Hi everyone, my name is Joonhong Kim, a moderator for this panel discussion. I spent 30 years in finance and tech and the last seven years in digital assets, founding a couple of blockchain companies here in Korea. Before I start I should confess that I have two phobias: English and public speaking. But anyway I'll do my best. Let's go. For this special panel discussion, we are actually welcoming two extremely distinguished global leaders who are very difficult to have in one place. They are Fernando Vázquez, president of Chainlink, and Yuval Rooz, co-founder and CEO of Digital Asset. Please give them a big hand. Could you please introduce yourselves and tell us what you do?
Sure. I'm Yuval, as you mentioned, co-founder and CEO of Digital Asset. We created a public layer 1 called Canton Network. My background is also in trading technology. I was at Citadel and DRW trading. I got into the crypto and digital asset space in 2012 and then started my company in 2015.
One thing, Yuval, you made DAML, right?
Correct. The smart contract language DAML.
Most of the web3 ecosystem is actually doing Solidity and EVM smart contracts. Could you please tell us the reason why you made it?
We needed to create a smart contract language that actually works for financial institutions, and not just a funny money language. So we'll talk in more details, but when we wrote the whitepaper for Canton and DAML in 2015, we thought about not just building another layer 1 for the sake of building another layer 1, but actually came at it from more of a first principle of what do regulated entities need to worry about when it comes to securing their assets, securing their client information. And we just felt that EVM and Solidity specifically were not able to meet those needs, as we've seen with many hacks and information leaking and other fun things.
Thank you for having us. I'm Fernando. I joined Chainlink three months ago as their first president. We are Chainlink, we secure around $8 billion worth of stablecoins from a number of features. We provide what we think are all the features that you need to have institutional grade stablecoins that support institutional grade use cases. In my previous role, I was the CEO of SBI Digital Asset Holdings in Japan. And in that role, I was quite involved with our friends from Circle and we helped them bring USDC to Japan. It was a pretty painful journey. So maybe I can share some of the learnings.
Yeah. Sure. Well, many folks in Korea actually think that stablecoins should float freely on a permissionless public blockchain such as Ethereum, valuing decentralization and anonymity as the most important value. But I just have a personal opinion, I have a slightly different opinion on that. For stablecoins, we need compliance, privacy and interoperability. From that perspective, we have the most important players in the market in this session. All right. First question. It's a bit stupid. If stablecoin really takes off, do we still need banks?
So, I think it's, first of all, not a stupid question and it's a question that a lot of people ask themselves: do stablecoins and just generally speaking digital assets disintermediate some of the existing players? As a former trader, the way I actually look at a bank, a bank is a credit extension to clients and therefore they manage risk. I actually think that stablecoins create opportunities for banks to create better products. Now I think that there's nothing new that new technology is going to disintermediate some of the existing players. They just don't know how to adapt to new technology. So as everyone knows Blockbuster had an opportunity to buy Netflix and they decided not to. And there is no more, you know, it's only Netflix now. So I just don't think that technology by itself disintermediates. It's the lack of the adoption of the technology that disintermediates. So we are going to see banks issue stablecoins. Banks have a huge advantage that their network is already connected to millions and millions of clients that are not just doing payments. They're actually borrowing money for mortgage. They are borrowing money for their business. You still need to know how to manage risk. If you are going to get loans towards your business, if you are going to get loans towards your house, you still need to have institutions that know how to extend credit. Today it's primarily banks. Tomorrow we might have new entrants, but I think that banks if they adopt the technology and kind of lean in, they are actually at an advantage compared to new entrants. And that's why you know you're seeing companies like Circle trying to become a payment company but some of the banks, I mean if you look at JP Morgan and Citi for example, they're some of the largest payment companies in the world. Now the question is and we have a former very senior person from Citi, will these large institutions be able to take advantage of the technology and lean in? Generally speaking, that's the biggest challenge of large organizations is that from a corporate culture perspective, they're not very good in disintermediating themselves. They're kind of like trying to protect themselves until one day they realize that it was too late. So that's generally speaking the challenge that I see with large institutions.
One comment, if you don't mind? Some people don't realize that there are other types of cash on chain. Stablecoin is one example, but the JP Morgan, Citi, and others, are also working on so-called tokenized deposits. So the fear of the banks is that you know you see outflows from deposits to money market funds, the balance sheet will become smaller and then they cannot lend as much as they wanted to, but I think the thesis of some of these banks is that if you talk about deposits you don't deplete that part of the balance sheet. And at the end of the day what I think the finance industry needs is programmability. We enable programmability, composability, you name it. But I see a world where you look at the taxonomy we have stablecoins backed by money market funds and potentially other assets, and you just have tokenized deposits. I think that's my thesis.
I'll add just to make it a bit more real. So on Canton Network already today we are processing close to 10% of the US repo market. So about $350 billion of repo transactions and as Fernando said you're going to look for what is the cash like. I think that the future of stablecoins or any type of cash on ledger is going to look like we think about collateral in capital markets. So there's quality of collateral, right? So US Treasury number one, then you have JGBs, then you have guilts, Euro bonds, and they start going down, down, down in terms of the quality of collateral. You could start thinking about stablecoins very similarly, which is who is the issuer of the stablecoin. And again, this is where I think that banks, whether it's true or not, will have a much higher credit rating or maybe quality of a stablecoin that at the end of the day, if you are a large hedge fund or a large asset manager, you would prefer to transact onchain with those type of stablecoins rather than with someone else. But again, I think that this is more of a short-term thing. I think over time and there's a few very important issuers of new stablecoins. As those issuers will show their value and their ability to execute and manage the risk properly, they will become and move higher and higher in that creditworthiness.
Thank you very much. Yeah, let's move on to the second question. Actually, we are moving from unregulated to the regulated area of stablecoin. The legislation on stablecoin in various countries is creating another regulatory fragmentation such as USDC US, USDC EU, USDC Japan, probably in the future USDC Korea. It's the same USDC, but it's different as before. Will it eventually become similar to the legacy correspondent banking model and CLS network which might also cause side effects such as de-risking, friction cost, another inefficiency or is it still better than what we have now? Fernando, could you start? You have the experience in Japan and Hong Kong in Asian countries, right?
Yeah. So the issue in Japan is that you were not allowed to actively manage the underlying. So if it's JPY denominated you need to put basically the equivalent amount in cash with the trust bank that is not generating any yield, no interest payments, you cannot actively manage it. You brought something like USDC to Japan even though it's already backed by money market funds in the US you need to bring again equivalent amount to Japan, so you have a 100% over collateralization. From the point of view of the user it doesn't really matter, you get what you want, cash on chain, but what happens is that you cannot build a viable business model around it. So this should become the supply side, then the user gets what he wants, cash on chain, but it makes it really painful for issuers and those who want to again, it will have to effectively subsidize the stablecoin itself. So I see this fragmentation as potentially a stiff lane innovation, it will mean that in many countries you will not have a viable stablecoin because there's no viable business model that you can build around it. That's what I see as the main challenge. This fragmentation.
I think a few things. I think that sometimes people think that the risk with stablecoins is that now everything they hold is fully backed one to one. The reality is, again, this is where I think that understanding the risk framework of different stablecoins, there's still risk. And even the risk is not that the issuer will do something that is not legal, but there's just operational risk. For a good example, is Circle, which is kind of like considered to be like top of the list in terms of those that do it right, didn't manage their exposure to Silicon Valley Bank correctly, and they could have lost a lot of money. So I think that one of the things that we at Digital Asset and Canton Network are trying to do, we just announced about a month and a half ago a partnership with DTCC where you can actually hold treasuries natively on Canton. So today most stablecoin issuers hold their reserves offchain. You don't get to see their reserves as a holder of the coin and therefore you are exposed to that risk. You don't actually get to see the reserves. And we're kind of back to today's world where really what you're holding is a liability by an issuer and you have a lot of trust in that issuer, no different than how you have a trust in your bank to manage the reserves properly. So, one of the things that I think we're going to start seeing is the ability to actually see through and to see the reserves in real time. Chainlink issued a product of proof of reserves. You know, those type of innovations are going to reduce the risk. But at the end of the day, it's important to understand stablecoins are not risk-free. And I think it's extremely important. The other thing that I would say it's about stablecoins which is related to what Fernando said which I was very happy because I just said the example about K-pop. I think that a lot of people get excited. If you look at Japan for example, they had stablecoins for a very long time but they haven't found the killer use case and as a result of that it never picked up. I highly recommend for Korea to make sure that whatever use case that they pick is something that is backed by usage because what will happen is a lot of energy, a lot of effort will go on and then no pickup will happen and the backlash would be much bigger because it's like look we did all of this work, all of this money invested and nothing came out of it. So I would actually say stay more focused, pick something that will be, you know, success on day one, and then grow from there rather than trying to go too wide.
