Unlocking DeFi for institutions with clear regulatory frameworks

Transcript

Perfect. No. There you go. Hello everyone. I'm Sebastian Widmann. I'm the general manager of Komainu. Komainu is a regulated digital asset custody business and today we'll be speaking about how we at the regulated custodial layer unlock DeFi for institutions in regulated markets. A bit of background on us. Um Komainu was launched as a joint venture between Nomura, the Japanese investment bank, Ledger, um a French technology provider that I'm sure you all are aware of, and CoinShares, one of the leading asset

managers in 2018 to focus on institutional grade and regulated custody for new market entrants, which we call here TradFi, coming into crypto. Since then, bring it to 2026, we've raised around $120 million. Our latest round was the first Series B to be done in Bitcoin. We raised $75 million in Bitcoin in January last year from Blockstream, who's a very strategic partner of ours, and the focus of that is really to expand our regulatory footprint. So, we now operate in five jurisdictions. We're the largest custodian outside of the US, including Jersey, London, Italy, um Singapore, as well as Dubai, where I'm based.

Um the business is fairly simple and I always say custody is um a boring part of the value layer, but I think it's also the most important part. So, as people think about custody, it's only about security, but I think in digital assets, as in traditional finance, it evolved significantly since the early days to where we're today. But, we'll go into that into more details later. Quickly on DeFi, I think DeFi obviously is on everyone's agenda nowadays, including governments, including institutions, including regulators. DeFi has evolved and I think as anything in crypto, it starts with retail momentum and retail adoption and then slowly moves into product market that fits and what actually stays through product market fit and gets validated starts creating um actual market

infrastructure, which then can be used by traditional institutions. But, I think there's three main layers that are coming at enabling DeFi for institutions. Those include one, custody has matured since the early days. It now really acts as much more than a safety box, let's say, to becoming a custody and access layer to decentralized finance. We're seeing that there's more governance risks and segregation that you can also do on DeFi rails and DeFi smart contracts. And then, DeFi, as you've seen over the past year, everyone's been talking about RWAs. We now see over 10 billion in RWAs on DeFi rails. And so, obviously institutions and our clients are quite active and engaged in tapping those.

Um that to say that I think DeFi, we're really at a inflection point. Regulation is looking at this space quite actively. We have names like BlackRock bringing Biddle on Uniswap. We're working closely with Maple, with Aave to really allow institutions, which are much more traditional investors, to access digital asset ecosystem. Why now? Um as mentioned, um I think what we've seen since the start of the Middle East concerns is that oil, for example, has been trading over weekends on Hyperliquid. There is as much liquidity on Hyperliquid as there is in many traditional exchanges and it's the only options for traditional players that potentially only trade in traditional markets to access liquidity and hedge their positions over weekends.

And I think that's just one use case. We'll see many more of those. And really, there's a big path from we saw ICE investing in OKX. We saw more and more Nasdaq partnering with Securitize. We're really seeing this inflection between TradFi and crypto, where in my view, in the next 2-3 years, you won't speak about crypto anymore. And as we as a business talked about since 2018, it's all about digital assets. And every financial asset, whether it's a security, a bond, or even real-world asset, will be represented on blockchain rails and powered um by the blockchain itself and then accessed through sub-regulated custodial layers like we have um to access 24/7 markets, um faster settlements, um more transparency, obviously, if and um

better capital efficiency. But, institutions can't access DeFi directly, um not like you guys most likely that use a Phantom wallet or a MetaMask wallet and click some buttons to access Uniswap or Hyperliquid. Institutions need to rely on the same infrastructure that they do in traditional markets to be able to access these decentralized markets, always focusing on your regulatory frameworks, as well as the risks and governance that is involved and required to enable that. Here's a very quick overview of how digital asset custody evolved. So, back in 2011, um when I think the whole space started, the most secure way to store keys and at the big picture, the first rule of a custodian is to store its keys securely for institutions.

Um in 2011, that was done on paper wallets. There weren't seed phrases or seed phrases were stored on paper wallets and these were kept as secure as possible. You know, it moved to cold storage. Um Ledger, one of our investors, has been at the forefront of that with their Ledger devices, which are USB-like sticks. Um but obviously, that is not fit for purpose for institutions. And also, the operational requirement that you have to keep the stick safe, put them in vaults, access them every time you want to do a transaction or sign anything, is just operationally inefficient and wouldn't work for any major institution.

We therefore saw a big push to hot wallets in 2016-2017, uh what most exchanges used. On the flip side of that, hot wallets are also the most insecure ways of storing crypto keys. And since then, we've seen multiple hacks from Mt. Gox in 2014 to Coincheck in 2017 to more and more also recently because of hot wallet infrastructure. I think in 2018, when we started Komainu, we also saw the maturation of this technology and we closely worked with Ledger and since then, there's many other players that really developed institutional grade secure key management systems, which includes MPC, so multi-party computation, which includes HSMs, which are used in all the traditional markets, that allow you to have the security of cold wallets, but also access the blockchain itself in a much faster way

as if you were operating on a hot wallet. So, that was the inflection point where institutions said the technology is ready for us to enable and deploy more capital to it. And looking at us as a business, we scaled from I think 200 million when we started to in 2018, we now have over $15 billion in assets under custody, which we keep for a fairly small number of institutions, which are very, very large clients and therefore security is the utmost importance. But since then, over the years, day one, it was purely around security. Day two, which I would say is 2020, it was around regulated access. So, how would you use the right technology, but put the right operational layer, policies, procedures, segregation of duties on top of it to really facilitate this growth of the market. And I think since 2024, their

focus has really been around utility. So, once you have assets in a regulated custodian and you have billions of dollars that you manage, how do you access new protocols, whether it's venues that you can trade off-exchange settlement to more DeFi protocols, which we're now actively enabling. Boom. So, how does custody actually help? Um as mentioned just now, custody is not just safekeeping. It's really focused on where governance permissions and the operating operating controls sit. So, as an example, um every time a client sets up a wallet with us, we work very closely with the organization, whether it's a hedge fund, a bank, an asset manager, to understand their own risk requirements and then we deploy best practices, whether it's um white listing of certain wallets, so we'll always know where the assets go to. You

can't send send a wallet to any random address. We vet smart contracts that they interact with, so we do secure screening internally. And then, we make sure that everything, the end-to-end life cycle of any assets coming into Komainu and then leaving Komainu is handled from a AML perspective, so anything from using tools like Chainalysis, which do transaction screening, to tools like Notabene, which is required for travel rule. So, there's this whole governance and regulatory reach on top of the actual technology itself, which we as a custodian manage. And then, a focus for us is always, once we have $15 million in assets under custody, how can we monetize those more?

Custody is obviously a depressing margin business, Um since FTX, obviously, that has changed quickly. So, one of the fastest growing areas that we operate in is off-exchange settlement, which simply means that clients can work with Komainu, create a collateral wallet, which is in Komainu custody. The exchanges we work with, OKX, Bybit, Gate, and many others, see the assets and then extend a credit line to our institutional clients. They can trade and then we do the settlement. Through

that, through the trading life cycle, all assets are in custody with Komainu in segregated wallets that the client and the exchange can verify on chain. And there's much less counterparty risk as we saw with FTX. So, I think that's really the move to where crypto's going over the next few years is exchanges will lose most of the assets and the assets will actually be stored in regulated custodian that still allow their clients to access exchange liquidity. And that's exactly what we want to bring into DeFi. There is many risks and challenges in DeFi from a regulatory standpoint. As mentioned, we're already regulated in five jurisdictions, so there's a lot of work to be done with regulators to explain to them what we want to do, how we're doing it, and really to just help them explain and understand this space

as a whole. Couple of questions that regulators always ask is, who's the counterparty? Assume we allow a client to swap on Uniswap. They want to move from USDT to USDC. The regulator asks, who actually gives you the USDC that you exchange for USDT? You can explain it's a protocol and there's pooled liquidity, but for regulators, often that's not enough. So, for example, they say if there is a sanctioned entity, whether it's North Korea or Iran, that deposited the USDC and you swap for that specific USDC, then the assets are sanctioned. And so, there's a number of risks which in permissionless DeFi, what we are used to and like, that is not fit for purpose for institutions. And that's why for the past 3 years, I would say, we've been working actively with DeFi protocols to really help them understand where

market infrastructure is moving, what works in their technology stacks versus what needs to change for institutions to tap that. So, for example, Uniswap are good example. Um when BlackRock launched BUIDL, the money market on Uniswap, only white-listed counterparties, i.e., players like us and our wallets can access liquidity from that pool. And so, to some extent, it reduces the benefits of DeFi because it's not fully permissionless, but it still enables most of the benefits in terms of 24/7 trading, no counterparties, etc., where you create the benefits of DeFi and we bridge them to the more traditional regulated space.

Other issues, obviously, are around who controls the assets. Um is it the smart contract? Is there a counterparty? What happens if the smart contract gets hacked? Is it the custodian's fault? Is it the smart contract's fault? The company launching the smart contract? So, there's a lot of questions around that that we're working with regulators to find the rules. The way we work, and I'll go into the slide later, is to really vet smart contracts to white-list entities and pools that our clients are allowed to access, and to blacklist the ones that we don't want them to access. And then again, anything around AML, which I mentioned, the sanctioned assets, how do you track smart contracts, and then what happens when regulation differs across jurisdictions, which is one of our largest issues, let's say, in the short term,

because some regulators are more proactive, so you can speak to them more openly, work with them, do a pilot or a POC, and they allow you to do something, whereas other regulators that are potentially more bureaucratic just say no because of rule A, and then it's a long forth and back to help them understand and actually move the needle forward. So, what we do, um it's fairly simple. So, think of us as a wallet management system with a lot of operational controls around it. We want to make sure that our clients can access as much utility of the assets they have with us as possible. This starts with custody, so safety as the core layer. We then enabled staking services, and I think we're one of the largest stakers of Ethereum and for institutions out there. The post

that, it was what I called uh Commonal Connect, which is our off-exchange settlement solution. So, how do you allow clients to trade on exchanges with assets in custody? And then what I'm most excited about, and my colleague Cameron is here with me, is really to allow clients interact with DeFi in an institutional layer. DeFi will move from what I call 0.1 from an institutional standpoint to full DeFi, which is, let's say, three. 0.1 um is the most simple and secure form. To give an example, is what the benefit of DeFi is is that you have on-chain balance sheets. I.e., instead of one company having to put up a lot of assets that people can lend or borrow against, you have this pool and network of participants and players like Aave or Morpho that can do that for you.

The difference is that, for example, currently, we're not allowed to send our clients' assets that are held as collateral to a smart contract because there's too many risks. However, working with Aave, Maple, and also Morpho, you can now hold collateral assets in a segregated Commonal wallet. So, we still control the collateral, and Aave or Maple sees the assets on-chain without having them in their own smart contracts, and on the back of that, extends USDC liquidity to us. And only in the case that our client defaults, does Aave or Morpho have claim over the assets, and we send the assets from Commonal custody to the DeFi protocol. So, I think that's the step 0.1, where clients' custody is still regulated and more TradFi, let's say, but the liquidity from the balance sheet

comes from an on-chain pool, which is you and me and everyone. Um obviously, that is day one. Day two, we want to do swaps, so working with the likes of Uniswap to do BUIDL, etc. Day three is allowing our clients to actually lend in specific pools that we white-list and check. And then day four, which I think is the potentially most interesting area, is allowing our clients to access hybrid liquids and the likes of it to trade perps directly from custody with collateral and margins being managed by the custodian itself. So, I think over time, as more and more of finance overall becomes digital, custody, whilst right now a bit boring, is the most important layer to access that new advent of financial services.

So, that's it. Happy to answer any questions you guys might have, or we're here for the rest of the day to answer any questions.