Recap of the BIS Innovation Summit: How do Web3 entrepreneurs think about regulation?
Original title: "Foundational technology for a new financial system
Original source: Bank for International Settlements
Listening and translation of the original text: Alpha Rabbit, Alpha Rabbit Research Notes
From March 23rd to March 24th, 2022, the Bank for International Settlements (BIS) held the Bank for International Settlements Innovation Summit. In the panel 1 discussion session, Circle CEO Jeremy Allaire, FTX CEO Sam Bankman-Fried and Michale Shaulov, CEO of Fireblocks.
The author participated in the whole meeting and listened to and translated the content. How do well-known entrepreneurs in the encryption field see the central bank's digital currency? How do you view the relationship between regulation and technological innovation? The following is the full text of Panel 1.
*Note: Due to equipment, network, speech speed and other issues, the author's guess of the original words may not be accurate, and it is for reference only. Notes are added where necessary. Readers can make deduction and judgment by themselves, and the official expression of the conference shall prevail. Do not provide any investment advice, do not accept any PR requirements, this article does not constitute any investment advice.
Summary of core ideas
In the future, we will see quite a lot of disintermediation. Users have fairer access to financial markets, and we are approaching a world where every user, whether it is a complex trading firm or an ordinary person, has access to fair financial applications, protocols, and liquidity .
Essentially, NFT is not just digital art, it actually has other implications, including security, participation in other financial applications, and more. And we actually see many participants, including many large asset management companies and investment banks, who have begun to study how to spread NFT to the primary and secondary markets.
Everyone will be able to abstract away the complexities of DeFi's decentralized financial space. But the real question is, it's still an open question as to who will be able to create the best experience, the one that consistently links these services.
The new infrastructure that is being built for the exchange of value, not just in the area of payments, but in the structure of how economic organization occurs, including all the structures of how economic exchanges take place between entities, is amazing. A lot of times when these breakthrough technologies come out, what if we look at them from an old world point of view and compare them to faster facsimiles? Better long distance calls? This is not appropriate.
There are inherent compatibility issues between new technologies and legacy systems, for example when integrating our infrastructure with core banking platforms. For example, many DeFi infrastructures run indirectly on the cloud, and most of them are OK at the level of technical implementation, but the problem is that the Know how, capability gap, and risks faced by different teams are very different. It can be seen how strong some market players are, while others are very average.
The real problem at the moment is also the very lack of regulatory clarity that exists in many jurisdictions. But most regulators are currently looking for workarounds to enable innovation.
Success and failure will happen, in my opinion, break down the problem, such as what value can the service create? How to get more customers? Improve the economic system? I think the regulatory framework for cryptocurrencies around the world is a bit of a mess right now. Each region's approach is different, and each jurisdiction, is trying to address regulatory issues individually. But I think that there has been a lot of improvement in terms of regulation. In the past few years, almost no country in the world has a framework for digital assets.
Regarding supervision: The United States has made great progress in the past year. The core of what we will see is: first, the reserve audit proof of stable currency may become the standard; the second is to include market, supervision, clarity, federal supervision, systemic risk, protection. The third is that there will be a registration system for some digital assets, many of which may blur the boundaries between traditional asset classes.
I think it's software that changes the architecture, which in turn changes the nature of the asset. We need to come up with new definitions for digital assets, rather than trying to cram everything into an existing system. Digital asset is a currency, it is a commodity, and it is a security, but our definition of digital assets must be very specific, because we have found many digital assets that meet two or more of the above attributes.
However, risks still exist, including various risks in fund monitoring, custody, and operation. Disclosing risks is of course important, but we need to reach some kind of consensus. At present, some people are trying to map the operation of the existing financial system and its regulations to the open source infrastructure of the Internet, but I don’t think there is any way to compare the two.
I think there must be a coexistence between CBDC and stable currency, including digital treasury. But most of the market and money is actually run through different assets and bonds in the market to unleash the real power. The central bank has to take both things into account, unless we have a cross-chain swap like an atomic swap between these two assets.
I think what might be really interesting is to give people the freedom to create sandboxes that don't necessarily run across the entire world, but really put some of these projects to the test in a controlled environment, and then you can really see to the effect, and they can iterate on it.
Fundamental technologies for the emerging financial system
Let me introduce the participants first: the moderator is Marten Bech, head of the Swiss Innovation Center of the Bank for International Settlements
Entrepreneurs include:
Circle Company, Jeremy Allaire—CEO (well-known serial entrepreneur)
Circle was founded in 2013 by Jeremy Allaire and Sean Neville. In September 2015, Circle received its first BitLicense issued by the New York State Department of Financial Services. In April 2016, the British government approved Circle's first virtual currency license, and Circle is also the issuer of the USDC stable currency.
Funding status: From 2013 to 2016, Circle received more than $135 million in venture capital in 4 rounds of investment, including $50 million led by Goldman Sachs. In June 2016, Circle D round of financing was 60 million US dollars. On May 15, 2018, Circle raised 110 million US dollars in financing.
Let me introduce the CEO of Circle, Jeremy D. Allaire:
Jeremy was born in 1971 and co-founded Allaire Corporation with his brother JJ Allaire in 1995; Allaire Corp. went public in January 1999 and was acquired by Macromedia in 2001.
In February 2003, Allaire left Macromedia to join the venture capital firm General Catalyst as a technologist and entrepreneur-in-residence. After Allaire founded Brightcove in 2004 and took the company public in 2012, Allaire stepped down as CEO in 2013 and now serves as chairman of the board.
In October 2013, Allaire announced the launch of Circle, an internet-based crypto/consumer finance company that aims to bring the power and benefits of digital currencies like BTC to mainstream consumers.
FTX Corporation, Sam Bankman-Fried—CEO
Sam Bankman-Fried, the son of Stanford Law School professors Barbara Fried and Joseph Bankman, attended Canada/US Math Camp (a summer program for mathematically gifted high school students) as a teenager. From 2010 to 2014, Bankman- Fried attended MIT, where he majored in physics and minored in mathematics.
In the summer of 2013, Bankman-Fried worked at Jane Street Capital, a well-known hedge fund. In November 2017, he founded Alameda Research, a quantitative trading company.
After attending a cryptocurrency conference in Macau at the end of 2018, and also inspired by the concurrent fork of BTC, he moved to Hong Kong and founded the cryptocurrency derivatives trading platform FTX in April 2019. SBF is an advocating supporter of altruism and pursues altruism as a career to make money, is also a member of Giving What We Can, and plans to donate most of his wealth to charity during his lifetime. SBF is vegetarian, and he often sleeps in his office next to his computer.
FTX: A well-known cryptocurrency trading platform, as of July 2021, the trading platform has an average daily trading volume of 10 billion US dollars and more than 1 million users;
In January 2022, FTX raised a $400 million Series C round at a valuation of $32 billion;
On February 11, 2022, FTX.US announced that the company will soon begin providing stock trading services to its US clients;
In February 2022, it was reported that FTX was creating a gaming division that would help video game developers use blockchain-based technologies such as cryptocurrencies and NFTs for video games;
Fireblocks Inc., Michael Shaulov—CEO (serial cybersecurity entrepreneur)
Michael is the CEO of Fireblocks, a secure digital asset infrastructure company. Prior to joining Fireblocks, co-founding Lacoon Mobile Security, which was acquired by Check Point, Michael is a serial entrepreneur and entrepreneur in cyber security.
He has presented numerous times at RSA Conference, BlackHat, and Infosec conferences. Prior to business, Michael pioneered mobile security at the Israeli Military Technology Unit (8200) and received a special honor from the President of Israel for his outstanding contributions.
Fireblocks: Founded in 2018, Fireblocks is committed to building security infrastructure and hosting services. The core technology is mainly composed of Fireblocks Networks and MPC-based wallet infrastructure. Clients such as banks, fintech firms, trading platforms, liquidity providers, OTC traders and hedge funds are able to securely manage digital assets for a variety of products and services.
Financing status: There are currently five rounds of financing. In December 2021, the E round of financing will be 550 million US dollars. From its establishment to now, it has raised a total of 1 billion US dollars in financing.
The following is the full text of the panel 1 discussion session
Moderator Morten:I'm Morten from BIS, and I'm very excited to be part of this conference, which will discuss the underlying technologies that drive innovation in the financial industry. We will discuss the advantages and risks surrounding stablecoins and Defi, and we will also discuss what the public sector can do to keep the financial system safe and stable. Today we have invited three guests, who can also be said to be giants in the field of cryptocurrency and DeFi, and they are all committed to creating the next generation of financial market infrastructure. Let's introduce it:
Jeremy Allaire, CEO of Circle, a global financial technology company; Sam Bankman Fried, CEO and founder of FTX, one of the largest cryptocurrency trading platforms in the world; Michael shavlov, a company in the field of digital custody + security CEO of Fireblocks.
Welcome, before we start the discussion, you can introduce yourself. For most people, you must be familiar with you, but since there are also officials from central banks in the audience, you can introduce yourself and your company again.
Jeremy Allaire：Thanks for the invitation. I'm Jeremy Allaire and the CEO of Circle. I've been an entrepreneur with a technical background for almost 30 years. I've also worked in a lot of different jobs in the Internet space and software technology product development, and about 9 years ago, founded Circle.
Our mission and vision is to focus on the specific application of the public chain, and how to establish a hybrid currency model, which can take fiat currencies, such as US dollars or euros or other mainstream currencies, and express them digitally. Here In terms of infrastructure, it functions through the public Internet. Our task is, how can we make storing and transmitting value as cheap and secure as possible?
Second, how open to innovation, which model is viable when you have cryptocurrencies that are programmable on the public internet? We are the main operator and issuer of USD Token/USDC. USDC is one of the largest USD digital currencies in the world. It has grown by 1000% in the past two years, and the current circulation is about 53 billion.
This is indeed the core market infrastructure of the crypto economy, a trading platform for digital assets, decentralized finance, and increasingly interfaced with existing payment systems. That's about myself and Circle.
Sam Bankman Fried：I'm Sam Bankman Fried, the CEO of FTX, and I worked on Wall Street for a while after graduating from MIT. FTX is a cryptocurrency trading platform, which means that in the background, it is a complete system.
We have done a good job in everything from front-end interface, back-end technology, matching engine, mobile application, custody, clearing, etc. There is a daily transaction volume of 15 billion US dollars on the platform, ranking among the top three in the world.
FTX has focused on regulation over the past year, obtaining regulatory approval as much as possible, and we are also working hard to assist in the establishment of a global regulatory infrastructure for key currency ecosystems.
Michael shavlov：I'm Michael shavlov. I'm the co-founder of Fireblocks. I spent the first 20 years of my career in cybersecurity, initially working for the Israeli Cyber Command. Before founding Fireblocks, at Checkpoint's company, Checkpoint is one of the largest network security companies. In 2018, we started Fireblocks, our goal is to protect the cryptocurrency (field). First, we provide our clients with a secure custody infrastructure where institutions and businesses around the world can safely store these (encrypted) assets.
Second, we have built the Fireblocks Network over the past few years, which is essentially a type of messaging infrastructure layer that allows institutions to conduct secure settlements on different blockchains at present, without being vulnerable to various attacks. simplified. In the past 18 months, we have gone very deep in providing and enabling DeFi (security) for our customers, empowering them to operate safely and effectively in DeFi innovation.
As a result, Fireblocks is currently serving more than 1,000 financial institutions, ranging from hedge funds, trading platforms, to some of the world's largest and most well-known banks. We also cooperate with many payment service providers. And we have caught many cases where assets have been transferred.
The Future of Finance & The Role of Banks in the Future
Moderator: The first question is about the future of finance. Finance will never stand still. What do you think about the future of finance? What will the financial system look like in 5 years? How can cryptocurrencies truly be leveraged against real-world assets? Or, what role do you think banks will play in the future? What will be decentralized and what will be centralized in the future?
Sam Bankman Fried：First question: I don't know, no one knows. We're all talking as we go. But if I had to make one prediction, it's that we're going to see quite a bit of disintermediation.
Users have fairer access to financial markets, and we are approaching a world where every user, whether it is a complex trading firm or an ordinary person, has access to fair financial applications, protocols, and liquidity . This situation is different from the way many markets operate today.
This is the advantage of cryptocurrencies, and I think that in the next few years, we will see crypto being fed into many other areas of the financial system. So this is an area that I'm very bullish on.
Michael shavlov：I agree with Sam that the future is hard to predict, but we spent some time trying to think about it. Perhaps at some point in the future, the transformation of the financial system will develop in the direction of decentralization. For us, because this is a part of our business, we spend a considerable amount of time dealing with traditional financial institutions, including banks, including central banks and other departments.
So now in the market, many people are concerned about the legal digital currency, and many powerful application cases about it are emerging. In addition, I think many people have heard of NFT, but in essence, NFT is not only Digital art, it actually has other implications, including security, participation in other financial applications, and more. And we actually see many participants, including many large asset management companies and investment banks, who have begun to study how to spread NFT to the primary and secondary markets.
But I think the question now is, what will happen in the future? They will be able to abstract away the complexities of DeFi's decentralized financial space. But the real question is, it's still an open question as to who will be able to create the best experience, the one that consistently links these services.
Jeremy Allaire：I would add that whenever I think about things 5 years from now, I try to go back to first principles, what I think might be possible, and then try to imagine.
As Michael pointed out, we have just begun to think about some of the most basic points. There can be a sufficient reserve, digital dollars, which can be exchanged in any place that can access the Internet, and even transaction settlement can be carried out at the speed of the Internet. There are very Strong privacy and security guarantees at a fraction of transaction costs.
If we look at the past, we find that the essence of the Internet is an open and permissioned network. People can connect computers, network protocols emerge, and then exchange structured information and Internet data protocols through common protocols. At that time, no one predicted that not only all users in the world could instantly obtain free knowledge on the Internet, but also no one expected that the amount of information created and published in the world would increase by 1 million times. The speed and scale will be like this.
Similarly, the world of 5 years from now, the procedural capabilities superimposed through (crypto) currency, although the current building blocks are relatively rudimentary, this has captured the imagination of many people, the idea has been around for 5 or 6 years, and then It has started to generate real growth over the past few years. The speed at which pure science is happening, innovation, developer innovation, business model innovation, thousands of ideas around the world are being built on this (cryptocurrency superimposed procedural capabilities) public infrastructure.
The new infrastructure that is being built for the exchange of value, not just in the area of payments, but in the structure of how economic organization occurs, including all the structures of how economic exchanges take place between entities, is amazing. A lot of times when these breakthrough technologies come out, what if we look at them from an old world point of view and compare them to faster facsimiles? Better long distance calls? This is not appropriate.
What happened in reality? This requires entrepreneurs to actually create the future. In 2007, when the Apple mobile phone came out, it could have a touch screen and a good interface, and then other technologies gradually merged and developed.
For example, with the advent of 3G, faster and more rapid data exchange is possible. Ever since, some mobile phone companies decided to combine GPS with their mobile phones. Many people think that this is just a navigation, but what they didn’t expect is that when we combine these things, it can be used in logistics, transportation, etc. And other links have produced profound changes.
Today, programmable (encrypted) money on the Internet, including public infrastructure accessible to anyone, will unleash economic innovation that is difficult for anyone to predict at this point.
On transition periods and challenges
Moderator: Thank you, and one more question, how do you think the transition in this field will happen? Will there be some clear winners and pitfalls? In our project with some partners at BIS, we basically integrated a new digital asset-based infrastructure with the traditional ancient banking system, and it felt like this posed a lot of challenges for us, but also probably limited the potential innovation.
Michael shavlov：Are there any particular technology channel challenges in this transition? I think there are. There are inherent compatibility issues between new technologies and legacy systems, for example when integrating our infrastructure with core banking platforms.
For example, many DeFi infrastructures run indirectly on the cloud, and most of them are OK at the level of technical implementation, but the problem is that the Know how, capability gap, and risks faced by different teams are very different. It can be seen how strong some market players are, while others are very average.
The real problem at the moment is also the very lack of regulatory clarity that exists in many jurisdictions. But most regulators are currently looking for workarounds to enable innovation.
Jeremy Allaire：Many things are done step by step. Everything the three companies here do is to iterate continuously, rather than to solve all existing problems. In my opinion, one of the strongest things about this particular technology is that innovation is completely open, all infrastructure is open source, run spontaneously by the community, and everyone invests in their own computing infrastructure and improves the protocol, which represents public interests and public opinion. This is how much of the Internet was built, and has become an extremely resilient infrastructure.
The technical foundations of the encrypted computing layer are all created in an open mode. Some teams are working hard to create a better whole. Of course, challenges also exist, whether it is scalability, privacy and security, or supervision. ; but everyone understands that these require continuous improvement. For example, there are many blockchains that are being improved with zero-knowledge proofs or similar techniques.
I'm very encouraged by the engagement from central banks, regulators, policy makers, all over the world to come together constructively and engage with these topics to understand them.
how to understand risk
Moderator: How to think about the risks of operation or other risks in different ways? How can one take a somewhat technology-neutral approach to thinking about these issues?
Sam Bankman Fried: Success and failure will happen, in my opinion, decomposing the problem, such as what value can the service create? How to get more customers? Improve the economic system?
When this is clarified, many things become clear. Is it a loser or a winner? Or is it not important at all? What new value can be added here? When this is identified, it often becomes very clear how we can continue to create value, as we have always done. Even though the form may change, the fundamentals remain the same. Therefore, I pay more attention to what specific companies should do and how to adapt to changes.
Moderator: All central banks will think of a problem when facing DeFi, and that is its scalability. Jeremy, in terms of scalability, what do you think? Do you think this problem can be solved? Approximately how long will it take to resolve this issue?
Jeremy Allaire：There is some progress at present. At the earliest, it can process 7 transactions per second, and now it has risen sharply. If you think about blockchain and computing architecture together, the real scale improvement comes from the improvement of its computing input, the continuous cycle of productivity following Moore's law, and the growth of bandwidth. I think there will be continuous great progress in this field.
How do you view regulation? What do you want the central bank to do?
Moderator: All the guests here also mentioned risks. Listen to your thoughts, how should regulation be viewed in this future new world? What do you want from central banks and regulators? How to understand risk?
Sam Bankman Fried：I think the regulatory framework for cryptocurrencies around the world is a bit of a mess right now. Each region's approach is different, and each jurisdiction, is trying to address regulatory issues individually. But I think that there has been a lot of improvement in terms of regulation. In the past few years, almost no country in the world has a framework for digital assets.
Today, five or so countries have comprehensive regulatory frameworks, and many more are moving in this direction. In particular, the United States has made great progress in the past year. The core we will see is: first, the reserve audit proof of stable currency may become the standard; the second is to include market, regulation, clarity, federal supervision, systemic risk, protection.
The third is that there will be a registration system for some digital assets, many of which may blur the boundaries between traditional asset classes.
Jeremy Allaire：Let me add that I think the blockchain and the financial services built on the blockchain work differently. As Sam said, their combination of custody, clearing, settlement, and payment transactions, so many different components, can be completed in one software stack. Historically, these parts of the capital market have been separated.
I think it's software that changes the architecture, which in turn changes the nature of the asset. We need to come up with new definitions for digital assets, rather than trying to cram everything into an existing system. Digital asset is a currency, it is a commodity, and it is a security, but our definition of digital assets must be very specific, because we have found many digital assets that meet two or more of the above attributes.
However, risks still exist, including various risks in fund monitoring, custody, and operation. Disclosing risks is of course important, but we need to reach some kind of consensus. At present, some people are trying to map the operation of the existing financial system and its regulations to the open source infrastructure of the Internet, but I don’t think there is any way to compare the two.
Therefore, this requires more study and exploration. On the regulator's side, there are many more detailed issues worth discussing. But we have also seen that serious discussions on these issues can take place in many of the major financial regulators over the past few years, which is very encouraging.
Michael shavlov：yes, I agree. My point is, first of all, we need to make sure that we don't incorporate new things that come out of nowhere that are disruptive and innovative in nature. A lot of the time, either it basically reinvents the old essence, and that sort of thing doesn't make sense. Now for the regulators, what I think makes sense are two things. One is that regulation is a global matter, so there must be a reasonable global consistency framework in the end, and encrypted assets have no borders, so I think that there needs to be some degree of coordination between the regulations of countries in various regions of the world.
Second, I think regulators need to ask themselves first. How can existing innovations be used to improve end-user protection? It's absolutely doable. Even though people often complain or criticize cryptocurrencies for crimes such as money laundering, in fact, I think cryptocurrencies are probably the worst way to launder money because it is traceable and one address can track all transactions. KYC and new technologies will enhance user protection.
The new system also brings interesting start-ups. There are start-ups that can add protections to the system, and regulators need to learn how they work.
Sam Bankman Fried：From other assets to cryptocurrencies, many similar principles of policy or regulation revolve around the details of consumer protection, however, there must be some refinement in many specific cases.
The role of the central bank
Moderator: Thank you, very good discussion. What role do you think the central bank will play in this future system?
Jeremy Allaire：Start with the history of e-money, innovate, then establish standards and fine-tune the details. I think stablecoins are just another outgrowth of this innovation that merges with the public internet and open source technology. So it has its own unique strengths, and at the same time, from a central bank perspective, obviously, the architecture needs to evolve along with that.
I believe that lessons from the pace of innovation and technology choices that have occurred in public Internet innovation will also persist. I'm leaning toward there will be forms of coexistence, but I also believe that the core architecture will evolve from computing and data and transaction technologies of the past to something more secure and interoperable.
Michael shavlov：I think there must be a coexistence between CBDC and stable currency, including digital treasury. But most of the market and money is actually run through different assets and bonds in the market to unleash the real power.
The central bank has to take both things into account, unless we have a cross-chain swap like an atomic swap between these two assets.
Proposals for the BIS Innovation Hub
Moderator: Do you have any suggestions for BIS Innovation Hub? The Innovation Hub at the BIS is basically set up to help central banks explore technology. I'd be very interested in hearing any suggestions from you.
Michael shavlov：Regarding the open community, open source certainly helps bring about some innovation. I think what might be really interesting is to give people the freedom to create sandboxes that don't necessarily run across the entire world, but really put some of these projects to the test in a controlled environment, and then you can really see to the effect, and they can iterate on it.
Jeremy Allaire：I think there is a lot of innovation happening in the open source, open blockchain ecosystem, partnering with some of the major open blockchains, even running with their own private consensus models, syncing up with the infrastructure that the market is building, doing experimental stack.
Sam Bankman Fried：Original link
references:
https://en.wikipedia.org/wiki/Circle_(company)
https://en.wikipedia.org/wiki/Jeremy_Allaire
https://en.wikipedia.org/wiki/FTX_(company)
https://en.wikipedia.org/wiki/Cryptocurrency_exchangeCrunchbase
