What's at Stake: Institutional Demand for Staking vs. Regulatory Frameworks

Transcript

Um, we're moving fast forward to the next panel. I could also call it kind of a fireside. It's about staking. What is at stake? Institutional demand is undeniable for staking, but how are the regulatory frameworks and what are the issues and problems? So, this is what we're going to explore. And I'm really really happy to welcome as a moderator Jill Nuspower. She works as compliance officer for six but with her other hat on she is member of the canton parliament of zoo right the canton zoo where we are in and please welcome on stage and also your speakers put your hands together please

have a seat here yeah hi everyone I'm so excited to be here tonight because this is my home country. This is my hometown and now I get to talk to the industry leaders of the crypto valley and they can tell me as a politician what we are supposed to do in legislation. So that's a great opportunity. I'm so pleased to have Eva Eva Lawrence here. She's head of EMIA at Figment and Fignet. Figment offers c um non-custodial staking mostly to c to clients like asset managers, custodian and also hedge funds. So give it up for Eva.

[Applause] Also here tonight we have Paval Chakov. He's head of product innovation and growth at Amina Bank which is also based in Souk. And they offer custodial staking mostly to their institutional investors. So give it up for Powell please. So let's start with the very basics. We all know that staking is validating transactions and creating blocks, but it's also a very important investment strategy as staking yield is often significantly higher than interest rates. So Eva, why is staking important both for the ecosystem and also for your institutional clients? Yeah, I would say

the first thing to highlight is uh staking staking rewards are not an investment product and rewards are not yield. Um but they are a way of participating in a network to secure it and to earn returns. Um I think that's really important because staking sometimes gets confused with lending. Two very different products as we've seen u from recent uh SEC guidance. We'll talk about that later. Um, but the way to think of staking is as close as you are going to get to a risk-free rate. So, if assets that you already hold, you want to uh earn a return, this is the closest you're going to get to uh a risk free rate on your assets. We see a lot of um uh asset owners use it as a

way to hedge against price volatility. Now it's not a clear clean delta hedge but uh again it is something that both retail institutional asset managers the whole broad spectrum um of uh crypto holders look at as a way of earning a return. Um I think it's also very important because it's something that spans the crypto ecosystem. So whether you're a a bank, whether you're a hedge fund, whether you're an asset manager, a retail investor, these are all people and institutions that are interested in staking. Whereas in other products, you might see a small subset of of the market that's interesting interested in

them. Uh this is something that that spans the ecosystem. So how about your clients? Do they see it more as an investment opportunity or as an opportunity to participate in the network? I'd say there's there's the definite, you know, investment opportunity that's that's there. Um, you know, we have a lot of interest in Ethereum, especially Ethereum hasn't been performing that great this season from what it seems. So, it's pretty obvious um move for investors to commit their Ethereum to to staking. But then if we look more on the you know technology level on on on the actual infrastructure level um we're also together with um our staking partners we're also making the network more

secure right the the greater the amount of validators the more secure the network is I guess I'm telling this to to the people who are initiated in in how things work but uh yeah it's it's it's contribution to the network it's increasing uh the validator count it's increasing the validator stake that's delegated to the validators. So again, it's it's making sure that there is, you know, a much more robust infrastructure uh that's providing rails uh for transactions to happen and hopefully much more in the future. Yeah. So Eva, you just mentioned the SEC statement providing clarity on staking offerings and especially how the federal securities laws apply to crypto

and staking. What is your comment on that? And do you think that Europe is now lacking behind the US that they published this statement? Yes. So I'm sure everyone in the the room is aware that there was positive guidance uh from Haurus out of the uh SEC in the US just uh just this week. Um we've seen that there's been clarification that staking is not uh investment, right? It's not doesn't create a security. So that is something that we have been waiting on and uh everyone within the industry has been hoping would come soon. Uh us along with many others have been speaking with the SEC to educate them on staking uh

and why um uh staking a transaction a delegated proof of stake uh does not create a securities contract. So to have that uh vocalized by the SEC is great. But I think what is more important here is that the uh SEC is open and is listening. They're no longer regulating uh by enforcement. They are actually putting out guidance uh to guide the industry. Now we've seen the SEC open their doors to um discussions with industry leaders like Figment um and and others from you know custody um trading to understand how staking fits into the broader crypto ecosystem. What I'm

concerned with is that we're not seeing um European regulators open their doors in in similar ways. They have some understanding of what staking is, what liquid staking is. um what restaking is even that's pretty limited. But what I'm concerned about is we're not seeing the the regulators and I'm including um the UK FCA here open their doors in the in the same way to understand these uh products and offerings. So what I don't want to see is uh is Europe get left behind as we see guidance from the SEC and uh and not as much from uh from the European regulators. So it would be

great to see even more o open dialogue just for education to begin with from um from the the European um counterparts. Yeah. And you have quite some experience with education with thinma with dialogue within especially when they published their guideline in 2023 on staking. How does this work the dialogue with their authority and how approachable are they in Switzerland? Right. So maybe to add to what Evra was saying, I think the guidance that we see uh from the SEC, it's it's it's that right it's guidance.

It's definitely a step in the right direction. Yet at the same time, it's still not policy. So I think we're a tiny little bit away from from the actual policym in the US. However, also the approach to policy in the US is is slightly different. The policy is there in case there is some type of litigation. So um and you know we have these absolutely insane conversations with um US startups where we just you know have our the back of our head kind of the hairs at the back of our head stand up where we go are you guys sure this is legal? They go yeah we should be fine. And then you start digging into the policy and then you're realizing that there's certain, you know, parameters that are there and then up

until the point that there's no actual litigation. Everything seems to be quite okay. It's a stark contrast to Europe and it's definitely a stark contrast to um to Switzerland. So Europe again, Mika talked and talked and talked over and over in in this forum and many others. I think the fact that there isn't proper guidance on staking is deliberate. I think it's coming most probably. There's also a panuropean mobilization of lobbying efforts through the entities like CCI and some of the others. Um so we'll definitely see something. That's that's our estimation, right? It feels like let's get the groundwork properly regulated with Mika and then let's move on to to staking and some of the other

products and then create proper boundaries around that. The Swiss regulator here I would say excels the most because staking guidance has been around for years now. Um you know we're in active discussions constantly in terms of different types of protocols. So there is an in-depth knowledge and understanding of how things work. Specifically for us the next big and I think that's more a technological requirement to satisfy the the regulator here is how can we access some of these opportunities that the previous panel has been discussing right in a safe regulated environment. So our customers would be able to participate right have that defi native opportunity so to say

and safe segregated d-risisk environment right so that's that's a that's a challenge that we pose to to all of our service providers and partners with whom we work on you know the staking um side of things on the custody side of things and protocol level because this is there's obviously our um requirements and our diligence and you know our parameters that we have to um implement and then there's obviously the the regulatory um demand so to say right for these things to work properly you also have the benefit here of the support of the Swiss blockchain federation so I think two weeks ago now they published another paper on staking

again like this is not legislation but this is guidance that I'm sure will be put in front of FINMA um and all of that is is helpful as long is um the right people are being spoken to to to understand the nuances uh around the different types of staking in particular. So staying at the topic of FINMA, they also are distinguishing between segregated and poolled staking solution. There are different regulatory requirements. How do you see the demand for segregated staking opportunities and also do you think the licensing requirement as they are right now in Switzerland are justified or should they give a bit more

leeway in there? So I think that first we need just to do a quick e explanation on what you mean by segregated and pulled staking. So if you're looking at Ethereum, Ethereum is segregated by by nature, by setup, right? you stake 32 ETH and you spin up a validator. So that is essentially um your own validator with your ETH. Um so that is segregated in in in that way. Um when you stake to a public validator if you were to stake a 100 Salana to a public validator that does not pull that 100 Salana with Pavl 100 Salana that he could stake to the same validator. It's not feasible on Salana for everyone to run their own

white label validator. It wouldn't be cost efficient. But additionally, your your rewards um would be significantly decreased because of the stake waiting required to you know achieve um outperformance shall we say on Salana. So when we're talking about segregated segregated uh stake, we're not necessarily talking about staking to a public validator um or staking to a white label validator. What we're talking about there generally uh when we're talking about segregated, it's normally the segregated accounts within a a custodian. So I would say rather than this being a staking point, it's actually just a custody point. Um, so it's more more of one for for Pavl than

for me. Red at Figment, we offer non-custodial protocol staking. Um, we never take custody of our clients assets. And I think whether you want your assets in a um, you know, omnibus or a segregated setup, it's more about around a custody um, whether or not you're staking th those underlying tokens. I don't know what you your your view on this is. Yeah, correct. It's it's it's exactly that the ability for us to segregate offbalance sheet um customer funds in this case crypto and then the ability to custoize it in a segregated environment and then delegated to the node operator. Things will get slightly more different when we start looking at um vaults locked pools

etc which is quite prominent in DeFi. This is something that we on the institutional side still don't have and we don't have that experience. We're hoping that through technological advancements and enablement together with the regulators we'll be able to achieve that. Um most probably Switzerland I hope is going to lead the way in this again in the same way like it led the way back in 2018 when it issued two licenses to one to Amina one to Siknum. Um, we hope that there's going to be this uh narrative or at least what we're pushing for is, you know, Swiss bank, Swiss custodian, Swiss node, and then within that node, you'd be able to um stake, you'd be able to create vaults. I'm hoping that we'll be

able to participate in Lido institutional at some point, hopefully in the future. So, there's a lot of um, you know, promising developments and we're quite confident that the regulators are listening. Yeah. And also you h holding a banking license you are able probably to provide most of those things then in the future. That's great. So also a very recent development is that one months ago the pectra upgrade went live on Ethereum and one of the primary changes is that the maximum validator staking limit was increased substantially. So Eva, what do you think are the benefits of the recent upgrade for your customers? Yeah. So I think you

know the first one that you you um pointed out I would say is a key one right easier to have uh larger more consolidated val validators easier to exit withdraw um from those validators. Um but I think it's important with PCRA to to highlight that these uh these benefits and these changes are are optional. So it's more of an an optin um if uh delegators choose. So for a lot of uh stakers, Perra won't actually change anything. It will still be business as usual for them. Um but it's it's great to see increased optionality on uh uh uh creating

and exiting validators that is is improving the the sustainability and the enhancement of the network overall. So positive overall, but I think it's important to keep in mind that it it's not something that impacts everyone. For some it it won't change anything. You're more on the it doesn't change anything side. It's it's not about that it doesn't change, right? If you if you zoom out, I think Ethereum is on a very interesting trajectory from the technological development standpoint, right? Um it's clear and we've heard it uh during the um Defcon at the end of last year, Ethereum 3.0, everything's going towards zero knowledge. I'm a big

believer in in the benefits that technology will bring both to DeFi opportunities and also towards the the institutional uh participants in in crypto. So clearly as you see and you zoom out a tiny little bit and you you see okay what is spectra you know two types of different um upgrades consensus level application level then you're seeing that slowly slowly there is a almost like a upgrade level of rolling out or preparing for whatever the zk upgrade is going to be. You can see that with as Eva said right it's optionality in terms of whether you want to participate or not. We're seeing the groundwork being laid for the vertical

trees which will you know compress proofs hopefully and then make things more efficient. Um you know the ability for network to be more resilient at greater speeds with um slashing I think it's now what one instead of one over 32 one over 4496 or something like this. Again, Ethereum is gearing up for faster execution time, more capacity, more load, uh faster throughputs. Um so whenever that happens, hopefully by 2030, we'll be ready. But these are kind of incremental upgrades that we're seeing. It's it's the same with any technology, right? the the best upgrades and the best improvements are the ones

that the underlying end user doesn't feel. But overall over time uh the improvement of the technology uh grows um but the the end user doesn't feel it doesn't impact them significantly like it happened with Shanghai. So I'm already at my final question before I give the mic to the audience and see if you have any question for our industry leaders. So now being here as a legislative um deputy, are there any specific policy changes when it comes to crypto you would like to see in Switzerland or in Europe or just some other mechanism the authorities would

follow in the future here? Anything that we say is is automatically going to be put forward for a policy change, right? Considering your uh your your involvement, Parliament works like that. you can hand in a proposal and then government will put it out and say no. But yeah, we can try. That's good to hear. That's good to hear. Um I mean I think uh f continuing focus on you know on education and understanding the the differences. I think there is still some work to be done on understanding how liquid staking and restaking fits into the whole overall ecosystem. I think that it is lacking overall. Um but I you know let's start with the basics. Um I think that it would be good to con

continue to see um you know Switzerland take an active role in in providing guidance around staking. Um I think you know we've seen the advancement of the US we talked about it at the beginning. Europe they have guidelines around casks and vasps but that's on the custody piece right not staking. they're kind of coming up close behind if we're thinking this is a relay race and then we've got the UK like still putting on their trainers sat at sat at home. So I think leading by example in Switzerland and and focusing on these topics uh is key for me because that does impact education across uh across Europe. U focus on staking and restaking and how that fits in and provide some um some

guidance there. And then I think um you know also look into um a clearer understanding of uh of MEV relays and MEV clients um and the importance um of having compliant uh MEV relays. Um so I think that would be another area for the regulators to to consider putting some policy and some guidance around. Yeah, Mev is a is definitely a big topic which I think we need a whole separate session on. Shall we? Yeah. Um I I I do wish that more regulators would adopt the the Swiss approach, right? Having a conversation and really seeing what type of we love that the the the no action letter that the Swiss regulator kept on

issuing um for different projects, especially in the in the early stages of development of the crypto valley. I think if we bring it all the way back to 16 and 17 for those of you who have been around, you remember the no action letters and that by that the regulator was also learning how far technology can go, how far the you know the folks deving it would would be able to push it forward and that I think is a very important instrument and really having this technology innovation versus policy discussion. um as opposed to what we saw in the US in the past four years which was quite unfortunate and now US is trying to catch up on a lot of different aspects. Europe I think it's also um you know member states are are able to um

kind of do more than the European Union is proposing. So there's always this minimum harmonization and then you can potentially do more if you wish to. Um we're also seeing a pretty robust network of VASPs being developed all over the world. So I think there is also in a way collaboration between the different regulators. My wish um if I could and we talked about it when we had our prep session. I really wish regulators would spend um more time understanding technology. There's no way around it. Um you have to roll up your sleeves and really touch it and feel it.

It's the only way that you learn what it is. understand the the intricacies on both maths and physics for some of the protocols uh involved as well as the economic elements of it. How things are distributed, how rewards are allocated, what is MEV, I think again you know whether it's a good thing or a bad thing. Yeah, exactly. Because innovation is always going to push regulation but then you need to understand exactly what is happening. Um and and again I think I say it again and again. I think Switzerland is leading the way. I mean who would have thought that we're talking about um liquid staking and what that may look like right in uh in a in Switzerland. Yeah, very good point from

both of you. So I understand expertise is key. So that's probably also a call for some industry players to join the government even if I know many of you are libertarian and would never do that. But still if we want expertise in the authorities there's probably no way around of some people who have firsthand practice to also join policym. So we have a couple of minutes left if there are any questions from the audience. Yes please. I will quickly repeat so the people

online also here so I understand stand the question is from the pector upgrade what in figment's view are the the differentiating factor and what is point around consolidation um right I yeah okay I I think so when you're talking about kind of validator consolidation and the increase of the the minimum we're driven by our customers and what what approach that they want to take. We've seen a variety right we've some seen some um clients want to uh increase the minimum. We've seen some not want to do anything and keep staking 32 ETH or increments of 32 ETH but we are very much driven um by

what our customers are requesting. So we work with everyone from a hedge fund, asset manager, custodian, exchange all the way through to a large bank. And so sometimes the um uh the needs and the requirements change depending on the client type. But for from us, we've seen um we've seen some clients want to to leave everything as is and others to make changes. If I had to pick what we've seen more of, I would see in terms of the, you know, the max effective balance and the the uh the minimum amount to be staked, we've seen more clients not want to change anything uh at the moment.

Please don't fall. Someone's been on the beers already. So, I think there was another question. Yes, please. Um, so we are not as lucky as in Switzerland where we have legislator sitting in a panel with you guys. How do you approach regulators and policy makers to help them understand this new weird topic that is scary and bad in their eyes and it's also extremely complex to understand? How can you like break down the complexity and bring it across and bring by pitching the Bitcoin reserve?

How do you approach and do regulators? Right. I mean, we work very closely with the regulators. So, we uh worked with some of our partners here in Switzerland to um provide guidance to FINMA on staking, but we've worked with the SEC, the UK FCA, VAR in um in the Middle East with mass in Singapore. And I think um the main tactic that we've taken is kind of going in and having a closed door session where they can ask any question that they want to without feeling like a question uh shows them in a bad light, shall we say? Just an open discussion where they feel free to ask um ask questions um and not that they have to just sit and listen and say nothing

because they don't want to appear like they don't understand a particular topic. So having that open forum uh but in a closed way has been key. We also look at putting out uh research papers as well. So if it's something that's written uh in a form that the regulators might uh might appeal to the regulators. So we put one out that looked at you know what's the regulatory treatment of staking in in Europe and the UK. But it was written um from a legal perspective. It was written with a lawyer in mind. So for some people it was probably the you know the most boring paper they would ever read but for regulators they were like this is how I like to see materials set out. So I think it's kind of meeting

the regulators where where they want you to be is is important. And I think you you highlighted as well with the the the policy groups like the Swiss blockchain federation CCI CCI does some amazing work. Digital digital economy initiative um the proof ofstake alliance which is now part of CCI. All of these groups I think do do a great job. Yeah definitely. And again, I mean, I was obviously joking about the the Bitcoin reserve, but at the same time, I also see this as an opportunity. Um, so especially for for the offshore uh jurisdictions, right? The the developing countries, I feel, and I think El Salvador is leading the way there. But it's it's it's a great initiative also for countries to start maybe hedging

some of the risk away from traditional markets into cryptocurrencies. And the, you know, the most obvious one is Bitcoin. And then if you are a government most probably it's not necessarily a bad idea to own your own bitcoin. So that means that you would need to have an infrastructure right you need to have custody and all the adjacent um things that that that come that way and usually through that you start thinking okay if we need to get it in right what is what is the process so most probably we need to have some type of um clarity around that and then if we get it in as a government does that at the same time do we then allow it how do we allow it is it a public tender uh do

we allow people to keep it not spend it invest in it? Should it be part of um um some types of you know savings scheme? So again, but I see this as as a net positive. I believe that more and more countries are going to um follow lead now that US hopefully is on board, right? Europe is on board. Things are looking pretty interesting in in in Asia as well. So yeah, hopefully hopefully there'll be more countries that would follow the Swiss path. We hope so. Definitely. So unfortunately we're already out of time. Thank you so much for participating in the panel and thank you great audience for your questions.

Thanks. Thank you. Thank you very much.