Who Controls the Keys? DeFi, Custody, and Institutional Access

Transcript

you know, and we can proceed and start with the panel. All right. Thank you. Uh my name is Jason Lau. I'm chief innovation officer at OKX. Um at OKX, we're a crypto platform. We provide Our mission is to provide access to crypto and specifically crypto markets. We do that uh via our exchange where we service uh over 120 million users, institutional and retail users uh across like I said, the exchange which is a centralized exchange product. We have our wallet, which is a self-custodial product. Uh we have which I'm I'm excited to be here to talk a little bit about. That's our Layer 2.

Uh as well as new things like our agentic wallet uh that we just launched uh last week. Um so, yeah, broadly we're here to make sure users of all kinds have access to crypto easily. Hey guys, I'm Reed Simon. I uh head digital assets for Figure. Uh Figure started in 2018. We're probably most well known for HELOCs. Uh we've tokenized natively about 23 billion. Uh we do about a billion a month of of new loans. But, I think what sets separates us from some of the other players in RWA um is we really are a full stack. So, we actually are the originator. We have the infrastructure for tokenization and trading. Uh we have securitization vehicles. Uh it's really a turnkey

solution for um for asset asset issuance, trading, and uh distribution through DeFi. Great. And uh good to be on the panel. So, uh John Halloran from Fireblocks. Uh lead our business solutions team. So, for those not familiar with Fireblocks, we're probably the largest provider of infrastructure in digital assets. So, over 3,000 institutional customers processing in the region of $6 trillion on a yearly basis. So, uh relatively significant. Uh if you're not familiar, uh the crypto uh that you might buy on Revolut is basically built on Fireblocks infrastructure at the same way if you're a large institution. If you're accessing crypto BNY Mellon, that's the same infrastructure. So, at a very basic level, we enable companies to custody assets, issue them, and then

also transfer them. Great. So, um one continuous like sentence that uh I mean, I I started in the space as a Bitcoin maxi and then Ethereum and all over the place and you know, the sentence that is regarding is not your keys, not your money right? Uh but institutions that are entering the space are always relying on parties like, for example, Fireblocks or parties that can help them to kind of you know, um manage and and trade and treat these digital assets.

And so, um TradFi and DeFi is always, you know, a kind of um it it's many years that we hear like institutions are entering DeFi, but then, you know, it's like it's probably this year. So, my question for you is the institutional DeFi is a paradox in the sense that institutions will never self-custody their assets or is how do you see like this a space evolving on the the management of the keys for for such institutions?

You can start, Jason. Uh sure. So, as I mentioned, we service all types of users across the spectrum from you know, people that want to self-custody and those that don't, right? Uh and we think that act- we we think self-custody is very important, right? But the most important thing is having the choice to do so when you want to. And so, institutions in particular are obviously very particular about how they manage their assets. They as you alluded to, they have compliance obligations, they have regulatory compliance regulatory obligations, they have risk committees, they have a whole slew of processes that need to work for them.

And you know, even for institutions, that's not one-size-fits-all, right? There are smaller institutions where yeah, of course, they're probably already using Fireblocks. They're already custodying assets with us. Uh they're maybe using uh a self-custodial wallet themselves and and and uh dabbling with DeFi. So, I think there's no one-size-fits-all number one. And then number two, for us, we're building products that that hit and help each of those segments uh perform what they need to. Uh if you're highly regulated, that is as you're implying, which is the institutions that have yet to come into DeFi, I'd argue that um they're doing things where uh you know, they're working with trusted counterparties, uh you know, regulated counterparties like us, where they may put assets on on our platform and then access DeFi via our our platform. So, um

I think there's there's different ways to get to the end goal while preserving the choice that's so important for for us here. Yeah, so I think um I think maybe the better question is, you know, are institutions going to avail themselves of composability? Because there's a a little bit of a friction point there, right? Which is can a custodian make something composable or or use it in DeFi? Maybe they're, you know, they'll custody your LP token um or they'll use extensions from from Fireblocks to perform some of those activities. Um but I think we've taken the approach of you have to serve all of your customers how they want to be served. So, that can look like more of a Web2 experience. It looks like that, but it's really an MPC wallet on on the

background. It can be an integration um with Fireblocks where they want to hold an asset. Um but also, there are institutions and public companies in in regulated spaces who are using self-custody. Um and they are doing this themselves um on plenty of the platforms in in DeFi. So, I don't I don't think that there's, you know, one answer or one solution. I think it's you have to serve your customers how they want to be served. Yeah, and and maybe to to maybe like push back on the framing a little bit from our perspective. So, we're not a custodian, we're a self-custody platform. So, our 3,000 customers are basically 3,000 custodians are holding their assets. So, I think that's a pretty good basis that institutions are moving into the space, right? So, not just crypto-native firms, but asset managers, hedge funds hedge funds,

pension funds, these types of institutions. And really kind of the the thesis that we have at Fireblocks is like the wallet is your entrance and your kind of control layer into these types of assets, right? So, if you're not owning the the wallet yourself and you're essentially passing that to a third party, you can't really control governance, you can't control the transaction integrity, you can't uh control policies that are basically implemented. So, we see that kind of wallet infrastructure as the first step and then the way that you access other types of assets, whether it's issuing your own, accessing DeFi based on that stack as well. So, I would say of the 6 trillion that's processed in Fireblocks, maybe only 2% is in DeFi at the moment. So, I think we're very early. But as the market is growing, as protocols are being launched like

Horizon and others, I think we're at the stage now where the flow is coming into the market. It's a very interesting data point. So, uh actually, let me follow up with a question. So, and um the institutions that you are onboarding that, you know, are still mostly using like c like centralized solutions. Um if you can share, you know, some of your lessons learned or what you are seeing because you are probably the perfect lens on the institution side. So, what is the main use cases that they are looking for?

So, I think like from a DeFi perspective, there's probably three major use cases that we're seeing. So, I would say the first one is around on-chain treasury, right? So, you've got a lot of these crypto-native firms who have large amounts of stablecoins. They're looking to get some form of yield. I think the success of money market funds was a good example of, you know, driving that need there. So, like a tokenization use case that has really good product market fit. We're also seeing institutions kind of stepping now into the space of of lending those money market funds and also the stable coins they have on balance sheet. So, I think that would be a number one. Uh number two then is more around kind of the trading firms and pension funds that you would see. So, they're essentially already using DeFi. So, a lot of these large firms you see

Wintermute B2C2 Cumberland Galaxy who've been operating in the space for a while but are they're the real users from an institutional perspective of DeFi that we see at the moment. Uh and then I think the the third one which kind of harks back to the the last panel that we saw is really around on-chain financial so we're seeing a lot of companies essentially stepping in and starting to issue now. And when you we've got, you know, high-quality yielding assets that can now be lent and also borrowed against, we're starting to see a lot more interesting use cases than just stable coins. So, I would say they're kind of the three pieces when we talk about institutional DeFi that we're seeing.

On top of all the, you know, banks, asset managers, issuers that are moving into the space that are going to provide other types of assets there on the institutional side. And are they interested in tokenization? The leaders that you mentioned like banks and Yeah, so like I think a a common misconception or maybe something that isn't very well known about Fireblocks is we work with about 100 banks globally. So, that's everything from G-SIBs like BNY Mellon through to like the likes of Revolut and Nubi Bank and other types of of crypto-native players. And they're essentially focusing on custody as the initial use case to kind of build out the infrastructure but then they're looking at things like what are the assets that we have that make sense to tokenize from a collateral efficiency basis, from posting a margin basis. Uh and really tokenization is the second use case

we're seeing people step into. So, we're seeing stable coins being interesting. We're seeing money market funds and bonds. I think we're going to start to see more things which are maybe more specific to the European context like structured products for example. Uh so, absolutely tokenization is a use case that, you know, a lot of these big firms are interested in. On this perspective, Jason, is um actually very valuable your point of view because you see like everything that is happening on the centralized like space with OKX. And now you are offering like, you know, a decentralized product for like, you know, probably matching the needs that you're not like matching with the OKX centralized infrastructure. So, but you are entering the space where there

are, you know, a lot of networks, a lot of like stable coins, a lot of other solutions. So, I would be curious like, you have already the network of institutions. So, what's the value proposition and, you know, the services that you are offering to distinguish yourself with X-Layer's compared to the other networks? Yeah, um so, if if you think about where we sit, where we have been offering centralized um services to again institutions and retail, one thing uh that we're excited to talk about today is is obviously Aave launching on X-Layer today. That went live a few hours ago. So, that that's very exciting and thank you. Um and that that really ties into, you

know, uh taking what we have, which is users, which is liquidity, uh and then helping these users bridge into and start exploring what DeFi could be in a way that they like you said, like a way that's you got to meet the user where they are today and bridging it in a way where uh they can access all those benefits, but at the same time be uh have have a familiar experience and familiar um understanding of all the risk and and and all that. Having us as that sort of intermediary to start, I think is is where this is a great point to be. Uh we're calling it C-DeFi, not the most original name, but really just again taking uh both both parts together and bring it together. And X-Layer sits

right in the middle of that. We're already doing that with our pay product, but now with uh you know, the launch of Aave borrowing lending, we're going to be integrating that into our broader exchange product. Um so, yeah, it's a very exciting time. And uh what's your approach with the stable coins? That's a that's a very long-winded question. Uh can you be more specific? Uh obviously we support a lot um with that. Do you like um are you enabling like uh some specific like breaching uh between other chains like fasting bridging or some like what's the value proposition of the stablecoin?

Because in my opinion one of the difficulty that the chain are having today is like to attract their the stablecoins because the stablecoins are on Ethereum and you need to give you know the motivation for the users to move the stablecoins there, you know. How do you think to attract the stablecoins in into your chain? So uh I mentioned payments earlier uh on X Layer specifically, I'm only talking about X Layer here. Uh we built our OKX Pay product on top of uh X Layer, you know, taking advantage of the speed and the low fees and that we we've seen tremendous growth on that space already and that's really OKX users making payments to merchants, paying payments to each other. And so that's one way where we're building uh and taking the benefits of X Layer directly into a product that users are

quite familiar with and have experienced. And another thing is obviously, you know, I I think again can't uh want to double click on this is obviously the launch of Aave on X Layer is going to be a big moment whereby there will be yield opportunities, there'll be borrowing opportunities, lending opportunities. Uh and again we're going to be directing and making that accessible to the wider OKX audience. So I think it's it's there's chicken and egg network effects at play here, but um you know, I think those are the core sort of foundational pieces for stablecoins. And then we you talked about RWAs, too. Um you might have seen our announcement with Hamilton Lane, a large uh asset manager, that they're going to be issuing uh hybrid RWA assets onto X Layer, too. Again, to provide for

opportunities for users to get yield and gain access gain access to uh additional types of um uh financial products. Well, for you Red, actually I find very interesting uh what you're building in the space and I see that is one of the most like probably attractive real world asset in the space. And because you are like matching what institutional like are looking for that are like liquidity and this kind of opportunities that were reserved to like institutional investors, investors you are kind of you know making on chain available to everyone and so matching the DeFi users with institutions.

So the first question that I was having is like where do you find more difficulty like to scale on the institution side or to scale on the DeFi user side because you need to explain you know a new bearing asset that is not so you know the standard for the DeFi users. Yeah, so I think you know one of the the things that we're all talking about right is access and there's different types of institutions. You just had a bank here, right? There's smaller smaller community banks and you know for us it's unlocking access for products that some institutions don't even have access to.

So like we're we're mostly well known for for HELOCs and so Democratized Prime is sort of our platform for democratizing access for for HELOCs. So for some institutions in TradFi you would use a warehouse, right? So you would post those loans to Goldman or or Jefferies and they'll advance against that. But if you're a smaller community bank or even a lot of funds that financing opportunity because of the collateral which is really high quality isn't available to you. So it's not just okay, we're unlocking like a private credit fund or we're unlocking you know more QP products for for retail. There's also institutions in in TradFi that just don't have access to

that. So going back to this idea around serving customers the way that they're used to or want to interact. There's plenty of institutions that want a DeFi access to a permissionless token to that lending opportunity. And we see them you know, we see plenty of institutions on Solana doing that for for instance. And then there's plenty of credit funds that are actually on-boarded to our web two version, which again looks like a web two login, but it's MPC. Um So I think it's as we look for other types of asset classes that are somehow locked behind a bank balance sheet or are are locked just from a regulatory perspective for even institutions.

That'll start to trickle down across across the spectrum. Okay, so I want to like slightly switch the topic on how you um what kind of requests actually you receive from institutions when you're like having discussions with them? And you start to explain DeFi because you know, we're seeing for example at our you know, you need to do a lot of educations with institutions. So it's like Um how do you explain or maybe what are your main concerns actually about DeFi?

So maybe you can start Fred. Uh concerns from like a risk perspective? >> Yeah, yeah, from a risk perspective. [clears throat] Yes. >> Well So I actually don't think it I don't think it is risk. Um I think it's liquidity candidly. And certain types of assets, how can you provide liquidity for them if they're not fungible or the amount you wanted to liquidate was not the whole asset, right? It requires a lot of debt capital to sit in a liquidity pool that isn't earning to demonstrate that yes, there's liquidity there. So that's been one of I think the the more challenging pieces with talking with other institutions or or again these products are accessible across that whole spectrum is well, is there liquidity for this, right? And I think

the first iteration of kind of RWAs that came on chain, we're seeing a lot of different people try different things for how can an interval fund get liquidity on chain? Um, and for us, we've kind of taken a step back and said, "Okay, well, the issue is that these individual loans are not fungible. And so, if it's a HELOC and the four of us have one, it may have the all same type credit box, but if I default on mine, it doesn't impact the price of you three." Right? So, going back and because of the scale and the the TVL of these loans, we we introduced a couple weeks ago something called uh Figure Forge. And the the idea here is that we can pull together similar loans

or credit assets that are similar. Um, and with our own kind of liquidity provisioning and access to securitization vehicles, we're actually able to provide liquidity across non-fungible but similar assets. And we'll start doing that with a ton of different other credit products, whether we launch uh consumer auto loans, SMB, trade receivables, inventory finance. So, I think liquidity is really the the biggest question we get from um from institutions and also from users on chain. Yep, fully agree. So, like uh when we're having unfortunately a part of my job is speaking with these risk committees and preparing customers for for going through them. So, we see three main risks. So, I completely back up the

liquidity one. Like, the question can I exit in stress is the one where if you can't answer that question, then a firm is not going to move in the space. So, that's pretty easy to start off with. Um, I think the second one is around kind of the regulatory risk. So, we have certain activities that are permissal permissible under certain regulations, activities permissible under MiCA. Um, but, you know, is it permissible to use the protocol? Is the protocol regulated? This is a question which comes up a lot. So, there's a lot of education required on that particular topic, right? Um, and that's a tough one to go through. Um, and then the one that we're obviously majorly focused on as a cyber company is kind of technology risk, right? And technology risk we see is is kind of two guises, right? So, you've got the

on-chain technology risk. So, are you connecting to a smart contract which is fraudulent? Is it going to drain your funds? So, we basically build uh I guess protocols. Uh for example, we have a DeFi threat module which essentially identifies the smart contract, who else is using it across the Fireblocks customer base. So, that's kind of an easy piece. And then on the on the other technology side, it's kind of the operational risk around how you manage your keys, how you manage your policies, which is obviously uh what you'd be looking for uh your infrastructure provider to do. So, they'd be the three areas: regulatory risk, liquidity risk, uh and obviously the kind of technology risk, which is on-chain and also in your own setup.

Um I mean, not too much to add. I think those are I echo those. I think maybe one one thing might be uh I think go you know, as regulated institutions, um you know, uh obviously institutions are familiar with those types of conversations, you know, which are just discussed. But then there's the potential benefits of uh on-chain and DeFi that actually lower the risk for some of these uh committees, right? We talk about the transparency that's afforded by um on-chain protocols. You know, we we lean into our proof of reserves uh that we've been doing for 3+ years now, allowing, you know, our our regulators and and our uh clients, you know, just just more more comfort around how assets are being

stored and and and uh managed. And then lastly, if they, you know, uh this is not purely DeFi, but you know, for for institutional customers that have either uh mandates or or issues where they don't feel comfortable custodying with us, we work with uh third-party custodians like um Standard Chartered Bank, for example, whereby, you know, you could park your assets with them and still uh trade with us. Like, that's another way to sort of mitigate some of these uh risk concerns. And uh on the let's let's look for a second on the chain perspective because, you know, you have maybe Fireblocks an agnostic approach. You have like connection with provenance because you have to do like a lot of checks on on the users. You are running your X-layer,

obviously. So um institutions are using a lot of like services like Fireblocks or BitGo or custodian or MPC. And they are interested in a liquidity. They are interested in assets. And initially, like a few years ago, everything that was like outside of Ethereum was like, "Nah, I don't know. I need to check, you know?" But now seems that, you know, there are there is more, let's say, flexibility from institutions to go and follow the assets and the liquidity, as you were saying above.

So, it could be interesting to understand your point of view on this like the chain still matters. Like, are they doing the final choose on the chain or they are more they are becoming more agnostic? Maybe, Jason, you can start. You're a a bit biased here, but Well, actually, I think that's an interesting one because because we service so many different users and liquidity does not sit on, you know, one chain or anything like that. It's I I'd argue we're probably one of the earliest that push for a multi-chain approach.

Our wallet was launched with fully multi-chain. Over 100 different networks supported today. We support our competitors' networks. We support, obviously, our own networks. And so, I would say we're we're we're very very much agnostic, but I think for X-layer, I think there's a unique advantage whereby we can build products that are very specific and tailored to our user base. And that's where we hope that unique user experiences and product experiences come about. That's sort of the bias. uh and obviously working with you guys is is a big part of that. Um but you know, I I think back to the the core point, I think is, you know, obviously offering users choice and access means you don't necessarily get to pick where

which chain people prefer to go or where they want to go uh find these opportunities. So, for us, that's that's offering as much as we can um while hoping to create moments and and experiences that users value. Yeah, so I I mean, I think it it it matters what's the the use case, right? So, we don't believe that Provenance is a omni chain is going to solve everything, right? But it's core and fundamental to how we built our business, which operates on Provenance. That said though, you know, we're moving to Ethereum.

Uh we've launched on Solana. Like, we think there is a reason if there's a use case um for uh for if there's a use case for adding composability, um the chain does matter. Uh and there's also a user experience, right? Um certain chains have real quick finality, certain chains are really expensive at certain times. Like, it's whatever the user experience that would demand the asset to be there, then it probably should be there. You are helping like institutions also to choose the chains, right? So, if you need to issue new assets or you'll bring assets or whatever assets for institutions, are you mostly be driven by the liquidity? So, if the liquidity will be

on Solana, you will issue on Solana or you will issue on Ethereum or No, so all of the assets that we issue are tokenized on Provenance. Um and that is just fundamental to the way that we've built our business and having a purpose-built chain for that origination. Um so, we won't move that system to another another platform, but we think that again, wherever there is stablecoin liquidity and there's a user base that views composable um assets have a place there, then we have no problem sort of expanding.

That said though, like we're not going to expand to to 50 chains, right? So I think if there's a demonstrable and there's defensible growth path for liquidity or some new platforms feature that benefits from the assets that we do originate, then we would certainly love to explore it. John. Yeah, and then I guess from our perspective we support 150 chains, but I think the reality is, you know, there's like 10 or 15 which are being used in a mass basis. And that's the That's the John opinion, not the Fireblocks opinion in that sense. So I think there's nuance in the question.

There is It doesn't matter for the issuer or the institution. So the issuer it does matter. So I think being able to be multi-chain from an issuance perspective to meet liquidity is something that does matter. So for our customers that are issuing, we've integrated LayerZero and Chainlink so they have kind of flexibility around that interoperability of issuance. But I think if it's an institution which is kind of seeking capital or looking to lend, they're going to go where the liquidity is. So I think that's the reality. And then I think from a chain basis we're probably going to go to kind of a a split into two different ethos's I would say. So number one is kind of the more generalist base chains, so most of the EVM base chains, Solana, and then we're going to have the more kind of use case specific chains. We're going to have

Tempo, Arc, these types of chains which are focused on specific use cases. And like the goal from us from an infrastructure perspective is to support all of them, right? Cuz our customers need to access depending on the use case, and it's going to multi-faceted. So I think that's kind of the direction of travel that we're seeing. So we are almost there. I will just ask you a last question, one sentence each one. Like What's What needs to happen to unlock, you know, 1 trillion DeFi institutional capital? You know, we are at DeFi Day event, so one sentence to everyone. What What we need to happen like in the next 24 months to

to unlock 1 trillion of of liquidity from institutional capital. You can start Jason. One sentence. I think we're well on our way. I I you know, I I think we're we're doing great things. Yeah, I'm sorry. I think we're progressing nicely, actually. Uh I mean, I think for for credit assets in in particular, I think we had this weird like dynamic around like crypto bros woke up and decided they wanted to be asset managers. And then you had real tradfi asset managers who maybe didn't take the most like crypto native approach in building that product. So, I think really what needs to happen is we need asset managers who are first and foremost building products for crypto,

um not necessarily just taking something that existed in tradfi and making it exist on on on chain, but um a more genuine natively built product. I think I'm a more robust on-chain compliance infrastructure, I think. So, being able to port your identity across different apps, being able to not have to kind of go through the KYC process. Like we are very early uh Fireblocks and Aave on the Aave Arc uh solution, the institutional DeFi solution, which is obviously on a whitelisting basis. The The identity infrastructure has has progressed so much in the last 4 years.

So, I think if we can kind of get a standard which is implemented across the industry where you can issue and go into assets across different protocols, I think that's where we see the TVL starting to jump up quite massively. Okay, thank you everyone. So, we had like three different point of views and uh very excited to see how this institutional world will evolve during next months. Thank you for participating. Thank you. Thank you. Pleasure to meet with you. Thanks for the opportunity. Cheers.

Just all the best.