Public Key Podcast

Exploring the Path to Digital Asset Adoption in Traditional Financial Markets: Podcast Ep. 58

May 30, 2023 | by Chainalysis Team

Episode 58 of the Public Key podcast is here! Imagine if we could remove the complexity of traditional institutions working with digital assets. In this episode, we speak with Adam Levine, whose company, Fireblocks, is doing just that. We dive into stablecoins, decentralized finance (DeFi), and the biggest debate in the crypto industry, privacy vs. anonymity. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 58.

Public Key Episode 58 preview: Speculation, utility, and regulation in the digital asset markets

Traditional and regulated financial institutions have always found entering into the digital asset space rather complex and even scary. 

In this episode, Ian Andrews is joined by Adam Levine (VP, Head of Corporate Strategy, Fireblocks) to discuss how Fireblocks has onboarded over 1,800 organizations as the industry’s leading crypto asset custody and settlement service provider. 

Adam talks about the recent travel rule partnership with Notabene, Fireblocks’ role in the first completed cross-border stablecoin transaction with NAB, and how the US may be slipping behind other jurisdictions when it comes to innovation and crypto regulation. 

Adam describes the payments and remittance use cases he is seeing in the digital asset space and explains how his company is helping TradFi institutions ease safely and securely into DeFi protocols and permissioned pools. 

Quote of the episode

“Prior to the creation of Fireblocks and what the founders developed, there was often this tension between how safe an asset was while you were holding it and how quickly you can move it. You had an asset online, you can move it instantly, but so could the hackers.” – Adam Levine (VP, Head of Corporate Strategy, Fireblocks)

Minute-by-minute episode breakdown

  • (2:39) – Providing comprehensive solutions for regulated institutions and digital assets moving on-chain
  • (4:35) – How crypto went from making no sense to Adam to him transitioning from a foreign exchange to Fireblocks 
  • (7:50) – What is Fireblocks, and how does this company fit into the entire digital asset landscape
  • (11:15) – Discussion on fiat-backed stablecoins with NAB and the Australian crypto market
  • (15:50) – The adoption of cryptocurrency and stablecoins to facilitate payments and remittances 
  • (20:34) – How will institutions adopt DeFi and decentralized identity while mitigating counterparty risk?
  • (27:13) – Digital asset regulation and how the US is playing catchup globally when it comes to crypto innovation 
  • (33:50) – Is real-world asset tokenization all hype, or are there practical use cases that it can be used for?
  • (38:42) – The future of Fireblocks and how the industry is moving past speculation and into utility

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

  • Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
  • Adam Levine  (VP, Head of Corporate Strategy, Fireblocks)

 

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Transcript

 

Ian:

All right. Looked like I had a video foul there, but I think it’s working now. Hey everyone. Welcome back to another episode of Public Key. This week I’m joined by my good friend Adam Levine, who is VP and head of corporate strategy at Fireblocks. Adam, welcome to the podcast.

Adam:

Hey Ian, thanks for having me. Excited to be here.

Ian:

We’ve been trying to do this forever. I think you wanted to make sure that we had gotten a year of podcasting under our belt before you finally agreed to come on the podcast, at least that’s how I interpreted it. But you’ve been a busy guy. Before we started recording, we were just chatting about an announcement actually you guys just put out today with a mutual partner, the good folks over at Notabene. Pelle’s been on the podcast previously. He was one of our first guests actually early last year. Maybe before we jump in, if you want to give a plug to the news you all put out today.

Adam:

Yeah, absolutely. So we’ve definitely been excited to make this announcement with Pelle and Alice and the Notabene team. For Fireblocks, and we’ll get into it later, but it’s important that we provide a comprehensive solution to our clients and not everything is going to be done by us. Some are done by excellent partners like Chainalysis, and this is an extension of how we think about it. We know that for VASPs and certain types of regulated institutions, they need a travel rule solution. And now being fully integrated with Notabene, that’s able to support the diverse and sometimes inconsistent travel requirements, we now have a solution completely built in and excited to start powering that for clients.

Ian:

That is awesome news. I think the more that we can do on the vendor side to make our customers’ lives easier, the faster adoption grows, the more innovation that happens in the ecosystem. This lower level of infrastructure that you all provide, that Chainalysis provides, that Notabene is putting together. It’s hard. The tech is hard. The adoption can be hard. It’s confusing to people that don’t spend all day thinking about it like us, and so if we can take that off the table, I think it opens the gateway not only for crypto businesses but traditional finance to come into the space, which is exciting.

Adam:

Yeah, it’s exactly right. We want our clients focused on the things that are more unique and differential for them and know that they have these solutions taken care of by companies like ours. So we’re excited about it.

Ian:

That’s great. Hey, let’s rewind all the way back, because I’m always fascinated by how people ended up in crypto. You’ve got, I think a long history working in the traditional finance world. What led you to Fireblocks and even to the universe of cryptocurrency?

Adam:

So I’ve taken a bit of a circuitous path. I often feel embarrassed of saying I thought crypto made no sense at all. The very first time I heard about it, I was like, “This is the silliest thing in the world.” And spent maybe four and a half milliseconds thinking about it. I’ll proudly say I’m wrong and tell you that for me, while crypto is clearly a thing, the broader story around digital assets and traditional assets moving on chain is what’s been exciting me. But I’ll tell you the very first experience, I was at CLS, which is a foreign exchange settlement bank, and we had a certain protocol come and pitch us, and I won’t name the name of the protocol right now, but to give you the context, we’re a systemically important institution. We settled five to six trillion dollars a day in FX and a bunch of techies coming in tell us about this fake currency that we needed to support.

I was like, yeah, we have 23 central banks that sit in our oversight committee. We’re just talking about three plus two settlements, this is a non-starter. And sort of politely said, “Please don’t call us again.” Fast forward to where we are now, and I couldn’t be more excited about bringing assets on chain. So it’s been a path.

Ian:

I think that connection back to foreign exchange, that cryptocurrency trading and FX to me share a ton of similarities. Now, I never worked in the space, so I’m kind of the naive outsider, but when I squint it’s largely the same thing. I mean, do you feel that similarity now that you’re fully in this space?

Adam:

I do, and it’s part of what helped me have that aha moment. So it starts off with, obviously there’s a lot of commerce that you need for an exchange to be critical, but there’s plenty of traders out there just looking to read the room, understand the data, and high frequency trading another, and that’s great. So you can quickly relate to crypto. Where let’s say, during the bull run there was a lot of that type of trading, but then everything that happens after the trade, the FX market has improved things significantly. It’s heavily regulated. There’s netting efficiencies and liquidity, et cetera. But I looked at the crypto market, I’m like, they could do this a lot quicker than the trillions of dollars in FX that are settled every day.

And I’m like, I see this path where if you’re not talking about Bitcoin or XRP or MATIC, but you’re talking dollar, yen, euro, this same tech could do things so much faster. It’s different in a regulated environment. That started getting me on this path, spent eight years thinking about post-trade settlement in foreign exchange and then seeing a new tech doing it in ways I wish we could think about in FX. And so you’re spot on, there’s a lot of similarities. The maturity of the crypto market’s not quite where the FX market needs it, but it’s rapidly getting there and we’re seeing that already, which for me it’s really exciting.

Ian:

How does Fireblocks fit into all this? And maybe it’s worthwhile to give sort of a background or explainer because I think the scope of the business is maybe quite a bit larger today than people realize. You’ve grown so fast over the last couple years, but when you think about that topic of not just cryptocurrency, but broadly digital assets, where does Fireblocks see the world going in that regard?

Adam:

Yeah, so look, our mission is to bring digital assets to businesses everywhere and very much thinking not just about crypto but digital assets. Broadly speaking, I think about the company in three key pillars of financial markets, payments, and then the non-financial or utility based of digital assets and even those are pretty vast. And so before we think about those business units, it’s important to think about Fireblocks as providing the safety and security of holding virtually any digital asset. Prior to the creation of Fireblocks and what the founders developed, there was often this tension between how safe an asset was while you were holding it and how quickly you can move it. You had an asset online, you can move it instantly, so could the hackers. And you think about traditional cold storage of locked in a vault, maybe literally cold in the Alps or the mountains. Good luck telling a hedge fund or a bank that you need two days to go and retrieve the assets and bring it on chain before you can move it.

And what the founders done with their version of multi-party computation tech is no longer have the seesaw between security and speed, but marry the two together. And so once you hold that asset safely, then all these use cases come out of it. So with that background of how our wallet was developed, we see that in the financial markets it’s the greatest number of our clients from the crypto bros and chicks trading crypto all the way to the regulated institutions like BNY Mellon and ANZ Bank, and they’re looking at us for trading and treasury management and a lot of tokenization we can get into, but we also power payments for large payment service providers. And what’s really innovative and seeing quick adoption is NFTs that are less pictures of chimpanzees, but more about utility. And so there’s the JPEG NFTs and the NFTs for ticketing, loyalty programs, client engagement. Fireblocks is the tech, the infrastructure that can power all of that. And so it is pretty diverse, but that’s sort of what makes us unique, that we can provide that premier tech and support those different types of use cases.

Ian:

Yeah, I love the way you described the tension between speed of transfer and security and protection and overcoming that, and I think you sit at this really interesting nexus point where you’re enabling connection to all the market participants, and particularly the ones that are critical to the aspects of exchange or commerce, the liquidity providers, the popular trading venues, and now extending that into the world of NFT marketplaces or those types of assets. Also, your comment about utility NFTs, this came up, we had one of the executives from OpenSea was on the podcast recently and he said exactly the same thing. He said the thing he’s most excited about in the coming year was this rise of utility NFTs. And so I think that market is ripe for some interesting acceleration and broadening adoption this year.

Now, there was some recent news with National Australia Bank related to stablecoins, and I think Fireblocks was sort of the core enabling technology underneath that. Maybe you can describe that for us and then link it back to this conversation we were having a moment ago around FX and international trade, kind of the whole category of I’ve had more CBDC stablecoin conversations in the last three months I feel like than I did in the two years prior. So it feels like there’s an explosion happening in that area, and I’m curious, what’s Fireblocks doing there?

Adam:

Yeah, so this is a great example for an FX geek like me, what you get excited about. And so when I was talking earlier, if you see how digital assets can allow for the post-trade, so after you’ve figured out the right price, how the assets are going to move, how it can be done so much quicker in the market, and NAB down in Australia has taken a really big step. So first off, what they’ve done is they’ve selected seven currencies that are pretty core for just the NAB group, so the large currencies, dollar, yen, Aussie dollar, Kiwi, et cetera, and created fiat-backed stablecoins. So Fireblocks was part of really the whole story working with them and BlockFold on what they were trying to achieve, and it’s a good example of what we’re increasingly seeing in the market around the evolution of stablecoins.

What they’re starting with is how could they, within the NAB group, really just improve liquidity, moving the assets between the different entities within there. And so they’ve selected the type of stablecoins they wanted and the protocol important for them and are now able to move it 24/7 within the group. You can imagine scenarios and whether it’s with NAB or others, how it starts off just within the group and step two is how they do it with certain customers and next thing you know, they’re going down a path potentially. I could see them or others thinking about automated markets for FX, but what’s great is they’re starting off with a very important step just within their group and be able to work with their local regulators and demonstrate how this could be a really robust solution, not just for crypto traders, but for a regulated bank that’s quite important down there.

Ian:

Yeah, I mean, I think that’s actually fascinating that it’s happening in Australia because I couldn’t imagine that happening today in the US market, so there’s clearly something unique in terms of both the banking industry and the Australian regulatory approach to digital assets that’s facilitating, or at least enabling the innovation to actually happen. What’s your perspective on the Australian market overall? Are you seeing demand from some of the other big banks there beyond NAB to do similar things?

Adam:

You’re spot on in terms of the regulatory environment resulting in real innovation down there, and so I’ll give a shout out to another client, ANZ. We worked with them on a stablecoin use case a few months prior to this news with NAB. They’re not going to be the only two. There’s definitely more coming and there’s a few reasons. I think the fact that the Reserve Bank of Australia is leaning into digital assets, there’s activity there and great conversations. I’m sure there’ll be some more public announcements relatively soon, but when you have a regulator where they’re taking steps for themselves to test it out and look for real use cases, not just academic test cases, that’s really important. You have companies down there thinking of others like DigitalX, a publicly traded company down in Australia and another Fireblocks client. It’s a good signal to the market of yes, these companies can be public.

Yes, the government wants to play in it, and when you think about an Aussie market that’s dominated by four or five banks, two of them already public with it, it’s creating a lot of innovation. It’s creating innovation at the top of the level, but they’re companies that are Aussie based that are doing really innovative work because they know the environment is open to that. It’s frustrating that we’re not seeing that in the same way in the US but there are other markets that are definitely looking to Australia and both governments and private sector, and they’re looking to replicate versions of that abroad.

Ian:

Now, shifting gears a little bit, you mentioned that as Fireblocks has grown, you’ve entered a couple segments beyond the core security and transaction engine, and payments I think is a big area that you’re expecting to grow for the next couple years. Talk to us about what you’re doing there. I mean, we’ve had a couple guests on the podcast who, a good example actually is the founders from Busha, largest exchange in Nigeria, and they made the point that foreign exchange is incredibly difficult. Access to foreign currency is really challenging to achieve for anybody living in Nigeria, and so they’ve significant adoption around Bitcoin and various stablecoin platforms. For anybody that’s looking to do international commerce, I’m curious your take on payments, is it trying to solve for that case or is it a completely different approach?

Adam:

Yes, and others. The solution is really important in digital assets. The way I think about it is it allows payments to happen quicker, cheaper, and sometimes with less risk than traditional payments, and this is where it becomes on the use cases, but you think about the global payment service providers and the high volume and value transactions they’re doing, you can think about remittances and just local commerce in emerging markets. Stablecoins could be a really good solution there, and this is part of what we’re thinking about from the tech side. About little over a year ago, we closed an acquisition of a company called First Digital, which bolstered the payments engine that we were developing. And for Fireblocks right now we’re working with companies, especially payment service providers to help them allow their clients to accept payments in stablecoins, make payouts in stablecoins, and cross border is all down the path that we’re working on.

If you think of it from a purely altruistic solution, these emerging markets where their local payment systems may not be as robust or they’re dependent on a dollar that’s hard to get physically, you could see stablecoins making a tremendous improvement. Same thing with remittances, thinking about the average maybe blue collar worker that has family abroad and maybe they’re trying to support, you’re making the payments back to their home so much quicker, so much cheaper than traditional solutions. These are use cases that we’re seeing and not that we’re a non-profit, we’re obviously for-profit, but you could feel really good about what you’re delivering when you could see not just large corporations doing things less risky, but also helping individuals make the payments they’re going to anyway in a way that’s just so much more efficient.

Ian:

Yeah, and one of the things that has come up when I’ve been exploring this payments sector is that on the merchant side, the merchants, most of them are not ready to accept the complexity of being in crypto. They want to get paid, they don’t want to have any exposure to volatility. I sold it for the equivalent of a dollar, but in Bitcoin and then suddenly it was $1.25 or 75 cents. They don’t want the complexity on either side of that potential for volatility, so they want to quickly exit to whatever the default currency that they operate the business in is as quickly as possible. Is the solution you all have built solving for that, where to the merchant, it really doesn’t matter that the transaction is happening in the particular cryptocurrency, it settles to their bank account exactly the same as traditional credit card swipe would. Is that where the integration with the payment processor that you’re working on comes into play?

Adam:

Yeah, so in part. The goal is from a tech perspective, when we work with a client, we can support virtually any digital asset. You want to make payments in Bitcoin or Ethereum, maybe not a recommendation, but absolutely you can do that. But this is where you see the nexus of stablecoins with our payments engine. So when we work with the client, the first thing we do is make sure we’re understanding what they really want. They understand they want to accept digital assets, but we do have teams that work with them and explain which digital asset might make sense, whether it’s a stablecoin, you have to select the protocol or are you accepting crypto versus digital asset? Many times that issue you talked about of the volatility in a cryptocurrency. Just looking back the last six months, the idea of a certain currency dropping 20% in a matter of days. Unfortunately, we’ve seen and not just once.

And so when we have conversations with clients and talk to them about the stablecoin, depending on the stablecoin you’re talking about and how it’s structured, you don’t get that volatility. And so a client that wants to accept it in their local currency, maybe they want to be the one to create a stablecoin, maybe they just want to accept an existing one, and that’s where we’re really seeing the payments use cases become really, really important. Not in any way bad for anyone to accept crypto as payment, but for institutions that are worried about the P and L impact of volatility where it’s hard to hedge against MATIC, Cardano, Ethereum, Bitcoin, it’s just easier for them to think about hedging against the dollar or another fiat currency, but move it in a digital way so much quicker.

Ian:

Got it. That makes a lot of sense. How are you all thinking about DeFi? Is that just another trading execution venue that you connect into like a liquidity pool on something like Uniswap for example or Aave? Or is there something more there that Firebox is doing?

Adam:

So Firebox was very much early in promoting some of the opportunities in DeFi, thinking about how we helped with Aave Arc and whitelisting clients into that DeFi. What we’re seeing now in versions two and three are different versions of permission DeFi, especially as institutions come in, they think about AML, KYC, who they’re playing in that dark pool or sandbox with. This is where we’re seeing a lot. Certain countries in Scandinavia, the central banks are actively promoting this idea. We’re seeing others in the private sector where they like the concept of DeFi and automated market makers as an extension of that.

For us, there’s ways that we do and will work with Aave in the future and some of the others, those protocols, but I think the next iteration of DeFi is learned from the experience of Aave Arc and others in the market and the institutional money is going to do it probably a little bit differently, but ultimately it’s probably going to be a more robust market when they know that they’re playing with counterparties that they could play against and that there’s some tech solutions to mitigate against certain types of counterparty and credit and settlement risk. That’s where we’re seeing some real increase, not just really good thoughts, but we’re seeing some projects start to get off the ground.

Ian:

Maybe we should rewind a little bit and talk about what Aave Arc is. I jumped past that in my questions there, so I got you out of order, but-

Adam:

Oh, good.

Ian:

Yeah, tell us about that partnership and the solution that you developed with the Aave team.

Adam:

Yeah, so look, Aave is a DeFi protocol and part of the challenges institutions want to know who else they’re interacting with for their own peace of mind, and for those that are regulated or have certain type of stakeholders, it’s a must have. They want to know that it’s not a bank owned by] Assad or the Myanmese Junta. They need to know who they’re playing against. And so Fireblocks was the first of a few whitelisters, making sure that we did a version of Know Your Customer review before releasing those institutions into the protocol.

Where we were in that part of the market, it was a big step. For true DeFi lovers, there’s excitement of, hey, I just want to know the tech works. I want to be able to do whatever version of a swap I need and I don’t want to deal with the institutional component of it. An institution sitting on the sideline we’re saying, okay, what’s a version of this that could work for us? Version one was Aave Arc, and now what we’re seeing is this next step, the future of DeFi is definitely moving to versions of permission pools, and that’s where we’re thinking the market’s starting to trend.

Ian:

Yeah, I mean, just this week I think, or maybe it was last week at Consensus, a week before we’re recording this, the folks at MasterCard announced a digital identity token, so you can kind of validate with them who you are, but then not have to give up your actual identity, but it potentially grants you access into some sort of tokenized pool. I think Circle is working on something similar that I think they call Verity. So there’s a number of these projects where some sort of third party identity provider validates you’re not a bad guy, or you have met the prerequisites to be able to participate in some sort of trading venue potentially. I agree with you. That just seems very logical to me that that is the next step in the evolution of these technologies and platforms. It doesn’t mean that it’s completely transparent to every participant who’s on the counterparty in an actual transaction, but you do need that level of reassurance that the collective group of participants are allowable under whatever regulatory scheme you you’re expected to operate under.

Adam:

That’s absolutely right. Knowing who you’re playing with, some version of on-chain ID is critical. It does not mean you completely lose privacy though. And so I think that’s what the industry’s struggling with now of, how do I know it’s okay to play with these people without everyone displaying exactly who they are in the public and displaying all their trading processes and their movement. Obviously, chain has a different visibility than others because of your skills, but what’s absolutely critical is we start to get the market participants understanding that compliance doesn’t mean everything’s public, and some of the innovations in the market are going to allow it to really unlock that opportunity.

Ian:

Yeah, I think there’s a nuance between privacy and anonymity that sometimes gets lost in this discussion. There’s very few things in this world that are truly anonymous, but there’s lots of context where there’s privacy.

Adam:

That’s right.

Ian:

And when I swipe my credit card to buy something at the store or maybe tap it these days or Apple Pay it is the more up to date scenario. But in that context, all the other people in line behind me don’t get to see the card I used, my transaction history for all time. It’s private to them, but the merchant, the bank who’s processing the transaction and the transaction processor, the network like Visa or MasterCard, they all have visibility into that transaction and they’re making a real-time determination about is the card stolen or is there some other form of fraud potentially being transacted here? And so it’s not anonymous to the people that have a vested interest in the transaction execution. And it seems likely that something along the lines of that model is where this industry goes. And I know that’s maybe antithetical to the most pure decentral-ists, if I can frame people as that way, but those most pro-decentralization. But I think for practical adoption, that balance actually generally works pretty well It seems like.

Adam:

I don’t see an alternative. Whether you’re a regulated institution or you just want to have a degree of comfort of who you’re interacting with. The true decentral-ist as you call them, probably don’t like credit cards anymore than they like an on-chain ID, and that’s fine. But for most adoption, for real commerce to continue to move on-chain, this is the innovation you need. I think it’s important that the way you distinguish it with privacy and anonymity, it resonates for sure.

Ian:

Yeah. I would be remiss to let you off the podcast without talking a little bit about regulation. It’s been a bit bumpy start to the year here at the US. I think a lot of activity from CFTC, from the SEC, policy makers are kind of pitting themselves on different sides of the debate. What’s your take on where things stand today? Where does this potentially go in the future? And what’s maybe the impact of US on your global business? Because I know that you’re working with clients all around the world.

Adam:

The US government has made their position pretty clear. Even the murkiness itself is a version of unclear, and in the alphabet soup, you could argue the FDIC has even gotten into it over the last few weeks and months, and it is not a pro-digital asset regulatory view in the United States. As an American citizen, I’ll tell you, I find it frustrating when any degree of innovation is not headquarter in the US. Obviously ethnocentric, I want all innovation coming here. That’s part of what’s made our country what it is. We’re not the only ones innovating, but we should always have the best and brightest when it comes to innovation. That’s not happening in digital assets. I was down in Melbourne and out in Singapore just about a month ago, those are in both countries where the government is leaning in, the private sector is leaning in, and it’s not just institutions, it’s startups.

And we’re at a point now where what’s happening in the UAE, even Hong Kong parts of India where crypto is not supported, but they’re pushing on digital assets. We’re seeing that that’s where the really interesting projects are coming out in financial services. And I think the average new FinTech startup, when they think, where do they want to go? They’re going to look at places like London and Melbourne and Sydney and Singapore before they think about the east coast or west coast of the US. That’s just not good as an American. In terms of Fireblocks, what we’re seeing is really good innovation in financial services through APAC, LatAm and AMEA, absolutely consistent with what we’re talking about. There’s some really important clients in the US in financial services that are working on stablecoin projects and really interesting tokenization projects, so it’s not dead at all, but the level of growth we’re seeing XUS stablecoins, we worked with the Tel Aviv stock exchange on bond issuance, certain FMIs abroad that are looking to tokenize traditional assets.

It’s clearly reflective of the fact that in the US there’s broad discomfort from the regulators and in other markets you’re just seeing a very different tenor. And the private sector is willing to lean in both at the startups and our institutional clients. So it’s going to be a process. There are definitely members of either Congress or certain parts of the regulatory community that are open to listening, and we’re making sure that we’re preaching the gospel and explain digital assets does not mean anarchy to the points around privacy. And even thinking about how we work with Chainalysis and Notabene and others, you’re not looking to avoid regulation or compliance with it. It’s incredibly frustrating, let’s say.

Ian:

Yeah, I was just in Canada this week meeting with a number of clients and some of our partners like KPMG, and it was fascinating because what will soon be the largest domestic crypto business in Canada is WonderFi. So they’ve acquired now four exchanges, I think Bitbuy, Coinberry, Coinsquare and CoinSmart. So they’re going to have over a million and a half customers, 600 million assets under management, but they are also an IROC registered broker-dealer. Which, could you imagine a crypto exchange having a broker-dealer license in the US right now? And they’re very proud of this fact. Now, it wasn’t easy. I sat down with their CEO. It was a long complex process to get there, but they were able to successfully collaborate with regulatory leadership and kind of bring them along. And it was clear there was market demand supporting that.

They wanted the legitimacy for their business, but I think there were lots of other entities who are encouraging that. And so it’s a very, very different how it seems like the story is playing out. Now, we’re also seeing some folks who are leaving Canada or suggesting they will leave Canada because the regulations are getting increasingly strict. But I think that may actually be good for all the market participants over the long run. And so there’s some positive models out there that I think it would be great if we can get things on track here. I’m curious to pull on a thread you mentioned there about asset tokenization because basically from when I was in Davos in January, this topic has just been through the roof. People see it abbreviated probably as RWA, real world assets on-chain, or I’ve talked to a couple central bankers who they’re looking at tokenizing government debt like treasury type assets on chain in a number of different countries around the world. What are you seeing in that area? I think this is a fascinating emerging space that seems to be going at an accelerating pace recently.

Adam:

Huge adoption. We’re seeing ideation, we’re seeing projects, we’re starting to see it actually implemented live. Globally with, I would say again, the slowest adoption in the US though far from zero. This tokenization is about bringing a traditional financial asset on chain. And so first question is, why in the world would you do that? And it goes back to what we were discussing earlier on, leveraging blockchain tech can allow for different solutions to known risks. Thinking about things like settlement risk. When you tokenize assets, you start to make the possibility of atomic swaps. And so imagine a scenario of a tokenized bond that is going to settle against a tokenized fiat currency. At the exact same time, you get that delivery versus payment solution or an FX payment versus payment, PvP. These are essential. The traditional markets have comfort with things settling slower because of these sorts of mechanisms and collateral management amongst other.

Now, these same institutions are saying, if I take the same asset that I know people want to trade and I move it against a fiat currency that is backed and created in a way that I’m comfortable with, now I can start to move the asset again quicker, cheaper, but still addressing the risk. And that’s the aha moment that institutions are getting. And so a shout out against the Tel Aviv stock exchange with a tokenized bond, doesn’t get more boring than a bond in financial assets, but they’re critical. And we’re seeing more and more adoption. What we’re expecting is you don’t go from a tokenized bond to, hey, let’s tokenize the entire US public equity market. That’s a bit too much for the market right now, but thinking about bringing money on chain with stablecoins, thinking about bringing markets that are large enough that it’s interesting, but small enough that you’re not necessarily disrupting the market.

So carbon credits come up all the time, assets like that private equity, that’s not necessarily pre-IPO, but you’re talking about companies where they’re not on that path. Those are the sorts of assets. Real estate is another opportunity. And it gets even more interesting when you think about NFTs with real estate and how you demonstrate ownership. Anyone that’s bought a house knows the idea of having to go and take most of your life savings to get a paper check and hold that with your life and hope there’s no fire or a car accident on the drive over to get another piece of paper that says that you and probably a bank own the home you’re moving into. It doesn’t take much more to realize, wow, if this could move on chain instantly, that would be nice and still get to the same result.

Ian:

So had somebody give me an example of this real world tokenization related to real estate that hadn’t occurred to me previously, so I’ll repeat it here. Which is less the you and I purchasing a house, the retail transaction, but if we rewind back to the 2008 financial crisis, well, what happened there? Well, you had the handful… Most mortgages, at least the United States, are not held by the originating bank. They get resold in a secondary market and those loans get packaged together. And then there’s an asset that is created out of a lot of mortgages that in ’08 were treated as being AAA rated, very low risk of default, when in fact a lot of the underlying assets, meaning the loan, the mortgage itself, highly risky. And we saw that triggered the global financial collapse.

And that lack of transparency into the underlying asset that the ratings agencies, the banks who were packaging them up, I think the institutions that were buying the assets all had very low visibility into what was actually underpinning one of these collateralized debt obligations, the CDOs. And I think there’s an opportunity using blockchain tech, this tokenization approach where you solve that lack of transparency. The asset itself that you’re actually moving could enumerate all of the data about the underlying products, and it could be open analysis in effect of all the parties who are considering transacting it. And that actually, it was kind of like a lightning bolt hit me when I had somebody walk me through that concept. I was like, that actually sounds incredibly powerful.

Adam:

Yeah, look, that’s a really cool use case, and it would’ve been great if that was actually implemented little over a decade ago. The one thing I’ll qualify is, you can do those sorts of solutions so much better with bringing the assets on chain, but really creative minds will find a way to escape some of those opportunities if they wanted to. So it’s not a panacea, but once the first company solves it, everyone else is going to say, well, how come they have all the transparency ready at hand? Where are you?

Ian:

Yeah, exactly. Exactly. Hey, last question for you before we let you run. I’m always curious how people are thinking about the future horizon. When you think about the next 12 or 18 months for the Fireblocks business and the industry as a whole, what’s getting you really excited and optimistic for the future?

Adam:

So the thing that I am focused on that, that we’re spending a lot of time on is less speculation and more utility. All right, we touched on a bit with NFTs, but it’s the consistent theme of the bull run had a lot of benefits for us. It’d be great if we were back there in the crypto bull run, no one’s going to complain. But a lot of that was fueled by speculation of which was the cryptocurrency that was going to be valued more. Now, the conversations that we’re having with clients is, hey, which protocol allows me to do something different? And that something generally speaking, as a version of commerce, whether you’re moving stablecoins quicker, you’re tokenizing real world assets, you’re making payments to facilitate commerce. Even the NFT utility is often about how you’re engaging with customers for the results of commerce.

And that’s a really different conversation than what was happening consistently, let’s say 18 months ago. And so we’re going to really work with our clients on powering those solutions. In that vision of traditional financial services, moving on chain is what we’re really focused on in financial markets and in payments, and then thinking about how to power some of these NFT utility solutions. In some instances, the individual end user may not realize that they’re using an NFT when they walk around a museum or they’re getting on an airline. So that’s the big difference that we’re seeing over the last six to 12 months. I would argue it’s good for the industry, the fact that this is what we’re focused on. There is nothing wrong with speculative trading, and we welcome that as well on the market, just like you see in FX and equities and traditional markets. It’s not a one or the other, but the fact that both are starting to happen in a more material way, that’s the future we’re excited about.

Ian:

I’m excited for that future too, Adam. Thanks so much for joining us on the podcast today. This has been a fun conversation.

Adam:

Fun as always. Really appreciate it, Ian. Appreciate the whole Chainalysis team, so thank you.

Ian:

Thank you.

 

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