the most liquid products that are kind of the best understood markets, that that's going to be moved first. What what's going to be later? What's going to be later are things that require intervention. Um, that that have a lot of disputes, right? When you sell a treasury bond to somebody, it's pretty straightforward, right? There's trillions that fly around, you know, constantly. Uh, it's a very well-known liquid market. It's a very efficient market. Uh, and those are easy to tokenize and and and and and

move move on on chain. The things that require a lot of other uh, extra processing or potential disputes or have different kind of confusions. I mean, you might run into some of the stuff with some of the other RWAs. I I I haven't really studied it, but the whole idea of, you know, owning a token that points at a, you know, to a sky skyscraper or someplace in Dubai, sounds interesting, but I I I just don't know how we make that work, you know, safely and efficiently when you when you factor in things like consumer protections >> Yeah. >> and that sort of thing. So, those feel like they're a little bit further off to me. >> Yeah, super helpful. Thank you. You said earlier that um, Swift was like the first DAO, and I think that's very accurate. Um, and in a >> Can't wait for that. Can't wait for the

messages and the inbound on that one. So, >> [laughter] >> that's usually how it works. >> And in in a way, I mean, you really championed mutual governance uh, before blockchains existed. Um, now, if we if we replicate that in a blockchain environment, some could argue or the crypto critique could argue that that is just the incumbency, but on blockchain rails. Um, do What do you think of that argument? And and and to and generally, when do you think public blockchains uh, can provide a better alternative to to to what we've had to date?

>> There's been there's a lot of discussion on on this one, right? When you think about cuz people kind of rush to and I'm going to post something on this tonight cuz I thought about this morning uh more more or deeply. But when we talk about the incumbents and and neutrality and things like membership to get into a you know, to a closed network or where you have to kind of be on board in the network. I think we have to be really careful that we don't replicate that in the in the web 3 space. You know, if we literally want to one chain and somebody's making a decision about the strategy you know, who could participate, what the rules are. It It doesn't feel like we're you know, a mile 10 miles off from what we have today, right? So, um I very much think that everything's going to be

tokenized. I think we're going to be in a multi-chain world for the foreseeable future. I mean, Ethereum obviously has a huge advantage. Um Chris was talking about this earlier in terms of the momentum that's there. I mean, Ethereum's clearly in pole position, but but having one of anything is generally not good um for business. It's not good for consumers. You know, you need real competition uh to to kind of keep things going. And and this whole idea of neutrality, if you only have one, well, who who's actually making the decisions, right? >> Right. >> And and how are those rules being changed and how are those standards being set? And with only one that that that becomes pretty challenging, I think.

>> Do you think there's room for more open membership and and more uh open proposals when it comes to changing uh governance? >> Yeah. >> Uh absolutely. And and I think some of the criticisms of um of a of a of a closed network and and kind of the largest contributors getting, you know, kind of setting the rules. Um uh yeah, we can definitely improve on that. Uh we we we should improve on that. Um I mean, I think there's a great opportunity and I think one of the things that's always kind of attracted me into in into DeFi was was it there is an opportunity to kind of level the playing field here and to have more uh have more voices heard, but also kind of expand the pie, right?

So, it's So, I think the way I think about it is, you know, the the overall pie gets bigger, but but but the allocations might shift between the participants. And I I I think that's an outcome that I know a lot of people in this room would would agree with and and kind of been one of my attractions to DeFi and you know, from the beginning. >> Yeah. So, I want I want to talk a little bit about the the tokenization stage a little bit more. So, there's there's a few primitives that come with tokenization or opportunities for primitives that come with tokenization that we haven't really seen before. Here's one, things like transferable KYC.

Um How how do you think that has a part to play in the future of money movement or or asset movement? And and what is required from a counterparty perspective to actually get comfortable or to set standards when it comes to embedding some of these features that could allow for more automation uh just generally more efficient systems. >> So, when we talk about about tokenization, let's take a step back and and just talk about finance today. And I don't I don't call it traditional finance, I just call it finance cuz that's what we do. So, how that got picked up on it, you know, in a Reddit room or or or cyber Twitter years ago, I I don't know where it came from, but I

don't say traditional finance. So, finance, how things work today, right? >> [snorts] >> Um the the largest fee pool in all of global finance is capital formation. Tokenization is actually changing every aspect of it. Issuance, secondary trading, um uh the the custodial businesses, the asset servicing, it's all changing. Not all at the same time, but it's literally every aspect of capital formation is changing with tokenization as kind of the driver. And so, um that that's going to create um tremendous opportunities for people.

Um it's going to it's it's going to probably take longer than people think cuz these kind of transformations take time. Um but I do think it's going to have a material impact on on everything. >> So you spent many years and a good portion of your career at a very well-established incumbent. What did you see from inside that convinced you that you couldn't fix it from the inside? >> So I think I I was at Swift for a little bit over 6 years, but even before that I started working with blockchain technology when I was at CLS. And for those who don't know, CLS is the is the bank-owned utility to to settle FX globally. And there's 18 currencies out

there. So an average day today at CLS is $10 trillion um in 18 different currencies. They actually move the money between central bank accounts of the banks that that settle foreign exchange globally, right? That's the average day. They had a record year last year towards the end of the year where they did almost $23 trillion in in in one day. In one kind of overnight run that they did. So there's actually not enough cash in the world and all of the banks in the world to run the foreign exchange market that we have today without without CLS. It's actually just not possible and the way they net things down the operational liquidity benefits they bring. When when people first start talking about blockchain and this is you know in

institutional finance this is 2016-ish. Um at that time one of the top use cases that popped up always was FX settlement. What if we just send the FX back and forth, you know, tokenize cash in different flavors of that. It's before stable coins got big, right? Um but that was the use case. And I thought well, since we're running the utility that does all the FX settlement, if this is what's going to kill us, we probably should learn something about it, right? So that's when I started actually look into it. And and what we did is we put a lot of that traffic on the Swift network, which which led me to working at Swift from the relationships and the work I'd done with them.

The work that we did on the Swift network was really revealing. So, the way I describe it is the first step for me was to actually get banks and regulated financial institutions hooked up into digital assets in a material way. And and have a trajectory where where they can figure out how they use it, which form of value they want to use. But really kind of get the wheels turning. What what what I what I saw there is and and that that's gets things going, but what I saw there is there's still some things that need to fall into place for us to be able to scale this up. And again, this is with a with a institutional lens on it, not not necessarily a retail lens.

And I think we're missing some things and I think part of those are in play today. One of that's we know with regulation, the US is is leading that way, you know, they're waiting for the kind of clarity act to come in place and get some some clarity around that. I think blockchains are certainly ready, right? You look at the the track record on Ethereum alone, you know, with with kind of 10 years and the robustness and everything else. All those things are happening and you see you see customer demand. That's happening, but but what doesn't work well is how do you get to scale? So so stablecoins in the retail environment or or for DeFi trading, that has scale.

Talking about 3 trillion a month, that's scale. And the other areas I I there there's still some missing pieces in that, especially when you go across venue, cross jurisdiction, cross chain. Because when you do that, regardless of how you do that, whether it's through an oracle or bridge or something else, the only thing that actually moves is value. So when you when you on the institutional front, and I know I know you know this, but on the institutional front, when you move it, you know, you have to the authority has to go with it. You know, is it KYC'd? What are the credentials? Is that wallet eligible to hold the security? All of those things need to travel, in my view, with with the token, with the asset. Especially when you go especially when you go across different blockchains. And I think we're going to

be in a multi-chain world for the foreseeable future. >> And and I'm quite excited about the propensity for blockchains to solve a lot of the fraud or issues that we see in validating or or you know, attesting to to certain transactions. I think ZK technology is very powerful and and being able to embed that those rules into the system itself directly, you know, holds a tremendous power for improving the system generally. And then we're coming up to time here. I want to end with a final question on let's zoom out, let's say 5 years from now, cross-border of value and value moving generally. Does it move on public blockchains that have stepped up and and

become uh compliant or or provided the tooling necessary for these value transfers or does it exist on something that doesn't exist yet? >> I I think it goes on the on the public blockchains. You know, Citibank just published a report last week and they put a number of 5.5 trillion, but what's different about a report they did a few years back was they're very specific about where that's going to happen. Right? So, so all of this is happening. My own view is that everything's getting tokenized. Everything that of value is going to be digital and we're just going to continue to expand. I'm I'm really bullish about this.

Really looking for, you know, kind of the same mission from a different seat to figure out how we can actually scale this up to the kind of expectations that people have for for the innovations. >> What an exciting time to be in the space. Thank you, Tom. I appreciate you joining.