Future of Finance


Is the digital asset custody industry ready to grow up?

[MAY 2022]

The transcript of the webinar of June 9 2022 entitled Is the digital asset custody industry ready to grow up?


Dominic Hobson  03:31 0.25 Introduction

Hello, everybody. I’m Dominic Hobson, co-founder of Future of Finance. Welcome to our webinar, `Is the digital asset custody industry ready to grow up?’ When we last visited the topic of digital asset custody almost exactly a year ago, blockchain-based assets were still discussed mainly in terms of who exactly would be disintermediated. Our then somewhat unfashionable theory was that the humble business of custody could probably do more to ignite the security token markets in particular than any other single form of service provision. Now, 12 months on, security tokens have still not taken off. Indeed, in terms of volume, in terms of value, NFTs and DeFi notwithstanding, digital assets as a whole are basically still cryptocurrencies and Bitcoin and Ether in particular. But I think a lot more people, including Importantly the venture capitalists who are now putting money into blockchain-based custody services seem to agree with our supposition that safe custody is a crucial ingredient in the expansion of the industry beyond cryptocurrencies. Why? Most obviously because cryptocurrencies are still being stolen regularly, and on a large scale, which casts a blight not just on cryptocurrencies, but on the prospects of tokenisation as a whole. Secondly, it is still not easy to move cryptocurrencies from one blockchain protocol to another. Again, that’s something which the traditional infrastructure in the securities industry, of custodian banks and central securities depositories, existed to facilitate, if not always with complete success, particularly across national borders, but it is what it existed to do. Thirdly, and above all, there is now a near-universal recognition that the future of the token industry lies with institutional money and institutional money will not come at scale without adequate custody arrangements. So today we’re going to talk about the insecurity of cryptocurrencies, their impact on the prospects for tokenization, why so much venture capital money is going into digital asset custody now, what traditional custody service providers are doing and should do about it, and how new the new value-added custody services actually are. To help us do that, we’re joined by Massimo Butti, the product and business development director at SDX, the digital exchange and CSD owned by the Swiss Stock Exchange. Johan Bornman is the product lead for Metamask Institutional, the part of Consensys that provides an institutional quality digital wallet, which can also free its users to interact with DeFi apps, Swen Werner is head of digital custody and payments at State Street Digital, the division of the global custodian bank that covers cryptocurrencies, Central Bank Digital Currencies (CBDCs) and tokenisation. Dale Quartz is Chief Technology Officer at Polysign, builders of the Standard Custody and Trust Company, an institutional grade custody escrow and settlement platform for digital assets. Neil Fillary is co-founder at Shuttle Holdings, a private investment office focused on digital assets, and also co-founder of Digital Asset Custody Services, an institutional digital asset custodian. As always, in addition to our panelists, we have you our audience, we want your questions, we want your comments, so please send them and keep sending them throughout this webinar using the Q&A functionality at the bottom of the Zoom screen. I will not be saving up your questions and comments to the end, but I’m going to address them as we go along so you can be, if you choose to be, an integral part of this discussion right from the start. And I think all six of us would be very disappointed if you don’t take that opportunity. 

Dominic Hobson 3.50 What can be done about crime in the cryptocurrency and DeFi industries?

I’d like to kick our discussion off by asking Johan the obvious question, Scams, thefts, hacks – they’ve been a recurrent feature of the cryptocurrency market since hackers made off with $500 billion of bitcoins from Mt. Gox back in 2014. Chainalysis tells us that thieves stole $3.2 billion of cryptocurrency last year and already stolen another $1.3 billion this year. Most of it, interestingly, no longer from the original villains, the exchanges, but from DeFi protocols. 97 per cent,  says Chainalysis, of thefts have come from DeFi  protocols in the first quarter of this year, against just 30 per cent of them back in 2020. Since Mt. Gox, there have been no less than 527 cryptocurrency thefts – that’s an average of 66 a year. And the problem seems to be getting worse. Not better. So my question to you Johan is what’s going on, in DeFi in particular? Is it still the loss of private keys? Is it the vulnerability of code? Is it the breakdown of security processes inside these firms? Is it as it used to be in the exchanges, insider jobs? Is it price manipulation? The bridges seem to have emerged as a vulnerability of late. So what’s going on? And how can it be fixed? After all, auditing the code doesn’t seem to have worked. Should we be thinking about better customer due diligence? Should in fact the industry be embracing KYC AML CFT, and sanction screening checks to make sure that bad actors don’t get involved with these protocols? It doesn’t work very well in the traditional industry, but might help a bit here. So is there a particular problem with DeFi? The code is open source, obviously, which means any anybody who knows what they’re doing, can fiddle about with it. And the police don’t seem to be very good at catching criminals. So, Johan, what’s going on in DeFi and what can we .. what can we do about it?

Johann Bornman  08:46 5.40 

Thank you, Dominic, thank you to all. It’s a pleasure to be on the panel. I think you’ve referenced some astounding numbers. And I think they can be very intimidating, sort of running through the hacks of the last several years. I think it’s very important to note that obviously hacks are very serious. You know, you have real money at stake. You have real lives at stake. And as we found in the most recent incidents, obviously, sadly, there were all sorts of loss of life tied to loss of funds. And so as an industry as part of building this space, we have to take this very seriously, we have to think very deeply about how do we build the products, the infrastructure, the tools, the services to protect users. The important thing to note though, is that we are very much in a Cambrian explosion. And therefore, we have innovation cycles that are second to none. And in that innovation cycle, you’re going to see experimentation being run, experimentations failing. And then often with that, as you correctly pointed out, egregious behavior. And you tend to find this in every single innovation cycle, that despite the changing technology, human behaviour does not change. I am deeply optimistic though, despite all of that, that you are seeing a range of tools, a range of products, a range of services is being built to cater to these problems. And I think it starts with a giant topic that we’re discussing today, which is, how can institutions and how can users have the safe storage of their private keys? How’s key management done, how’s the signing happen? How can we manage risks around signing transactions? Now on top of that, you’re seeing a range of new capabilities being built. Therefore, how do we decode transaction parameters so that users know exactly what are they interacting with? How can we have additional services around ensuring that we notify the user that they’re actually interacting with the correct smart contract and not a nefarious smart contract. And then lastly, and very importantly, making sure that we have, you know, the infrastructure in place that users can bridge safely, as you pointed out previously. Now, again, we are very, very, very early in this ecosystem. DeFi is incredibly nascent, especially when compared to the traditional financial system. And so what we already have is the future is already here. As the famous saying goes, it’s not evenly distributed. And so what you will see developing really quickly, over the next six to 12 months, is sort of the building out of the services to help protect users, to help keep them safe. And so I am deeply, deeply, deeply optimistic that through decoded transaction parameters, through AML and KYC tools that exist in the market today, through decentralized identity, this industry can solve the problems that you have pointed to. And so maybe I’m the optimistic person on this panel but I very sincerely believe that hacks, vulnerabilities will continue to trend lower, despite the breakneck innovation in this space.

Dominic Hobson  11:49 8.42 Is crime in the cryptocurrency and DeFi industries soluble?

Dale, you’ve heard what Johan said. What occurred to me listening to him was that actually the traditional financial services industry actually has a very rapid development cycle as well. Your ideas come straight out of business school, the next thing you know, they’re being turned into financial instruments sold to German retail banks. So they actually what’s happening in, in in DeFi for example, isn’t that different from what happened in TradFi if you like. So you put finance and computer code together, you get very rapid cycles of, of development. But do you share Johan’s optimism that actually these problems are soluble- partly because the cycles are so rapid?

Dale Quantz  12:29 9.22

Yeah, so I think I do share his optimism in that sense. But I mean, the same problems that traditional finance has, you’re going to have in the DeFi model with cryptocurrencies and blockchains. But there’s no, there’s no silver bullet with this one, it’s really a layered defence. And that’s going to be embracing the traditional models that have definitely worked in terms of knowing KYC and KYT. And building further, really professionalism, I’d say, within the context of the cryptocurrency and crypto exchanges, because I think you’ve seen a lot of technologists, a lot of companies spun up that did not have those deep, traditional roots, that would allow them to know the patterns and practices that were used to help mitigate some of these attacks, that are basically hitting a technology front that are not as common in traditional finance. And so that’s important, but I think the answer is, is as simple as it’s always been, you’ve got to reduce the human touch points, eliminate as much of the human element as possible and create as immutable a set of structures that are supporting your assets, and protecting your assets as you possibly can. Every time something changes, there is a risk and opportunity for someone to come in and actually insert themselves and essentially, hunker down within the actual technology stacks in order to wait for the opportunity to steal assets.

Dominic Hobson  13:51 10.45 Do institutional investors active in cryptocurrency and DeFi markets treat their custodians as insurance policies that will cover their losses?

Swen, like Dale you are aiming to service institutional money in in the first place. I alluded to some of the fixes which had been tried already. One is to audit the code of these, these protocols. Clearly that isn’t terribly effective. We’ve also seen insurance be introduced. And I’ve often thought traditional custody is like an insurance policy. Basically, institutional investors are saying, well, I’ll appoint State Street Bank or Bank of New York Mellon, and if my assets go missing, they will make me whole. It’s like an insurance policy, possibly one for which they’re not really paying the right premium, but it is an insurance policy. What is the … how sophisticated is the discussion you’re now having with institutional investors about liability for loss and how complicated do those discussions get? Johan mentioned, you know, keeping private keys secure. That’s not a straightforward task. Dale mentioned you’re trying to minimise those human touch points. That’s hard as well.

Swen Werner  14:53 11.47

Yeah, maybe. It’s just I think that’s an excellent question. It reminds me in a way of many discussions in particular here in Europe we had around AIFMD and the liability regime. So probably always is a question, `What do we mean by insurance policy?’ As a custodian I don’t think of myself as an insurance policy. What I do think of myself is as a safe and secure place to store these assets. So obviously, we’ve put a lot of procedures in place to ensure that and the loss of assets that is being considered obviously, something that hopefully is a very remote chance of happening. Now, as you said, in the crypto industry, in particular, has adopted the idea of insuring the loss of assets, as an important means for that. But I would say this, this idea that you need to have insurance for crypto custody, for me is a deeply flawed idea. As well as the idea that – I hear it quite a bit more, I would say, from providers of …  FinTech providers, than necessarily from investors – which is that what you can insure is, so far, mostly, is cold storage, which is therefore inherently more secure than the alternatives. Both ideas now have some challenges and arguments from investors as well, that a driver for the need of insurance, at least in the way the industry has been operating so far, comes from the fact that these are typically, you know, smaller start-ups. They don’t have the financial muscles, muscle and experience to deal with these kinds of issues. So I would be surprised, if you want to, if the same dynamics will apply if institutional banks offer these kind of services. And the same way that also I think, in terms of what is an inherently better model for private key management though I’m not sure these terms actually have any real meaning. I think that also has to be debated. What I find quite interesting, if you want to see [INAUDIBLE] these issues that we have been grappling with as a traditional securities industry, will come back for digital assets. So if you look, for instance, at the proposal from the EU Commission, around the DLT pilot regime, that makes it very clear that in future a DLT, market infrastructure in Europe offering tokenisation of securities, equities, fixed income, what have you, it would be subject to an AIFMD-like liability regime, right, a strict liability for the loss of assets. So you can see it’s a complete shift, if you want, from how you think about the traditional industry, where a CSD, in that sense, has no liability, per se. Instead, you regulate the function of that industry. So I think that is an interesting aspect in terms of how the  introduction of DLT to either financial instruments, or in the case of crypto, changes how we think about loss of assets and what they [INAUDIBLE] but then saying everyone offering such services becomes an insurance policy, I think, would be, from my perspective, a step too far.

Dominic Hobson  15.04 Custodying digital assets is not just a case of monitoring entries in an electronic register but custody of the asset itself – so it is plausible that custodians could refuse to custody certain types of asset because they do not wish to assume the liability. How hard is that to do with clients, in practice?

Well, I’m interested, you brought up the question of AIFMD, because that liability was extremely contentious with the custodian banks at the time, not least because a lot of the assets were not actually held by the custodian banks but were being rehypothecated up the wazoo by prime brokerage houses. You don’t have that, that problem here, do you? You will have a strict liability, but you will at least control the assets, whatever we mean by that. And we mean by that a lot of information about it, not only an entry in a register, but actually the asset itself – lines of code.

Swen Werner  18:41

Yeah, well, that is the thing: do you actually [know wat we mean]? Actually this was an interesting debate that took place recently in the context of the crypto-sprint that the FCA has undertaken, when you when you think about the, if you want, in crypto, the absence of the product regulation. So who is creating that code? Who is ensuring that if you have a smart contract for tokenised assets that the smart contract is actually doing what it’s supposed to be doing? Who is liable for this? You have no framework to control this at the moment. And would this be an obligation in future that rests with an issuer? Or would you assume, which hopefully, we’re not getting there, where a custodian has to be a gatekeeper to almost assess the risk inherent in that code before allowing investors to invest in those instruments and consequently, hold them in custody? It’s a change from the traditional world unless you have a clear definition: this is a role of a CSD; this is a role of a custodian; this is what an investor does. With DLT, you have to re-think if that clear delineation of activities still applies and, if so, how it’s being enforced and what the law has to change to actually reinforce this in the future world.

Dale Quantz  19:53

I think I’m going to sort of make a comment afterwards. What I had mentioned before. The role of the custodian is necessarily to actually decide what assets they decide they’re going to custody. And they are looking at, you know, deep sets of information on each of the assets they consider to custody because it does create a risk profile for their customers, right? So having the assets in the case of a custodian having the assets in their custody system and secured, yet subject to a contract that might allow those assets to be lost, that’s, that’s a really important factor in terms of considering when you’re going to custody that sort of assets. So I’m not, I’m not saying we go all the way to the liability side. But any good institutional custodian should be looking at the assets and rejecting those that don’t have a highly decentralised base, that don’t have a set of patterns and practices in terms of their trade profiles that look like they’re normative versus having money laundering and other nefarious activities in there.

Swen Werner  20:49

So [INAUDIBLE] if I may. Obviously, I know about the idea of current policies, etc. But you have to ask the questions. At what stage do you then as a custodian become involved in the portfolio decision of an investor? Because it’s almost saying today, obviously, we look at country risk, market risk, CSD infrastructure risk and make a determination as to  what is a good framework around it, in which market we are comfortable. But here, it will be almost saying, `You go, let’s say the UK, and saying I’m happy to custodise BP shares, but I’m not happy to custodise some other FTSE-100 share because of something in the code behind it. Now, this can be very well done. And maybe that is a consequence of the move towards DLT. But it is a quite a move away from the traditional world where that level of, if you want, security by security decision is something that a custodian typically wouldn’t do.

Dale Quantz  21:47

Yeah, but I think that given the level of transparency that can take place when assets are actually managed and issued and available on public DLTs, you have that additional information and we shouldn’t be ignoring the information in terms of our decision-making process. That’s my point.

Dominic Hobson  22:03 

But then how often, as you look back over your career, have State Street been able to say to an institutional client, `Well, you may be investing in that stuff, but I’m afraid we are not able to keep that on your [INAUDIBLE]’? 

Swen Werner  22:14

There is no doubt that would be a significant point of contention with institutional investors. But I think that that problem isn’t, with all due respect to some of the colleagues, the issue. There’s a different dimension how a regulated financial institution like State Street is looking at this, because you have on the one side CASS regulation but, more importantly, you have asset management regulation, AIFMD, UCITS and what have you. So these kinds of decisions, have a more complex implication from that perspective about who takes the liability for these decisions. And what is the criteria you have to apply to make the decision in the first place. So the crypto industry at the moment is, is not exposed to these requirements, we need to bring them in line to say, in future when the portfolio manager makes a certain decision, what is within their remit versus the custodian? That’s an unresolved issue [INAUDIBLE] from a regulatory perspective.

Dominic Hobson  23:09

Now we’re starting to get some questions come in which I will ask in just a second. Before I do, perhaps, Massimo you would want to contribute to this discussion about the question of liability. After all, at SDX you’ve built yourselves a whole digital CSD to sit alongside your traditional CSD. So you must have been thinking about the liability question as well.

Massimo Butti  23:32

Well, yes, and we also had to strike a balance between the liabilities that we as an FMI provider are willing to take on board and also the liabilities that we share with the custodian. And it was an interesting … there were some interesting conversations in there. I think that we reached a position now where we are happy that the CSD, or the custodian role of our CSD, has struck that balance. A lot of it hinges around non-processes and processes that we have re-engineered and sometimes reapplied from the world of TradFi whereby a lot of these controls and these checks are already embedded, for example, in the format of the membership to the CSD. Questions about auditing code? It becomes very much at the end, very rapidly a contentious conversation. So, I guess that what we are aiming at going forward is to try to really work and to fulfill our role as an FMI – to create as much as possible standards that can be used within walled gardens like ours but also [be] externalised very easily, and then bridged between the two. However, as you pointed out, the bridges seem to have been the weakest link in the recent crisis. So I think that there’ll be a lot of work that we will have to do with members, with technology providers as well, in order to reinforce those bridges, because we see them as key to create more liquidity around assets, but also more opportunities to offer custody services for more diverse set of assets. And also, I think that that will … we’ll aim towards creating new roles, where … For example, risk management at CSD level and at a custody level. We’ll look more at portfolio diversification, but also at exogenous risk, for instance. So, to answer your question, we are … we have reached a happy balance. But it’s not the final state and I don’t think that, as an industry, we will reach that very soon. But one of the key points here is that we have readapted some of the TradFi processes and also some of the thinking behind these assets. Probably for us it has been easy, because we are also working with assets that are fairly traditional, in a sense, in terms of asset classes. But as Swen was saying, you know, we would like to prevent a situation where you are saying as a custodian, a custodian has to say, `Oh, we are taking on this share in tokenised form, but not this one, because we’re not comfortable with the protocol risk, if you want, connected to that tokenised asset of that particular company.’ This is … I think it would be tremendously destructive and if we can work with the industry as an FMI, to solve that and impose, not impose order but impose a set of rules that we can on the whole happily live with. And because again, there is no silver bullet to solve this one. We can’t certainly provide an answer in terms of substantially increasing safety of these assets without compromising the safety of the CSD. So it’s a balance that needs to be reached, with that in mind as well.

Dominic Hobson  28:15

But to cut to the chase on that balance, do you, are you, have you been able in contracts with custodian banks that operate, that have accounts if you like at your CSD, specifying who is liable in different situations? Or is this something you’re going to have to learn with experience? What happens if the CSD fails or falls over or loses the asset?

Massimo Butti  28:36

Well, if the CSD falls over we have assets segregated in two types of omnibus accounts where the banks are required to settle their proprietary position and their clients’ positions. And then underneath the client omnibus accounts, we offer account segregation. So there are individual accounts in … with the beneficial owners of the accounts, information embedded into the wallets, if you want. Beyond that, as I said, is .. I think that this, sort of, builds a layer of security that everyone can understand, is simple, as I said, is very much adapted from TradFi. Certainly, as we expand our ecosystem and we start to look at assets that are perhaps not native in our environment, we will certainly have to go deeper in that and perhaps there will be some levels of technology protection that we need to provide or we will have to ask the custodians to provide.

Dale Quantz  29:57

I agree with Massimo in the sense that segregated accounts – you kindly mentioned it – is one way of actually mitigating the risk of loss, should there be any breach. Coming back to this on the asset mix, I wanted to clarify my statement in saying that what I meant was an asset type, we need to look at it in terms of to determine whether it’s actually securable. In other words, before we were willing to take on as a custodian, that’s a different statement than to say, `Well, based on the patterns and practices, what’s going on and the protocol, we don’t want to take on that asset.’  I’m really talking about, as a custodian, we’re responsible for the security of those assets. So we need to make sure that we have high confidence that we can secure them and allow them to trade the instruments as necessary. But that’s the differentiating line for me not whether or not we think this is an asset we want to custody because of other outside factors. This is just really about security.

Dominic Hobson  30:52 27.47 Are climate-friendly digital assets a contradiction in terms?

Now, Neil, you’ve been very, very patient. Can I throw at you a question from Trevor Hunt here, who says climate friendly digital assets – is this an oxymoron? I assume he’s referring here to the fact that digital assets consume a lot of electricity. It’s slightly off topic here. But I wonder if as an investor, you come across this as a barrier to entry.

Neil Fillary  31:18

I don’t necessarily think so. I think he might he or she might be pointing towards the fact that there are a whole bunch of alternative energy uses for the mining of cryptocurrencies – perhaps that’s the climate orientated question. I don’t know, I’m not sure. But we’ve certainly seen, you know, that come to fruition because of the computational power that’s required to mine some of these assets. Of course, you know, things like hydropower. And some of these other mechanisms are becoming … Blue Power is becoming more and more of an influential energy source to power the mining equipment that’s required these very power-intensive application-specific integrated circuit (ASIC) miners, for example. We have a lot of experience in buying and selling miners from the beginning of time when this when this space came about. 

28.57: How important as a source of competitive advantage are the different technical solutions to the custody of private keys?

Neil Fillary: But just going back to the custody element, I think, just a couple of points. For us, when we first started in this business, you know, back in 2014, was when we really hit the market, one of the key things for us was the core infrastructure layer of custody and digital identity. So having a combined self-sovereign digital identity layer, and a secure custody solution was absolutely paramount to get ready for the institutions and the regulated world. So we spent a lot of time in actually …There’s always this conundrum with business owners and institutions is, you know, this high availability of the asset class versus, you know, how secure you need it to be. We took the stance that if we’re managing money, or we’re advising investors in a regulated environment, you know, we can, you can lose money, markets go up and down, but you can’t lose the private keys, right? You can’t go to an investor and say, `You know, holy crap, we’ve just lost the private keys of your assets.’ So we took a very strong view that the core infrastructure to digital assets had to come from a custody solution that didn’t have this, as was mentioned earlier on the panel, you know, eliminate single points of failure. You know, we want the highest-grade hardware to be able to back up our back end, right. So when we’re, when our assets are in flight, that’s one thing. And that’s where I think typically the insurance comes in place when assets are in flight, meaning in a hot wallet scenario, right? So we looked at cold storage and actually thought that there are issues around that, of course, because you’re relying on a party to perhaps go in and unlock a vault in, in Switzerland, when there’s human intervention that might cause a problem. So we went down the route of building an end-to-end trusted computing environment, that was a warm wallet- based solution that arguably was more secure than cold storage. So I think these aspects are very, very important. And that was really sort of dear to our hearts, when we started in this in this business.

Dominic Hobson  33:53

Do you think …  there’s different technical solutions like multi-party computation (MPC), the hot, cold, warm wallets – are these actually a source of competitive advantage to anybody anymore? Or is there kind of a standard that has sort of emerged where you have to meet this minimum requirement? 

Neil Fillary  34:06

Well, we were doing a form of multi-party computation before the term was defined. And we had a trusted computing environment that we built with IBM, which enabled us to have those aspects within our custody solution. And then, you know, it was really designed to be built for the largest banks and custodians in the world. And that was our approach, you know, we need something that we can scale, we need something that can be, you know, hyper secure from sort of military grade HSM right the way down to having the ability to be able to service a high frequency hedge fund. Very, very difficult to do, right, because you need to have the high availability of the asset as well as the secure storage on the private key side. But yeah, that’s it really.

Dominic Hobson  34:42

I’m looking at my external hard drive here wondering if it’s military grade! It doesn’t look it. 

Dale Quantz  34:47

Just to Neil’s point, I think it’s critically important that we have a zero-trust model that is within our custodial organisation. Anybody that has the ability to touch or access keys creates a risk. And so that’s why, for instance, we’ve built a model with just a zero-trust operational model. No one within the organisation has the ability to move assets but the owners themselves. 

Neil Fillary  35:10

I couldn’t agree more. I mean, putting ownership back into the user for self-custody is absolutely paramount. And I wouldn’t trust anyone actually to be touching my private keys to the assets. That’s not because I don’t trust people, at times. It’s just that that single point of failure can be eliminated through technology. And I think that’s important when you build an architecture.

Johann Bornman  35:31

Maybe, Dominic, to your point, you reference the phrase `competitive advantage’. And I think it’s mainly a sort of strong phrasing because you tend to find different users or particular institutions have different needs in terms of storage. I think the panel seems to be in agreement around the single point of failure being a very important point to consider. Let’s say we find working with you know, seven partners globally, offering custody check, qualified custodian, MPC, HSM, all these various flavours that you have referenced, you tend to find the different institutions have different trading strategies, different books, different requirements, different regulatory oversight. That then drives them to a particular type of key management solution. So, again, I think competitive advantage is maybe a strong phrase. I think the market naturally drives different requirements, and therefore you’re seeing the adoption and you’re seeing the innovation around different key storage solutions.

Dominic Hobson  36:23 33.18 Why are retail investors neglectful of custody – is it too difficult for them to access an effective custody service? 

While I have your attention, Johan, what about retail investors? They seem to have been very comfortable with some pretty cockamamie custody solutions. They don’t seem to have paid that much attention to it, which has made them vulnerable to being … losing their assets. Is the reason for that that it’s simply too difficult for them to purchase a safe custody solution? Does there need to be easier on-ramps for retail investors, in particular in cryptocurrencies, and beyond that eventually in security tokens as well?

Johann Bornman  36:55

Yeah, I think it depends on how we how are we defining what custody is in this instance. You know, if we’re talking about obviously traditional custody services in terms of an entity signing on your behalf or storing those keys, I might take your point, although we have seen innovation, particularly in APAC markets around HSM providers, providing infrastructure to solve for retail users. Your point, though, I think comes back to some of the earlier points referenced by some of the other panelists around this idea that we’re talking about the retail market, you’re definitely seeing a more active user stepping more actively into crypto generally and more stepping actively into DeFi. And therefore naturally interacting with a range of different tokens, DeFi protocols, bridges, etc. And that by its very nature drives a type of need for key storage, key management and signing yet again. And so what you’ve seen is, you know, custody tech players play a quite, I think, profound role in terms of serving institutional … excuse me, consumer needs. And you’ve seen recently, the adoption of MPC technology to roll out for a variety of different large institutions that cater to consumers, as well as MPC playing a very big role in providing infrastructure and the crypto rails sitting behind, you know, a lot of B2C FinTechs today. And so I do think there is a way we can think about custody infrastructure and custody tech serving consumers in a way that can solve for the single points of failure. And there’s also obviously, you know, hardware wallets that I think play a very important role in the consumer space. You know, again, it comes down to cost structures, the costs of paying for a qualified custodian, goes back to previous points around insurance as well. There’s sort of a unit economics that does not make sense for the average consumer. But there are, I think, really important solutions that are being developed in the market today that does give that freedom to the consumer. It also provides him with security around signing and storage.

Dominic Hobson  38:58 35.53 Regulatory compliance is seen in TradFi as a large and unwelcome cost. So is it a mistake to welcome regulation of the cryptocurrency industry?

We have an interesting question from a member of the audience here, who says, `Today’s sequential process compliance costs are killing us in the securities market; they are very manual; there are lots of people; they vary by markets. How can we fix automated [INAUDIBLE] cost and risk processing effectively in a distributed ecosystem for cryptocurrencies and tokenised securities?’ Now, we’ve talked about regulation of the cryptocurrency market as a kind of supposition now that it’s going to happen. It’d be good if it was [regulated] because it’s casting this blight on the whole tokenised side of the industry as well in the DeFi side of the industry. And so regulation is kind of good. And there is a convergence of opinion that, outside the extremes, that regulation of crypto would represent an advance. But here we were being asked, actually, `we’ve got lots of regulation in the traditional securities industry, it’s killing us. It’s incredibly expensive. It’s totally ineffective. And actually we need a whole new, a whole new system.’ So I suppose the question is, how quickly can we move to a tokenised future? Massimo, SDX is betting on that happening quite soon. What’s your … what’s your thought process?

Massimo Butti  40:12

Well, for us, our bet is based on the fact that Swiss legislation actually has created the background conditions to create a regulated market in digital assets. So I think that regulation, hopefully will bring more clarity, reduce fragmentation, especially in Europe. And there will certainly be efficiency gains and benefits deriving from that – that’s for sure. However, at the moment, there’s still a lot of disagreement, even at national level, on how this this regulation should be shaped. Just look at, again, deposits and custody. You know, we just mentioned use of private wallets, and, private keys, keeping track of security and asset movements across different, what are regulated, but still fragmented jurisdictions. So it’s a gigantic puzzle to solve. Our bet is that the Swiss regulation can be a good reference point and a good starting point for other legislators. Because I think it’s been very pragmatic and very open to the concept of creating markets, and support services around these markets. So I guess that  – and I don’t want to be facile – but again, it is a matter of try as much as we can, make an effort to strike a balance between the trade-off of having adequate investor protection, and adequate recourse in terms of failures, and a regulation that becomes a burden to investors without really solving any real pragmatic problems. I think that in the case of DLT there’ll be a lot of technical solutions that could easily solve the burden of rather hard and heavy, regulatory measures. Again, I think that our bet is that, as also the regulators become more comfortable with what we are doing, and let’s put it pragmatically, we’re not breaking anything, they will, they will probably become more comfortable and be able to be more also very pragmatic in adapting the regulation to the purpose of what they’re trying to regulate. So, it will require a lot more detailed discussions than in TradFi. And because otherwise, you’re going to end up with some sort of very sweeping pieces of regulation that blanket entire segments of the value chain. So I think that here, we’re going to be, we will need to be a lot more, as market practitioners, a lot more active in counselling in that respect. And I think that the tech providers, the FinTech providers, have a lot to contribute. And, you know, we have, we have a couple of on this panel. They are at the forefront of this and I think that they can really bring technology solutions that can really help us as an FMI operator, but also the regulators and the legislators to really adapt the playground in a way that is accessible and fair for everyone.

Dominic Hobson  44:52 41.48 CB Insights says venture capitalists have invested US$1 billion in digital asset custody providers in 2022. What is the growth they are betting on?  

Now here’s – thanks Massimo- an interesting question, `Who are going to be the winners in cryptocurrency? Traditional institutions, spin-outs or native digital custodians?’ And that question interests me because at Future of Finance, we’ve been trying to track the number of digital custodians out there and the figure … It reminds me of the old fund administration industry, which seemed to fragment and consolidate at the same time, so there’s lots of purchases and deals going on. But also the number seems to be increasing. The last time I saw it, it was more than 100 digital asset custodians of various kinds out there. So it is a very fragmented ecosystem. Now, Neil, CB Insights claim that more than a billion dollars of venture capital money had gone into various forms of digital custody in 2022. What is the growth that those investors are seeing. It’s not in cryptocurrency, is it? Is it in DeFi? Or is it in security tokens? What are they really betting on?


Neil Fillary  45:46

I think for me, there’s a second wave within the security token offering market that’s coming in. When we looked at this, you know, three years ago, it wasn’t so vibrant. We thought it was going to take off a lot faster than it did. But I think it’s back. I think, if we had the ability to look at the real asset market, or the more tangible asset market, and create digital representations of those asset classes, that for me is the sort of Holy Grail. For any investor to get access to other asset classes that you typically wouldn’t be able to be bankable, or in your portfolio, right? So one of our mission statements is to, is to bring more tangible assets, you know, real assets, like real estate, artwork, you know, you name it, anything down to music rights and other asset classes. This is something that I think there are trillions of dollars of assets to unlock and to bring into client portfolios in the wealth and asset management space, right? So that’s a big shift that I’m seeing. I’m seeing more and more, you know, real assets, security-backed assets, asset-backed tokens, coming to market. And to have an infrastructure to be able to support that within a regulated bank account would be actually something that we would you know, welcome in the industry. I think from a venture capital investment standpoint, obviously, we’ve seen the likes of Andreessen Horowitz and such big VC investors ploughing billions into this, creating second and third funds out there. There’s no doubt that VC money is chasing the new sort of blockchain infrastructure projects out there. And, you know, this is a clear trend that we’re seeing, in terms of institutions, who’s going to be the winners and losers. I think that was a touch point. I think that there is – it’s clearly evident – that the large, you know, custodians, the JP Morgans, the Bank of New York Mellons, the State Streets, the Citibanks, we talked to all these very, very early on. There was … I think it’s been a decade of education, and people catching up to what this could really do. But now, I think a lot more, many more institutional based corporates and groups have got their arms around it, and it’s starting to put the investment dollars to work to really, you know, accelerate the growth of blockchain infrastructure and enterprise

Dominic Hobson  47:48 44.43 Why have traditional global custodians been so slow to enter the crypto-currency or digital assets custody business?

Swen, State Street could have gone into this crypto custody, if you like, back in 2018, but decided not to proceed at that point. You are now working with Copper to develop a service. You know, I asked that question, Neil referred to a new wave and there was a wave of crypto custody happening back in 2018. And there’s a second wave of it happening now. What’s your answer to this question from a member of our audience? You’re not allowed to say State Street’s bound to win. But what do you think the ingredients of a successful digital custody offering are going to be if you look forward four or five years?

Swen Werner  48:25

I would say maybe part of the confusion comes from this, `When we say custody what do we mean by this?’ And I think everyone still has a very different idea depending on which part of the ecosystem they belong to. When I think about custody, I think about an institutional platform that is integrated with accounting, risk management tools, which is geared towards the needs of asset managers, and also it deals with the respective licences, from depository licences that you have etc. That bundle does not exist today; that is what we are building and it will also be subject to, you know, one of the highest security measures when it comes to key management. So in this, if you want the issue it is that today we are servicing clients – asset owners, unregulated funds who have crypto investments requiring various kinds of accounting services around that. But taking, if you want, a traditional custody franchise into the regulated asset management industry is something that is subject to regulatory challenges. Take for instance, the UCITS regulation in Europe. A crypto investment is not an eligible investment for these types of investors. You could argue the lack of an institutional grade custody solution may be one consideration for regulators to make that decision so far. That’s something that, if you want that real money, as I mentioned, the industry is still watching at the gates. And so therefore, I think, by providing solutions that work for that part of the financial industry that will unlock additional investors to participate in, therefore, I don’t really see sort of the head-on competition between [us and] FinTechs. We are all having a role to play. And the cooperation that you just mentioned with Copper is one example. I’m just using technology where it’s available. And I don’t feel, you know, [INAUDIBLE] competition. I think we can be very complementary on the journey.

Dominic Hobson  50:22 47.18 Are developments in the DeFi market an opportunity for traditional institutional custodians or something to be wary of?

We’re into our last 15 minutes or so, now. I’d like to perhaps talk now a little bit about value-added services, if you like, which is something which has become very familiar from the traditional custody industry down the years. And value-added means for my purposes, in this particular discussion, what’s going on in DeFi – the staking, the lending, even the prime brokerage services, which are being developed there. What is the attitude – and Dale, perhaps this is a question for you first, but I’d be very interested what Johan has to say about this as well – what is the position of a, if you like, conservative institutional custodian supposed to take towards this – and Massimo, I’m sure, I know you’re developing a cryptocurrency yield service, if you like, as well – so I’d be interested in what you have to say. But, Dale, why don’t you tell us what is the right view for a custodian like you to take towards what is going on in the DeFi market? Is this a big income opportunity for your clients? Or is it something you need to be very wary about?

Dale Quantz  51:21

It’s definitely a big income opportunity. But, like I said, you also have to differentiate between which liquidity pools you’re going to be interested in supporting, and that’s really about securing the assets again. But I’m going to go back to something that Swen had said – sort of, he talked around it as well, there’s a whole set of surround-sound services that go along with a custodian that have to be a part of the service, the front that you’re creating for your customers. And the set of services for that is key. So, for instance, we as an organisation just purchased a very large crypto custodian fund administrator to be able to add those set of services around just the basic custody. And I think that’s what institutions are looking for. They are looking for a solution like that. And I think those folks that have a broader set of services that they can then make available from, you know, within the confines of the traditional regulatory framework are going to be incredibly important. Now staking – staking is one of those, I would say perfect yield opportunities. I think there’s real value and real security in being able to take assets and stake them on the DeFi side, there’s real value in being able to offer your assets up and move it into this decentralised lending model. You’ve just got to be concerned with who the partners are. And that really comes down to a couple things – diversification of the pool, when you’re looking at those assets to be able to embrace and, once again, the patterns that are taking place on the pool and its reputation. And that comes down to what assets were being, you know, we’re interested in servicing. We want to service the broadest possible set of assets. We also need to enter into this realising that we are beholden to our, you know, like, we’re a New York DFS regulated entity, and we’ve got to be able to defend our positions on what assets we decided to take on as a custodian and what services we offer with that. But a great opportunity there. But obviously, with the opportunity comes greater risk. So we’ve got to be more diligent in our processes, our human elements and our security models to be able to support it.

Dominic Hobson  53:15

Johan, opportunity means risk. What what’s your advice to digital custodians looking at DeFi?

Johann Bornman  53:21

Yeah, so normally, we can see – and maybe it’s an obvious statement – that regulation is directly caused and correlated with adoption cycles of web 3.0 and DeFi generally. And so you have seen the likes of custody tech providers being able to step into the market more actively. And we’re definitely seeing a crossing of the chasm of more regulated entities, both institutions, as well as custodians, you know, thinking through how might they get or gain access to this ecosystem. So in a lot of our partners, as well, so just to reference it, again, we work with seven partners globally. These are licensed custodians, qualified custodians. We’ve definitely seen our conversations change as well over the last six months with more regulated entities being very interested in accessing and providing DeFi services to their clients. Now, a lot of the work we do – in terms of integrations for them and working with Metamask Institutional  – is hard. It’s to figure out some of the things that Dale referenced earlier, which is, how might they allow the smart contract calls? How might they allow a list of tokens or Dapp URLs? How can they build curated DeFi experiences for their users, given the risks that they have to take on from a regulation perspective? And we actually work with a partner that is a very heavily regulated institution that has managed to figure how out to offer a very sort of curated experience of DeFi, of giving their users access to DeFi pools, a handful of DeFi protocols in a way that sort of ticks the regulatory boxes. And we’ve helped them sort of think through those problems and on the engineering side as well. The last thing I’ll say is that, you know, risk management around DeFi is something that I think is very important. And we actually built a tool that can do this, can run pre and post compliance on DeFi pools, and then tell an entity, what risks they’re taking in terms of this anonymous counterparty within that decentralised pool. And that’s something we’re seeing getting sort of large usage, adoption from regulated custodians. And so, again, I come back to my first point, and the fact that, you know, we are in a really important innovation cycle, and the tools that will allow regulated entities to move into the space are being built. They exist today. I think the struggles we have, the headwinds we have, is the uncertainty with regards to regulation. And I think that still provides a really strong headwind for more regulated entities to understand how to interact with DeFi generally.

Dominic Hobson  55:46

Now, Massimo, you have or are developing a service to offer clients who hold cryptocurrencies, the ability to pledge them into the Ethereum network to earn a return for authenticating, validating transactions. It’s a relatively conservative approach – you’re not looking to go into the DeFi area. What’s … I mean, conservatism is understandable in your case, but it still marked something of a departure from your original model. What’s drawn you towards doing that?

Massimo Butti  56:18

Well, it’s, I think, there are two things in play here. One is that we see it as more than a departure – as an evolution of our initial business model. And that is, I think, based on our assessment that the opportunity – as we just heard – is quite substantial. Also, there is, as Johan pointed out, there is a whole ecosystem surrounding that. A regulated CSD, a centralised FMI, has a role to play to curate and orchestrate the relationships, as he said, but also to really be the connecting tissue between the different elements of the value chain. So in order to do that, I think that you have to go out there and try and start doing it and really start to bring people over with you on this. And one of the things we are doing is really, with our clients, is redefine also what really the role of the of the custodian is because, again, there’s so many. There’s not only the custody and the asset servicing but there are a lot more, especially if you’re bridging into or if you’re planning to bridge into DeFi. There are a lot more roles that could emerge – new roles that could emerge in the future. They touched upon the liquidity pools out there. How do you make these assets available in these liquidity pools in a secure way? But also how do you give back to your clients data on the stability of these pools? So there is a massive opportunity, for example, to work with, with analytics [firms] to help to bring out a new generation,  a completely new generation of analytics that can help accessing these liquidity pools. And I think that the … It feels like the CSD is the right place where these services can start to be made available, and the right place for different users to come and consume these services. So what guides us is this belief that this is going to become a much larger, much larger market, more diverse, where as Swen said, there is a lot of space even for new entrants that we don’t even know yet because we don’t know what the problems will be. But there is at the moment space and we see more cooperation than competition in solving those problems. And we think that by providing some of the elements that we are best at doing we can help. And again, it’s all about adapting our experience and reinterpreting new products based on the old knowledge that we have, and transforming that into new knowledge. But we see the size of the opportunity. We don’t see it as a departure but more as an evolution.

Dominic Hobson  1:00:06

Swen, we’re into our last four minutes – three and a half minutes left now – and there’s a couple of questions I’d like to address from the audience. But before I do perhaps some thoughts from, Swen, about … It’s not as if the traditional custodian banks and traditional CSDs have really leapt at this opportunity, either for cryptocurrency or for DeFi, or indeed for security tokens. When I look at that list of 100-odd digital custodians there are 15 banks in it, and some of them are private banks. So the traditional industry has been quite cautious about this opportunity. What’s the view at State Street about DeFi, bearing in mind that 97% of the defalcations in the first quarter of this year were DeFi protocols thefts.

Swen Werner  1:00:49

I mean, they are intrigued by this, and I think there’s a lot to learn how you could use some of the more technical aspects for things like credit management, etc. But the reality is, and I sometimes think like I’m a broken record, that regulation is a concern, because we are a globally systemically important bank. Which as a bank means that regulatory obligations are imposed on organisations like State Street that are absent from more FinTech-type organisations. And so, if you look, at the moment, some of the core aspects to DeFi, everyone can play, it’s self-service. There’s no product regulation, there’s no suitability criteria for these products. That is somewhat at odds with traditional regulation in terms of requiring a bank to determine, you know, whether that particular product is suitable for a certain type of investor. So something has to give. There are ongoing debates also with regulators about what has to change, or what are the circumstances under which you would allow banks to participate. But right now DeFi is something that, in the way it’s being structured, would make it very difficult for a highly regulated bank to actively participate in. But we’re looking to find ways to do that. And, for instance, staking is one of the areas that maybe is more confined, and there are probably easier ways to provide services that are within our framework than maybe more complex structures.

Neil Fillary  1:02:18

I can just add a point to Swen’s comments. I think, historically, if we look  … I’d like to see technology driving some of the regulatory decisions. Now if the technology is not understood at its core by the regulators themselves, then it’s very difficult to get that implemented. I think there’s been a good job [done] in recent years to really get [regulators] up to speed and educate [themselves] around distributed ledger technology, staking as a service – you know, core blockchain implementations, the protocol layers, you know, all these inter-operability layers. People are getting more and more of an understanding about how this space is operating. I think that’s helped. I think if you go back five years, it was pretty minimal, actually, the understanding about how this space could actually affect the traditional custodian world. So I think that’s improving all the time. And I think it’s clear that the big institutions are spending a lot of money by bringing in teams of blockchain experts or cryptographers, or others, to bring into their mix, to add to their existing pool of talent, to actually, you know, help this move along. And I think that’s a good sign.

Dominic Hobson  1:03:18 1.00:15 Is custody now the logical route into digital assets for ambitious and talented capital markets professionals?

Our time is up but I’d like to deal with a couple of questions from the audience. One is from [ANONYMISED]. He says, `Hello, my question is in general. I am a capital  markets professional from India. There aren’t many discussions happening here for CBDC or tokenised securities. I see great potential for instant settlement, the blockchain tech.’ You’re absolutely right about that [ANONYMISED]. We were talking about custody today. We have talked about CBDCs on five or six previous webinars, which you can find on our website. We also talked about tokenisation of securities, probably four or five times. All that information is on our site. Here today our topic was really securities. What I like about [ANONYMISED] is he said, `What advice can you give us for someone who wants to switch his career towards digital assets?’ So is the answer to that, Dale, to get into custody?

Dale Quantz  1:04:01

That’s a really good question. It depends on your background. But I’d say there’s a huge demand – or there should be – in the FinTechs that really don’t – they have a dearth of TradFi experience. They really need to pull in people who have TradFi experience and you can bring them up the curve quickly on methods and mechanisms within the digital assets space. It will help augment their career. So I think there’s huge demand for people from TradFi at this point.

Dominic Hobson  1:04:26 1.01.23

[ANONYMISED] has corrected me to say that he meant it’s not being discussed in India rather than it’s not being discussed generally. Forgive me [ANONYMISED] for misunderstanding your question. [ANONYMISED] asks what impact or changes the tokenised assets have on the current settlement infrastructures involving fiat [currency]. Can you touch on this? Again, we’ve talked about custody rather than settlement here. And I’m not sure what we can add with only 30 seconds remaining. But, Dale, what would your be your advice be to [ANONYMISED]?

Dale Quantz  1:05:05

I say the reality is now with DLTs, and the mechanisms that we have with digital assets. The realities of how we handle and manage fiat [currency] will be the same. And so we’ll be able to actually move quickly to instant settlement networks. I think we’re seeing that already. I think one of the disadvantages that the current markets have is a bunch of private networks that aren’t linked together. And so I look for more and more mechanisms to be able to link all those private markets together to build a broad settlement ecosystem across all different sorts of asset classes – especially, I would say – and this was referred to earlier – more of the traditional illiquid ones. Ones [to which investors] have not had access to more broadly, such as private equities and other ones as well as real estate. Look for major changes there, because even T+2 [settlement] is painful, right? But let’s be clear, real estate is, you know, T+32 or T+45. 

Dominic Hobson  1:05:53 1.02.49 Which of the global custodian banks, the exchanges, the technology vendors and the digital custody start-ups is going to “win” the race to dominate digital asset custody in the long term?

Yes, and we do you see DTCC, a CSD, moving into the privately managed asset space to build an infrastructure for that. So we will be touching upon that in future webinars. But I don’t want to let you all go before you have at least one last say, and I’d like to go back to that question about who’s going to be the winners, but I’m not sure we have really answered it here. The global custodian banks? The start-ups? The suppliers of technology? Who do we think is going to win? I think we agrees that custody is going to be a very important component of the growth of the tokenised security markets in particular- we were talking about that just a second ago. What’s your view, if you look five to 10 years ahead? Can we expect this market to consolidate? Should we expect global custodians to actually buy some of the better start-ups? What do you think it’s going to look like? Is it going to be an oligopoly like global custody today, where  80 per cent of the assets are with four large banks? Or is it going to be completely different from that? I can see Dale disagreeing with that, but I’ll let you speak in a minute. Swen, what do you think the market is going to look like? Once it’s gone through this chaotic phase of growth and fragmentation and consolidation?

Swen Werner  1:07:15

Yeah, I mean, these obviously would depend on like, who has the right answer to make sure that the client base can conduct business. I think a lot more depends on the ultimate structure. So if you just take the one extreme view, all that’s really going to happen is traditional market infrastructures deploy on DLT and nothing really changes. That, you know, I think may lead to one outcome. But if you want the traditional industry stays the way it is. Or you move to the other extreme, where you would have fully permissionless networks – market infrastructure, in that sense, don’t really exist, and then everything’s up for grabs. And you change the definition of what a custodian does, which is more like a network orchestration service, And [INAUDIBLE] audits you mentioned already for smart contracts. And so with that comes the question of, is there still a banking service that is subject to Basel III rules and all these kind of things or not? And all of that is, I think, up in the air. I think for us, it’s very important that we provide maximum flexibility. I want to have optionality. If FinTech provides a good solution, we’ll make it available to our clients. There’s no more of this thinking that it has to be built in-house in order to be successful. I think that will drive [the process of change] and that’s when I’m really thinking about this in a very complementary sense, as opposed to, you know, one versus the other.

Dominic Hobson  1:08:32

Massimo, a year ago, our discussion was all about, you know, CSDs would be disintermediated. And here we are 12 months later, you not only have a traditional CSD, but you’ve built a whole digital CSD, as you alluded to earlier, looking, you know, for a transition from traditional securities markets to security token markets, and you expect to be able to service both parts of that transition. What do you think the CSD industry is going to look like in five or 10 years’ time? Who is going to be the winners – it is going to be you and DTCC and others who are early into this market? Or is it going to be something completely new and different?

Massimo Butti  1:09:12

I think that is going to be something new and I think that the winners will be enablers. The enablers, as I said before, who stand between the different nodes of this network or represent  different nodes. Whether the enablers will be us or DTCC as traditional FMIs or even banks who take that role, that is too soon to say. I wouldn’t speculate on that. But I think that in terms of their function, the winners will be the ones who are enabling, facilitating, creating, orchestrating all these processes. And they will have a different business model, a business model that is made up of smaller, little revenue touch- points all along this line. They will extract rents, smaller rents, but from a lot more specialized and confined roles. For example, a lot of FinTechs don’t want to get regulated; they look at us in a way to access regulated services and provide the bridges into regulated services because they don’t want to become market operators [that are] regulated themselves. So that is one role that we could potentially expand, and so can other exchanges. But again, whether it’s going to be us or others, I don’t know. But I’m fairly sure that the way they’re going to look is, as I said, like someone who is there to enable processes.

Dominic Hobson  1:10:54

Neil, you’re placing bets on what’s going to work here. Is it going to be creating a business and selling it to State Street? Or is it going to be extracting rents from obscure corners of the marketplace like Massimo suggested?

Neil Fillary  1:11:08

No, I think there’s going to be multiple players. It’s very difficult to say about the winners and losers. Of course, for us, if we’re trying to capture the lifecycle management of digital assets end-to-end, right, we will either look to go and buy or we will build ourselves. We took the approach of building ourselves when you couldn’t find anything that met our requirements in the market early on. But if it’s something that we can have interoperability between our other components within the lifecycle management of assets, whether that’s clearance and settlement, whether that’s, you know, digital identity, custody, trading, you know, access to exchange connectivity to be able to get best execution on multiple venues around the world, I mean, we want to have the best solutions for our investors and families and clients, whether those  … Who’s the winners and losers, I don’t know. We want to back infrastructure in the space from an investment standpoint. And we then want to create tools to have the management of the of those assets. So digital asset management is right on the forefront of our minds. So, yeah, winners and losers, difficult to say. Of course, it’s clear that the big institutions are backing this in a big way. But we just build ourselves where we can’t find it, but we’ll buy it or we will invest in and/or utilise or integrate with it with the platform if we don’t have it in our own toolkit.

Dominic Hobson  1:12:23

Dale, a last thought from you. You were disagreeing with me a minute ago when I forecast a full bank oligopoly in digital assets. Why am I wrong?

Dale Quantz  1:12:32

Yeah, so I think those [forecasts] are wrong. So let’s look at the market itself. And just in general, there’s a whole set of assets which are not available for trading in in any reasonable forum. They may be available but they’re in small private markets. Imagine a flood of all of those different asset types. And it’s going to take more than five years, maybe 10 years, maybe 15 years, or even longer, for a majority of those assets to really make it in digital form and to begin trading and to begin the generation of revenue and wealth. And so it’s going to be the enablers that allow those assets to come to a digital form, that can be maintained on them, that can do reporting with those that, you know, in the case where regulation is required, that regulatory oversight is going to be [in place]. So there’s a massive wave of new assets that are going to be available for money and investment. And that’s going to drive an incredible amount of innovation and growth. It’s not clear who the winners are going to be except those people who are able to embrace those new assets as they’re coming on, and service them, are definitely going to have a great revenue stream.

Dominic Hobson  1:13:30

Thanks, Dale. Last word from you, Johan.  The future is very hard to predict. In fact, it’s impossible. But how do you expect this to unfold?

Johann Bornman  1:13:46

Yeah, we have two extremes. The oligopoly status that you referenced earlier, and then the world of web 3.0. And the world of web 3.0 is the birth of a new Internet. The financial system around that is called DeFi. And I suspect the infrastructure required to store and manage keys will look far different. Now, the truth is probably somewhere in between those two. It’s probably a combination of both. And I think I agree with the panellists that enablers are going to be very important in [building] bridges. And that’s certainly what we think very deeply about. And that’s why we enable bridging into web 3.0. And with that, I think, probably, you know, we take a very conservative ASIC approach. And I agree with Dale’s statement that I think the infrastructure that will allow the enablement of this eco-system to grow, of digital currency as you grow, all the players are going to sort of win in the future.

Dominic Hobson  1:14:36

Well, that’s a good thought to end on. I think something that’s common to all five of you is this is all about the infrastructure which enables these things to happen. We’ve run over so we must stop there. I’d like to thank our panelists. Masimo Butti from SDX; Johan Bornman from Metamask Institutional; Swen Werner from State Street Digital; Dale Quartz from Polysign; and Neil Fillary from Shuttle Holdings and Digital Asset Custody Services. I’d also like to thank you, the audience for your questions and your comments. Here at Future of Finance, our next webinar is on Wednesday, 22nd of June. In it we’re going to be asking, `Has the drive to reform cross border payments lost its mojo?’ I hope lots of you will be able to join us then.’

If you would like more information or we can assist in any way or you would like to join future discussions please email Wendy Gallagher on wendy.gallagher@futureoffinance.biz