Salick Cogan on DeFi, crypto infrastructure and institutional investors

With the rapid growth of digital assets, the need for a secure and easily accessible infrastructure has become clearer than ever. For institutional investors in particular, it must be as safe as it is easy to enter the blockchain ecosystem and DeFi applications.

Digital asset storage platform Fireblocks has established itself as one of the leading service providers for institutional investors looking to enter the crypto space. The customers primarily include stock exchanges, credit institutions, custodian banks, banks, trading departments and hedge funds. Speaking to CVJ.CH at the 2022 Crypto Valley conference, Head of Web3 R&D at Fireblocks Salick Cogan talked about the emergence of Web3, institutional flows, appropriate security and other considerations for service providers.

CVJ.CH: Where do you currently see the biggest infrastructural weaknesses in the industry?

Salick Cogan: The crypto industry grew at breakneck speed in 2020 and 2021. The rapid acquisition of extremely lucrative opportunities took precedence over best operational practices, exposing infrastructural weaknesses in this area. But now reality has set in and it’s time for the industry to get back to basics.

Security: There are many institutions that still do not prioritize security. This is becoming more and more obvious as the value of hacks and attacks increases. We help companies protect client and investor funds from cyber-attacks, internal collusion and human error using a multi-layered technology that combines the latest breakthroughs in MPC encryption with hardware isolation.

Counterparty risk: With the regulatory environment evolving around the world, any business can be shut down overnight. This leads to significant counterparty risk incurred with centralized providers. Counterparty risk is real, and blockchain technology allows digital asset providers to significantly reduce these risks. For example, blockchain technology can help companies ensure that their invoicing practices are immediate and instantaneous.

self care: Currently, self-sufficiency is a very important concept and we adhere to the motto “not your (private) keys, not your coins”. In light of recent events, we have seen custodian platforms being able to freeze users’ funds and completely restrict access to the funds. We are already seeing users withdrawing their funds from centralized platforms and putting them into self-deposit wallets. After all, users want to be sure that their funds are fully owned by them and that no institutional factors are making decisions about their funds. In light of recent market events, this measure allows for better risk management. The most important lesson to learn from recent events is to always stay in control and ensure that your wealth is not on someone else’s balance sheet or wallet.

What interests your institutional clients the most at the moment?

It is interesting to note that recent market declines have not dampened institutional clients’ interest in digital assets. We continue to see interest in areas that have been minimally affected by the downturn – areas such as Web3 (especially around DeFi, NFTs and GameFi) and payments. Banks and exchanges are particularly interested in areas such as stablecoins and tokenization. An example of this is our partnership with ANZ Bank and their Australian stablecoin, A$DC.

We also completed the first half of the year with foundational partnerships with FIS, SDX, and others. The world is just beginning to see the true benefits of tokenization. Major financial institutions are beginning to explore and offer tokenized products for the first time – from digital bonds and stablecoins to fractional art and carbon credits.

DeFi offers attractive returns compared to traditional financial products. Where do these returns come from and are they sustainable?

The return is due to two different factors:

  • Stake a token to earn a percentage of network fees
  • Investing liquidity in DeFi protocols to earn a portion of trading fees

These returns serve as an incentive to increase the decentralization of a blockchain network, the security and overall capacity of the markets built on it. This allows the return to be sustainable with lower interest rates. However, the high yields that DeFi has offered in 2020 can never be matched again.

Do you think NFTs will become institutionalized similar to the DeFi sector or are tradable images a more retail oriented market?

I think it’s important to think about the different types of NFTs. There is definitely a retail market for art, music and collectibles. But for institutions, tokens offer enormous value when we consider how they can make any number of structured products more efficient. NFTs can represent a variety of other real-world assets and serve a greater purpose than just profile pictures. This includes real estate, mortgages, identities, memberships and more. Most recently, the High Court of England and Wales allowed the service of proceedings over NFTs.

We offer the same level of security, efficiency, flexibility, scalability and confidence to run Web3, NFT, GameFi and Metaverse businesses. For NFT services and financial institutions planning to develop the next generation of products using Web3 technologies, we offer the most comprehensive and secure suite of solutions.

Where do we stand in terms of regulation?

I think the progress in the EU with MiCA is a good indication of where we are going globally. The US and UK are unlikely to be very far behind. While the current crisis in the crypto market is still unfolding, there is clearly no global consensus yet. From our point of view, many institutions welcome the regulation because it clarifies how they can move forward. In the countries where there is no clear legal framework, the institutes tend to lag behind in the introduction. Regulatory frameworks such as MiCA allow us as an industry to correct misconceptions.

As an industry, we need to do a better job of explaining to the public how we will work with regulators. It gives us the opportunity to use our knowledge of this technology so that the authorities can act according to the rules. Regulation provides clarity and stability. It will minimize these concerns by forcing industry to act. Frameworks like MiCA help market participants see an opportunity here. To achieve these policy goals, it is not enough to repeat traditional models. The ecosystem will have to change to accommodate these new norms. Certain companies will do this better and more effectively than others, and those that can adapt will in many cases thrive.

As regulatory efforts have been delayed recently, policymakers and industry will now have the opportunity to assess the outcomes and risks of these products/services over time. I am convinced that it will both unlock further innovation and lead to well-thought-out regulation at the right time.

What is the most important thing about onboarding customers from the traditional financial world?

There are several key areas that traditional financial players need to consider in order to easily and securely support digital assets and cryptocurrencies.

custody models: For most of our clients, our services are provided either in direct deposit or in a non-custodial form. Catering to customers from traditional sectors requires a revision of custody models in the most safe, efficient and secure way.

Policies and management frameworks: Traditional sectors have extensive regulations and rule books, while regulation of digital currencies is just beginning. When onboarding a client, a comprehensive assessment of these overlapping differences is a critical step in the process.

Security: We recently received certification in the Security (ISO 27001), Cloud (ISO 27017) and Privacy (ISO 27018) categories from the International Organization for Standards (ISO). With this accreditation, we are the only crypto-tech company to have received all three certifications covering the key areas that matter to most traditional financial clients.

What do you think of the situation for the ailing lending platforms?

Many of these centralized providers offer the same products and services. There are no differentiating aspects between their offerings. The only way for these companies to compete in the traditional market seems to be through savings and putting the client’s assets at risk. These risks relate to the security, control and settlement of assets.

In light of recent bankruptcies, consolidations, etc., both companies and individuals are choosing the self-custody model we offer, which gives them full control over their assets.

How much will the space change in the next five years?

If we look at how much has changed around digital assets over the past year, I think we can safely assume that we are in the midst of major changes. The new regulation will certainly play a role in this. Current market conditions are leading to new innovations that are likely to make markets more accountable and more attractive to institutions.

Business and technology will become much more robust. Now is the opportunity for institutions to weather the storm, determine their priorities and approaches for future success, and maximize their resources to ensure their institution’s survival. Crypto provider clients are refocusing their efforts and returning to the basics, such as reviewing counterparty risk, settlement practices and custody infrastructure.

A large part of the financial infrastructure is being converted to blockchain and digital assets. Financial institutions have a long-term view when it comes to digital assets, and their commitment and investment in the technology remains undiminished – especially when it comes to tokenization and payments.

We have just seen the beginning of Web3 and will see many innovations emerge in this area.

Salick Cogan is head of research and development for Web3 at Fireblocks. He is an accomplished R&D group leader with 20 years of experience in global, large and mid-sized companies, where he has managed the entire lifecycle of software products from strategy to delivery. Prior to Fireblocks, Salick worked at Wix for more than 6 years, leading research and development teams to build their core business competencies. Salick began his career with the elite Unit 8200, Israel’s technological intelligence unit, and holds a bachelor’s degree in computer science.

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