Digital Assets @ Duke - Learnings, Lessons, & Looking Forward
Vertalo was invited to speak on a panel about the future of decentralized finance. Here is what we learned from the various panels and conversations over the two-day summit held at Duke University.
By Vertalo Team
We love the digital asset industry because it’s still budding and young, and many of the smartest and most talented people in finance, technology, mathematics, economics, and business, are leaving traditional fields to come and join us in building the future of capital markets, underpinned by new technologies, new business models, and an ever-expanding array of possibilities.
While at the Digital Assets At Duke event, we had the chance to hold many conversations with large financial institutions, small startups, consultants, students, and even government officials. In particular, asset tokenization sat at the center of nearly every conversation, including a full panel on the subject and what we’re seeing in the world of equities, real estate, collectibles, and others.
These are the top takeaways, themes, and learnings we observed throughout the two day conference.
Government Regulation
Probably the strongest observable theme we heard on every panel and throughout the individual conversations we had was a deep and visceral frustration around the lack of clarity from the government, especially:
What is a security vs. what is not?
How do we treat governance or utility tokens?
What is the yardstick for governmental enforcement?
e.g. why prosecute this ICO over another?
How do governments & regulators approach stablecoins, CBDC’s, and other monetary instruments?
What pitfalls do regulators need to consider (e.g. property rights) when seeking to fold blockchain into their economies?
The United States is lagging behind many other advanced nations in the adoption and application of this technology, and we need to focus on the stability produced by a clear regulatory framework for how to treat digital assets, cryptocurrencies, blockchain-based real world assets, tokenized fiat, and the dangers of central bank digital currencies. This was one of the strongest themes of the event from our perspective, and it was telling to us that the regulators we heard from not only fully agreed, but are actively working to provide that clarity and stability that we so desperately need.
We had the chance to hear from a number of regulators throughout the conference, including Congressman Patrick McHenry, SEC Commissioner Hester Pierce, CFTC Commissioner Kristin Johnson, and Governor of the Central Bank of the Bahamas John Rolle.
Congressman Patrick McHenry
Congressman McHenry talked about his subcommittee on digital assets and emphasized that the House Financial Services Committee is very crypto-focused at present. He highlighted three areas of interest for the subcommittee:
Definition of digital assets, digital asset securities, cryptoassets, cryptocurrencies, and the like.
Exchanges, particularly the regulation thereof, including order matching, account management, customer deposits, cash settlement, margin lending, etc.
On/Off Ramps to fiat and how to treat them vis-à-vis anti-money laundering.
The question of who should regulate which assets was mentioned, and we recorded this magnificent quote from him around the existing laws and regulatory frameworks for securities, commodities, and banking law:
“It’s a glorious, beautiful mess.”
No disagreement with him there.
Additionally, he mentioned the subcommittee’s interest in stablecoins and the possible uses of tokenized fiat for settlement, trade, finance, and capital markets. We were also thrilled to hear him speak about the importance of the following:
US Jurisprudence over stablecoin regulation
Property rights
The freedom of markets overall
As people who can be cynical towards regulators and their approach to regulating new technology, we were very pleasantly surprised by the Congressman’s understanding of the subject matter and its many nuances.
One thing we’ll note about the event that we really appreciated as well - while the format of the conference was panel-based, with experts weighing in and providing unique insights into the subject matter - Jimmie & Lee, the conference’s primary organizers/sponsors, really encouraged questions from the audience, more akin to a dialogue than a lecture, and this made for some outstanding exploration as the audience felt comfortable enough to join in, rather than passively participate. Indeed on the panel our VP of Solutions Architecture was featured on, not five minutes into their remarks someone raised their hand and asked if we could please slow down. It was welcome feedback, since those who know him know that he can get going when he gets excited about the subject matter or discussion, but the mark of true understanding comes not from speed, but rather the simplicity with which one can explain the matter at hand. How does the old adage go? “I didn’t have time to write a page so I wrote ten!” Complexity and speed are easy, but taking complex topics and explaining them slowly and simply - that’s the real challenge. It was a great reminder and takeaway for us personally.
SEC Commissioner Hester Pierce
Commissioner Pierce provided the evening dinner address, and made several important statements around her disagreement with how the SEC has handled regulation and enforcement to date. She openly admitted that one of the unspoken elements for enforcement action, what she called the “fifth prong to the Howey Test”, was truly whether the SEC wanted to prosecute certain cases or not.
While we agree that the SEC’s yardstick for enforcement has been completely non-standardized to date, it was somewhat startling to hear that so blatantly from a standing Commissioner of the SEC itself. We spoke with several individuals who sat at the same dinner table with her after her address, and they assured us she was very aware and open about the lack of process and standards when it comes to the regulation of the crypto and digital asset securities space.
Another critique she provided was that while the SEC has created some standards, especially the Special Purpose Broker Dealer distinction for BD/ATS’s who wish to trade blockchain-based securities, the rules are so stringent that no one is currently using it. This is also the case, as she mentioned, with the Digital Asset Security definition, where you have a fully chain-native asset with no offchain component.
We know of no fully chain-native digital asset securities on public blockchains within the US that are both compliant and exempt or registered, so while we have the definition, it’s not possible to make full use of it because of the strictness thereof. All of the blockchain-based securities we have to date are of the “digitally enhanced” flavor, or have been issued on private blockchains, which are effectively just private databases, the use of which has been legal since 2006.
It’s almost like saying, “Here’s a bench press, and anyone can use it, as long as you register with us first, then only bench at least 405 lbs!” Sure, there are people out there who can push that kind of weight, but it would not be surprising to anyone if they chose not to operate under such stringent standards.
She continued to lament that the lack of standardized enforcement has not only quashed innovation, but also hurt existing token holders in the process, since the announcement of regulatory action against a token issuer has historically been accompanied by a drop in the value of the token issued. She concluded by highlighting that the traditional disclosure requirements we see in capital markets when raising capital from investors were designed to inform investors of the risks involved in investing such capital. Her exact words were that “we need bespoke regulations designed for crypto itself,” and Congress may very well decide that the SEC is not the best regulator to oversee crypto; that role could fall to an entirely different agency.
See Commissioner Pierce’s full statement here.
CFTC Commissioner Kristin Johnson
Commissioner Johnson did an excellent job in highlighting some of the challenges facing regulators, including the fact that crypto regulation has a bad reputation as of late. In her words, “Consumers don’t really seem to care who handles the regulation and enforcement, they just want to be able to safely participate.”
She also reviewed some of the problems between FTX’s derivative exchange and the commingling of customer funds, as well as the (now) problematic acquisition that occurred between LedgerX and FTX.
She referenced the Digital Commodity and Consumer Protection Act and the current lack of regulations around cryptoasset futures and derivatives, and was transparent in her desire to increase consumer trust around these financial instruments as the industries surrounding digital assets also mature.
Governor of the Central Bank of the Bahamas John Rolle
Unfortunately we had a conflict during this keynote address which meant we were not able to listen to very much of it, but what we were able to catch we found compelling. He mentioned that the Bank of the Bahamas was actively exploring the use-case for a central bank digital currency, but was quick to note that this would be akin to “tokenized fiat” and not “programmable money” that could be used as a tool against its people. He said this multiple times in the few minutes we caught of his address, and added how a digital cash option would be very useful for transacting, especially in places where their citizens have cellphones, which could host wallets, but not bank accounts.
This was after the exchange we had with Circle’s Corey Then during the stablecoin panel (see below), but it was comforting to hear that regulators are not aloof to the potential problems that could arise through the weaponization of finance via a stablecoin or central bank digital currency.
Stablecoins, CBDC’s, and Payment Rails
There was a dedicated panel on stablecoins and it was probably our favorite panel of the event simply because it generated some excellent discussion, civil disagreement, and thought around the use-case and application of stablecoins globally. We think we can all agree that digitizing fiat and providing faster settlement, more transparency (think adding flags against tokenized assets when collateralizing them), and banking services to the unbanked of the world has tremendous application. But there are moral perils here also, and this panel was not shy about surfacing them.
Tokenized Fiat vs. Programmable Money
Those who know us know that we’re never one who’s at a loss for a strong opinion - especially where crypto, blockchain, Bitcoin, and digital assets are concerned - and during this panel we ended up throwing in our two cents into the fray whilst sitting in the audience.
Corey Then, of Circle, who issues and backs USDC, made some critical distinctions between tokenized fiat that could simply digitize the way we do everyday business, and programmable money, especially in emerging markets. He noted that property rights and freedom could be at stake when you actually begin to analyze “programmable money” and what it’s being used for.
To the best of our recollection, here was our exchange:
Corey: “Take China for example, they have 300M individuals using the ‘Digital Yuan’ in a test format, but most of them don’t want to actually use it and they don’t like how it works.”
VT: “That’s because they see it for what it is!"
After a pregnant pause, Corey responded: “That’s right.”
VT: “The implications of this are very real. This discussion really matters. In fact, a month ago the Minister of Finance in Iran publicly exclaimed that they weren’t worried about compliance, since they were going to implement a CBDC and if you were a woman who refused to wear the hijab, they’d just shut your bank account down!”
That turned more than a few heads, most of them in agreement that this was an issue worthy of debate (at least that was our read of their body language & facial expressions).
We apologized for our outburst from the audience, but restated that this conversation, the programmability of money as a prospective tool of oppression, really matters as governments look at how to implement blockchain across finance, capital markets, and everyday life for their citizens.
Corey went on to say that one of the primary reasons Chinese citizens have rejected the Digital Yuan is precisely because of the capital controls the government is able to place over an account at the individual level. The example he provided was that if you have Digital Yuan in your government-issued wallet but don’t spend it within a specific time frame (what we’ve seen is typically a 4-6 week window) then the government can simply claw back that money. The underlying narrative in support of this is one of “stimulating the economy” but of course, depending on who holds that control and what their motives are, it could easily morph into something far more nefarious and dangerous to both democracy and freedom.
We approached Corey later that evening and thanked him for his graciousness in allowing us to extend our comment beyond a simple heckling statement into the point we were trying to make, and we had a great back and forth once we were in person. We expressed our appreciation to him for his willingness to consider property rights and individual sovereignty as someone working to implement the USDC stablecoin as a payment rail in the new digital asset economy.
Finally, an interesting statistic from this panel was the fact that there are roughly $45B worth of USDC in total circulation, but have transacted in north of $2T to date. That level of velocity of the USDC stablecoin as a monetary instrument was quite impressive, we would not have guessed a number that high.
Security & Data Protection
“Criminals used to steal your data so they could steal your money, but now, that data IS money.” - Elliot Lewis, CEO & Founder, Keyavi.
The idea that our monetary system has come so far since the creation of the internet such that data and money are now synonyms with one another was another excellent takeaway. And while we could easily point to the massive infrastructure underpinning capital markets, the flow of capital, cross border payments, and other large scale systems that support our daily life that are firmly rooted with fiat as the foundation, we can all agree that data and monetary value are increasingly growing together in their use-case and application.
According to the panelists, protecting data comes down to two core factors:
Data & Security of the systems themselves, including forensics and insights into what happens once a breach occurs.
Social/Human element to security, privacy, and protection, which is a much more difficult problem to solve for, since humans are and always will be flawed individuals, with blind spots, biases, and weaknesses.
This panel also discussed the security requirements of centralized entities like crypto exchanges, custodians, derivatives and others, and what we can do as an industry to protect ourselves. From a self-regulating perspective, there have certainly been missed opportunities for enhanced security and policies about how to handle digital assets.
Of course, in the case of FTX, which came up on nearly every panel at the event, if actors like “Scam Bankster Fraud” or others are determined enough, no amount of security controls, corporate provisions, or regulation, will stop them from committing fraud. That said, there have been plenty of avoidable, even foreseeable, attacks on the crypto industry, and more attention to detail when it comes to security and vulnerability, would serve the entire industry well.
Decentralized Exchanges & DeFi Beyond Dex’s
We learned about what’s known as impermanent loss in the DeFi world when you use multiple currencies grouped together to underpin a loan against an on-chain asset, and how traders tend to make bets, known as “taking a tilt” when executing trades based on the expected volatility of both underlying assets.
We were highly impressed with Uniswap’s approach to trading these assets, especially where orderbook management and depth is concerned, since historically that has been entirely proprietary, but with blockchain those flows and movements can be measure in near real-time terms. The power of this aggregated data, and the signals sent to capital providers, startups, and end-users, is simply astonishing.
Another point that was echoed throughout the conference, and driven home during this panel, was the grassroots nature of the growth of decentralized finance. The reality is that there was an explosion of adoption, followed now by those left standing to figure out how to fit regulatory requirements into the world of DeFi, rather than how to fit DeFi into the world of regulated capital markets. This dichotomy has really interesting implications for market participants and investors alike, and will shape the growth of the ecosystem in a major way over the next decade.
DeFi Beyond Dex’s
This was the panel we were apart of, and we thought we held a fantastic conversation about where we can go from here once tokenization and blockchain-based assets truly start to take their hold in finance. Our personal opinion is that the adoption tipping point for the confluence of DeFi & TradFi will be when we can create collateralized loans against tokenized real-world assets, with the liquidity provided from either a bank, custodian, or institution, OR from a liquidity pool of everyday users, like MakerDAO or Centrifuge. Tokenizing the asset is the first step, but what’s truly unique is what you can do with it once it’s been staged, issued, and tokenized.
One point we made was about the difference between a sovereign monetary system like Bitcoin, where you can have trustlessness (or something very close to it), versus the securities world, where trust is inherent and constant. Peel back the layers of any blockchain system for recording data, and there are opportunities for bad actors to inject data or commit fraud, especially if the underlying asset is a security or financial instrument. The Digital Assets At Duke Twitter account captured our VP of Solutions Architecture’s thoughts:
Because of this reality, another point we sought to drive home was the fact that in the world of equities, the sources of data and the reality of an ever-changing regulatory environment necessitate flexibility over rigidity. If you’re talking about a simple financial transaction, the rigidity of smart contracts is a feature, but as transactions and inputs get more complex, that rigidity can actually make the transaction, and system as a whole, more brittle.
The future will be a hybrid on-chain off-chain approach that provides more transparency, but retains upgradability, flexibility, and control for issuers, brokers, custodians, banks, and others.
Chuck Mounts, of S&P Global, brought up the nature of credit risk and the fact that we will need to have both on-chain and off-chain functionality to support the accuracy and veracity of the underlying data, and we couldn’t agree more. The source of truth and where trust is placed within a tokenized world is something all players must consider.
When referring to the opportunity and interest in the infrastructure that still needs to be built to support the future of a hybrid world, with assets on-chain and data off-chain feeding smart contracts, trading venues, and other players, Colin Cunningham from Centrifuge said that “the amount of building that still needs to occur is staggering.” Again, full agreement from us here.
Conclusion
We want to applaud Duke’s faculty for hosting such an outstanding event. We were fortunate enough to meet with some of the sharpest minds in the industry, and dig into the nuances and subtleties of this industry with an eye towards how we drive adoption and grow the space.
Universities that are seeking to arm their students with knowledge, deep insights, and valuable connections, would be wise to mimic this approach and host events like this one, because one thing that was cemented into our minds was that the permanence of blockchain technology, asset tokenization, and decentralized finance is something that can no longer be ignored. Blockchain is here to stay and will only grow in its applications in our lives, and that represents enormous opportunity for those seeking to get involved.
Till next time.
Interested in connecting over the digital asset ecosystem, capital markets, or blockchain-based securities? Reach out to us on LinkedIn or Twitter!
Disclaimer: We are not attorneys, broker-dealer,s investment advisors, or wealth advisors. Nothing presented herein is nor should it be considered as legal, professional, business, investment, or any other kind of advice. The information presented here is done so for educational, informational, and entertainment purposes only. Always consult a licensed professional before taking professional, investment, or legal action.
Great write-up! I wish I had been able to attend.
Great read!