DeFi's Institutional Moment

In the early days of the internet, the Italian government was opposed to the fact that anyone could have a website and in the United States, Congress tried to pass a law to say that you needed an FCC License to have a website. It used to be a radical idea that the internet should be open…

Now DeFi is doing the same for the financial economy, as protocols built atop public blockchain networks radically increase efficiency and transparency while widening the aperture on who can participate in the global financial system. But are decades-old financial regulations holding back DeFi’s institutional moment? 

In this episode of The Money Movement, Jeremy joins Johann Bornman, Institutional Product Lead at ConsenSys Metamask on a panel hosted by Pierre Legrand, Partner, Consulting & Research, 11:FS.

Jeremy Allaire: Welcome everyone. I'm Jeremy Allaire. I'm co-founder and CEO of Circle. I'm very pleased to be here in London tonight, hosting everyone. It's a fabulous venue, hopefully, a fabulous conversation. We have great co-sponsors with 11:FS and MetaMask institutional, a great conversation. This is a special episode of the Money Movement Podcast that we operate and publish. I'm really pleased that everyone could be here.

There are a number of Circle team members here. Everyone's already standing up, so it's hard to ask them to stand up but we've got- folks, if you want to raise your hand if you're from the Circle team. All right, you can hunt those people down if you want to have a conversation about different things that we've got going on. I'm not going to say much because it's going to be a great conversation, but I want to welcome Pierre and Johann to join on stage here for this great conversation.


Pierre Legrand: Hello everyone. Jeremy and your team, thank you very much for arranging this fantastic event. It is absolutely beautiful. We're going to have an awesome panel discussion this evening. Our plan is to have some interesting talking points regarding DeFi and the opportunities, challenges, and what the future holds for widespread adoption across the institutional investment ecosystem. Our panelists tonight are the best in the business. I would like to introduce them very quickly.

Jeremy who already introduced himself has spent over 25 years in technology and leadership roles and running large-scale global companies. More recently, he's the co-founder and chairman of CEO Circle, a pioneer of USD coin. In this role, he not only drives the strategic vision of the company but also gives his perspectives on public policy as well. Please welcome Jeremy.


Pierre: Johann joins us from ConsenSys DeFi. Johann was a fund manager early on and built an investment business in London. He went on to join a robo-advisor firm as a product director. Finally finding his own FinTech business and joining ConsenSys this year and to lead MetaMask Institutional. Welcome too, Johann.


Pierre: I am your host and moderator Pierre Legrand. I lead our global ventures business at 11:FS and with our help, the clients across banking and industries to transform them to offer truly digital financial services. Let's tackle a few tough questions. What is the current DeFi market structure? Jeremy, if we start with you that would be great.

Jeremy: What's the current DeFi market structure? I guess we could probably spend an hour easily on that question. I think one of the common things that I think people do when thinking about this is to think about the traditional market structure that exists in financial markets and try and think about what's the equivalent market structure in crypto and in DeFi. I think to some degree, that's helpful but I think at another level though, what I see is oftentimes a lot of different roles that exist in market structure just get collapsed. If you just think about even the centralized crypto world, an exchange is a custodian- it's a settlement environment, it's actually a market.

In DeFi, the market structure is quite different. An individual can be a custodian of their own assets and can interact with a market where the market itself is really just software. The roles are quite different but I think what we're seeing take shape is basically building blocks that look a lot like the building blocks that we see in traditional finance. I think from our perspective at Circle, we're really just focused on just the basic layer of Fiat money and how do you represent Fiat money on these new platforms. Then there's so many other roles in the ecosystem that build value around that.

I've actually heard you answer this question, Johann. I'm going to punt a little bit to you because I think you do a pretty good job of breaking it down.

Johann Bornman: Right, well no pressure then, try my best. Gosh, how to think about the market structure? I think there's physics and there's chemistry to describe what the market structure is. On the chemistry side, I'll start there because it's probably a bit more poetic and it's probably a bit more visionary. I think obviously, we've seen a new ecosystem get bolt that allows for permissionless innovation. I know the great Marc Andreessen talks about software's eating the world. I think we can all say that software hasn't really eaten the financial services sector. We have the exact same architecture infrastructure that runs most of trading today.

I think what we see in DeFi is a rethinking of that architecture from first principles, using blockchain technology, using smart contracts, and decentralized applications. That's obviously a fundamental change in how value is stored, how it's created, how it's transferred, and then obviously unlocks unparalleled opportunity. That's the chemistry side. On the physics side, obviously, if you think through the transaction flow process today, we have price discovery, we have execution, we have clearing and margining, we have settlement and then post-trade reconciliation.

What DeFi does, it actually disintermediates all those layers. Obviously, again, that is a profound effect because we now have an incidence of money.

Pierre: Got it. Great. That was fantastic. Thank you for that. The next question is really around how could capital market structures be rebuilt on decentralized infrastructure? Johann, I'll toss it over to you now first.

Johann: I think, it probably continues the previous mental model that I painted. Today we obviously have, as I pointed out those five layers. Those five layers are very much held by central entities where the majority of trading happens today. What DeFi does is obviously, it allows for completely transparent infrastructure, almost instant settlements. As I pointed out earlier, the fact that we have the creation of value, the storing of value, and the transferring of value being basically free, that obviously unlocks huge potential in terms of what capital markets will look like going forward.

Jeremy: If I can ladder off that one of the ideas that we've always been interested in is the idea of what I call long-tail capital markets. When you think about the internet today, the internet's really great at building these multi-sided markets and multi-sided markets that provide price discovery and access at an incredibly long tail. If the advertising market was obviously completely transformed by creating a extraordinarily efficient set of price discovery that allowed really anyone who wanted to reach in a potential customer in a highly targeted way to do that.

The same thing in the sale of goods and services with platforms like Amazon and Alibaba in content marketplaces and communications platforms. All of these models basically allow capital formation and capital access to happen at just a much deeper level than you could imagine. I like to think about capital markets of the future that are built on DeFi as being as deep and extensive as e-commerce marketplaces are today with that level of global access for all the participants, whether it's an individual on the saving and investing side or it's an entity, a person, a business that's on the capital formation side and then obviously, there's many, many pieces in between, but it's that kind of transformation of capital market function that I think is possible.

Pierre: How is DeFi superior to traditional finance or centralized finance capabilities or is it really solving a different problem? Jeremy, your thoughts?

Jeremy: It's like asking is email better than a fax machine or is the web better than a magazine. I really do think it's the equivalent. I think what we're doing is we're building internet scale access to financial products and services with the same reach, with the same efficiency. As we've seen in these other mediums that the internet has transformed, you see like not 10 X improvements, you see 100 X improvements. It speaks a little bit to what we were just talking about but I think it's a pretty dramatic difference. We're obviously in the early stages of seeing that play out. I don't know if you want to ladder off that?

Johann: Yes. Obviously, the buzz stems we can throw around. We can say things like transparency, interoperability. For me, the fundamental difference is really risk. Obviously, risk is transformed. We're going from counterparty risk to small contractors. This is actually a fundamental change and it's actually fundamentally important. The other thing I would say is that if you look at risk generally, insane leverage generally within the financial services sector.

If you look at something like Lehman 44:1 leverage ratios, LTCM 50:1, even this year, we had Archegos, they blew a 23% hole in discovery in Viacom's market cap over a couple of days and wiped out the earnings for Credit Suisse over one quarter. When you think about DeFi, we have a system that is self-correcting by its very nature. We have today collateral ratios, we have health factors, we have automatic liquidations, we have a system that fundamentally at the moment self-corrects and has complete transparency, and again, as I mentioned, almost [unintelligible 00:10:52] settlement.

If you compare it to finance, I think the example that Jeremy gave is very apt, and I think you can take it a step further and say, "Well, this is the vinyl compared to Spotify."

Pierre: Gentlemen, what are the biggest barriers to institutional adoption? What are some of the compliance challenges that are faced today?

Jeremy: I think obviously when you look at DeFi today, there's an extraordinary amount of innovation. There's this proliferation of protocols, proliferation of options for investors and market participants. There's obviously enormous opportunities to access the underlying crypto markets themselves. There's these growing primitives for generating yield for borrowing, lending, and these are getting more and more sophisticated by the week, and it's astounding. I think most institutional capital, if you look in the world of institutional capital, is not involved in this really at all. It's very, very limited.

I think today it's crypto funds, it's private wealth, its crypto hedge funds, maybe a little bit of traditional hedge funds. When you think about institutional capital allocation, it's still tiny. Debt and equity capital markets are $350 trillion. Obviously, crypto capital markets remain quite, quite small. The natural question is why is that the case? There's many, many reasons for it, but I think one of the biggest is, people are still really trying to get their head wrapped around how they deal with risk. Risk is what does it mean to trust software to execute a market function versus an intermediary and just getting your head wrapped around that? That's a huge thing.

There's obviously fundamental risk that has to do with trusting software on a blockchain. Is the blockchain itself secure? How do I know it's secure? What does it mean to actually have possession and control over an asset? What is a cryptographic key? What the hell is this? There's these very basic building block-type things. Then I think there's also very legitimate concerns over the fact that you have capital markets executing with billions of dollars of value and people are finding software bugs. Software bugs in a smart contract is really different than say a software bug in a photo-sharing app. These are huge issues.

I think probably one of the biggest issues that is really limiting is the concern that it's not possible to have a compliant interaction with this infrastructure. For many, that means interacting with essentially an anonymous pool of liquidity or an anonymous pool of counterparties. For many financial institutions, that's just a hard line, because they're regulated and have requirements around anti-money laundering, knowing who they're interacting with, or at least knowing that they're interacting through venues or intermediaries that are ensuring that that kind of financial crimes compliance. I think that's one of the most vexing problems that exist today. I think there's a lot of ideas around how to address that, but I don't know what you would add on that, Johann?

Johann: Yes. There is the regulatory framework that most institutions have to operate in today. That means that they have to apply that same regulation framework to when they step into DeFi. That is a tough thing to do. I think it's incumbent upon us in the industry to build the tools and services, the products that allow them to bridge into DeFi. I know Circle is working on something and then so is MetaMask Institutional. I think again, there's the aspect of regulation today here in Europe and Asia, we have the 5th AML directive, basically states that if you're a fund manager and you trade with a nefarious counterparty, you can be subjected to jail time.

We know a lot of crypto funds just can't touch these centralized exchanges. Again, there's the framework that institutions have to operate and today, that's really important. Then there's also the framework that how is DeFi being viewed by regulators, which I think is still very unclear. We have a situation where we have tough regulations that corporations have to adhere to and then there's new ecosystem that happens step into that, again, is a bit murky. I think, again, it's incumbent upon us in the industry to build the tools, the services, and also provide the education for them to bridge into this phase.

Pierre: Jeremy, you had talked a little bit about potential risks. One of the questions around identity and DeFi. What are some of the possible solutions around understanding who those counterparties may be, and understanding what those identities may be within the ecosystem? What are your thoughts?

Jeremy: When I first got into crypto and started looking at what crypto primitives and blockchains could solve for, I looked at it as essentially the birth of a new operating system layer for the internet. These are technologies that have the ability to be applied in a lot of different areas, not just in finance. Finance is I think, actually one of the more relatively narrow places that blockchain technology can be applied. Early on, I think we thought that crypto and blockchain could solve for creating money on the internet and everything that's involved in money on the internet.

We also thought that eventually, it could be applied to solve identity issues. I think this is something that has attracted a lot of ideas in the past. Decentralized identity, how can you have decentralized identity work alongside blockchain transactions? I think right now, it's almost a perfect moment for some of these problems to be solved. I think some of the fundamental crypto primitives have evolved to a point there's building blocks for doing things like provable claims about users, what we think of as attestation methods where you can cryptographically attest to something, and a wallet or a smart contract could actually say, "Okay, that attestation is valid."

There are models from the early commercialization of the internet, like the way that we all secure how we browse websites. What's called Secure Sockets Layer, that actually provide us a little bit of a template for how to think about some of these issues. My own view is that there needs to be models for doing crypto identity issuance, and enabling crypto identities to work across self-hosted wallets, to work across smart contracts. It is going to depend ultimately on institutions like a financial institution, or it could be a government ID or other things.

Organizations that can prove identity can essentially prove that to blockchain transactions. I think there are potential solutions to this. I'm actually quite excited about some of the things that are coming on the horizon, but I think it's a problem that has to be solved. We're not going to see this as a global capital market, as a global financial system if we don't have some mechanism like this in place.

Pierre: Great. Johann, what are some specifics about the UK and the EU, I guess, for this audience, or even more relative to our discussion today?

Johann: That's a tough one. I think you tend to see innovation happen in varie particular ecosystems. We have Silicon Valley, we have London is a FinTech universe or ecosystem. Crypto is quite distributed and has a culture of being very distributed. I think that I would say particularly the FCA has been very forward-thinking and encouraging innovation.

I think they've been very forward-thinking in birthing the FinTech industry within London. I think there's a huge opportunity for them to take a leadership role with regards to crypto and DeFi.

As I pointed out, regulation is still quite uncertain in a lot of jurisdictions in the world. I think it's very important that if we have a new financial infrastructure, and we have new financial technology, and incidence of money, I think regulation is going to have to change. Today, regulators hire lawyers out of university. We have a transparent blockchain where you can verify every single transaction, and so the type of profile that regulators need to start thinking about hiring are no doubt, very technical-minded and rethink of how they do compliance generally. Again, there's an opportunity for the UK to take a leadership role in this because they've been very supportive of fostering innovation, especially around FinTech generally.

Pierre: Jeremy, your thoughts?

Jeremy: Sorry, can you repeat the question?

Pierre: Yes, it's very much around-- What are your views about DeFi for this UK audience, and UK market, and Europeans, as we get more pervasive and more into the crypto, what are some of the things about our discussion today that make things relevant to this group?

Jeremy: The interesting thing about DeFi is it's inherently a global phenomenon. A smart contract that is published to a blockchain exists everywhere that the internet exists, and that's really profound. Blockchains don't have any notion of nation-state boundaries. They exist just as a decentralized infrastructure on the internet. While it's interesting to think about innovation happening in a geographic context, the whole point of this is that we're building a new global financial system that is inherently open to everyone, and where the market structures and the innovations-- Again, they don't know those boundaries.

Now, that's challenging. That challenges preconceived notions about money. It challenges preconceived notions about the way the financial system is structured, how risk is managed, but the internet did that in a lot of other places. In the early days of the internet, the Italian government was incredibly opposed to the idea that anyone could have a website. In the United States, Congress tried to pass a law that said you had to get an FCC license to have a website. The idea of an open internet of information and communications was a really radical idea.

Actually, when people started accessing it, they said, "This is a radically better world. I'm not going to give that up. That represents a change to possibilities for humans and we want to have that." I have enormous faith that's what's going to happen with the financial system, and this technology is going to drive it. That's a long-winded answer to say, while there are regional contacts and there are really important companies solving really significant problems, what I think brings a lot of us to this is the fact that we're building something global, and that's really profound.

It's going to take a lot of work to work through tax collection, and financial crimes, and fraud and abuse, and all the things that actually, most governments are concerned about. I don't want to discount that those are aren't really significant things, but personally, I like to elevate it up to not just a regional context.

Johann: If I would just riff on that for a second, what do regulators care about? Primarily, three things. First and foremost, protecting consumers and investors. Number two, ensuring that there's no money laundering involved in transfers. Then thirdly, making sure that obviously there's no systemic risk. I would argue that blockchain infrastructure and DeFi is a fundamental better way to address all those three. I would also say that the regulators should really view this ecosystem as a fantastic, powerful thing that actually helps their job and makes their job easier.

There's a lot of misnomers on the fact that there's an ecosystem with decentralized pools and pseudo-anonymous counterparties doing all sorts of dodgy things. The participants behind this is building a new financial system. Again, the number of nefarious counterparties, if you actually run the analysis, is really small compared to what you're seeing.

Jeremy: To ladder off that again, the ultimate promise is something that's more open, more fair, more inclusive, more resilient, more secure, and more efficient. That's what we're trying to build and that represents progress over the financial system of today. It is very material progress over the financial system today. We can actually build that on this foundation. Once regulators understand that actually you can build something that has greater transparency, greater resilience, greater auditability, greater security, protects private information more fundamentally, those are social benefits ultimately, and I think everyone will see the light.

Johann: 100%.

Pierre: Well, that's great. That's very, very exciting. One question-- Yes, round of applause.


Pierre: Obviously, there's interactions on the blockchain, but there's actually assets and data that exists off chain, if how that's called. Is there a way for that to integrate into the decentralized finance picture and create something that's even smarter, and better, and add more value?

Johann: Well, I think [unintelligible 00:25:47] comes to mind, which is probably not the best start for what you have in mind. I personally think we haven't really seen a real bridge of all-chain data being bridged into on-chain to drive financial primitives. We might see more of that going forward. Maybe you have a different view on that, Jeremy.

Jeremy: Right now, most data is not on a blockchain and that's fine. Blockchains aren't necessarily a great place to house data itself. What we're seeing though is the ability to have trusted sources of data that can prove that data to a blockchain. It's that melding of external sources of data and people feeling that they're trusted sources of that. Once you have that cryptographic proof of trusted data, you can do amazing things with underlying crypto primitives. We're seeing that with market data, obviously, and what people can do with that price feed data.

A lot of the third-generation blockchain technologies like public-chain technologies are being designed with the idea that you could actually have internet-scale information transmission matched to markets and then executing those markets in a decentralized way. There are a number of projects that are really trying to solve that. That's a profound thing, as that takes place. It's also the Oracles and linking external data to blockchains is also relatively new, and the architectures to do it have really come to life, materially, over the past couple of years. You can imagine what that looks like when you have a 100x number of sources of data that connect to this infrastructure.

Pierre: One last question before we open it up for questions, how does the advent of some of the more sophisticated lending markets really implicate our discussion and what we're talking about here?

Jeremy: Can you repeat that? I'm sorry.

Pierre: The advent of more sophisticated form of lending markets?

Johann: We've obviously seen protocols like [unintelligible 00:28:03], Alkemi, address the KYC layer that we talked about earlier. This obviously allows institution capital to step in because they're solving quite a host of those AML concerns that institutions have. We're also seeing a lot of innovations, generally, in the space, things like Element finance, that's like rethinking strips. We're seeing different types of fixed rates, learning protocols. We're seeing yield curves being built, which is profound and has a huge opportunity. I think we're very much at the start of fixed income primitives that was solve institutional needs.

Again, Alkemi, [unintelligible 00:28:44], I know some of the folks at Maple Finance on this office as well, are examples of primitives that are addressing specifically the institutional market.

Jeremy: It's an area we're super excited about, which is right now most borrowing and lending is essentially leverage for trading. That's the design of a lot of these protocols. The idea of having a market that can find suppliers of capital and borrowers of capital, and being able to bridge things like external data so you can prove your receivables to a blockchain. If you can prove your receivables to a blockchain then a market can underwrite those receivables in a super efficient way and could tokenize it, and tranche it, and do a lot of things with it. That's just one example.

Even just the ability for, as Johann said, known counterparties to face each other in a lending pool, and then, to be able to make their own risk determinations underwriting decisions, insurance decisions, allow those things to actually happen on this kind of market infrastructure. I think it can really transform how fixed-income works but, you know, fundamentally, this is at the end of the day, from our perspective is how do people and businesses get capital that they need for economic activity?

If it's all just about the trade, that's one thing. Obviously, trading plays a huge role in providing those sources of capital and liquidity, but at the end of the day, how can I, as a business owner, face a market to get capital? How I as an individual that owns property, borrow capital against that property, can we bring all those things on-chain and replace what banks do with this? I think that's really the vision. I think we're making really significant steps towards that. I think, say, two years from now, we'll see really, really elaborate debt capital market structures that exist entirely on-chain, and that are global.

I think that's what's motivating projects, like some of the ones that you've described. I also think this particular problem space is one that is wide open for innovation right now. I think just like three years ago, there were a couple of startup DeFi protocol projects. Now, there's however, 1,000 or whatever it is. A lot of them are not serious.

Johann: Seventeen thousand.

Jeremy: Yes, 17,000. Okay. That's right. This is a space that's going to attract really great minds, it already is on a huge scale. I'm excited about what that looks like and I think there's an opportunity to build really things that deliver real value to the real economy. I think that's ultimately what this is about.

Pierre: Great. Does anyone have any questions?

Participant 1: I think it was a great presentation. If I can hear your views about where you think regulation for stable coins and stable coins land is going, do you think it's going to be banking regulations, securities regulations? Where do you think this is going? Both of you. Thank you.

Jeremy: Sure. I have a lot to say about that.


Jeremy: I mean, look, when regulated stable coins emerged a few years ago, there are a limited number of these projects. In the United States, most of the most widely used asset backed stable coins are dollar-based. At least those that sought out to issue them under a regulatory framework did that under a clear set of banking and payments law in the United States. That's how they operate today. That's how they've been operating for the last three years. I think, here in Europe, there would be an E-money equivalent. It's a stored value, electronic money transmission payments law and the issuers like Circle, like Paxos and others operate these under those frameworks.

Now, three years ago, these were tiny. Today, USDC is about 32 and a half billion in circulation growing 1,000% a year. I think the prospect of that level of growth, and that level of growth happening in the coming years, this technology reaching a tipping point where third-generation blockchains layer two scaling technologies, making it quite likely that you'll be able to transact these very low cost at internet scale. I think that's brought a lot of attention and I think it's well-deserved attention because I think what regulators are looking at is really two things. One is this could become global scale, systemically important, just in a matter of a few years and that's important.

If you talk to banking regulators who look over payment systems, such as the Bank of England here, and in other jurisdictions, it's handled differently, they're looking at the fundamental security, fundamental risk management, thinking about the actual integrity of the reserves, how are those managed? What does that look like when it's half a trillion dollars? How to think about that. I think it's bringing a lot of attention. Then clearly, there are tokens that are really involved in a lot of trading and investing behind the scenes. I think there's questions about those as to whether those are a banking and payments activity or something else. There's a lot to be resolved there.

There's a huge effort globally on this topic and that effort actually started years ago, and I think because of many of the things that I just talked about. It's now actually coming to the forefront. We're going to see, for example, in the next few weeks, very specific guidance that comes out of the US Federal Reserve, The US Treasury Department, and a broader set of participants that are looking at how to regulate this. I think it's very likely that asset back stable coins that are operating as a form of payment system, and are holding reserves against that payment system are going to be regulated under federal banking supervision or national banking supervision in different jurisdictions around the world.

I think that's very likely. There may be other products that are more involved on the investing side that might be regulated securities. I think it has to do with fundamental design principles but I think that's what we're seeing. A lot of this is, there's a lot of work out in that it's not, this isn't just a straightforward thing and say, "This is what it is, or this is what it is." I think the novelty of a global scale stable coin issuer is a new thing and there's no as I like to say, there's no exam manual at the US Treasury Department for how to examine and supervise that activity. There's a lot of new things that have to do with the security and the soundness and settlement finality and other things that are specific to public chains and how they operate. There's a lot of work that has to be done collaboratively with governments, as this grows into something that is used by billions of people.

Pierre: Other questions?

Participant 2: I'm very concerned with or interested to know what the speakers will say about the issues surrounding decentralized blockchains, et cetera and the challenges we face today with those governments and banks who want to introduce Central Bank digital currency and that's all in line with the great reset agenda. If people haven't learned about that, please look into that, because it's really bad. I would just like to know what they've got to say about that because to me, the decentralized networks is the way forward and central bank digital currency is a really bad thing.

Jeremy: Is that a question or a statement?

Johann: I'll let you take that one.

Jeremy: You'd like me to take that? I mean, there's a lot to say on this topic. I think that if you put yourself in the shoes of a central banker, which I know everyone in crypto loves to do, there's a couple of really important perspectives. The first is that there is some form of government liability that a person can have that is not a loan to a financial institution. First principles, notes and coins as an example, are a liability of the government and you can have that, and it is not a liability. You're not loaning it to a bank. Almost all money we have today is a loan to a bank. You're saying, "I'm going to give you my base money, the government liability money, and I'm going to give it to you to go and effectively lend and invest on my behalf." but it's really a liability there.

I think that from a public good perspective, central banks don't want to see a world where there is no public option on money. I think that's from a central banker's perspective. The concern is that if all money becomes private liabilities, then in times of great crisis, there is no ability for an individual to hold a straight obligation of the state. Now, you could argue, well, governments abuse that and it gets inflated, and the government money is no good anyway but in many parts of the world, monetary policy is looking at purchasing power parity, and it's looking at inflation rates, and it's always trying to adjust the amount of money in circulation to keep that somewhat in line. It's a hard thing to do. That's what I think some of the more advanced central banks do reasonably well. Again, you can argue about it, but there are many central banks that do it awfully and we can name those 100 times over, but I think that that's one valid issue is should there be a form of crypto money, that is a straight obligation of the government that is not just a private sector obligation. That's a reasonable question. I think over the very long run, I think there probably should be. Now, the other point on this is that the innovation in terms of how private money works and how the open block chain money works, and programable money works, and all the things that you could with that, is happening at an incredible pace.

The technology revolution that that represents, and how that will grow is happening in an incredible pace. I think it's also government's obligation to allow that to flourish because it's going to deliver incredible benefits to society. As long as it's well-managed from a risk perspective, and it can't blow up on people in a horrible way, that needs to be given a structure, so it can really thrive and grow.

Then you have competition amongst public money and private money, as you always have. That is today, we all use privately issued money, every day. That is pretty much what we use. We don't use a lot of public sector money. That competition needs to exist. I think certainly in the West, which is a history of open liberal market based, private sector-based economies. That's a first principle. I think that that needs to be upheld, and I think it's a huge opportunity for western governments to get out in front of that right now. It's a huge opportunity.

The path of state controlled money with total observation of society is a very scary path. Nationalized money entirely is a very scary path. I don't think we want to have a strategy of emulating China. I think the strategy ought to be one of embracing open internet innovation, open-source innovation, private sector innovation. The benefits of what we're seeing flourish right now, that's a huge opportunity and should be embraced. I don't think it has to be that-- There's no possibility of public sector crypto money. I think there can be, and I think it'll play a role in the future.

Pierre: What's really clear from what you guys were saying is, yes, I can completely understand why institutions want to invest in crypto, and why they want to hold digital assets, because the returns are really great, and there's a lot of innovation, and if you believe in the space. What I'm not yet sure about is what you were talking about Jeremy, about how-- where we evolve. How we bring on different forms of debt, how we integrate real world debt with DeFi?

What I'm not yet sure is, what's the real value proposition for that? If I'm a real estate developer, why do I care about DeFi? Why do I want a loan from DeFi when I can get it from HSBC at 2%. If I'm a small business owner, why do I want to get a loan from DeFi when I can get it from a bank at a pretty low rate? Just love to hear your thoughts on that.

Johann: What a great question. I think there's so many answers to-- ways to approach your question. One thing is that there's human flaw in the system today. I'll use the example with judges sentencing people around lunch time, which is [unintelligible 00:43:30] that there's a high sentence rates when the judge has eaten, whether they have not eaten. That same bias is present in the banking system today.

Yes, it's driven by a system that analyzes collateral, analyze your assets and spits out a number. Of course, that happens. There's also a human factor in the system today, and there's also a discrimination factor as well to say quite bluntly. What DeFi is does it takes all of that, and writes smart contract, write all that through smart contracts, so not just do we have a more transparent system, but we have a more fair system.

That's obvious. I think that's where your question started. You talked about the idea of getting a business loan, or getting a housing loan. What you tend to find in DeFi, and obviously, we're very much at the start of the ecosystem. [unintelligible 00:44:17] beginning of the ecosystem. Yes, we are seeing adoption Circles being driven by the DeFi Degens. After that, the crypto funds and as Jeremy pointed out, now the hedge funds.

I think we’re all just starting to see real use cases, people buying assets that then allows them to acquire a house because they've had this asset grow in value. What you have here is [unintelligible 00:44:39] innovation opening up infinite number of use cases. What this means is that your real estate developer, or your average person getting a mortgage, can potentially get a bigger mortgage.

There's this case in Australia where a person got a mortgage that paid itself off, and they could a buy house by using these Lego money blocks that we're talking about. We're starting to see far more real use cases DeFi. Yes, I guess for the average person, if you talk to my mom or my dad, and you say to them, [unintelligible 00:45:12] how to get a mortgage or a small business loan, they wouldn't even know what DeFi is, or where to start looking.

We're starting to see slowly but surely more adoption. I think it's encumbered upon us in this industry to build the products and services where average people can cross into the space. I can promise you within consensus and [unintelligible 00:45:34], we think very, very, very deeply, but how do we bring the next seven billion people into the space. Otherwise, it's just cool ecosystem, where a bunch of people trade with each other, and we tokenize things, and we all have NFT's.

The dream of this, if it ends there, I think we'll be terribly sad. It's very important that we think about—This, I think ,[unintelligible 00:45:576] got right, which is like think about UX, think about UI. Think about the sort of things where you can help see if people make the right decisions. Again, Defi started in 2018, but we're only really about 12 months into this explosion. I think those beautiful real use cases that we hear all the time from people that could afford a house for the first time or they sent their kids to university because of the investments they've made, we hear a lot of those cases.

I think we're going to start seeing way more of those going forward.

Jeremy: I would add. It's hard to see clearly, but I think when you have cryptographically provable identity, and you have the ability to have cryptographically provable claims about an entity or an individual, and you have off chain data that can be proved online, and you think about that applied globally, then you get into a world where these market structures can underwrite risk really, really differently than the current way that risk is underwritten.

The risk could be underwritten really by anyone in the world in that scenario. A land owner in some distant location may be able to find a way to prove the yield of their land, theoretically. If they could prove that on chain, then a global market place of underwriting could happen. They could access credit, and they could tokenize yield, their own yield quite literally, and they can access that credit.

When I talk about long tail capital markets, that's only possible in an infrastructure like this. I think it does get down to the household level. It does get down to the small business level. Just like a small business owner who is trying to find customers, they had limited options for how to do that 20 years ago. It was like, who is in their local newspaper, who is down the street, they put something up on a post, or they buy direct mail and send mail to people.

Now, you can target exactly who you want from anywhere in the world to anywhere in the world, and you can efficiently find customers. That's because of the ability to have enormous amounts of underwriting data in a sense. The advertising ecosystem as one example. I think there's some building blocks that are needed. We're talking about some of those here. As those building blocks come into place, then I think it really starts to widen the aperture for who can really benefit from this.

Right now, you look at it. It looks like a bunch of punters trading, and making money, and this kind of thing, and that's real. That's a real value that the yields, and the investment, and projects that are getting funded, and how they're growing, I think that's real, but you have to zoom out a little bit to see what these building blocks ultimately are going to allow for.

Participant 3: My question is for Jeremy. The USDC use cases [unintelligible 00:49:09] from 400,000 wallet in 2022 to 1 million wallet [unintelligible 00:49:16] USDC 2021. 65% of the wallet hold in USDC are for emerging market. When you look at the chain analysis of the crypto adoption across the world, that only United States makes the developed country where the adoptions are coming from.

Now, when I look into this [unintelligible 00:49:39] in terms of [unintelligible 00:49:41] your teams, and people that actually runs Circle. What is a conscious effort? Circle is growing really fast in emerging market, and there is no one in your team today that is understanding that market, or is trying to invest, or trying to support a wallet [unintelligible 00:50:01] that utilize the USDC as a form of payment, because the real use case for the stable coin, are those countries who are classified in traditional finance today as non-convertible currencies, and those are where the stable coins are being used today. As a CEO of [unintelligible 50:00:22], what conscious effort is certainly taken to understand that market and to begin to invest into the market where the adoption of USDC will come from. We already see that from Paxos as we speak today.

Jeremy: That's a great question. I think one of the things that's obviously really powerful about digital currency is the global reach. I think our vision has been how do you create an open format for dollars and an open protocol for dollar settlement that works across the internet? What's amazing is that tens of thousands of companies can implement that. They never need to talk to us.

A software wallet can implement support for USDC, an exchange, a brokerage protocol, all of these things can implement support for that. I think that's part of the power of an open internet model. I think in terms of our own focus, we're very interested in the global growth. We're very aware of that global growth.

I think for us to directly get involved in a market, there's a big undertaking. We need to do things the right way. If we're going to be directly in a market, we need to ensure that we're meeting the compliance requirements, the registration requirements, the doing business requirements for us to directly get involved in a market, but I think we support a major ecosystem.

I think as some people know we're in the process of becoming a publicly listed company. We've raised considerable capital, I think, have raised this considerable amount of capital in the coming months, and we've made it very clear that global expansion is a really critical priority for us. I think that's not just in developed markets. I think that's a huge opportunity in emerging markets and in other parts of the world.

We see that very clearly, but if Circle itself is going to directly get develop a presence in a market, we need to do it the right and compliant way. I think at the same time, as I mentioned, just the use of this technology is inherently global. I think we're very encouraged by that.

Johann: I'm taking my hat off as crypto, I wanted to encourage the guy behind you, just ask the question. I work three is so far on the project World Mobile with essentially addressing one of the biggest issues that we all face, which is that half the world population isn't even connected. The digital divide has been exposed. Quiet, please. Thank you. Jimmy's talking.

The digital divide has been exposed by the pandemic massively, and I'm just really just saying, I encouraging you guys, it's fine, we all can play a role. I make an old help, but in order to do it, we need to get the rest of the world actually online. It should be a human right to be digitally connected. Actually, as you said, digital identity is absolutely fundamental to that. I applaud you all and thank you very much for having me as well.

Jeremy: Thank you.

Participant 3: Thank you. I agree.

Pierre: Thanks very much for tonight is very interesting. What I wanted to ask you was, what are the biggest fears, do you think from large institutions and even governments about crypto? Obviously in this room, we can all see the benefits. What do you think of the largest fears?

Jeremy: Yes, I think as a society and as regulators, we tend to see very short term-decisions being made at the expense of long-term decisions. I think in financial services sector, we often see the fear on money laundering surpassing the bigger fear of systemic risk. I think 2008 is a fantastic example of that, the European banking crisis, a good example of that.

I think in crypto, there's a very strong focus on AML, KYC. I think those things all fundamentally important, we have to pay attention to them, but actually, I think as we pointed out earlier, there's a huge opportunity here around systemic risk that are going to take a regulator they're paying attention to. Right now, the fear is a lot around like are there nefarious counter policies, doing nefarious things on blockchain technology.

I think a lot of the focus, if I talk to institutions, is about figuring that out, making sure they're not trading with an affairs counterparty, and also reporting to regulators in a way that's very clear that they all have some a risk framework in place, both on a pre-trade and post-trade compliance basis of how do they think about AML and KYC and KYT risk generally.

I would say that's the fear that I constantly see. When we engage with regulators, that’s top of mind, who are the nefarious counterparties, is anti-money laundering, taking place. Again, I would highlight that I think from a risk management and from a regulatory perspective, yes, we care about those things. We care very deeply about these things, but actually, it's the biggest systemic risks that I think blockchain has the opportunity to address.

Pierre: I would say it depends on which parts of governments you're talking about, which and government specifically you're talking about. I think there's a general fear that this technology could get to a huge scale, systemic scale and just introduce a level of risk that's just completely unanticipated. I think there's a little bit of a web2.0 that's biting us in the ass right now on that front, which is, “Wow, that was really cool. You can share your photos with your friends.”

Then, all of a sudden, you're dealing with societal systemic risk issues that are affecting elections, violence, a lot of other very, very awful things. That escaped the view of governments. I think there's a fear that that’s information and communications, what if that happened in the realm of the economic system and how profound that could be, but that's actually the point.

That is actually the point, that is actually the point, is that we do want to see not a centralized platform that's controlling all of the financial system in the world of Facebook of money, as it were. We don't want to see that. Governments are having a huge negative reaction to that very specifically. I think we do want to see a decentralized internet that has greater control, that's put in the hands of users that has more resiliency, more safety, more security, more privacy, more efficiency, more access, and it transforms the unit economics of banking and finance and provides access.

That is, I think, a really powerful thing that we do want, but it's also terrifying. It's terrifying. That's the project that all of us have here is working through that in the coming years.

Jeremey: Just to add to that, I think in what major in this year we saw crypto markets fall up to 50%. We didn't see regulators have to step in, we didn't see the FED open this kind of window, we didn't see any bailouts. It just all worked. We can say this is still a small nascent market, but if we imagined that the same thing had to happen in debt markets, the equity markets where would we be today?

I think this litmus test that we'd be seeing of a down market cycles and crypto winters, I think this is time when holders in this space really step in to keep holding. I think the conclusion and something we see a lot of is for years, we've been talking about institutions arriving, and I think we're finally there. We're actually starting to see that happen. I think it's a really exciting time in crypto.

Participant 3: Thank you very much. I appreciate it. Outside of the regulatory piece about mass adoption, what would you say is the biggest obstacle for mass adoption of DeFi? In my own opinion, I feel like it's very steep learning curve for someone that knows nothing about crypto and moving forward, if we truly want mass adoption, in my opinion, some aspects need to be simplified, but I'm keen to hear your thoughts.

Pierre: I think today it's very complex to create a wallet, connect to your protocol, confirm a transaction and understand what has happened. The way to think about this is that the beginning of the internet, you had very similar, people playing around with it, then they basements and trying to figure out what internet would look like generally, and today everyone uses it.

We don't necessarily know what happens when you type something into a browser. It just works. A lot of us don't know how to rack a server or exactly what happens with routing, but we all use the internet. I think DeFi has that opportunity. Now, what needs to happen, I personally feel, is a next evolution where we are today, which is like, okay, the infrastructure is being built. I think the next wave is really about how do we think deeply about user needs, user experience, user interface. This is something we can learn a lot from FinTech 2.0.

FinTech 2.0 didn't really change the infrastructure of financial system but it built fantastic user experiences and businesses. The stage it DeFi is we're building fundamentally new architecture that can, as we pointed out tonight, be the internet of money. I think the next evolution about this, okay, we only need to just think about our users now.

This is something as simple as seed phrases, right? What happens if you lose the seed phrases and how do you interact with protocols generally? I was with my team the other day, we were looking at protocol and my technical lead said, “It looks like we're hacking to the CIA,” because it was just like-- you're looking at the interface like, "What is this?" If I had ask my grandmother or my mother or my sister to look at that and lend or borrow, it's a very intimidating thing to ask them to do. Again, this is something that we in the industry need to think very deeply about.

At the moment, 140 million unique wallet addresses within Ethereum. We want to get that to seven billion. We're going to get back to work after this and keep building.

Pierre: Jeremy, last word for you on that, anything you want to tell?

Jeremy: Yes. I've been asked this question in indifferent ways for like eight years. It's sort of the same question. I think there's this triumvirate of regulatory clarity so that mainstream, not just institutional investors but corporations, households feel like they understand that this is something that they can interact with, that is an infrastructure that there's some degree of regulation around infrastructure and the many, many layers of infrastructure we could talk about, but at the core it's scalable block chain infrastructure that can handle hundreds of millions to billions of users and user experience, which is this focus on UX and delightful UX.

This can actually all work together. If you get those things working together, that's how this gets to billions of people. I'm very confident that we're going to see that happen in the next two to three years. I think that's my high-level view.

Pierre: Great. With just about time, so thank you so much for those fantastic questions. We really appreciate and a round of applause for our panelist. Thank you so much.


Jeremy: Thank you.

Pierre: Thank you very much.


Jeremy Allaire
Co-Founder, CEO & Chairman at Circle
Johann Bornman
Institutional Product Lead ConsenSys MetaMask
Pierre Legrand
Partner 11:FS

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