The Day the Chain Stood still

Transcript

[Music] Ladies and gentlemen, in the movie I'm going to present to you today, humanity is on the brink of a war. Um they have discovered a fantastic new technology uh public blockchain and they are bickering about how to use it. Some people think that it should be used to tokenized assets and others strongly opposite.

So what is wrong with public blockchain? So these people opposite. Over the past years, I've been working um often with authorities and there are recurring points that uh are concerns for using public blockchain and promoting it or authorizing a wider use of them for tokenizing financial assets. On the interest of tokenizing itself, I think it's uh settled and done. There has been many reports almost every authority in the world has published a report explaining that it would be fantastic to have delivery versus payment in using a DT but on public blockchain there is a really few voices that are interested into it. So first let's see why is that the first reason is authorities are

experts in looking for market abuse fraud manipulation they have been doing that for decades and when they see things like me it really looks like the kind of problem they have been trying to address for decades so I've heard the fantastic presentation from flashbot a few days ago and I recommend seeing it there are things being done to address it but even some effort is not enough to uh totally um address this concern. A second one is settlement finality. In finance, you need to know when an asset has been transferred. Uh it's particularly critical if there is a bankruptcy to know when the asset was sent from Alice to Bob, if the ali the asset was still in the possession of of

Alice or um no in the hand of Bob. So on this same um there have been effort to clarify this. I think it's not only a technical question but also a question of definition of clarifying um what when the transfer has happened but there are cases that are complex for instance if you do a transfer on the L2 you have sent the transfer from your point of view you cannot revoke it but it's not still settled on the on the layer one how should we consider that so there are question like this that need to be clarified the third one is governance and actually a really big one so I think it's a characteristic of blockchain to have uh this complex governance. Um but we have seen also this week this discussion

about um Ethereum being aiming to be a neutral platform. But I think neutral should not hide the nuances. There are many nuances on how a platform can reach this sort of neutrality and many stakeholders in how the governance work between the stakers the developers and this to me need needs to be clarified. same. I think part of it could be in doing studies in governance and trying to explain how um this process work and also clarifying which blockchain have reached a level where you can have some trust in the process or not. One example is the DO is mentioned often in authorities as a concern like could there be a big fork and all the

tokenized asset are all of a sudden duplicate in in two different blockchain and how you address that. So I think on the layer one of Ethereum there is less concern now about that but how it can be clear from to someone on the outside and what could happen on smaller blockchain if there is such an issue. So that's part of this problem. Um the fourth is scalability. Scalability is not only about the throughput and the number of transaction per second but it's also the variability of this uh throughput the fees that can increase when you are within the ecosystem if there is a new D5 project that is launched it is fine if sometimes the fees spike a little bit and you cannot do your transaction I

think it's an accepted risk but if you are a traditional financial institution all of a sudden the infrastructure is not working because someone is launching a degenerate NFD doesn't make sense right so I think I think that's part of of this problem. Same from this problem. I think that's problem that have been acknowledged by the community but pro the answers are probably not yet satisfying for authorities. The fourth then the fifth is fragmentation. Fragmentation across blockchain you have especially from the perspective of people that are not working in the space. Blockchain is one big thing.

There is the blockchain space. How you can you explain that your asset is in one blockchain another one is blocked in a bridge and you have to wait for some time that's difficult to perceive. So all the blockchain abstraction work is precious on this and in the case of tokenized asset they analy layer because um and assets are even more fragmented. They don't follow the same standard. They are not compatible between each other and depending on the issuer you can have two different of the two different version of the same asset. If Alice issues an Apple share on in a tokenized version and someone else issues a tokenized version of the same share, you have two different assets and you cannot easily um exchange them. So

that's a problem. So now let's see a little bit the faction in that space. First one, the central banks. So the central bank actually are quite interested in blockchain. I've said they are the one publishing the most reports on DTS and they have a lot of geeks within them trying to experiment. So let's say you have an asset that on this public blockchain and you try to settle it and one key issue that the central bank is responsible for is to provide you money in a secure manner that you can use to settle against that asset. So currently the ECB is looking at three different option on how to do that. None of them implies a public blockchain directly. So the first one which is uh to create a new blockchain on which you

will transfer your assets from your public blockchain or another blockchain that will be provided by an um an infrastructure and here there will be um the settlements sorry will be happening in this blockchain that's the first version the second one is to create an intermediary blockchain is proposed by Germany where you will have there the exchange the the the the digital euro and you would have a sort of API that connects with your blockchain. So you can have some sort of hash locked time um hash time lock contract uh and do uh this transaction.

Another one a bit simpler using a fast payment system but with the same principle. So what is not considered so far is issuing directly this euro on the public blockchain which would be the easiest way of doing all of this. So let's see all the actors. One is the central bank. The other one are financial infrastructures. Financial infrastructures, I'm talking about the CSDs, all all the different actors that actually settle asset at the moment. They are the least interested in public blockchain because they currently have infrastructure they control. It's their business model to be this infrastructure. They are absolutely not interested. So they are doing tokenization project but in their own um infrastructure and probably adverse to this change. On the other side we have the tokenizers. So of the companies that

are tokenizing assets and issuing them on chain uh you have a v wide variety some are more or less rigorous in the way they establish and this asset especially on the legal side how the asset you have is actually the asset that is claimed on this we have I think in France an interesting project spyo that's the tokenized money market fund on chain and then what's also more interesting is they are not they are addressing a specific market so they're looking for treasury of company they look for yield and so they give them this access to this uh tokenized mmf so for people who don't know mmf is just a type of investment product that's super safe where you get a little bit of yield so it's the staking of the traditional

financial world um the networks that are competing for attracting um assets and projects and I think that has been discussed now how many foundation have been super active in in that domain and probably ethereum needs to do also its work stable coins that on the opposite are looking to issue on every blockchain and they don't care at all about uh the small wars of different religion. They just want to have their token as accessible as possible and the banks that are currently a bit on the verge. Some are trying some experiment on public blockchain. In France we have some examples um because their business is selling to the customer activities.

So they might find interest in using it in the longer run. So that's all this faction at war. Um in our movie there is a Nalian entity that comes to Earth and see how we might misuse this technology and end up in a terrible situation. So they want to wipe out all of of what we are doing on purpose. This is based on the actual movie that's more a scenario. So what have do we have as a solution? That brings us to the announcements from two days ago of Robin Hood on which we can remark the beautiful James Bond aesthetics. I think that's a fantastic um welcome to vintage. Um and they have been presenting the tokenization of u

assets with this really clear schematics showing all the process. Maybe if I can dive a little bit in a different dimension. Um he explained mostly the execution part like as an individual you can uh go to Rubyhood and there is a chain reaction that allows you to get in the end the tokenized version of the assets uh with an interesting approach of faces of saying it's totally not tokenized initially or at least you cannot use your token but in the future you will have I think we have heard that kind of melody before so we need to be cautious but um apparently this is the plan. What risk are you taking when you're buying the tokens that are proposed by Robin Hood? Higher risk. And this is not me saying it. It's the

choice of Robin Hood. In their official legal documentation, they have chose to grade it as the highest risk possible to when you are buying this assets. How that work? If we look a little bit closer, um so you're a person or a robot in the future maybe anyone and you want to buy a to and you buy a token. Um I will look now on the legal side what happening. So you buy this token. Actually what you're buying is contracts. It's a derivative product that guarantee you that when you will sell it again you will have the same value as the value of the share as it is quoted in the US. But you don't have any ownership on the share at all. This contract is between you and Robinood in

European Union. So that's what you have. The token is a representation of this token of this contract and every time you exchange the contract the token what you're doing is exchanging the the the owner the yeah the counterparty to this contract and it's the contract evolves on the other side Robin Hood um in the EU has a link with Robin Hood in the US and they are the one that will actually buy the share on on their side put it in custody in the financial markets and so on. What's interesting in the setup is how robust it is. Is it safe do you think to do this complex process? Um actually I I find it quite safe because

they are using first they are doing themselves a lot of the operation because if we look at other tokenized asset and I've looked many tokenized asset in that have been done recently a lot of them use similar processes. So the the exact legal uh disposition can be a bit different. Some are using SPV in in foreign countries. So like a special purpose vehicle. They create a company, the company owns the shares and you have a share to the company but the company you have few recourse to to get the the share in the end. Um so the general idea is similar in many project because you cannot issue directly on chain these chairs because they have been issued by Apple in the US stock market and that's where they are

officially anyway. So you need to do this arrangement. But what's quite safe with Robin Hood is first they do most of the chain so they don't have too much counterparties and second they are regulated at every step. So in the US they are regulated as a a dealer broker a broker dealer. So they they have this between Robin Hood US and Robin Hood EU. I don't know the details but I guess they have a contract then in the EU they are regulated institution also to be able to issue this derivative contract and then they are also regulated to have to sell this token especially in the second phase when they talk about exchanging on bit stamp then they are as bit stump um an exchange mika compliant and providing this

service. So as you see there is a quite protected chain between you and and your asset but definitely you have to bear in mind that you are not owner of the final the final assets and also that there is this long chain of risk and that um and also that even themselves they advertise it with saying it's a risky product. So how we end our movie? So in the in the movie I I mentioned um it all goes better because the the alien person discovers or libraries or music and then they find it beautiful and everything stops. Okay. Um we might need to do a little bit more and in my view it might be a lot of coordination. We have all

these actors I mentioned they can cooperate sometimes but they don't coordinate and there's a lack of joint effort of trying to move on. One of the ideas that we need is to find a better spectrum to address different needs of the different actors in terms of compliance in terms of risk. This is how financial ecosystem works like not everything is perfectly regulated and clean and it's a it's a full spectrum and I think in in D5 for instance we need to acknowledge that and try to find a broader spectrum of actors. One example I would give is how we make some compliance on the D5 smart contract in a protocol. But the same applies also at the underlying blockchain. How much we want to be have a spectrum of uh safety.

One example is absolutely permissionless. So anything can do anything and that's one way. Another level is blacklisting. You just forbid some address to do something that are illegal. whitelisting which is the case for instance for Spyro where you just select a number of client you KYC them once and then they can do whatever they want as long as it's only with KY people and then you can even go further and authorize each transfer at the moment you do a transaction someone check it's right that's how the current financial system works so if we manage for some transaction that are B2B that are lesser risk to use lower level of compliance probably we save some energy So in the end potentially we reach this beautiful

word and the alien doesn't destroy us and that would be fantastic and that's a park that's really nearby if you want to touch grass later in the week. Um thank you for your attention and we have five minutes for question if you want. [Applause] Yeah thanks thanks for the great talk. Does anyone have any questions? Um, hi. Yes, very interesting presentation. Um, this is Vlad from Ipore Labs. I just wanted to ask, do you think these tokenized stocks that Robin Hood that you just talked about will be quickly available um in custodial custodial uh

wallets, non-custodial, sorry, and uh and then available in DeFi for example. And from a legal perspective, how easy is to do that if these tokens actually exist exists on the blockchain and then need to change owners and they need to be used for example as a collateral in DeFi potentially. Do you see this happening quickly or happening at all? So what I find first fascinating with that strategy is they know that they cannot change the world all at once and what they are doing is applying all the rules as they can as they explain um they have issued in in this way initially and potentially they hope that

more and more we can rely on the blockchain part to do all the trade and the settlement of different transaction and they so I don't know their project but it's very clear that it it's it will take some time anyway to have the the token. They explained that you can have it as a non-custodial pretty soon. That should be in months. But to be fully working Defi as we have, I don't think that's at all possible because because they are compliant with all this regulation, they need to check who who has the this token and they even it's a contract. So they need to know the counterparties their contract. So they cannot do that. But that's why I'm talking about coordination and I think that's why uh the problem we have at the moment is we need different identity

system. We need different different compliance mechanism that then we can slowly like Robin is not going to do it themselves. But if there are slowly protocol that are recognized of having a safe way to to allow transaction that are a bit more anonymous or um a bit wider without breaking all any any sort of trust. Maybe then we can hope that regulation change a little bit but definitely that's not uh what they can do initially and that would be super safe initially. Um thank you also very good presentation. Um just on that last point you you were mentioning on the identity.

So where do you see the current shortfalls or better to ask what do you think needs to be done to make that better? Um so I'm not a specialist on the question of identity. I know in Europe there is a framework that's trying to be promoted of creating a digital identity. Currently it's not really uh linked with the force on chain but there is the acknowledgement already that technologies like verifiable credential are a good way to go. So yes, I think all the bricks have been identified and they should be at some point better more cryptographic based solution where you don't have to give all your identity to to all the actors you're interacting with to to guarantee uh safety. So but it will take time. You

need um governments to provide you a safe way to to identify you. You need to have a link with the chain of and sorry just to follow up on that. So you're saying that the current issue is that they worry about the amount of information that you give away as a user. No, I I worry how much information I'm giving. Every time I interact with any platform, I have to give all my information uh for for safety. I don't think it's a reasonable way to address these problems. Um no from the perspective of regulators I think it's more um a question of slowness of evolving is currently the way to go is you ask everything you ask your passport and so on and but it's also a question of the government providing u what is called digital public infrastructure so

and digital ID is not already the case in in most European countries so that's what's missing like if you have already an easy way to identify you and then you can build on that to creates um secondary identities that that would be great. Thanks. That's our time. Uh if you want to take more questions outside uh feel free to do so. Uh thanks Ky. Thank you. [Music]