Technology is at the heart of the innovation in the digital assets marketplace today. To understand more about the emerging opportunity for both native and traditional firms, Eurex spoke with Stephen Richardson, Head of Product Strategy & Business Solutions at technology firm Fireblocks.
Fireblocks works with clients in a range of areas, where are you seeing the most interest now?
As a digital asset infrastructure provider, we develop the technology that allows our clients to access digital assets securely and at scale. There are three areas of our business that growing rapidly today. The first is our wallet infrastructure where we are starting to see significant institutional adoption as firms enter the digital assets space.
The second area in which we are seeing significant growth is tokenization. Today, there are use cases within tokenization coming to fruition across multiple asset classes. We are working with banks like ANZ, which has launched an Aussie dollar stable coin. We're also seeing other clients developing things like commercial bank money tokenization as well as increasingly engaging in broader markets like NFTs.
The third major growth area for us is DeFi. We're seeing institutions and regulators take more of an interest in DeFi and understanding the benefits. DeFi offers huge potential for traditional financial institutions to develop more efficient settlement using the underlying technology for example. There are still a lot of challenges to overcome though and we are helping our clients do so.
How is DeFi likely to evolve when it comes to traditional financial?
I think you're going to have two distinct ecosystems. On the one side will be the crypto native firms in which progress will be defined by accelerated, open innovation involving multiple platforms and protocols. More and more of the processes within traditional finance will be disintermediated by applications on chain and the native world will be able to innovate faster because they are not subject to the same regulatory requirements as the traditional institutions.
Then other ecosystem will develop in the regulated market. This will be more around regulated DeFi permission pools for processes such as KYC where there are clear use cases for on chain processes. Those two ecosystems will run in parallel with the main innovations developed in the crypto native world before being adopted by traditional finance. We have spent a lot of time historically with crypto native firms but more and more time is being spent on regulated applications with traditional financial firms.
As the regulatory barriers to operate DeFi protocols in traditional finance are reduced as the technology proves its benefit in real life use cases, there will certainly be disintermediation of processes. That will lead to traditional finance operating further up the value chain.
Our role as a technology provider is to understand the challenges that our customers face and to help them optimize their infrastructure. In areas like settlement infrastructure, we are helping clients understand the challenges and overcome them to enable large scale settlement on chain whether that is the broader communication and identification of incoming and outgoing transfers or through secure connectivity to venues.
What are the major challenges that institutions have in accessing crypto and how are they being overcome?
Up to around three years ago, many of the technology providers that service the market today didn’t exist. So if you wanted to get involved in crypto you had to build and manage the complex infrastructure to participate yourself.
I think that is still perceived as a big challenge in the market. However, firms like Fireblocks are helping clients simplify the process. The technology behind us is complicated but the deployment into an institution to enable them to run at scale is simple.
Regulation also remains a big challenge. Institutions are unsure about where they can operate and struggle to navigate the multitude of different licensing regimes. Legacy regulation was not built for digital assets. Take the concept of qualified custody as an example. The idea of qualified custody makes perfect sense in a world of centralized liquidity with small numbers of firms that hold large sums of money.
In this environment it makes total sense to limit who is a qualified custodian. But it makes less sense in a world in which everything is on the blockchain. Regulators and the market need to work together to develop the right frameworks to allow firms to grow and succeed and leverage the new technology.
What impact has absence of the sell-side had on innovation in the crypto native market?
If you look at what the large liquidity providers are doing in the market you can see that they have bridged the divide between the centralized and decentralized ecosystems. They can operate as efficiently on centralized markets like Coinbase and Kraken as they can in decentralized markets providing liquidity between the two.
I think there is a lot to learn in terms of how they approach interoperability but also the processes, technology and efficiency that they are developing. These firms are developing connectivity and the ability to trade across different liquidity pools and allocate capital across a fragmented market without moving markets.
You have talked a lot about increasing efficiencies. Where do you see the most inefficiency in the market today?
I think the on ramp and off ramps coming in and out of crypto markets are still a major challenge. Right now you can switch USDC and USDT on a decentralized exchange with very little friction but if you are a large asset manager in the crypto market, you are funding your primary account in US dollars and need to trade in and out of stable coins from US dollars and that last mile is still a major cause of inefficiency.
Added to that we still only have a dollar-denominated stable coin. This is changing with things like the launch of the Aussie dollar stable coin from ANZ but it is early days still. When we see more commercial bank money being issued in a tokenized fashion, we will see a lot more efficiency and interoperability.
What excites you most about what you are working on now?
We think the world is going to be increasingly tokenized and the technology we're building around that is designed to support our clients as they tokenize more assets on chain especially on open or permissioned chains.
Another area of huge excitement is around payments and payments infrastructure. We are currently working with payments companies to understand what they need to be able to operate in this new digital asset market. As more and more money is brought on chain, what do our clients really need to be successful? What are the security components that they need? What are the types of wallet infrastructure that they need? What is the connectivity that they need?
Web3 and DeFi is a massively growing space. As we move to a new technology paradigm, developing infrastructure with both security and the ability to scale is really exciting.
Fireblocks is speaking at this year’s Derivatives Forum Frankfurt – for further information please see below.