From Experiment to Infrastructure: How Institutional Capital Is Reshaping DeFi

Transcript

All right, good good good afternoon everybody. Uh it's great to be here talking uh to you especially those times where crypto is doing through through rough times. We know a lot of people who's already thrown the towels. So it's good to be here and explain to you why we are still bullish on crypto uh on blockchain and on defy in general. Um little background I'm standing my career in 2010 with Capgeemini as a computer science engineer and then I moved to private equity and financial markets and went all in crypto in 2019

and I'm the co-founder of BM Capital. Um a few a few words on on BM. So, Bellum Capital is a Luxembourg asset manager and we provide defy solutions to institutional investors. Um, we run three strategies, uh, Bitcoin and stable coin mainly uh, USDC. Uh, we provide liquidity to decentralized application. So, we are purely market neutral and delta neutral.

We like to sleep at night. So, we don't depend on the market swings. uh we don't depend on the direction of of Bitcoin or ETH. Um we manage around 400 million of digital assets through a Luxembourg fund, SMAS, uh votes and we are now in the process of opening a cayman fund. Um we we are a team of of 17 people. Um I like to say our team is hybrid. Um so half of the team is from the Traty world. So we have ex bankers, we have ex big force and the other part of the team uh is a purely defy player people or engineers or blockchain

developers. And this uh mix of people of great people uh allows us to reach institutional standards uh which is very important. If you want to speak with institution you need to speak the same language that than banks or financial institutions. All right, it's all about tokenization. Uh tokenization is the main story here and it seems that financial institutions thinks that tokenization will transform finance. Uh in fact u Larry Frink in an in an interview a few months ago said uh that tokenization is as exciting as the invention of double bookkeeping entry

double entry bookkeeping sorry. So, I'm not sure if it's that exciting, but it's definitely a big deal. Um, all started in in 2024 when um we saw the approval of E and Bitcoin ETFs. Um then we started to see financial institution becoming more crypto friendly. Uh we know that JP Morgan has been a terrible hater for crypto for many years. Well, it seems they changed their mind and they launched their own stable coin on on Ethereum. Um, we have Black Rockck who launched their bele fund uh T bill's tokenized fund on Ethereum 2 which is around 4 billion today. Um, and more recently the race of the tokenization of

cash with the stable coins and all of these shows us two things. First, all financial products will move on chain in the next future. And if you include um real estate, this is more than a quadrillion of dollars that will move on chain in the next year. So, this is huge. And second, um tokenization started with the most liquid assets, gold, T bills, cash, and we'll continue with the less liquid assets, real estates, LWAs. We have use case with preipo shares at bm and many others that will move on chain very soon.

All right, stable coins. Um the size of the crypto market today is between three to four trillions. Size of the stable coin market is around 300 billion. But in terms of volume, stable coins moved more than Visa and Mastercard combined uh which is more than 30 trillion 33 trillion uh last year. So this is this is a big market and a lot of use cases. All right. Usually when I do keynote here, I'm explaining what Defi is, but I'm not sure at ECC you guys need to to another explanation on D5. But what we can say is that uh Defi has changed uh for the last five years. Um first in terms of size uh if I did 10x terms of

TVL second in terms of infrastructure risk management and the approach globally I'm not saying we are perfect now but we are certainly reaching perfection um we are using tools that didn't exist five years ago we use for example Iive to prevent hacks we use great non-custodial MPC solution like Fireblocks or or Fortify All these solution didn't exist five five years ago and those solutions allows us to reach institutional standards that u allow us to welcome and onboard a financial institution into defy and onchain management.

Um so investor dilemma what do we hear at Belm Capital from our investors from institution? Um first they tell us bitcoin is too volatile. Well, it's true for for you and me, it's okay. We can manage 50% swings on and rodons, but for a financial institution or bank, they they can't manage this this kind of of drawons. Um, so how do we solve this? By by doing DeFi with stable coins. Okay, when you do D5 with stable coins, you have a very uh stable yield uh with less than 4% volatility at BM. Uh, and this is a perfect product for for institutions. Second, they tell us that ETFs are directional.

Again, it's true. If you buy IBIT, for example, you are exposed to the Bitcoin volatility. And another solution is to do DeFi with stable coins, less than 4% volatility. This is a perfect product for institutions. And finally, they want to invest in an environment they know. They want to invest uh in a in a vehicle they understand. So at bum capital we choose Luxembourg which is the CSSF but you have Switzerland with FINMA you have Kayman you have many places where you can set up a vehicle that accepted by institutions. So the idea is to set up a regulated vehicle with high risk management standard and the underlying

are strategies. I will let Nasima continue but one last slide. Um here I wanted to show that the growth of AWS started with the approval of the ETFs by the SEC. Approval of the ETFs was the green light for institution to dive into crypto and into DeFi in general. So all of this started in 2024 and big institutions are coming now and they are we see them coming more and more uh with with BM capital. Nasim I think it's your turn now to to dive more into risk management.

Yes. So uh hello hello everyone. Um I'm Nim so CIO at uh Belam also have having a trade fire background um big four mainly on on risk and uh started my asset management journey with uh like when DeFi was booming and was mainly helping web two and web three startup to manage the treasury. Uh but that being said, so how we moved from this web two and web three startup managing their treasury in DeFi to institutions and all these large banks that are like okay we want to have this alternative exposure but how does it work today we have RWA but why do we

have that a little I would say size of RWA when I say size is not in TVL because it's growing pretty well it's mainly in diversification like everything started with private it and now we have way more different share classes and the main problem is not how to tokenize these RWAs, how to underwrite them. Do we have the right teams uh that are most like really often defy and cryptonatives to be able to completely underwrite this um check that the the data how the legal and the rediction are are could be enforced the cache operation valuation reporting.

So this is quite I don't want to say new but the team are scaling up to be able to underwrite all this. Uh so the main bottleneck here is more the underwriting that the tokenization because RWA that is not properly integrated in the D5 ecosystem doesn't add much uh than just the RWA by itself like it just tokenized. You just added basically a layer of complexity that is blockchain. But what matters is how is it integrated. I'll just probably stand up.

Um but the underwriting pipeline here and what is quite important is you have uh seven pillars that needs to all be uh respected. So from the first one uh to the last one. So of course you have some frictions uh between them. But the the idea is how to go through all these steps and make sure that all these check box are actually checked uh without any issue. And here you have at each step a world where the the the capital can get stuck.

So how to underwrite that risk and basically what's the the stack and how we can do it because on top of saying okay we have to underwrite the risk is can we underwrite it do we have the capacity and the capabilities to do it and that's what at bm we're building and working with all the the largest bank and large largest issuer so as you can see I mean I will not mention all of them but for each of them you have at least three points uh the main One is credit market and liquidity. So you need to have models on the on the liquidity.

How do I monitor this liquidity? Uh how do I assess my credit risk for private credit and so on. And these goals for the legal the data counterparty the risk monitoring the valuation nav and so on. So once we said all this which means we know how to assess our risk, we know to underwrite it. But when you do this, you basically just have a snapshot of the risk at the t instant. As we know, crypto is moving and moving fast. Blocks are often mine every second to not stay even faster sometimes.

So the risk assessment I have today is probably not the same. I will have tomorrow in a week or in a month. So our challenge is how can we move from a snapshot assessment to a real time monitoring. So to make sure we always master and control our live exposure to the different underlying and is this underlying actually moving is there any bridge at the smart contract level. Why I'm saying this? If you check for example the maybe you heard about it like the last incident we had last uh last weekend with with resolve there was no issues at all with the backing assets like the point of failure has been the smart contract itself which

could be true for all the RWA actually had to have a provide credit where everyone is like focused is this safe or not safe it could stay safe while at the smart contract level you have an issue and it end up in the same problem. So all this is linked to the real-time monitoring like the event um audit trails and how we track all these events happening. That being said, what does it mean? What does it mean exactly in term of uh operation for us? So here so you have the risk uh order flow with ipernative mentioned by Stan just earlier. So we have live monitoring and signal by our third party services that we work pretty closely with. I don't

know if those just by raising your hand anyone heard about hypernative already or is it like first time? So what is it quickly for you is a solution that let anyone who subscribing to their service according to how you basically set the parameters to listen to what's happening on chain and at the fraction of second it's happening. So if someone is meeting a large supply of USDC or USDT, you can be informed in real time even before it gets actually minted on chain. So sometimes when a hack is happening, you have like a small window of let's say 10 second before it's really happening but we can get the alert ahead so we can act

accordingly. So how it's working once we said that. So we got the signal from ipernative we got the detection we have our policy and join. So saying this is a threat. So we just execute and this is automated. I don't have to wake up at night like we said like to sleep. So everything needs to be pro properly done ahead. The action is prop is like only allowed to do this which is for example withdrawing from a certain protocol selling at a certain slipage something like this and then it acts. So all this is fully automated. thanks to the hypernetative integration

and then how we do offer all this uh with bm to the institutions because what matter for them is first of all you can think about it's the performance in defy and how they want to expose themselves to defy but not specifically they really want to make sure the risk is mastered and not today it will be tomorrow in a month in a year and they will keep the always the same risk risk exposure. Um if you make you basically the performance was 12 and the realized performance is 10, you can always explain yourself or you can justify why performance was has been 10 and not 12.

But if the risk explain when you sold the product or your board them was a and in practice the risk they're taking is like B or C then it's another problem that you have to explain to the institution. what matters is how they master the risk they're they're exposing themselves to. So for all this we have the institutional LPs, we have the Luxembourg fund and all the fund then are managed at at the strategy level and fully on chain 100% on on our MPC custody solutions.

So we have the race engine, the policy engine and the monitoring as we said which is this 247 it like just never stop uh even as we speak here it's always running and then the onchain layer so all the D5 application you know then we have our reporting and nav and we have the audit trail before it goes to the uh institutions so that's mainly hit and that's how how we on board them and how they're literally reshaping uh defi By reshipping DeFi, what matters is thanks to this institution, they're just raising the bar for the retail. Even though you you're not aware but because everyone wants to get their institutional money and instit in

institutional inflow everyone has to raise the bar in term of risk management in term of how we do uh offer them the exposure how they can just manage all this and all the all this is transparent and not kind of upgradeable by one entity or one single person or one single address. So thanks to this the old DeFi is actually I think gonna be better and it's already getting better. Um so thanks I mean thanks for for listening to us. Uh I will let the the mic to stand if he wants to conclude something.

Yeah probably have few minutes if you have any question. Yeah. Hello. Thanks for the presentation. How do you handle the due diligence by the institution investors? >> Um, hello. I don't know if you want to I mean you want to take this one. >> You mean the KYC we do on our investors?

the due diligence process by the investors. Well, we we have uh again uh installed institutional standards. So, we have a full data room uh that is uh feed by uh administrative documents. So, for the fund we have uh the term sheet, we have the PPM, we have the LPA, we have all of these legal and administrative documents that are very important for institutions. uh after we have a more technical document. So we have a DDQ document that is 40 or 45 pages thanks you thanks to Nicholas here uh that is very precise on our strategies uh we define our risk limits um but the main point uh that uh those clients want to look at is the

separations in the Chinese world between uh risk management and asset management. Um I think D5 5 years ago when when we started uh uh was I mean the the asset management and the risk were kind of in the same team working together and what is important when you work with stratified people ish to show that the risk is not the friend of the of the asset manager and uh the risk is really controlling what the asset manager is doing. This is important for them. I'm just curious when I make a trade, I

go into Rabby uh and and I do it manually, oldfashioned way. I'm going to guess you're a little more sophisticated. Um but I'm just curious, how do how do you actually make a trade? you you mentioned Fireblocks. Um, and you know, maybe maybe I could make three trades in seven minutes. I don't know. It would take a while. Um, I'm also wondering like how fast can you actually what's your throughput? Like could could you do a thousand trades in a minute?

I >> I mean, we can like the the the real question is more what's the trade? uh if we're selling money we have some risk threshold for example there is no on our side no asset manager that can directly operate a trade alone uh we always have a double layer check so you have one asset manager that will initiate a transaction then you have a second one that will approve it and on its approval it's like a multisig if you're familiar with it a bit so so trade is could take time but most of the time we don't have to be an emergency and then you have some function at the smart contract level could could be whitelisted like just a withdrawal. So there is no kind

of slippage. You're just exit ex exiting the liquidity from a specific uh protocol or or smart contract here and this is why it's listed in case of emergency and asset manager alone can do it and then the funds are just basically idle. To go back to your question, how do you execute it? we go through the uh MPC solution mainly for D5 and by design we cannot do anything we have to whitelist all the action we can do uh so that's how we trade let's say we want to swap like you said through I mean on rabi let's say you'll use co- swap or unis swap or curve then we have to white list curve or unis swap then we have to white list the asset we're going to swap and the asset we're going to get uh in

the max slipage the function the chain and so on. So that's how we operate. Um >> thanks a lot for this very interesting presentation but we have to >> okay >> and it um I invite you to ask more questions outside. >> Yeah with pleasure >> and u thanks a lot. >> Thank you very much everyone.