With the rapid growth of digital assets, the need for secure and easy-to-access infrastructure has become more apparent than ever. Especially for institutional investors, the entrace to the blockchain ecosystem and DeFi applications has to be just as secure as simple of a process.
Digital asset custody platform Fireblocks has established itself as one of the leading service providers for institutional investors looking to enter the crypto space. Its customers mainly comprise of exchanges, lending desks, custodians, banks, trading desks, and hedge funds. In a conversation with CVJ.CH at the Crypto Valley Conference 2022, Fireblocks Head of Research & Development for Web3 Salick Cogan talked about the emergence of Web3, institutional flows, proper security and other considerations for service providers.
CVJ.CH: Where do you currently see the biggest infrastructural flaws in the space?
Salick Cogan: The crypto industry grew at breakneck speed in 2020 and 2021, moving quickly on extremely lucrative opportunities was prioritized over operational best practices, revealing infrastructural flaws in the space. But now, reality has set in and it’s time for the industry to get back to basics.
Security: There are many institutions that are still failing to prioritize security, and it is becoming increasingly apparent as the value lost from hacks and attacks grows larger in size. Fireblocks helps businesses secure customer and investor funds from cyber attacks, internal collusion, and human error with a multi-layer technology that combines the latest breakthroughs in MPC cryptography with hardware isolation.
Counterparty risk: With regulatory frameworks materializing around the world, any business can be shut down overnight, resulting in substantial counterparty risk that you are taking on with centralized providers. Counterparty risk is real and blockchain technology provides digital asset operators with the ability to significantly reduce these risks. One example is that blockchain technology can help businesses ensure that their settlement practices are instant and immediate.
Self-custody: Currently, self-custody is an extremely important concept, and we stand by “not your keys, not your coin.” Given recent events, we have witnessed that custodial platforms are able to freeze user funds and limit access to the funds completely. We are already seeing users pulling their funds from custodial and putting them into self-custody wallets. This is because users want to remain ensured that they completely own their assets and there are no institutional factors making decisions on behalf of their assets. This action allows for better management of risk, given the recent market events. The biggest learning lesson from recent events is to always be in control and make sure your assets are not on someone else’s balance sheet or wallet.
Is there anything that piques the interest of your institutional clients the most?
It’s been interesting to note that recent market downturns have not slowed down institutional clients’ interest in digital assets. We continue to see traction in areas that have seen minimal impact from the downturn - areas such as Web3 (especially around DeFi, NFTs, and GameFi) and payments. Banks and exchanges are especially interested in areas like stablecoins and tokenization, an example of which includes our partnership with ANZ Bank and its Aussie-backed stablecoin, A$DC.
We ended also H1 with foundational partnerships with FIS, SDX, Checkout.com, and others. The world is just starting to realize the true benefits of tokenization as major financial institutions begin to explore and offer tokenized products, ranging from digital bonds and stablecoins to fractionalized art and carbon credits.
DeFi offers attractive yields compared to traditional finance. Where do these yields come from and are they sustainable?
Yields come from two different things:
- Staking a token to earn a percentage of network fees
- Staking liquidity into DeFi protocols to earn LP rewards
These yields act as incentives to increase a blockchain network’s decentralization, security and the overall ability for markets to be built on top of them. So yields can be sustainable at lower APYs, but the high yields that DeFi offered in 2020 may never be surpassed again.
Do you think NFTs will become institutionalized similar to the DeFi sector, or are tradeable images a more retail-driven market?
I think it’s important to think about the different types of NFTs. There’s certainly a retail market for Art, Music, and Collector's items, but for institutions, tokens offer enormous value when we look at how they can make any number of structured products more efficient when they are tokenized. NFTs can also represent a host of other real-world assets and serve a greater purpose than just profile pictures. This spans real estate, mortgages, identities, memberships, and much more. Just recently, the High Court of England and Wales has allowed for the serving of lawsuits via NFTs.
We are bringing the same level of security, efficiency, flexibility, scalability, and trust to serve Web3 businesses and NFT, GameFi, and metaverse companies. For NFT services and financial institutions planning to build the next generation of products using Web3 technologies, we provide the most comprehensive and secure suite of Web3 solutions.
What’s most important when onboarding people from the traditional financial world?
When onboarding, there are several key areas that traditional financial players need to consider so that they may easily and securely support digital assets and cryptocurrencies.
Custody models: For most of our customers, our services are typically delivered in either direct custody or a noncustodial fashion. Onboarding clients from traditional sectors requires a revision of its custody models in the safest, most efficient, and most secure way possible.
Policy and governance frameworks: Traditional sectors have vast regulations and governance frameworks whereas the regulation of digital currency is only beginning. When onboarding a client, an extensive assessment of these overlapping differences is a crucial step in the process.
Security: We have recently received certification in the categories of security (ISO 27001), cloud (ISO 27017), and privacy (ISO 27018) from the International Organization for Standards (ISO). This accreditation makes us the only crypto tech company to achieve all three certifications, covering the main areas of concern for most traditional finance customers.
Where do we stand in terms of regulation?
I think the progress in the EU with MiCA is a good indication of where we are going globally. It’s unlikely that the U.S. and the UK are very far behind. While the current crypto market crisis is still unfolding, it is clear that has not arrived at a point of principled global consensus – yet. From where we sit, we see many institutions welcoming the regulation because it clarifies how they can move forward. In those jurisdictions where there aren’t clear regulatory frameworks, institutions have tended to lag in adoption. Regulation frameworks such as MiCA present an opportunity for us as an industry to correct misperceptions.
As a community, we need to do a better job of explaining to the public how we will collaborate with regulators in order to leverage what we know to be true about this technology so that officials may implement regulations accordingly. Regulation brings clarity and stability. These will help minimize these concerns by putting the onus on the industry to act. Frameworks like MiCA are part of what is driving market participants’ view of the opportunity here. We will do better than replicating traditional models to meet these policy goals. The ecosystem will have to change to incorporate these new norms. Certain firms will do this better and more effectively than others, and those that are able to adapt will, in many cases, thrive.
With recent delays in regulation efforts, policymakers and industry will now have the opportunity to assess the performance and risks of these products/services over a longer time period, and I believe this will both unlock further innovation and result in more thoughtful regulation at the right time.
Do you have any thoughts on the situation surrounding some centralized borrowing/lending providers?
Many of these centralized providers offer the same products and services. There are no differentiating aspects between their offerings. Arguably, the only way for these companies to compete within the traditional space is by cutting corners and putting the customer’s assets at risk. These risks involve the security, control, and dissolution of assets.
With recent bankruptcies, consolidations, etc., both businesses and individuals are moving towards the direct custody model that we provide, allowing for full control of their assets.
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How much will the space change in the next five years?
If we look at how much has changed in that last year around digital assets, I think we can assume we’re in the midst of major changes that will come very quickly. New regulation will definitely play a part in that. Market conditions now are ushering in new innovations that will likely bring more accountability to the markets, making them more attractive to institutions.
Companies and technology will become much more resilient. Now is the opportunity for institutions to weather the storm, determine their priorities and approaches for future success, and maximize their resources to ensure their institution will survive. Crypto operator clients are realigning their efforts and getting back down to basics, like reviewing counterparty risk, settlement practices, and custody infrastructure.
A lot of the financial infrastructure is going to move to blockchain and digital assets. Financial institutions are taking a long-term view when it comes to digital assets and their commitment and investment in the technology remain strong, especially when it comes to tokenization and payments.
We are just seeing the beginnings of Web3 and we will see many innovations emerge in this area.
Salick Cogan is the Head of Research & Development for Web3 at Fireblocks. He is an accomplished R&D group leader with 20 years of experience in global, large and mid-size organizations, having managed the full lifecycle of software products, from strategy to delivery. He is a two-time cofounder, having launched a software services company as well as a startup in the hospitality space. Before Fireblocks, Salick worked for 6+ years at Wix, leading R&D groups to build their core business capabilities, covering half of the company’s premium services. Salick started his career in the elite 8200 service, the Israeli technological intelligence unit and has a Bachelor of Science in Computer Science.
