TradFi Goes Onchain, Part 2: From Pilots to Market Infrastructure

Andrei Yurkevich, Protofire · 00:00

Hello everyone. We are live with episode five of Protocol Roundtable. And today we are speaking about TradFi going on-chain, continuing with the topic that we started in our last episode. And today we are speaking specifically about transition from pilots to production to market infrastructure. And we have awesome speakers, as always, but today's speakers, I think, they're special, because they clearly know what's the difference between pilot and production.

Now, to give you some numbers and to introduce our participants: we have Emma from Kinexys Labs by J.P. Morgan, we have Martin from Centrifuge, we have Ryan from Aptos, and we have Rado from Protofire. And the promised numbers is that Aptos carries close to one billion in RWA-backed asset on the chain, and about 50 billion a month in stablecoin volume. Centrifuge has a number of RWA funds, and only one, Janus Henderson, passed one billion in volume. And Kinexys is just running 5 billion a day.

So yeah, let's have our speakers to introduce themselves. And while you introduce yourself, please also answer a warm-up question. And the question is: complete the sentence in one word. The blockchain part of my job is... So yeah, let's start with Ryan. Ryan, Aptos.

Ryan Zega, Aptos Labs · 01:54

Yeah, definitely. No, yeah, pleasure to meet you all, and thank you again for having me on today's roundtable. My name's Ryan Zega. I lead the institutional business development efforts at Aptos. So I've been here for about a year and a half now. So Aptos is a global layer one. We have a strong focus on money movement and then getting financial products on-chain. Our project emerged from Meta's Libra/Diem efforts back in the day. And then, as you noted, right, we do about 40 to 50 billion dollars of stablecoin transactional volume a month, and then also have about a billion dollars or so of RWAs on-chain.

So the blockchain part of my job is also growing the Aptos ecosystem, specifically with institutional issuers. And then prior to joining Aptos, I worked for a very tokenization-focused broker dealer within the US called tZERO, so a very early entrant in the RWA STO space. And then prior to that, I had a TradFi career in commercial real estate.

Andrei Yurkevich, Protofire · 03:02

Okay, yeah. So now please answer the question: the blockchain part of my job is...

Ryan Zega, Aptos Labs · 03:07

Yeah, the blockchain part of my job is growing the Aptos ecosystem, specifically with larger institutional firms.

Andrei Yurkevich, Protofire · 03:16

Okay. Yeah, it's a little bit longer than just one word, but okay, we'll take it. So yeah, Emma, please introduce yourself.

Emma Landriault, J.P. Morgan Payments · 03:26

Perfect. Thank you so much for having me today, and nice to meet all of my fellow co-panelists. So, Emma Landriault, I am the global head of Kinexys Labs. And really, that mandate focuses on the growth of a lot of our public blockchain products, businesses and infrastructure, which has particularly been a step forward for Kinexys. And for those of you who don't know, Kinexys is the business unit within J.P. Morgan that focuses on all of our blockchain products, services and businesses. And really, we have a couple of different products around payments that are on a private chain, information movement on a private chain and digital assets on a private chain.

And then last year we actually brought JPMD, which was the first bank deposit to public chain. And then shortly after, worked with our asset and wealth management business to bring the first sets of tokenized money market funds to Ethereum from J.P. Morgan. So lots of exciting things going on in the J.P. Morgan ecosystem and in the Kinexys ecosystem, really focused on how we're continuing to grow and scale both our private chain business and our public chain business.

And so the blockchain part of my job is, let's say, ever exciting. I've personally been in the space in institutional digital assets since around 2019, so definitely when most other banks weren't even really thinking too deeply about institutional digital assets. So I think we're definitely at a more exciting time in this space, where we're really starting to see kind of the TradFi and public chain or DeFi convergence become more meaningful, and the right regulatory environment as well to support that. So "ever exciting" is my cheat of, I would say, two words put into one. Thanks, Andrei.

Andrei Yurkevich, Protofire · 05:12

Okay. Yeah, thanks, Emma. Martin.

Andrei Yurkevich, Protofire · 05:20

Yeah, Martin, you're muted. We don't hear you.

Martin Quensel, Centrifuge · 05:27

Okay, just clicking on it. Sorry. Hi. Hi, everybody. Thanks for having me. I'm founder of Centrifuge and also of Anemoy. Centrifuge is a tokenization platform, and Andrei, thanks for introducing already what Centrifuge is. And Anemoy is an asset management servicer, helping asset managers adopting the technology and bring, with our help, really products on-chain. Back to your question, how to continue that sentence with a single word: I would most likely call it creating tokens where token utility is beating traditional financial products, or a comparable traditional financial product.

Andrei Yurkevich, Protofire · 06:07

Awesome. Yeah, thanks, Martin. And Rado.

Rado Patus, Protofire · 06:10

Okay, thanks for having me here. I'm Rado Patus and I'm the lead product manager in Protofire. So I've been in crypto space since 2017, I would say, around the digital assets, also similar to Emma. However, before that I was part of almost 16 years building enterprise stack inside Deutsche Börse: services, Eurex, risk engine, and this traditional finance.

And today my job stretches basically from choosing the rails to going live. So what you guys built, Emma, Ryan, Martin, that's the rails, and I'm on the side, usually with the banks that want to use it and build regular products on top of it. And to complete the sentence, the blockchain part of my job is, I would say, plumbing, and how to use this plumbing to build real products.

Andrei Yurkevich, Protofire · 07:23

Okay. Yeah, now I want to declare, Rado, you a winner, but you spoiled it eventually by adding more [context]. So yeah, all right, all right. Yeah, so the first official question is: two weeks ago we had a consensus that most banks, most blockchain teams in the banks, have like three people and a press release.

Rado Patus, Protofire · 07:31

I'm not a winner.

Andrei Yurkevich, Protofire · 07:52

So you guys clearly know what the difference between the pilot, the production, and please tell us what is the separation. So, based on what you see with your customers and their journey, and they start with the pilot: now, is it like a decision that, hey, now we secure more budget, now we see that what we wanted to see in our pilot, now we're going to production? So what they need to see in their pilot to make this decision? Or maybe it's just completely different. Maybe it's just organically growing, growing, growing, growing, and wow, we're already not a pilot anymore, right? So what do you see, how it happens, and what is the kind of this transition moment, when companies decide, okay, now it's time, we're going? So yeah, let's start with Emma.

Emma Landriault, J.P. Morgan Payments · 08:50

Thank you. No, it's a great question. I mean, and maybe just giving some background. So we started what is now the Kinexys Digital Payments product. So you mentioned, we clear on average 7 billion a day on that rail. Started in 2019 as a first product launch, but pilots and central bank experiments before that, and similar with our Liink network back in 2015. And it took us around 2016, 2017 timeline to go live. So I share that because we're definitely, like almost every other institution in the space, have had the experience of starting as a pilot and starting small.

And I think before going to what is the moment that shifts it, what I would say is, particularly for banks and other highly regulated institutions, whether it be asset managers or other types of non-bank financial institutions, I think, from my experience, being able to first start with a pilot, to start small, to get everybody who needs to come along for the journey comfortable, is huge, right? Because outside of just having the right business cases and the right external environment and the right demand, typically to launch a full-scale product and actually move to production, there's going to be coordination and understanding and requirements across operations teams, cyber ops teams, various different finance and legal teams.

And so we've definitely seen the benefit of being able to kind of start small, start conservative, and slowly grow into larger products that can actually clear significant values, particularly for private chains. For example, with the Kinexys Digital Payments network: it has been 4 trillion since that 2019 date. So I think there is a benefit to going to pilots. But of course a lot of us in this world, I think, have a little bit of whiplash of getting stuck in pilot, right?

And so some of the factors, I think the way I would look at it is, not every institution is created equal. So there's always going to be different factors that will drive that push from proof of concept into an actual production-grade application. Typically, some that we would see, to your point, Andrei, is: is there organic demand, right? One. Two is, yes, the continued investment, because again, I think the uplift between manual processes and a one-off transaction to actually bringing a full product to market is significant. Sometimes it can take in these institutions over a year just because of the amount of

Emma Landriault, J.P. Morgan Payments · 11:11

training and cyber uplift and automation uplift that actually has to happen to get there. And then I think it's also more broadly as well, the market dynamic, and how that specific institution is looking at playing, or their strategy within that market dynamic. I think we've seen a lot of push across the institutional digital asset ecosystem to move towards production-based use cases at the back of stablecoin summer last year, followed by a ton of infrastructure acquisitions, right? And so I also think that those external factors, based on the institution's own strategy, are key.

And then I think the last but not least is risk appetite, right? You have to have the risk appetite to actually bring these products to market and be comfortable at scale, be comfortable that things will break, and know that you have the right teams from an operations perspective and from an exception handling perspective to actually remediate these issues, and the right posture to do things like, particularly for the public chain world, have really strong compliance monitoring, cyber monitoring capabilities, because these are all new types of risks that traditionally financial institutions aren't actively thinking about, because they're not typically on fully public networks. So a few different factors, I think, can really set that push of going from what is first a proof of concept into an institution choosing to take that into production.

Andrei Yurkevich, Protofire · 12:33

Awesome. Yeah, very comprehensive. Thanks, Emma. Martin, do you have anything to add to that?

Martin Quensel, Centrifuge · 12:42

Yeah, so I think it's most likely a totally different perspective. And maybe, I think, Ryan, Rado, you follow me here. We have a production-ready environment, so we don't really do pilots anymore. We of course support pilots when we work with partners like J.P. Morgan, et cetera. But our protocol is version 3.3, just issued 3.3 last week. So it's kind of audited, works, has thousands of users, is transacting billions of dollars. So it works on different blockchains, et cetera.

And I think also, if you would like just to tokenize and distribute, I think you can actually start straight and don't need a pilot anymore. Most of the products have product market fit. If you look at tokenized equities, funds, fixed income, et cetera, all that is already on-chain. Emma, you just mentioned your money market fund. So I think the kind of, yeah, you need to experiment and check the technology, I think that is over. The technology has matured, is kind of improving, of course, obviously. But I think, yeah, not kind of in '21 anymore.

Andrei Yurkevich, Protofire · 13:56

Okay, yeah. Rado, what's your take?

Rado Patus, Protofire · 14:03

Oh, sorry. I [understood] Ryan. So my take, I would double down what Emma and Martin said. I would say that currently the decision going from pilot to production, at least in this bank environment, it's: whoever owns the risks decides, and decides on the evidence they can defend. So

Martin Quensel, Centrifuge · 14:04

Yeah.

Rado Patus, Protofire · 14:25

They need to see usually a reconciled month, a compliance evidence in regulators' format that they will accept and they will understand. They need to see usually at least one uncoached party that can accept [it] as a counterparty. And the CFO usually needs to see some number that he can put in a presentation for the board. So this is the practicalities. So I would say again, who owns the risks decides.

And there is one thing, and I like that Martin said that they already have a product and basically running in production. Yes, what we see right now is that there is a bunch of pilots running and most likely are going to be running forever, because they are not designed to be production-ready. So those are just experiments. So once we go from these experiments to something that's designed to be used in production, then that's the way to go, in my opinion.

Andrei Yurkevich, Protofire · 15:37

Okay, yeah, thanks, Rado. And Ryan, anything left to add?

Ryan Zega, Aptos Labs · 15:44

Yeah, yeah, definitely. So, similar to what Martin mentioned, right, we've been live on mainnet at Aptos for almost five years at this point and transacted 7 billion transactions. So the proof of the actual blockchain is there. And then we are involved with a number of different consortiums, pilots, et cetera. So definitely agree with Rado's point on, it's really that underlying consortium, right, individual larger firm, right, that's going to be deciding when you push that pilot into production.

And for us at Aptos, right, we'll have varying degrees of involvement, right? At the bottom layer, right, we're an underlying L1. We also have a very robust engineering team, so sometimes we'll actually incubate and build out products, similar to our DEX, Decibel, decentralized file storage solution, Shelby, as well as other privacy solutions, and then look to apply it in these different pilot programs. So we're very much interested in choosing the right pilots that will eventually roll into production, and we've seen a lot of successful implementation of those pilots.

Andrei Yurkevich, Protofire · 16:58

Okay, yeah, Emma, please. Looks like we'll have a debate.

Emma Landriault, J.P. Morgan Payments · 17:02

Not a debate. I just want to clarify, right, that I completely agree with Martin's sentiment. We are in the business of building live products. We have a rail today that has processed $4 trillion. That's probably one of the biggest banking private blockchain implementations to date, as well as three other live products, including an information network with multiple different financial institutions that are using that every day to share account validation information; JPMD, tokenized money market funds, live on public chain; and a number of digital asset applications for intraday repo and tokenized collateral.

So I want to clarify that my point is not so much internal. Like, we are ready, right? And we have had to build and launch products. And even being able to put JPMD on a public chain, we had to do it to the grade of a full product launch after a pilot, right? So I think the ecosystem is there, and I agree, we're not in 2021, and we don't want to be in the business of shipping pilots.

But what I've seen from the market and from our clients and from other institutions who are just first dipping their toes, I think Rado said it really well, which is, at the end of the day, it comes down to the risk owners. And when you want to effectively sell to the risk owners, particularly for those who are not necessarily crypto native or in the business of managing risk on public chains, dipping the toes in to get the posture comfortable, to then be able to go into a production-grade application, I think it has been certainly the trend that we're seeing across our client base and across other institutions that we work with.

Andrei Yurkevich, Protofire · 18:38

Yeah, thank you. So let's switch to the next question. And the next question is about regulation. So two weeks ago, Senate failed to advance the CLARITY Act. In the meantime, SEC and CFTC are writing the rules themselves. But you guys are in production for like several years already. And speaking about the United States specifically, that is for, let's say, Ryan, please start. [unclear] Emma, I'm sure that you have something to add here.

So how did you start, without CLARITY, without GENIUS? But you started to process payments, you started to process transactions. What risks did you have to take? What decisions did you have to take back then? And what is still something which is not completely settled today? What risks still reside till today? Yeah, so Ryan, please.

Ryan Zega, Aptos Labs · 19:43

Yeah, definitely. And then, look, regulation's nuanced, right? Depends on product type, geography, a number of considerations. And we have a very robust legal team, both internal and then external counsel, that assists with these efforts, and it's really project dependent. So within the US, even though CLARITY hasn't sort of gone into the next step, right, there is some advanced potential rulemaking, right, that's coming from the SEC and CFTC that we're looking at very closely, right? And then we're also thinking about, hey, how do we take some of the DeFi products that I've built out in the Aptos ecosystem, including our DEX, which is obviously a non-US focused DEX, and potentially applying it to evolving regulation.

And then when we think about advancements in money movement, right, similar to Emma, right, we'll kind of look at it from a jurisdictional perspective and then see what we can do potentially beyond stablecoins, right? We've worked with a number of kind of top-tier issuers, right, Tether, Circle and others, to have their stablecoins natively issued on Aptos. And then kind of the next extension of that is looking at different tokenized deposit and other sort of institutional money use cases. And again, it's going to be highly nuanced based on the counterparty and then what they're looking to address from a jurisdiction by jurisdiction perspective.

So ultimately, I'm very bullish, right, on advancing kind of regulation and then kind of figuring out where our DeFi products fit, as well as some more institutional focused use cases. But again, very nuanced.

Andrei Yurkevich, Protofire · 21:31

All right. Yeah, thanks, Ryan. Emma, so what risk did you have? What decision did you have to take back then? Yeah, and how it's changing.

Emma Landriault, J.P. Morgan Payments · 21:39

Yeah, no, I mean, obviously, I would say not just in the US, but globally, the regulatory environment is evolving massively in the last year or 18 months or so. I think there's been obviously CLARITY and GENIUS in the US, but also across Europe, across APAC, we're starting to see either new legislation evolving or existing legislation starting to be reopened, right, as new issues and new maturity in the market come up. So I think it's definitely a really interesting time.

In terms of the money, right, because I think your initial question was, how did we launch, right, absent this regulation? And it's a bit similar actually to Ryan's sentiments, which is, for both the blockchain deposit accounts offering and JPMD, these are commercial bank money, right, which means they are a deposit. So actually, rather than looking at it as a stablecoin and kind of launching in regulatory ambiguity, these are designed to be deposit-based products and ultimately commercial bank money, meaning that they have to fit into the existing depository legislation, which is interesting, right, when you're building a token-based product, to look at legislation, for example, that was written in the 1930s. But that is kind of the way that we've looked to evolve this product.

And it was more because, certainly, a lack of regulatory clarity from a stablecoin perspective for our clients, right? So not just can they hold stablecoins, but ultimately also how will they do things like capital risk treatment, operational [unclear] treatment of the stablecoin balances. So they were interested in saying, would we be able to get a type of cash that we can use on-chain that would just aggregate as a total deposit position, so that they just do the same capital stress testing? It's the same credit quality that they're used to for the amount of money that they would hold with us on a daily basis.

And that probably won't resonate to everybody, right? But I think for our client base, which tend to be some of the largest institutional clients, large balance sheets, and behind those balance sheets, treasurers, right, who are very risk-averse and who need to very carefully operationally manage their positions, commercial bank money was appealing. And so we opted to build something that is just a deposit, as you would use it in any other bank account, but, particularly for JPMD, can have some of the transferability

Emma Landriault, J.P. Morgan Payments · 24:02

and technology capabilities that stablecoins could provide for those specific users.

Andrei Yurkevich, Protofire · 24:09

All right. Yeah, and Martin, actually, for you is a little bit opposite question. So for Centrifuge, there was a decision not to open your services to the American market. So is it something that you will be waiting for to clear completely, or it was just too much risk and the rest of the market is big enough to start with? So what was your thinking back then? What was the decision? Why the decision not to open to the biggest market in the world, arguably, was taken, and what is your stance right now? When you believe will be the time?

Martin Quensel, Centrifuge · 24:55

So first of all, the CLARITY failed, I think, hasn't really increased the risk for all of us. It just didn't further improve, I think. The decision we made, based on kind of having basically Reg S, excluding US investors, offering, was based, of course, on the higher risk on kind of offering something in US, is number one. But the second was also a commercial decision, that actually, if you look at distribution, an offshore model focusing professional investors which are located outside of the US isn't actually a real restriction. If you look at where money is deployed today, mainly in DeFi, all of those investors can either act offshore or are already offshore, so it's actually not limiting us in distributing it right now.

I think with the partners we are working with, the advancements we are seeing in US, and that was so good that actually kind of the SEC, just almost at the same time when CLARITY failed, issued their, what they call, the tokenized security venues. This is really, I think, a much more important step for us as an industry to explore these things, actually kind of how a tokenized product can be distributed and can actually be plugged in in the existing regulation, which is obviously from the '33 and the '40s.

And that is something that, I think, together with institutions, we will explore the US market, or actually doing it already at the moment, and kind of, with partners, most likely taking that step into the biggest market, and most likely starting there when also distribution is actually ramping up in US itself. So it's more kind of that token adoption in the developed markets, I think, for the broader investor community, will just take longer than in most likely emerging markets, or for investors, it's super easy, who are already on the blockchain using stablecoins already. So I think, Emma, what you've been saying about actually how you approach the stablecoin market

Martin Quensel, Centrifuge · 26:56

is essential. So stablecoins are the foundation for tokenization and tokenized distribution. I think anything else doesn't really make sense. You would then still reconcile what's on the blockchain with what's not on the blockchain, money and securities, for example, and that doesn't make sense.

Emma Landriault, J.P. Morgan Payments · 27:10

Yeah, Martin. And actually, one of the things that I think we really tried to push forward was actually, how do you create digitally native cash, whether it's a stable or a deposit, right? Because [...] the reconciliation burden, we will be in a two system for a long time. But I think part of the benefit that we can really get across doing assets and cash on the same chain is actually reducing reconciliation and counterparty risk. So it's absolutely something that we want to think more closely when these solutions are being developed, of just how native can they be while you can still maintain operational risk and ownership profiles appropriately.

Martin Quensel, Centrifuge · 27:51

Yeah, and I think what is really great is that you don't really change the ownership of the underlying. Your clients still own the money on their bank account, can use a tokenized deposit receipt, and actually kind of you have no idea at the bank, actually not the ability, like other stablecoin issuers, to actually play with the underlying money, because that's still owned by your clients. Yeah.

Andrei Yurkevich, Protofire · 28:15

All right, yeah, so let's move on. Emma, this one is for you. J.P. Morgan runs a private permissioned chain, and now you also issue deposit token on Base, a public chain. So what are the drivers? Is it regulatory choice? Is it customer demand? It's a hedge? So why this decision was made, and what public chain brings you that the private doesn't?

Emma Landriault, J.P. Morgan Payments · 28:29

Yes. [unclear]

Emma Landriault, J.P. Morgan Payments · 28:46

Yeah, no, it's a great question. And sometimes I get to wear my builder hat, but this answer I'll wear my banker hat, right? Which is that we actually had a ton of clients across our wholesale client base, whether it was FIs, asset managers, corporates or otherwise, coming to us and being really interested in engaging in the Web3 ecosystem in some way, right? It was either some of the kind of primary and early-day bond issuances, or later money market funds, or any other real-world assets, private credit, et cetera, that are being issued on public chain, or even ability to look at things like staking. We've heard it all, right, in terms of wanting to get exposure, wanting to get new forms of yield. And I think the other thing that's really resonated is this ability to potentially even create more liquidity and secondary market trading and traditionally primary and illiquid types of asset classes.

So as they've come to us with this interest, one of the things that we were hearing a lot from our clients, and maybe as a timeline reminder, we started, I think the first white paper that we wrote on what a deposit token would be is around 2022, so these conversations had been going on for some time, they were coming to us saying, we can't necessarily hold stables. Now, there's all sorts of different reasons, and of course we have a lot of partners who do hold stables and who are able to appropriately risk manage that. But I think for some parties who are traditionally off-chain, right, don't have exposure on-chain, their corporate treasurers were looking at how they would hold different stablecoins and essentially saying, well, if we are going to look at holding these at scale, right, on our balance sheet, then we need to be able to risk manage them.

Meaning every single stablecoin, they would want to go in and look at what are the reserves made up of. And some stables look more like probably money market funds, in the sense of lots of high-quality liquid assets, lots of treasuries and deposits and things that treasurers know how to manage. Others look a lot more like a hedge fund's balance sheet, right? Not everything is created equal, because there is not that standard, right, necessarily, of how these reserves have to be structured.

So if you're looking at this as a corporate treasurer, it means that you need to figure out how to assess that risk and then how to hold risk management practices, capital policy reporting, right? How do you maintain transparency in the view of what those reserves cost? And then how do you manage the risk of the underlying reserve banks?

Emma Landriault, J.P. Morgan Payments · 31:03

Right, which the holders don't really have any say in, because ultimately that's where the issuers will choose to actually custody those reserves. So for corporate treasurers, large scale, that's quite complex, right? So they were coming to us saying, is there a way that we could use cash on-chain? We actually started by connecting our blockchain deposit accounts, so our private chains, in order to provide deposit capabilities. But I think our view is that, in order to actually get the benefits of composability, the benefits of atomic transactions to reduce counterparty risk, and importantly, to be able to build something that can be more transferable than just J.P. Morgan clients, we wanted to look at creating this deposit token, so that it could meet really that demand that we were seeing from our clients as a form of base liquidity that is just US dollar, and that has really quick integration and the same treatment as their existing holdings.

So I think what's interesting with this is, a client can mint a deposit token, make a transaction, and then very, very quickly off-ramp into their account, and there's no change in the actual liability or the asset that they were holding at all. So that was really what drove us to bring this to market, was actually hearing from our clients that they wanted this exposure, but also having operational issues with holding large amounts of stables on their balance sheet. So we wanted to respond to that by creating the deposit token, and being able to issue it on public chains where that liquidity, that ecosystem actually is, and, frankly, a lot of amazing innovation is, right? And we also want to be a part of that innovation. And so that's really what drove us.

The last thing I would say on this, and I touched on it briefly, is also because we are in a unique position where we have a deposit product that clients can open, and those use cases are more so opening accounts to do things like counterparty payments or rebalancing their own positions or real-time FX, right, globally. So they can move money on this private chain across London, New York, Singapore in a day, right, as long as they're moving within the J.P. Morgan ecosystem or paying out of the J.P. Morgan ecosystem.

So because we are in a position where this product already exists, when we also went onto public chain and built the token, it was important to us that it was built with a foundation where it would be able to be transferred to clients' customers as well, so that we could grow that boundary of transferability. So it's not designed to necessarily be as transferable as a stablecoin, right? But it is designed to have

Emma Landriault, J.P. Morgan Payments · 33:25

a broader transferability boundary, so that it could really get integrated further into the Web3 ecosystem, while just bringing the assurance and safety of demand deposit, US dollar, particularly for large institutions and corporate treasuries.

Andrei Yurkevich, Protofire · 33:42

Martin, Ryan, for you is actually a little bit opposite question. You are representatives of public chains, born and raised there, right? But most of your assets are whitelisted. So what do you still get from public chains, and under what conditions you would believe that, okay, the permissioned chain completely, like Kinexys, will be a better choice? So, Martin, let's start with you.

Martin Quensel, Centrifuge · 34:11

Yeah, so I think it's access. So public blockchains are accessible by everyone on the planet. It's like the internet. And of course, if you then would like to talk to your bank or a specific product, you need, even using your web browser, authenticate yourself, go through KYC/AML and make it permissioned. But really, that the technology, that you can use your computer and access the system, that makes a difference.

And I was very, very skeptic about kind of the private blockchain projects I've seen, and most of them failed. I think if you look at almost the 2019-2021 projects, there's so many of them: TradeLens, I think, if you remember, Marco Polo, et cetera. And I think the issue is really that, what is blockchain being used for? It's replacing intermediaries and decentralizing trust. That is, I think, the main use case.

And that makes it so interesting that actually J.P. Morgan is using a private blockchain. But what is the purpose of the private blockchain? It's the biggest, most likely most international bank on the planet, and with all these different jurisdictions, all the branches and offices, I think just reconciling how assets and money is moving through an internal blockchain, which is obviously private, and J.P. Morgan, makes total sense for me if you look at it. So it's one of the rare use cases where I see the technology working in a totally permissioned private environment. For actually kind of replacing markets and traditional finance as we know it, I think private blockchains are the wrong instrument.

Ryan Zega, Aptos Labs · 35:47

Yeah, definitely. And I echo a very similar sentiment to Martin, right? At our core, right, we're a public blockchain, right? The goal is to have that accessibility, right, the ability to kind of build out our ecosystem globally across a number of different product types, whether it's stablecoins, tokenized deposits, right, other forms of money movement, or if it's even data, right, generally, and allowing for different users, whether they're

Ryan Zega, Aptos Labs · 36:14

warm-body users, right, or sort of agentic kind of use cases. But on the same note, right, we have a number of discussions with regulated counterparties like J.P. Morgan, other exchanges, custodians, et cetera, that are more comfortable with a private environment and then kind of growing that into something that is public eventually, right? So we even have our own instance of Aptos that we could create under our namespaces program. So if a group is kind of comfortable with having something more private and then transitioning into our public blockchain, that's something that we can deliver, right?

And so we've seen sort of growth in sort of tokenized securities, right, and other types of environments. We're seeing the start in private, but the holy grail is ultimately going into a public environment that has the right level of whitelisting and permission, which is ultimately creatable, right, by the different counterparties that are participating.

Andrei Yurkevich, Protofire · 37:19

All right, yeah. Emma.

Emma Landriault, J.P. Morgan Payments · 37:21

Yeah, I just want to add one thing, which is, because you asked Martin, right, around the approved listing, but I think the fact that we're even at a place where, as an industry, we're comfortable moving from protocol level permissioning into token level permissioning is actually quite incredible, right? And it does show a really big change in where the institutions have been versus where we can get comfortable going. It doesn't mean that moving to public blockchain doesn't have issues, right? Absolutely. And we actually wrote a paper with MIT around some of the things we learned from going to public chain.

And there's obviously the things that we all know, right, around receiving airdrops and around privacy. But there's also things like front-running risk and transaction tampering risks and risks that do have to get managed at an institutional scale when you go there. But again, I think the market signal that we can move away from just protocol level or network level permissioning, and moving forward, and the industry starting to even discuss these issues, is a huge, huge kind of move forward compared to where institutional digital assets have been for the last at least five years, if not more.

Andrei Yurkevich, Protofire · 38:29

All right. Rado, my next question is for you. Hope you're not falling asleep, not [participating]. So you manage the products that turn institution ideas into something running. And three companies here, they provide rails between [which] we choose: Kinexys, Centrifuge, Aptos, and we are live with the customers. What do institutions really have to build between the idea and production? And what do they usually discover that they didn't plan for? What comes as surprise?

Rado Patus, Protofire · 39:10

Yeah, that's a very good question. So

Rado Patus, Protofire · 39:17

The rails usually provide you the settlement and the tokens. Those are the two main things that provide you, and a bunch of bells and whistles around that. So what the institution, what we still have to build, is how do you connect your core ledger, for example, a bank, and your treasury system to this particular either blockchain or a product, whatever that is. How do you reconcile every day, including, let's say, some failed transactions, reorganized transactions? They need to build their signing policy: who can move what, when, in what amounts, and what happens when this person leaves the organization, for example.

They also need to build the compliance evidence for the regulator. So usually they don't really get it out of the box, or they have a special format how they communicate to the central bank, for example, because they already have an established channel for that. That needs to be rebuilt. They need to rebuild also all the screening, wallet addresses, KYC, travel rule, audit logs, their operational runbooks. What happens to the systems when basically blockchain runs 24/7, their systems close at 5 p.m.? So what happens if there is anything that needs to be processed during this timeout? That's another thing. And I guess there is many, many more. Okay, maybe one more which I can

Rado Patus, Protofire · 41:17

get from top of my hat, which is usually kind of interesting, and they forget about it, is: what happens if there is, for example, in Ryan's system, there is some upgrade at 3 a.m. o'clock? What's the bank supposed to do with it? So there needs to be someone who needs to upgrade the chain, or basically all of their systems, to adapt to that, or they will fail eventually in six hours, in the morning. And I would say that, on the last panel, you guys were discussing that this is roughly the 20% of the project. And now comes basically, the 20% is the rails, and 80% is all of the rest that I mentioned. And this is the part where we still get stuck. So hopefully that answers the question.

Andrei Yurkevich, Protofire · 42:13

All right, yeah, thank you. Let's move on. The next one is for Martin. So most tokenized funds today are essentially digital receipts. You can hold it, and you cannot do anything with it. Your funds actually are used as collateral and reserve assets in DeFi. And what has to be true for tokenized assets to be accepted as collateral by someone who is not an issuer, and whose job it is to make it true? Is it an issuer? Is it a chain or a builder?

Martin Quensel, Centrifuge · 42:48

I think it's a multitude. So I think, anyway, the first project I'm having, and I had a few startups in my life, it's really essential to have in-house legal. So it's of course a legal question, so you need to find a legal framework. And then the second is really technology, I think. So the technology needs to actually allow that the token can be moved, but actually that the technology itself is also ring-fencing it.

So what do I mean? So I have a security token as a primary issuance that is a permissioned model that's restricted in transferability, and this is actually something which is very strictly regulated. And if you then actually start to distribute, this is an underlying instrument for something you would like to use in DeFi, that needs to be all on-chain. So that basically everyone who is using a token wrapper, for example, as a collateral in a Morpho vault or in other, et cetera, is actually able to liquidate that and unbind it entirely on-chain on smart contracts, and doesn't need to rely on anyone or anything off-chain. That is essential.

That actually, as soon as actually you would like to liquidate an asset, let's say on Morpho, something like an LTV limit is hit or whatsoever, that actually unbinding it, liquidating it, is actually all on-chain until the point you actually need, most likely, to sell an off-chain asset. And then you actually can kind of go from an on-chain compliance model into an off-chain compliance model. And this shift needs to be very strict, that actually investors are being protected and either have an on-chain claim that is executable

Martin Quensel, Centrifuge · 44:34

or an off-chain claim which is executable, and then actually a hundred percent shifting from one to the other, and that is actually clear [and] ring-fenced. And a lot of the models I'm seeing, that is not the case. The investors actually do not know what are the counterparty risks, what do I actually own with the underlying, et cetera. And that also has created, I think, a lot of kind of, anyway, the issues around not actually knowing what you actually own in worst case. And all these assets are actually kind of, what an investor actually needs to ask itself on any kind of a token: what can actually happen in the worst case? How much of my money can I lose? Is it all? Is it just the interest, et cetera? So

Andrei Yurkevich, Protofire · 45:24

Ryan, what do you think?

Ryan Zega, Aptos Labs · 45:28

Yeah, so we have a number of counterparties that are building on Aptos. Some are regulated, right, similar to Martin's firm, right, as well as others, right? You think about kind of the Archaxes, Securitizes, tZEROs, right? They're tokenizing a wide variety of different debt, equity, security, non-security products, and then each has its underlying risk. And then as we look to kind of evaluate these counterparties and some of their underlying products, we think about counterparty risk, right, underlying kind of collateral, how it's structured. And then ultimately, if there is a liquidation event, what does that look like for the underlying investor, right? So it depends, right? And then when we think about kind of our role as an L1, it's definitely providing a public chain, right, for a wide variety of different use cases.

Andrei Yurkevich, Protofire · 46:27

Rado, anything else to add?

Rado Patus, Protofire · 46:29

No, this is really an interesting and complex issue. So, and I completely agree with Ryan, Martin. So it just boils down to, the token is basically useful only when the third party can accept it without calling the issuer. So that's where it boils down. However we do it technically, that's more on how to do it. But really, that would be it, to describe it quickly.

Andrei Yurkevich, Protofire · 47:04

Okay. All right, let's play a buyer. So assume that you are buying from other panelists on this panel. So Emma, let's start with you. So assuming that you're buying from Aptos, what would be the one question that you would ask them? And what would be your best advice for Aptos buyers to ask Ryan when they want to buy their services? The same for Martin, the same for us, and everybody else, I would like to do the same thing.

Emma Landriault, J.P. Morgan Payments · 47:33

Yeah.

Emma Landriault, J.P. Morgan Payments · 47:40

No, it's a great question, because I think, from an issuer perspective, it really comes down actually to chain selection, right? And how do we think about chain selection? And I would say, so currently we're obviously live on Base, we've announced that we'll be going to Canton, we have our tokenized money market funds on Ethereum, and then the market side of our business have launched on Solana. And we continue to look at our multi-chain strategy across our product stack.

I would say we would look generally at a few different things. So one is kind of the technical aspects of the chain itself. So how does consensus work? I think Rado mentioned something really important, which is, if there will be forks or upgrades, how are they managed? How can we use blockchain telemetry? Can we use blockchain telemetry? Right, on private networks, it's not that straightforward either. So can we use telemetry?

Andrei Yurkevich, Protofire · 48:29

Let's cut down to the chase. Emma, your question for Ryan.

Emma Landriault, J.P. Morgan Payments · 48:34

I don't have a single question. I would probably analyze across the view of the technical operational considerations of the chain itself, and then the distribution capabilities and the network and developer community that's there.

Andrei Yurkevich, Protofire · 48:47

Okay, yeah, [unclear].

Ryan Zega, Aptos Labs · 48:47

Yeah, and Emma, we've done a lot of RFPs, so I imagine that would be kind of a logical due diligence RFP with institutions.

Emma Landriault, J.P. Morgan Payments · 48:51

Yes.

Emma Landriault, J.P. Morgan Payments · 48:56

Yeah. And I think it's also, as issuers, can we manage our risk, right? If I'm issuing a deposit, that's the bank's core balance sheet, right, that we're issuing there. So can I get comfortable on your network that we can manage the risk ultimately?

Andrei Yurkevich, Protofire · 49:10

Would it be the same question that you would ask Martin?

Emma Landriault, J.P. Morgan Payments · 49:14

Probably from a different point of view. But yes, right. I think if you're on the buy side or an issuer, the core thing that we're looking at is essentially: are you making yield, and can you manage your risk? Or how are you managing your risk? Or what risk are you opening yourself to as you go into these markets?

Andrei Yurkevich, Protofire · 49:17

Yeah, [unclear].

Andrei Yurkevich, Protofire · 49:33

Okay, and for Rado?

Rado Patus, Protofire · 49:37

Yeah.

Andrei Yurkevich, Protofire · 49:39

No, no, no. Yeah, Emma, what question you would ask for, like a service provider, system integrator, a consultancy? Yeah.

Rado Patus, Protofire · 49:43

Sorry.

Emma Landriault, J.P. Morgan Payments · 49:45

Sorry. Yeah, yeah. No, it's a good question. I mean, I think it's also, when it comes to service provision, it's absolutely looking at the body of work and the requirements of what we need based on the project we have in hand. And I think the deep level of understanding, right? If it is, I think, Rado, you said a lot of interesting things that really resonate from our experience in building products, of actually how do you think about going to chain, building plumbing and building resilient products. So to me, it's more around what is the body of work? What is the level of maturity of the service providers? And yeah, can we count on it for the specific project that we're looking at?

Andrei Yurkevich, Protofire · 50:23

Okay, yeah, Martin. What questions would you ask?

Martin Quensel, Centrifuge · 50:26

Yeah, I think, first of all, taking a step back, and I think for Emma it's just so obvious, I think how an investor is looking at an investment hasn't really changed. So I think identifying the risks, and then what, for every single risk, can actually be the worst case scenario, still remains. And I think blockchain is just adding technology risks and legal risks and structuring risks, and you need to look at every single of them and need to price them in, and then actually make the investment decision. And that's one thing, so really the risk side.

But the other thing is really what can you gain. It's always what investors call risk-adjusted return. What is the return? And there, especially on a token side, that can deliver also a lot. So, and that is, investors actually should look at it: it's, first of all, is the risk okay to invest? Yes. Then is actually the return I can achieve using that tokenized investment actually good enough for me? So, and that is most likely a decision you need to make just considering your entire portfolio, your investment strategy, [unclear], et cetera.

So any of these investors doesn't have a single investment. They have a multitude of investments, and diversifying combined risks, obviously. So, and it is most likely then triggering what amount you would invest. And these are kind of setting the framework of if I would invest, the set of questions I would actually ask everyone here in the round, if it is infrastructure, if it is actually the issuer, or is it someone who is kind of distributing, kind of, the secondary distribution, like DeFi, for example.

Andrei Yurkevich, Protofire · 52:08

Okay. Yeah, so far everybody is floating high level. Ryan, can you be straight? Can you ask a straight question to Martin?

Ryan Zega, Aptos Labs · 52:16

Yeah, yeah. So ultimately, question is going to be: what does scalability look like for you, right? So we want to find projects that are ultimately going to scale at a global level, right, kind of displace existing kind of TradFi rails. So that's really the question that we have with any institutional counterparty, right, intermediary.

And then ultimately for service providers, right, like Protofire, it's the question of, what's your exact kind of case study and client that you really specialize in, right? We want to have a very kind of white-glove approach as we work with institutions and other groups, and then service providers really fit an important role there, right? So question there is, what's the ideal kind of client that you've serviced in the past? What does a case study look like? How can we deliver you to a J.P. Morgan equivalent, right, to kind of build out an on-chain solution on Aptos? And then ultimately for that client, we're looking for something that will sort of scale globally and then scale to something that is more traditional, right, in transactional volume.

Andrei Yurkevich, Protofire · 53:30

Okay, Rado, what would you ask?

Rado Patus, Protofire · 53:32

You guys spent all my good questions, so now I have to figure out something on the fly. Anyway, there might be two which I would ask, and it's not really usual that we see in the RFPs from the fintechs and so on. The first one would be: can you show me your reconciliation and the exit? What will happen if either you guys disappear, or we want to leave your chain in five years, or your product? What's the thing that we will keep, and what we will lose? That will be one question.

And this depends on how you would approach the client with the implementation. So if you are only offering us a product and we need to do the integration by ourselves, that's one part. If you don't really do the integration, like, who does it? And if the answer is our partners, then I would circle back to Ryan: can you show us some work with the comparable clients, of the same as our [bank]? So yeah, and this is kind of a [unclear], but yeah, these two will be my two cents.

Andrei Yurkevich, Protofire · 55:06

All right. Yeah, time passes by quickly and we barely scratched the surface. I think we covered less than half of my questions, but let's go to the final one. And please, 30 seconds everyone. So picture the head of digital asset in a mid-sized bank who watches this call. They have working pilot, they have supporting board, and not yet in production. What is the one thing that they believe they cannot do today, which is actually not true? Where they are blocked by a myth rather than a fact. Ryan, let's start with you.

Ryan Zega, Aptos Labs · 55:51

Yeah, so the excuse that we'll see sometimes with regulated counterparties is that overall regulation is not there to do what they want on-chain. And then we sort of pivot that towards, hey, here are case studies and use cases of things that are being done on-chain, right? Stablecoin issuance, we have a number of third-party providers that can do something white-labeled; tokenized deposits, right; tokenized money market funds. They're all out there. So we have a lot of mid-sized banking discussions of, hey, we want to do something on-chain. And then we're like, great, let us point you in the right direction of something that we can do together. So regulation's not the end-all, right, for a mid-sized bank. There's a lot to do on-chain to be innovative.

Andrei Yurkevich, Protofire · 56:36

Awesome. Emma.

Emma Landriault, J.P. Morgan Payments · 56:40

There we go. So the number two answer I hear behind regulation, because I think, absolutely, Ryan, that's a key one, is also just still, and particularly for institutional clients, infrastructure is still a decelerant and it's still an issue. And whether that's integrating custody infra, wallet infra, are they holding crypto on their balance sheet? Are they using gas abstraction? I could list the questions, but I think infrastructure is a bit like the number two thing that we hear quite a bit. And of course, all of you in this space know very well there's a lot of great infrastructure solutions out there. So I do think it's something that we need to continue to educate on, and the more implementations, the better, to show that it is a myth, right? And you can get [unclear] infrastructure integrated to your downstream systems and can continue to build on-chain and reach chains.

Andrei Yurkevich, Protofire · 57:28

Okay, Rado.

Rado Patus, Protofire · 57:32

I would look at it from the other side, for example, from bank side. Usually there is that myth that I need everything approved before anything goes live. And that approval never comes. We know that. And each of you guys know that you have started with one flow, one counterparty, one approval, one product. And that's it. That's where it needs to start. So I guess that.

Andrei Yurkevich, Protofire · 58:06

Okay, thank you, Rado. Martin.

Martin Quensel, Centrifuge · 58:08

Yeah, I think the super important question, also the reason why a lot of the pilots actually failed, is the business use case. So I think anyone, not only mid-sized bank, needs to ask: what are the clients we would like to approach with what product? And is that something which has product market fit, or will most likely have product market fit? And the discussions we're having with our clients is actually, hey, think of it as a new distribution channel. And what is the client base you would either actually approach and you don't have access today, or where your existing clients can do more? And if you find there are the answers, and we help obviously our clients with these questions, then look at all the other points and start executing. And of course, Rado, you're absolutely right. I really like your comment on the approvals. That is something where you just need to do it and push it forward sometimes.

Andrei Yurkevich, Protofire · 59:03

Awesome. Yeah, thank you guys for joining us today. We are up on time. I would love to continue for another two hours, but hope to see you soon in our next issues of Protocol Roundtable. Thanks, everyone.

Martin Quensel, Centrifuge · 59:17

Thanks for having me. Bye.

Rado Patus, Protofire · 59:18

Thank you.