The Tie The Bridge 2024 Collateral Confidential: The Privacy Unlock for Institutional Crypto Trading

Captions as YouTube publishes them, usually machine-generated, so names such as Daml and Canton can be misheard.

1. 0:00

   welcome to this panel on collateral privacy um I'm sure you're all familiar with the friction trying to operate on chain and everything is great when you transact on chain until somebody knows what your address is and a single transfer becomes Market moving um so very excited uh to have our great panelist today um we'll do a quick R of intro and then just dive into it um so let's start to my left with uh Leo hi guys I'm Leo mizuhara I'm founder and CEO of hash note we're um an onchain

2. 0:38

   first asset manager uh my background is 17 years in trafi before starting this so a lot of the conversations that we're going to have today are very close to uh a lot of issues we've had in the past uh hello everybody I'm Eric ceki I'm one of the co-founders of digital asset uh prior to this I spent about a decade at drw and I started Cumberland early days hey everyone uh name is bi naabb uh director of principal trading at Galaxy digital I've been there for four years

3. 1:08

   uh prior to that I spent five years in various trading roles at City Group thanks everyone um so we'll get started directly with uh kanton so Eric um kanton has always prioritized privacy uh from the very beginning um especially as you you guys work with a lot of institutions um so what drove that early focus on on privacy especially collateral privacy and why is this critical for rans today

4. 1:39

   to understand that um how that is a Cornerstone for institutional adoption of crypto whales and having the right liquidity uh needed to operate in the space uh yeah sure I mean that's a great question you go back to very very early days of Satoshi posting in the in the forums and he says the the transparency is a bug not not a feature somehow this narrative has been created in the space that transparency is the value of the blockchain and it's far far far from it

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   I think the easiest way to understand this is imagine walking down the street you got a little dollar sign above your head everybody knows how much money you have it's not so safe to walk down the street anymore so just basic Market fundamentals safety um just Market fairness is based on the asymmetric information of you know exactly what you're supposed to know so when we start a digital asset we just recognized that a threshold issue for adopting the

6. 2:34

   technology for any real world application is privacy um and and important to note that we do not mean anonymity when we say privacy that it's a common conflation uh so really when we're talking about real world assets it's about the specific definition of who must know and those people are always guaranteed to know they have high integrity guarantees and proofs and everybody else by default is not allowed

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   to know they're not allowed to see it they're not allowed to store it they're not allowed to validate it encrypt it or otherwise that data doesn't belong in anyone else's environment and you know when you talk about privacy there's so many different elements of what you're solving for you go into jurisdictions like Singapore data is not allowed to leave uh so it's not just whether or not

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   you can see something um so privacy just was we recognize it as a meaningful threshold issue and it's been at the heart of everything that we've done uh in the Canton Network for the past 10 years um and how how are you guys addressing that um that problem from a structural solution I mean I think the easiest way to think about Canton is to think about the internet no one party in the internet stores all of the data of the internet but yet I still have a single experience as a user so Canton is

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   actually a really fragmented underlying ecosystem every app controls exactly how it behaves in the ecosystem it determines exactly who can see what who could join you know just just because I have a browser doesn't mean I get to see every bank account at chase.com and that's exactly the same way that Canton works there's no fancy new cryptography developments just designed a protocol that said for the parties that must know there have the data Integrity guarantees of being on a

10. 4:11

    blockchain and nobody else ever sees stores or touches it so it's just a a a totally unlimited horizontal scaling system with segmented data privacy oldfashioned very very secure very safe and so let's go back to what you mentioned of full transparency is a bug not a feature uh because one of the big arguments in crypto has often been that pure transparency is really good for the

11. 4:37

    market how is that true in reality I mean a couple other Traders here around me I'll let them speak to it but at drw we we worked very hard to know other people's positions it colored the way that we thought about making markets uh the fairness of markets is being able to provide a truly fair price Discovery to someone and knowing their position knowing what they need to do uh

12. 5:02

    doesn't always produce the the the like absolute price perfect sort of scenario so knowing positions knowing what people are trying to do it it interferes with Market fairness it just does and um you know so the full transparency might make sense for something like an nft you know where you're trying to brag about I own this piece of art and I bought it and I paid this much money I'm so cool look at me like genuinely I could see the benefit of that but when you're talking about you know what's your US Treasury

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    position or how much collateral Are you delivering to the options exchange because of you know how many options you may be long or short there that is actually Market uh changing and it will interfere with the fairness of markets so I can throw a couple of examples in there that are very kind of both real to the current market but also are very important for the for the traditional Market in general um so uh

14. 5:57

    hash node is actually the issuer of usyc which is you know fourth largest money market token out there and um really was built as a collateral asset and uh as Eric mentioned like when you're posting collaterals run options Market that uh transparency is really problematic right if we are uh so we're accepted on darbid right now and the problem with transparency is that theoretically you if you can identify somebody's wallet call it galaxies and you can see that

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    their collaterals moving up and down in a correlated fashion to bitcoin right you can infer what their position is going to be and that's really damaging right that's the kind of information that trading firms are looking for all day long and you know people might think oh that's okay like that makes the market more efficient but it really doesn't right it actually amplifies moves when you think that you can start firing at a hedge fund or a trading

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    firm's positions and so in order to not create that extra volatility I think that um that ability to uh have privacy around your your collateral allocation is really important in a second example uh so previous to my uh so I was at drw for five years before starting hash note before that I was at Bank of America for 12 years uh we ran the corporate Investments Group and for us if there

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    was a rumor that we were going to move funds the market would move right and that's a cost to the consumer right whenever our hedging costs were higher because information leak or something that would be a cost directly to the people to whom we're issuing mortgages the people to whom were paying interest out of their savings accounts uh people who are trying to take loans out from Bank of America so that information leakage in itself can be really

18. 7:43

    problematic and expensive for for customers of you know one of the biggest banks of the world um so in these ways we think that privacy is going to be super important when you're trying to grow this ecosystem and so the Canton blockchain is a perfect place for products like our usyc collateral token because because uh the primary use case is one in which privacy is super important yeah and just picking up on on

19. 8:07

    Leo's first example of you know when you've got collateral being posted to to darab bit every time you know Bitcoin goes up you know folks might identify that as you know a counterparty being short upside or or short optionality when in reality I could have a trade on in CME or in OTC form and so that really incomplete information uh and so when you've got this full transparency mode and folks are are looking at information

20. 8:37

    that isn't complete that leads to to bad outcomes a lot of times and and people don't even realize any War Stories From The Trenches that you've heard of or or that you've experienced I have I have a good one from OG Bitcoin days there was a mining company called 21 E6 they they had in their fundraising deck we will never sell a single Bitcoin ever and uh there were only a couple OTC

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    desks at the time you know the CTO makes a couple phone calls Market was down 20% in 5 minutes sounds an easy way to get indicted for fraud yeah but I mean it this in ill liquid markets it's very very easy to see and there are definitely elements of the crypto ecosystems that are that are not liquid enough to shrug these things up and I I think the best examples are actually uh you know shorts getting squeezed and anytime like you know shorts become public you know the the

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    the market constantly tries to to squeeze folks and GameStop was was the biggest example everybody knew that you know Citadel and 72 were were short and so you know retail just just just piled in um and so in a lot in a lot of those instances you know transparency isn't really you know your your ideal sort of situation maybe can one of you guys walk us through how you know how can you can you get that information leakage and people identify that you're short an

23. 10:03

    asset I mean that generally speaking large Traders like to use trip party Solutions you guys use a tri party solution and the accounts that are you're you're settling out of tend to be static you're probably not rotating your Pub keys because operational mistakes are higher probability of problem than than someone front running your orders so you have static Accounts at the exact same time every single day making IM and

24. 10:27

    VM movements in and out of of the exchange is the whole world has your accounts labeled today uh and so it's very very easy to track are you net delivering or net receiving collateral into the exchange at variation margin settlement time so from there there's only a few things you can trade on darab bit it's pretty clear your longer short ball longer short Deltas based on what

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    happened over the previous settlement cycle and again I could just have the exact opposite position on in CME and nobody sees the VM on posting there and so you know you really like put yourself in a bad situation just having everybody follow your your movements yeah but I I'll step away from collateral for a minute I think that you know for these trading use cases I I think it's fairly transparent and clear

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    but for for the audience that's maybe not an Institutional Trader just think about B2B payments uh imagine you're the auditor of a really large crypto exchange and you're getting paid in a stable coin on chain that's leaking what you've charged that client and maybe that is going to interfere with your ability to price your next audit client and again it's impartial information so someone's not going to know that you're

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    also providing XYZ services in kind and someone's going to absolutely cut through cut you on price on your next deal somewhere else so just this information is not just in trading markets it's in all of the price making markets that we're involved in and there's a real glass ceiling on the adoption of these of these systems because as those payments as those collateral movement M ments become more

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    material more important to you then that same value of that information becomes more important to the external Market as well for them to be able to utilize it against you that's why you see very very low B2B payment work uh uh volume in these ecosystems it's why you haven't seen a lot of alternative collateral yet really get used at scale um or my favorite question to ask people is just

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    imagine if all of your trading activity was completely transparent would that change how you interact with that Exchange and I think everyone has said yes I mean it's it's like asking you know would you act differently if there was a camera in front of you and yes right like in reality TV people don't behave the same way you know that they would if if they weren't on camera we see a fair bit of this for uh

30. 12:49

    people's wages as well like some people are asking to get paid in stable coins and they when they realize that by being paid in stable coins they're actually just showing the world how much they get paid and and they're their peers and colleagues most importantly and then suddenly they're like oh never mind that's not really what I want yeah I mean and there are clear signs of that we've done some work at the tie with the on the lab side where you know you have somebody you know who is an employee of

31. 13:13

    a project and you see recurring transfers to that account well that's that's a fulltime that's the paid employee right um one of the big problems I have with the E addresses right when people do like their name. e and suddenly you're you always know what they're getting paid yeah and there's what you don't know now but that you can figure out potentially later and with AI and all the computational system our ability to make sense of that data is

32. 13:37

    increasing every day I think that's an very underappreciated point is that it's not just that it's transparent it's part of a public permanent record so maybe they can't figure it out today but you know maybe in 10 years it wasn't cool to buy that brand of T toothpaste anymore and you're going to get canceled for it that happens now like everything you've ever done is part of a permanent public record so that's just a like a never-ending liability that you just

33. 14:01

    can't get rid of yeah so going back to the collateral um issue U and moving to ulio um there's been a big Trend in the last year of you know hugely skyrocketing and increasing AUM uh for yield bearing cash equivalence um so hash notes usyc is is part of that Trend uh how does that fit into um into this can privacy capabilities help dve utility for um these kind of assets uh especially for institutional investors what are you seeing how what's your issuance strategy um and what use cases

34. 14:40

    are you focusing on yeah so we've talked a lot about the the specific use cases for collateral and why privacy is so important to Traders there but um you know I think this is true in general with uh you know people are talking about using money markets as collateral uh within the trading ecosystem in general and I I think it's really important for people to think about from a first principles perspective how would I how would I construct that collateral

35. 15:06

    product differently from what we currently do in traditional Finance you know we look at a lot of our competitors and we say that is not fit for purpose it is a product that people were just kind of like well I've got this thing I'm going to tokenize it uh whereas for us we were very purposeful about uh the design of the token the design of the payouts and all the things that make this easy to use as collab that are not necessarily true of our

36. 15:31

    competitors and that's why I think when you look at the the big players in the market you know we're up there with the big Trad big traditional firms because we designed it fit for purpose and um our deployment on Canton is an example of that because we know that privacy is going to matter and so we want to be the first ones to establish ourselves as the the players who know that privacy is going to matter here particularly for

37. 15:53

    this uh collateral use case we're going to help get exchanges on board we're to we know our market makers already care all of our market makers have already talked to us about like how that transparency thing is going to work for them yeah normally an L1 has to go cut a market making deal with a with a market maker to get them to join Canton we've cut zero deals we have 15 of the largest market makers in the world on Canton it was our first adopters so it's coming

38. 16:17

    it's coming very much on the back of this opportunity to solve these discrete problems that they have on every other chain what you already do but with the added benefit of privacy is just the simplest way to approach the institution participants I think it's also worting that from from my perspective at least I think collateral is going to be the first use case for traditional Finance right I know there's a bunch of things that are already happening like mortgagees are a great example on Canton

39. 16:42

    um but when we think about crypto adoption into trafi the reason collateral is the first use case is because it's one of the most broken in trfi so when I ran a trading desk at drw it took me it's a t+3 operation to move funds from CME to urex for example like that's crazy to me I can literally put cash in a box and ship it to Germany before I can get like cash moved it's like the most asinine process um with onchain collateral we could do that

40. 17:12

    immediately uh well within within seconds right and so um that's why we thought that that's the first place that's going to go and then when we think about the players right the players involved are players like drw Jane Street jump these are all traditional Finance firm that also dip their toes into crypto so being able to say that all of these firms that are already familiar with how collateral is supposed to work are using onchain

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    collateral they're the easiest players to push into traditional finance and say hey we're already using this let us also post it the CME um but you know that's going to be nearly impossible if it's fully transparent yeah we're we're solving with the same solution to very different problems in trafi we have a Mobility problem your T plus3 example and in the crypto native funds we don't have a Mobility problem your assets move very quickly but we have a transparency

42. 18:04

    problem and with the same solution in Kenton we we can solve both those problems for both those parties and both those parties participate on both sides of the of the trading venue I don't know if people are aware but some of the major trading exchanges allow you to post treasuries through a banking relationship so this is already happening this this divide between the two worlds is very quickly dissolving and so being able to solve that with a universal solution that allows the large

43. 18:29

    institutional players to bring the best forms of collateral into the crypto markets uh is is uh symbiotic yeah and uh Leo you know can't forget Galaxy in there in terms of the the trafi participants um but yeah you know what I really like about this is in terms of like just just thinking about the the marketplace and what you're really trying to address like I think the global bond market in the US is like you know call it $50 trillion uh and a ton of that trades uh as as as

44. 19:03

    basically cash and cash equivalent in the sense of like repo right and so when you're trying to actually come up with like a real world use case for crypto this is the the first thing that comes to mind for me it's it's transferring value it's uh you know it's crypto as collateral and you can't really get to the ultimate state of that without addressing these transparency and privacy nuances uh and so in terms of you know hash note being on Canton Network like this is

45. 19:34

    exactly the the type of uh Synergy that that you kind of need um to have happen for for us to really get to the point where you're addressing a $50 trillion market right uh I know that you guys have done you know you're saying $2 trillion doll in in repo sorry $2 billion doll in repo volume every month now no no no it's trillion We Do 50 50 to 100 billion a day broadridge is here in the room there guys like that's an

46. 19:59

    amazing number uh and if you told me uh you know two years ago when I was or sorry four years ago when I was on a a repo desk that there'd be a blockchain moving trillions of dollars uh in a pretty efficient way I'd tell you ah that sounds a little crazy um but you know the whole idea is that once these big institutions get a taste for it in terms of the efficiencies the cost savings Etc it it's almost a moot point Point as to you know why wouldn't you do

47. 20:31

    it right like all of these these big institutions money market players Etc you know they're fighting for basis points at a time and so if you can take that whole operational layer uh and convert it and put P put it on a blockchain and you know cut down your labor force by 80 90% like guys are going to do it uh and you know they're only going to do it if they're they're in good products right so it's really

48. 20:55

    key that you know when you have a a stable Co coin come to the market that's interest bearing it's got the Dynamics that trafi players are uh accustomed to and so like one of the reasons why I like hash note a lot is you know it's it's 90% reverse repos correct me if I'm wrong and so it's it's got the the liquidity uh kind of structure that I would be most attracted to and and you

49. 21:19

    know if I was at my seat at City Group I'd be like oh that's actually something I I would do and so you know this is really kind of where you'd like the the space to head there's one feature we haven't talked about in countown that I find really interesting and important um just to build on this conversation um one thing that comes to my mind for privacy is we're we're acting like it's fully private all the time but one

50. 21:43

    feature I really like about Canon is that it's kind of selectively private right Eric so um again this is a thing that came up when we were BFA portfolio um and this went through traditional markets as well so when you report your transactions to a SEF so a swap execution facility if you're at different sizes they won't show you the actual size right they'll show you the price and a category of sides and the reason they did that in traditional markets was because it was too damaging

51. 22:13

    for players like BFA to be like oh we printed this m like you know 20 billion at this price people would be like oh that's a big trade we're going to front run the rest of that um whereas with Canton we can do the almost the ex exact same thing right we can say well we want price transparency so we'll show a price and maybe we'll show a size category or maybe we don't show any size and that configurability is really valuable to us um we're currently talking about doing a

52. 22:43

    a bond issuance uh project with um the folks at sock gen they were here a second ago and um that will also be in Canton and with things as IL liquid as bonds right that that privacy becomes even more important because it allows you to start well having the transparency would allow people to really uh fire against people's positions so much more clearly yeah I mean thanks for reminding me but the the configuration is really the key about Canton it's not a universal setting so we have assets that are completely

53. 23:14

    decentralized totally public and we have assets that are extremely locked down maybe only one or two parties know about what's going on with them and everything in between so every unit of data is configurable to what is the appropriate thing to do and what's also I think really interesting around some of these products are uh it's been eye openening to to me to see how our Auditors have treated us as holders of some assets on

54. 23:38

    Canton and you know being able to configure that an auditor could have their own node and have proofs of what's being taken place and be able to independently verify what you do hold and don't hold or be able to extend that to a regulator so it's it's the configurability about Canton that I think is really quite unique not just the general existing of privacy itself and jumping on on on that right you've all mentioned right what's at the core of a good healthy functioning

55. 24:09

    Financial Market is price Discovery making sure that fundamental changes get reflected in prices as fast as possible um without having harmful behaviors like front running because at the end of the day it's everybody's um retirement accounts that suffer from that um so how is Kenton addressing that from you know you mentioned privacy and disclosures the ability to have Auditors get the right information that they need uh what

56. 24:40

    about regulatory aspects I mean very very easy you just you can figure who must know it they get guaranteed a real-time stream of that data and then it's uh you know whatever their right is to do with that data they're entitled to do so so there's a project around someone building a data Oracle on Canton normally a data Oracle on a public network you're talking about injecting data in but in Canton we're

57. 25:04

    actually talking about buying the right to be an observer to that information and redistribute it and some of those use cases for redistribution are in aggregate hey what's the tvl of usyc on Canton there's really only one party that can answer that question and it's hash note unless they're allowing a third party to be an observer to that information and disclose it in aggregate but as someone that might hold usyc my auditor is going to say prove to me that

58. 25:29

    you hold x amount and I don't want it I don't want to know it from your node and I don't want to know it from the issuer's node because you two might be colluding together so to be able to go to that data Oracle and then again just sell that back to our auditor and just say there's your independent Third Party Source so that could be a regulator that could be an auditor that could be in aggregate a stream through the tie uh into a into a dashboard so that people can see all that information uh there's

59. 25:53

    there's no one siiz fits-all you do you configure exactly what you need for the use case to be fully compliant and what do you see this enabling in terms of collateral because we've known for banks and you know especially in the digital assets there's been a lot of um let's say conservative uh approach is to like managing all the the collateral um how how is that going to enable more real asset real assets to come on crypto rails well I mean I'm hoping that in

60. 26:28

    institutions like Galaxy won't have to park1 $200 million of cash over the weekend in the case that something is going to happen and instead could carry treasuries over the weekend repo them as they need them through something like broadridge DLR receive a stable coin for working capital and go back to it and being able to finance your desk as you need the working capital is something that would be a material savings for

61. 26:54

    Galaxy and others like yourselves and would create whole new intraday markets that have been lost since the global financial crisis so just solving a real problem delivering uh meaningful cash savings to the participants is going to draw more participants in that's literally like one of the things that we're working on right now right like being able to hold weekend collateral uh

62. 27:17

    for Galaxy and being able to do that uh so you know usyc has instant creation and Redemption even on the weekends so um you know we think that's going to be a really important use case um but also you mentioned Banks right banks will not be able to hold large sums of their hqaa you know everything they have on balance sheet without this sort of privacy right they really cannot have that real time

63. 27:42

    monitoring on that stuff so um and that I think that's going to be a limiting factor which was the design principle for Canton from the beginning and so being able to unblock that is going to really allow the biggest players in the market in finance to start using blockchain more effectively it it is a threshold issue I I don't know how else to say it like the lack of privacy is preventing the

64. 28:06

    adoption of blockchains so as we're coming up on time I think I I have one more question that I'm the most excited about so you can do all those things so now how how do you get started how do you get started on Canton Network I think you have to pay Eric a bunch of money quite quite the opposite quite the opposite we did a we did a fair decentralized launch so we did not do any pre-sale no pre-mine no Ico no stto everybody that

65. 28:36

    wants to participate in the network can come and do a little bit of work you run a node you're running a node um and that node allows you to start to earn coins so that you can participate in the ecosystem and then as soon as you join that that ecosystem uh we start driving very hard into connecting you to the high utility applications in the network making sure that you're educated about what you can do while you're there uh

66. 29:00

    much more of a depth before breath approach in the Canton ecosystem um so we have a number of Partners one of them here in elect you can talk to them about running infrastructure for yourself uh you can run it on your own um but really it just starts with the same way you would enter any other ecosystem run a node set up your wallet start to interact with the things that are there awesome any final thoughts for our audience

67. 29:25

    today thanks for finding the random side room nice attendance thank you yeah I think you know a theme that I keep coming back to is really thinking about what the requirements are from a first principal perspective we're seeing a lot of people who are like oh I'm going to make that with this little change I'm make this with a little change I'm going to take this thing that's there and deploy it over there all of that is like

68. 29:49

    not nearly as valuable as if you can start from first principles and say what are the things that we're missing what are the things that matter here and build to that solution rather than try to keep porting things back and forth yeah and I would just say I mean there there's a lot of Vaper Weare in crypto and and so when when you find projects that have actual real world use cases and you know are are transacting trillions of dollars uh in in a construct that is scalable uh you

69. 30:21

    know I would latch on pretty quickly awesome well please just join me in thaning her amazing group of of panelists and enjoy the rest of the day