citiesabc and openbusinesscouncil CEO Dinis Guarda’s recent webinar showed the important role that digital assets, NFTs and DeFi will play in the future of the global economy and exchanges. In conversation with fintech pioneers in Europe and the US, Guarda fuelled debates over cryptocurrency and how to bridge the gap between traditional banking and modern finance. The article below outlines important points made (and conclusions drawn) from the webinar.
Crypto, blockchain, bitcoin, DeFi; these are words heard of by many and understood by few. A top priority for Guarda and the other panellists was to democratise the language surrounding modern (and future) finance, and stress its newfound (and continually increasing) accessibility.
True, crypto holds a diminutive place in the global financial landscape at present – evidence of its relative exclusivity. The digital crypto landscape currently stands at $1.7 trillion: a meagre sum next to the world economy in collected GDPs (excluding assets), which currently stands at $83 trillion; or next to the FX market, worth $7 trillion; or the equities market, worth $85 trillion; or the fixed income market, worth over $100 trillion.
However, Douglas Borthwick, Chief Marketing and Business Development Officer of INX Services, anticipates these figures will “change at a speed which no one is really ready for”. He argues that while only 0.5% of Americans have an electronic wallet at present, there is a chance that, within the next year alone, as many as 60% will. Indeed, the OCC (Office of the Comptroller of the Currency) seems keen to discard ACH and swift wire transfers, and encourage the American citizen to use USDC stablecoins instead. Drawing an analogy, Borthwick reminded his audience that cell phones were shunned by the average citizen in the first ten years of their existence as they were deemed dangerous and unnecessary; current statistics estimate that there are now 1.4 mobile phones for every American citizen. In other words, it is not unprecedented for an innovation to flatline before it surges.
The panellists agreed this surge starts now. Already, blockchain is being adopted outside the realm of pure finance, with retailers and auction houses such as Christie’s employing NFTs (Non-Fungible Tokens) as an alternative form of commercial transaction. While the first wave of cryptocurrency users and advocates were “anarchists” coming out of the 2008 financial crisis disillusioned with the economic establishment – in the words of panellist Guenther Dobrauz, Partner at PwC Zurich – the second wave is sure to be a larger group of people following a more global movement away from traditional finance.
What does blockchain offer which traditional finance does not? The primary selling point is the removal of middlemen – or, as Borthwick puts it, “friction in the marketplace”: “assets, especially on the equity side, are going to move to blockchain for pure AML (anti-money laundering) and KYC (know your client) reasons”. Borthwick resorted to another analogy to further illustrate these advantages:
Remember in the old days when you wanted to raise funds, whatever your target, 1 million, 5 million, 100 million, you always had to give 5-6% to the underwriter: the person helping you raise that money. You don’t have to do that anymore with the type of security token that we designed and put together with the SEC.
What is the next step in Borthwick’s game plan? To passport digital securities that have come out in foreign jurisdictions for use in the US, so they can be traded on American exchange platforms. Two essential challenges remain: first, that the technology developed for blockchain was not intended to bridge any gaps between modern and traditional banking; second, that European countries are largely divided when it comes to blockchain rules. This poses real, legal problems; but Borthwick is confident that the impending surge in blockchain adoption will be naturally accompanied by new regulatory and compliance laws: supply follows demand. Indeed, Borthwick anticipates that “every single company specialised in equity – in the US, Switzerland, Germany and elsewhere – is going to move to the blockchain. Every five-year note, every ten-year note, every treasury bill, will move onto the blockchain.” The regulation of coins and tokens will thus be institutionalised.
Hirander Misra, Chairman & CEO of GMEX Group & SECDEX, further expanded on the jurisdictional challenges touched upon by Borthwick:
Let’s say there’s custody and issuance in the UK but that particular entity doesn’t want to issue tokens; how do we overlay that with tokens? Let’s say the Seychelles offer those out to a wider audience, but then how do you align the corporate actions or proxy-based actions or any other elements by way of smart contracts with those jurisdictions? […] Everyone talks about blockchain being a magic wand formula, but a liquid bond – whether it’s on a blockchain or not – is still a liquid bond.
While the digital exchanges set up in the blockchain landscape act like walled gardens on security, Misra argues, this is a problem which can be solved from a technical perspective. Indeed, he sees “a lot of opportunity around structuring products and packaging them in portfolio-based plays.” There is a gap in the market for the distributed transfer agencies and registries specialised in token transfer, which Misra identifies as a crucial playing point.“The focus has got to be on quality rather than quantity,” he argues. “Quality will lead to trust and scale accordingly.”
Peter Kristensen, Co-CEO at JP Fund Services, also stressed the importance of quality and transparency: “you can run from regulations, but you can’t hide from them,” he said, reflecting on his own professional experience. Derek Mayne, co-Founder of Cresco, championed similar ethics, arguing that his enterprise is built on three pillars: regulation, insurance, and blockchain. It’s this “three-way balance” that makes Cresco FX products desirable, according to Mayne. But transparency is not easily reached. Borthwick spoke of the challenges of DeFi work in the US; DeFi is based on anonymity, yet “you cannot move an INEX token to another wallet unless that wallet is whitelisted” – that is, unless it has gone through AML and KYC checks. This restricts the DeFi audience as institutional players are highly sceptical. The landscape is more positive when it comes to individual customers, however, whose number is increasing rapidly. Indeed, digital assets are now being held by an unprecedented amount of digital custodians, sketching out a greater need for interoperability in a young, fresh financial space with no pre-existing standards.
On this topic, Misra advocated for a hybrid approach, drawing on both centralised and decentralised financial models; while blockchain purists are likely to argue in favour of everything being decentralised, says Misra, “legacy stacks – not just in the exchanges but in the banks – that are decades old aren’t going away anytime soon.” Moreover, the traditional ‘big players’ were “set up to be b2b”. The transition from b2b to b2c, as advocated by Guarda and Borthwick, was tempered by Misra, who suggested an approach closer to convergence than conversion.
Closing the discussion, Guarda was more optimistic about blockchain and crypto’s revolutionary capacities, returning to Borthwick’s point about DeFi’s velocity: where the financial demand exists, the regulatory and technological supply will follow. Although crypto exchange structures (centralised or decentralised) were not built on regulation, the move to blockchain driven by more established players in the field (NASDAQ, New York Stock Exchange) changes standard regulatory practice while creating space for new financial services such as security token trading. Therefore, we can expect to see greater cooperation between blockchain and regulatory services – cooperation driven by necessity and mass-scale fintech democratisation.