Digital Asset has built the tools to tokenise assets and is now encouraging network effects
- Future of Finance
- Apr 9, 2024
- 49 min read
Updated: Jan 30
A Future of Finance interview with Yuval Rooz, co-founder and CEO of Digital Asset, and Eric Saraniecki, co-founder and head of strategic initiatives at Digital Asset
In October this year, Digital Asset will celebrate the tenth anniversary of its foundation. Under the flamboyant leadership of Blythe Masters, who was CEO from 2015 to 2018, no start-up did more to promote the potential impact of blockchain technology on the capital markets. Over the five years that have passed since she stepped down, Digital Asset has transformed itself from a pioneer of institutional-grade blockchain technology for financial market infrastructures into a provider of tools for building the smart contracts that enable assets to be tokenised, and a sponsor of the public but permissioned Canton Network blockchain network. Above all, it survived unscathed the cancellation of the flagship ASX contract, won in January 2016, to rebuild the post-trade infrastructure of the Australian stock exchange. Though the current strategy can be portrayed as a pivot away from the grand visions of 2016, the company has remained remarkably consistent in its (eponymous) belief that one day all assets will be digital, and that blockchain will provide a secure technological foundation for a network of networks that will encompass tokenised securities, funds, private equity, real estate, privately managed assets, commodities, rights and royalties, and collectibles. Dominic Hobson, co-founder of Future of Finance, spoke to Yuval Rooz, co-founder and CEO of Digital Asset, and Eric Saraniecki, co-founder and head of strategic initiatives at Digital Asset, about the history of the company, its products, the use-cases it has found and exploited, the thinking and the strategy behind the Canton Network, and the challenges the digital asset industry has still to overcome.
Key Insights
Digital Asset believes that every asset, whether digitally native or backed by something in the real world, will one day be digital but any technology that promises a transformation of the capital markets is unlikely to succeed if it fails to ensure that issuers, investors and intermediaries can continue to meet their current legal and regulatory obligations.
The Digital Asset Modelling Language (DAML) offered by Digital Asset enables users to build digital asset applications to specific designs in terms of work and cash flows and deploy them to any in-house or Cloud-based ledger they choose, though Digital Asset also offers users the opportunity to deploy applications to the blockchain-based Canton Network that it sponsors.
All financial services reduce to ledgers that record holdings and transactions, and portfolio valuations, transaction settlements and distributions of entitlements depend on different ledgers agreeing their contents are the same through the exchange of information, usually in the form of structured, machine-readable messages.
Reconciling ledgers through messaging leads to breaks in reconciliation that increase costs, which blockchains eliminate by ensuring that, when one ledger is updated, all other ledgers are updated atomically (i.e., transactions succeed or fail as “atomic” units, eliminating the cost and risk of reconciling partial or incomplete transactions).
The costs of reconciliation are evident in the delay between transaction and settlement in traditional capital markets, because the time is needed for the various intermediaries to exchange enough information via messaging utilities to be confident that the seller has the asset and the buyer the cash, and an atomic process eliminates this.
Tokenisation is driven by the sell-side rather than the buy-side (which does not want to invest in new systems and processes to accommodate digital assets) and will focus initially on asset classes that are inefficient at both the trading and post-trade levels (such as fixed income and privately managed assets) rather than efficient (such as US equities).
Tokenisation is a major opportunity for global custodian banks because they can cut the cost of the buy-side investing in digital assets in much the same way that zero commission brokers cut the cost of investing in equities, and so increase both the value and the volume of activity in digital assets, including their use as collateral for credit.
Digital Asset has used its technology to accelerate the structured product issuance process in Germany (working with D7), reduce the transaction and capital costs of US dollar repo transactions (working with Broadridge) and cut the operational costs incurred by clients of a firm active in the physical commodities markets.
Beyond capital markets, Digital Asset is working with an insurance company on the tokenisation of life assurance policies and retirement annuities; a mortgage vendor on increasing efficiency in settlements; and in the sports wagering industry with a firm that sees advantages in coordinating transactions globally.
The termination of the Digital Asset contract with the ASX to rebuild its post-trade systems using blockchain technology proved yet again that – although the technology worked – major transformations are extremely difficult, and Digital Asset now focuses on delivering value to clients as soon as possible in every project it undertakes.
Blockchain development in capital markets has focused on narrow- use-cases such as collateral management, when the original promise of the technology was seamless interoperability between transactions and asset classes and Digital Asset sponsors the Canton Network because it believes that multi-faceted interoperability is still the prize.
Digital assets are hampered by a needless dichotomy between public permissionless blockchains (cryptocurrency) and private permissioned blockchains (traditional finance) when the true opportunity lies in Internet-style public blockchains (open to all, maximising network effects) that are permissioned (there is control of who can do what).
Digital Asset expects Canton Network to generate network effects not only in the classic sense (users that attract other users) but by enabling participants in proprietary networks in different asset classes to interoperate with each other and by committing to an open network where innovators can be confident they will keep the rewards of investments.
Canton Network aims to achieve interoperability between market actors, asset classes and proprietary networks while ensuring that participants remain fully compliant with existing laws and regulations governing the issuance, trading, clearing and settlement of tokens and current data protection requirements as well.
Although standards would facilitate information exchanges, Canton Network can operate without standardising information about digital assets or processes, providing instead a means by which multiple models can interoperate successfully enough to tie different strands of information from different systems and processes into a single transaction.
Digital Asset believes the Canton Network could evolve into a “unified ledger” or “single programmable platform” of the kind described by the BIS, the IMF and the Regulated Liability Network (RLN) but believes that any attempt to impose uniformity on digital asset networks would create insuperable governance problems.
The DAML smart contract language offered by Digital Asset is no more immune to bad actors than any other software and, although Canton Network can help with proof of ownership in cases that come to court, some digital assets (such as cryptocurrency) are bearer rather than registered assets, and so incur a higher risk of being lost or stolen.
Perceptions of progress towards the digitisation of assets are influenced primarily by expectations, so believers in radical, overnight transformations are more likely to be disappointed than believers in incremental steps that deliver measurable value at each stage and add up over time to a radical transformation of the status quo.
The digital asset industry has committed a strategic error in arguing that the incumbent institutions and regulators that operate and supervise the capital markets today have got it all wrong, and that the tokenisation of assets will be markedly superior to the status quo, because it makes regulators nervous about the consequences of endorsing change.
A US dollar Central Bank Digital Currency (CBDC) is critical to the long-term success of the digital asset markets, and the Canton Network model makes it possible for the Federal Reserve as the central bank to retain ultimate responsibility for cash and securities settlement without any change to its governance or sphere of control.
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guests today are Yuval Rooz, Co-founder and CEO of Digital Asset, and Eric Saraniecki, also a Co-founder of Digital Asset and now head of strategic initiatives at the firm. Digital Asset is the provider of the DAML smart contract language and a blockchain platform for tokenising assets, and the sponsor of the Canton Network, the blockchain network that aims to overcome the crucial interoperability problem that is constraining the growth of the digital asset markets. Yuval, Eric, thank you very much for joining us.
00:52 Yuval Rooz: Dominic, thanks for having us.
00:54 Eric Saraniecki: Thank you for having me.
00:56 Dominic Hobson: Let me begin with a bird’s eye view of digital assets, an overview of what you’re doing, and I guess the right starting point, because the firm has quite a long history now, is to look back at the rationale which was behind the founding of Digital Asset. What are the problems you’re looking to solve, Yuval?
01:16 Yuval Rooz: Sure, I think that when we started the firm in 2014, the trend of digital assets was not still a hot topic. And really, our view was that eventually, as we move into the future, every asset, whether it’s backed by something real or not, or just a financial instrument, is going to be completely digital. Front to back. Everything is going to be viewed as a digital asset. Everything from what we think of traditional assets as stocks, bonds, but all the way to music rights and other rights, carbon credits, made up assets that drive some kind of financial behaviour. And that’s really why we chose the name Digital Asset. What we do and what we have been doing since is really thinking what technology needs to be created in order to enable a world where digital assets are front and centre in financial services. And in order to do that, you really need to take a step back and think about, well, why financial services are the way they are. A lot of it has to do with jurisdictional differences, regulation differences, and then also understanding how liquidity gets created. So we’ve been in the space for now almost ten years. We’ve been, as you mentioned, building a smart contract language that allows you to digitise assets or tokenise assets, as people like to say, front to back, all the way from issuance, all the way to modelling what are the transfer rights, liquidation rights, and then created a blockchain that will allow to manage these assets, but most importantly, in a regulatory compliant manner. Which means you have to solve for privacy, scalability and all kinds of other regulatory requirements that exist all over the world.
03:37 Dominic Hobson: Eric, Yuval mentioned the smart contract language, and any visitor to your website would quickly pick up that DAML actually comes in more than one flavour. There are three separate forms. There’s DAML Enterprise, DAML Hub and DAML Finance. Give us some insight into why three versions are better than one.
04:02 Eric Saraniecki: Yeah, actually, thanks for the pointer on that being a little bit confusing. It’s all the way top to bottom. So the way to think about it is you use DAML and the language and a whole bunch of associated tooling products – a lot to go with it – to construct the applications that you will deploy and embedded in that package is the Canton Blockchain. You can deploy it to that blockchain and there’s a whole bunch of building blocks in there for financial instruments. So how should an asset behave? How do the cash flows work? How do the workflows associated with it? That’s in DAML Finance. And you use all these different components to get an application up and running. Really, the only distinction between those options are where would you like to deploy it? But it’s otherwise the same product. So whether you want to run it in your own on premise environment, in the Cloud, or if you want us to host and manage it for you in demo hub, it’s really just a matter of preference and ease in terms of where you’d like to operate your ledger. But it all starts with building an app, deploying it to a ledger somewhere and interacting with your customers through that ledger.
05:10 Dominic Hobson: Yuval, there’s a risk here we might get ahead of ourselves. I’ve already raised the interoperability problem once in my introductory comments, and it’s clearly pretty central to what you’re doing. Eric’s just mentioned the Canton Network again. At the risk of getting ahead of ourselves, could we talk a bit about the interoperability problem? It’s clearly a huge opportunity because it’s a massive constraint, as I said, on the growth of digital asset markets. You’ve got an awful lot of firms, awful lot of people thinking very hard to come up with solutions to that. So tell us a bit about how you’re approaching it, what the Digital Asset approach to solving the interoperability problem actually is. We’ll come onto the Canton Network a bit later, but …
05:53 Yuval Rooz: Sure, yeah. And maybe let me try, because I think the goal of this series is extremely important. It’s the future of finance. But I think in order to understand the future, I think it’s also important maybe to ground ourselves with kind of making sure that we’re all speaking from the same point of understanding. And maybe an example that I like to use a lot is what is financial services? What is actually happening in financial services to effectuate the industry? And this is my view, or maybe a way of looking at it, is if you put aside physical instruments, when you just think about the financial side of financial services, it’s really a bunch of ledgers that have all kinds of entries, whether it’s account holdings or all kinds of different actions that need to happen. Where really when events happen in financial services, where it’s, whether it’s settlement or lifecycle events of assets, you need to get agreement between these ledgers. And when those financial events happen, today we use messages in order to get interoperability across these ledgers. So when we send these messages, we hope that at the day of settlement, all ledgers are aligned with one another. And if they do, then settlement happens in orderly fashion. The problem is that we know that when messages get sent, well, these ledgers don’t necessarily update each other in an exact manner. And that’s where we have breaks. And we have not only operational inefficiency, because now we need to have people manually figure out where these breaks are, but we can also have real systemic risk in the system. Meaning if settlement fails, for example, in a clearing house, well, you actually might have a systemic shock to the system. And those things happen not necessarily daily, but they happen more than we want. So to me, just making sure that we’re all on the same page, that the real opportunity is, can we actually get away with messaging between ledgers and really update them atomically? Meaning when an update happens on one ledger, all relevant entries in the other ledgers happen atomically, or they don’t happen at all. That is my view on what is interoperability. And therefore the opportunity for the market is not only a massive reduction in operational cost. As we all know, most financial players have pretty large teams in low-cost areas that are literally just doing manual reconciliation of these ledgers. But there’s also a very big opportunity to reduce quite a lot of systemic risk out of the system. Now, when those things happen, I think that the opportunity for the market is processing of many asset classes would become cheaper, more efficient and, as a result of that, it creates an opportunity to create financial products and instruments that today just wouldn’t be financially feasible. So, as a result of these three elements, operational costs, operational risk, and then an opportunity to innovate, we think that the ability to create an interoperable world in financial services is a generational opportunity that we are very excited about.
09:43 Dominic Hobson: I sometimes think listening to you talk about financial services as just a bunch of ledgers that maybe those photographs of banks in the late Victorian/Edwardian period of men in tailcoats sitting, filling in ledgers would give a better idea of what banking is really like than a load of people staring into computer screens. But the point is well-made and the future you see is one in which all transactions settle atomically. So if a transaction doesn’t happen, it just dies. You don’t have to spend money and time repairing and reconciling things which didn’t settle properly in the first place. But could I ask you – these reconciliations are obviously necessary because there are two sides, with many intermediaries, to each transaction – which of the client groups you’re aiming at? I assume you’re aiming at both the buy-and the sell-side. But do they have different demands when you go to talk to them about what their needs are?
10:38 Yuval Rooz: I mean, yes and no. So maybe the way I think about it is, first of all, the way I think about the opportunity is really kind of very similar to how generally speaking, you should think about opportunities. It’s a risk/reward or a return on opportunity cost. And where we see quite a lot of interest from clients is around areas that assets that today are very inefficient. So you probably won’t see much tokenisation to begin with around US equities, because US equities for the most part are very efficient. There are brokers that allow you to trade them 24/7. The marginal cost of processing 1,000 shares versus 100 shares versus half a share is really zero. So if you’re going to invest so much money, you’re not going to get that much return out of it. And that’s where I think there is consensus between the sell side and the buy side is. At least from an asset perspective, there’s much more interest thinking about assets that today are not as efficient as US equities. And that gamut starts from fixed income products all the way to alternative assets like private equity, private shares and the like. So that’s where you have consensus. That being said, I think that there’s a very similar trend between the buy-side and the sell-side today, which is true to historically some other technologies, which is you’re seeing a lot of innovation being driven from the sell-side as usually the providers of services to the buy side. So you will see for the most part a lot of sell-side players really participating in building platforms for tokenisations. That’s not to say that there aren’t buy-side firms that are thinking and doing stuff in the space, but I would say you see more activity from the sell-side, building these types of platform where the buy-side is actually playing more of like requirements generator. I would like to see more innovation in this space. I would like to see more innovation, but I would say that the most important requirement from the buy-side is. `I don’t really want to have my entire world change on me as a result of tokenisation, meaning I use my custodian to manage my assets. I want to be able to use the same systems or the same types of way of working when it comes to digital assets. I just want to be able to benefit from some of their properties as a result of using them.’ I would say that’s the biggest demand that we see from the buy-side is how you can integrate digital assets into their portfolios or way of working without really having a significant change in their systems or daily routine.
13:57 Dominic Hobson: I’d like to talk now about global custodians as a target group for you. As you were running through the list of opportunities. The US equity market being very efficient and therefore no real opportunity there. The privately managed assets markets, the alternative asset markets, even the fixed income markets, being less efficient, there are opportunities in there. And clearly global custodians are servicing that type of business. They have large domestic equity businesses, most of them are American, but they also have those fixed income and alternative businesses as well. Then I guess, secondly, the last point you were making there about the asset managers wanting to be insulated really from the process of change, they’re kind of excited about tokenisation, but they don’t want to have to invest any money or time in the operational, infrastructural side of it. So global custodians must be important for you as a target group to change this market. Can you tell me a bit about what you’re offering to them is? The US equity markets might be efficient, but the cross-border equity markets are probably not at all efficient. So there’s some opportunity there. They have of course this function beyond settlement, this huge asset servicing responsibility, collecting entitlements, actioning corporate actions, voting people’s stock and so on. What’s your offering to global custodian banks? Because having them on-side is clearly going to help with progress.
15:26 Yuval Rooz: Yeah, you’re spot on. I think that global custodians, there’s just an endless amount of opportunities with them. I think that a lot of people think that tokenisation, at least when I hear people talk about tokenisation, I hear more about distribution and it almost feels like, `Hey, if we just turn this asset into a bearer instrument, everybody in the world will be able to put their hands on this asset.’ And I think that’s a bit of wishful thinking, because just because an asset is bearer, in a regulated world doesn’t mean that you could just make it arrive to everyone. And I think, yes, blockchain does make the opportunity to arrive at the end-user more efficiently. But I think that it’s really like the less important component of tokenisation. To me, tokenisation is kind of like where I started. It’s the opportunity to digitise an instrument front to back. The reason why zero commission brokers got created is because of that marginal cost of US equities. That’s why they can offer it. That’s why getting paid for order flow makes it a legitimate business model. Because if processing the transactions on the back-end is super cheap, I don’t really need to get paid that much in order to make it a successful business. And the reason I go back to that, in the context of your question about global custodians, I think that one of the opportunities with global custodians is to make processing assets, not just issuing them, not just storing them, not just transferring them, but actually managing their entire lifecycle. I think people underestimate how expensive it is to manage, for example, a private equity or a fund front to back throughout its lifecycle. So I think that the opportunity is really to create a whole gamut of financial instruments that are fully digital front to back. So you mentioned corporate actions. In the private equity, there’s capital calls, capital distributions, there’s just so many lifecycle events that today are extremely expensive. And as a result of that, you make managing assets much more efficient. And when it’s much more efficient, the cost of investing in these assets goes down significantly. So a lot of people talk about tokenisation of private equity or real estate. Well, if you don’t solve the fundamental problem that managing a real estate asset or a private equity fund is, at the margin, extremely expensive, then it doesn’t matter that you have a token, because you’re still going to have to pay quite a lot of transaction fees to hold it because it’s expensive. So the opportunity with custodians is really to digitise all of the assets that they custody. And as a result of that, it would lower the operational costs, which should also increase volume and ability to transact these assets in smaller increments. But it also opens the door for much more collateral mobility, which I think is one of the most important opportunities in these markets.
18:57 Dominic Hobson: Yuval, to some extent our conversation so far has been a bit theoretical. Can we look at some concrete projects which are actually, where things are actually happening right now. And I’m thinking of D7 in Germany, which we wrote about in the Future of Finance custody book a few weeks ago. I’m thinking of the Broadridge repo-on-blockchain project and I’m thinking also of the Hong Kong Stock Exchange Synapse service for making it easier for foreign investors to invest in mainland China. What role have you played in those projects?
19:37 Yuval Rooz: Yeah, sure. I mean we can take a few of these examples and maybe I can add a few examples because I think we have a few projects that are now in production for quite some time and we can actually start looking, like you said, rather than theory at some of the statistics and actual results that are coming out of these projects. So in the case of D7, we were trying to solve the issuance process of structured products, which today, again, although have a very concrete template of the waterfall and the structure of a product, you have this back-and-forth email on term sheets and structuring, even though it’s supposed to be like pretty cookie cutter templates. And the product was a one-month call option, effectively. It’s called the turbo warrant, which is a very popular instrument in Germany. And when you think about it, when you want to issue it, if it takes you multiple days to issue, well, it’s kind of not necessarily a great experience for the customer, especially when you’re talking about a one-month call option and you want to issue it during volatile times. So what we’ve done, again, is really digitised what you call [inaudible], which is really the structuring of the instrument. And we went from multiple days to issue an instrument to effectively doing it in real-time. So again, just being able to accelerate the issuance process, which again is all part of this digitisation or tokenisation model that we’re talking about then. I mean, I don’t have the most up-to-date number, but we’re talking about tens of thousands of instruments have been issued, including not just structured products, but also bonds. I think it’s the largest bond issuance to date that have taken place on D7. Another great example is Broadridge that are tokenising US Treasuries. And again, I’m talking about collateral mobility or collateral management or financing. Today is going to be an extremely important use case. Broadridge is processing over US$100 billion of digital repo transactions a day. And they’re offering everything from intra-dealer repo, bilateral repo, sponsored repo, and then also going to be intraday repo. And I think that they’re being able to manage collateral in a more efficient manner actually translates into not only the ability to execute repo more efficiently, but also from a capital management perspective. The benefit now is being measured in the millions of dollars every year for all of the broker-dealers that are participating. You’re going to see more and more dealers join the platform later this year to increase that volume. So in the context of things, although US$100 billion a day sounds like a large number, the repo market globally is $10 trillion every day. So we’re inching slowly but surely towards the goal of making repo a much more efficient product. We have another client in the physical commodities space that have been running in production post-trade for commodities. The participants that are participating … So they have about, I think, 15 per cent of the market participating in that project for now over a year. The participants, when they trade with one another … So when I actually do talk to network participants, they see a significant reduction in operational costs because they don’t have breaks between one another and therefore there’s real-time agreement on the state of transactions between one another. And eventually as more and more join that network, I think you’re going to see a significant operational cost [reduction]. So we’re actually seeing that all of the statements that are being made around the technology gets achieved, that the problem is how do you build these networks over time, because at the end of the day, the real benefit to the market happens when most financial participants actually join.
24:08 Dominic Hobson: Have you identified applications of this technology outside financial services? All the examples you’ve given, they are financial services industry examples. Is this applicable and useable outside financial services?
24:22 Yuval Rooz: Absolutely. I mean, every industry has its, I would say, financial services element of it. But when you go into life insurance, for example, life insurance or any insurance, it very much looks like structured products. I mean, if you think about it, you have some kind of an event that might or might not happen in the future. In the case of life insurance, it will definitely happen to all of us. And then there’s a benefit and there’s different ways of insuring against an event. There are what you call term life insurance, which is you just pay a premium until that event happens. Then there’s whole life insurance where you could actually invest your money into financial products. So I would say that insurance is a great example. And within the next couple of months you will see a very large platform that is effectively tokenising life insurance products and annuities into this technology. So that’s just one example. Another example outside of capital markets that we’ve been working on is mortgages, where, again, when you issue a mortgage and manage its lifecycle, there’s a lot of settlement inefficiency that takes place. And there we’ve already in production proved that you could reduce settlement time by more than 90 per cent. So that’s quite a significant reduction, especially when you think about balance sheet implication to homebuilders or other financial players or other players that play in the mortgage industry. And then we can take it really to the other extreme, even doing things in sports wagering, where coordinating transactions globally could become a very interesting application. So go all the way from capital markets.But again, I think even healthcare, trade, finance, there’s just every one of these industries will have an element of, `How do I share a state with multiple parties that have to drive a product or some innovation forward?’
26:37 Dominic Hobson: So you’ve identified a very large number of use-cases, some of them in production, and you’ve got a pretty strong pipeline of other use-cases coming down towards you. Now, of course, not all use-cases succeed. And there was a lot of excitement eight years ago – I was amazed when I looked back that it was actually January 2016 when the Australian Stock Exchange (ASX) appointed you to rebuild its post-trade systems. I remember that excitement well. I think I shared in it. I thought this was the breakthrough that was required. Now, 16 months have elapsed since the project was terminated. What are the lessons from that experience that you’re now applying to all these other use-cases which we’ve just been talking about?
27:24 Yuval Rooz: So, first of all, I shared that excitement and I actually thought that it was a very big opportunity because when you think about what is happening around T+1 [Trade Date Plus One Day], treasury reform, you’re going to see a lot of operational pain being, I was going to say, inflicted, but maybe not inflicted as much as there’s going to just be real operational struggle as a result of settlement times being compressed and cost of capital going up. So I actually thought that the ASX saw where the future is going and having the ability to effectuate clearing and settlement in a much more streamlined manner was a really good idea. That being said, I think that when you think about these big transformations, whether it’s via blockchain or not, they are always hard. When you look at T2S [TARGET2-Securities] in Europe, how long that was, over budget, over schedule. When you look at other clearing and settlement solutions, and I’m not going to necessarily names, that are using off-the-shelf technology, are over budget, over schedule. Doing big transformation is just hard as it is, whether it’s with blockchain or not, it is very hard. So that’s just a reality of life. I think that when it comes to specifically that project, the way I would, you know, the most important lesson learned for me is, okay, if we all agree about what I just said, that big transformation is hard, as is, now you’re putting new technology and people are going to be concerned on top of that and think, well, actually, can even the technology work? And I think that what we try to do now with our clients is create significantly smaller steps where you actually give some benefit to the technology to first of all, show that it works. Because I think that at the end of the day, when you look at the Accenture report, the Accenture report said the technology is capable of doing what it needs to be doing. And it actually gave a very positive view on digital asset technology and its capabilities. And I think that the projects in production that are delivering what they’re supposed to be delivering is actually the best testament. That being said, when you have customers that are waiting for a big aha moment, and that big aha. moment is just going to take so long to deliver, because, like I said, big transformation is hard as is, you create scepticism naturally, and that’s just not a good thing. It’s just, it doesn’t add value to these long transformations. So our biggest lesson learned is show any value, and I’m saying any value on purpose. It doesn’t have to be significant value. Show any value as fast as possible, because you buy the trust and confidence of the market participants. And I think that is actually the big failure of that project, is that we kept the collective, we kept them waiting for this Big Bang moment. And to achieve a Big Bang perfectly is very hard with new technology or without. And I think that that created quite a lot of lack of confidence in the market – by market participants. But like I said, again, if you look at the Accenture report, I think the technology is capable of doing that. We were actually, in my opinion, pretty much there. The technology was able to process the volumes of the Australian market and actually even more, it was able to achieve pretty much all the functionality. It was just people didn’t want to stomach any more changes. There was a new CEO and they made the decision that they made. I’m not necessarily going to agree with it, but it’s their market to manage and they made the decision.
31:30 Dominic Hobson: Okay, let’s talk about the Canton Network. You announced earlier this month a successful pilot of the Canton Network. It was a pretty big exercise. You had 15, according to the press release, you had 15 asset managers and 13 banks, four custodian banks, three exchanges and presumably a CSD [Central Securities Depository]. And they were simulating many different types, I think 350 different types of tokenised asset transactions. And all that’s a pretty complicated exercise. What have you learned from the pilot test? What do we know now that we didn’t know before the test was completed? In other words, can you just tell us what you accomplished with that test and what its significance is to the market? Perhaps, Eric, you could go first. You’ve been very patient.
32:15 Yuval Rooz: Yeah, maybe I’ll just go for a second before. Because Eric does deserve all the credit when it comes to Canton.
32:21 Dominic Hobson: I didn’t know that, but I just thought he’d been waiting patiently
32:23 Yuval Rooz: Well, I mean, there’s a lot of people in our development deserve credit, but Eric has been kind of like really leading the way of managing it. But I’ll just kind of give my intro to Eric. I think for me, the pilot, the most important thing is a good number of the applications in the pilot are actually in production already today or on the way to production. But I think that one of the things that the industry forgot to think about is that really the goal of blockchain was to connect all of capital markets throughout the different stages of capital markets. And I think what happened over the last few years is people just started really drilling down and focussing on very narrow use-cases, which actually has a lot of value. Like I said, repo, securities lending, tokenisation. But what we wanted to do with the pilot is really say, `Okay, can we pause and take a step back?’ Because when you think about T+1 [Trade Date Plus One Day], T+1 can have implication across the entire value chain. Treasury reform can have application or implications across the entire value chain. And we wanted to really take a step back and say, let’s remind ourselves of the value of the technology is not really just these individual use-cases, but how they actually interoperate with one another and allow these things to seamlessly work with one another. So that’s just kind of why it was important. And then Eric and his team actually made it real. So I’ll hand it over to Eric to kind of add his thoughts.
34:00 Eric Saraniecki: Yeah, I think what was exciting for me personally was just the opportunity to do this thing that I think is the first time in history has ever been done to atomically coordinate so many disparate, different types of applications into one action. The story, our thesis, to just play along with Yuval’s point, is so much velocity in our markets starts with this single margin call. You’ve been trading over the course of the day. Step up to the window, make sure you meet your margin. Well, people don’t just sit on cash, it’s not just laying around to meet your margin calls. These firms are highly efficient and they care about maximising the yield on any excess capital they may have. Holding assets, leveraging assets. So that margin call is this really simple, discrete moment, `Come and put x dollars in the window.’ But what happens after that is a flurry of activity. Unwinding positions, leveraging assets, lending assets, borrowing assets. And this is being done across a whole ecosystem of apps. Not just the place where you would trade or execute the repo, but at the register where that asset lives. Rehypothecation. Cash systems. So being able to coordinate all these actions into one atomic update, margin call, all of the activity to be able to meet that margin call and the delivery of cash into one seamless, synchronised action, to the best of my knowledge, that’s the first time that’s ever been achieved. It was incredible to be able to do that with the market and let the market actually play the roles that they play today, have them push the buttons, pull the levers and really show that this is a possibility and that we can move to a world of seamless synchronisation which would enable more frequent margin calls. I’m not going to go all the way to real-time. That may not necessarily be the best thing for everybody, but certainly twice a day or three times a day would reduce risks in the markets. So just being able to increase the frequency with which we do this is as important, if not more important, than moving from T+2 [Trade Date Plus Two Days] down into T+1 [Trade Date Plus One Day] or further.
36:07 Dominic Hobson: I’d like to come back to the question of the commercial logic of the Canton Network, and I registered Yuval’s observation there about the narrowness of use-cases and the need to make this all more joined up but before I do, could I ask what would probably be a very stupid question to you, which is, Canton Network is described as this institutional grade, private, secure. Permissioned, public blockchain network. Now, a lot of people listening to this will be wondering why public and permissioned aren’t a contradiction in terms. Why aren’t they?
36:38 Eric Saraniecki: Actually, let me ask you a trick question, Dominic, if you don’t mind. I’m going to pull you in. What’s the most successful public permissionless network in the world?
36:47 Dominic Hobson: Bitcoin?
36:48 Eric Saraniecki: Okay. So a lot of people are inclined to go that direction. I think that the Internet is actually orders of magnitude more successful. We don’t tend to think of these things as public permissionless networks. But I assure you, there are some very awful things in the Internet, and the protocol does nothing to prevent it. Now, the reason that we can have bank and central bank apps in the Internet side by side with some extremely horrific things is because the boundary of their control is strictly permissioned. I can find Chase.com from any browser in the world, and I can ask to join Chase.com from any browser in the world, but they control whether or not I can join. And even when I do join, what can I do and what can I see? And you get the benefits of this self-sovereignty, that entity that really controls its boundary with being part of an ecosystem and a network. And the network effects of the Internet are, I think, massive, probably the largest in human history. I’ve heard someone else give a good answer. This was just cash. I think cash is, our money, is a very interesting alternative theory to be the most successful. But the Internet, I think, is undeniably a very strong permissionless network with network effects. I think that the pendulum has swung so far between public permissionless crypto networks and private permissioned blockchains that really neither of them are in that sweet spot of an ever-growing permissionless ecosystem with all the strict controls necessary to be a responsible participant in it. And so we’re very much trying to find that sweet spot in this new capability of interoperable transactions. The Internet has different types of interoperability, and it’s very powerful, but we’re looking to add this additional capability, this transactional interoperability, that we don’t have today.
38:42 Dominic Hobson: Yeah, it’s a good point. We often forget that all this is an iteration, I suppose, of the Internet, really.
38:51 Eric Saraniecki: I think it serves as really strong inspiration because we don’t have a lot of case studies on wildly successful permissionless ecosystems, but that certainly is one, and there are a lot of important technical conclusions to draw from what made it successful. Unlimited horizontal scalability. How many packets per second are going across the Internet? Nobody knows. Nobody tracks that. Certainly, it’s in the billions and continues to grow with every investment in infrastructure and additional apps in the system. But still it’s a single experience for a user. I have one browser, I can access the whole ecosystem. It’s this simultaneously physically fragmented world with this really nice single experience for a user, and it’s just always growing, always capturing these network effects. You can always come in, participate as a responsible party, regardless of what else, what other, nefarious characters might be there. It’s just a very strong case study for us all to carry as inspiration as we think about building other networks going forward.
39:55 Dominic Hobson: And now, Eric, I think you probably answered this question in talking about network effects. But if I go back to Yuval’s observation about the narrowness of the use-cases and the need to join these up, is the commercial logic behind the Digital Asset strategy, which has given, which has caused you, to sponsor, create, if you like, the Canton Network, which is, as I see it, a network of networks. Is that the commercial logic – to maximise the network effects? And how do you benefit from that? And how does Canton differ from other efforts to create these networks of networks?
40:37 Eric Saraniecki: Yeah, sure. So I think, I like to think about this a little bit in phases. So, to Yuval’s point earlier about starting with something that provides some immediate value, there are immediate network effects to that. If you look at Broadridge and their repo product, they have built a nice little bubble of parties that are adopting that process, and they’re rethinking how they think about these networks in general, and they’re getting immediate, demonstrable money, monetary benefits, from doing that. That has a little bit more of your traditional network effects, like, why would someone buy one software versus another? You’ve all went through the laundry list of other things that are like that. The next opportunity is to start to connect those things together. You have this unique value prop in the technology that allows me to coordinate a repo with a margin call, with a cash delivery. Now we get to that next order of benefit from being a participant in Broadridge DLR [Distributed Ledger Repo] or in GS DAP [Goldman Sachs Digital Asset Platform] or in any one of these systems. And that starts to build a second order of network effects. Now we have the network effects of apps that are connected together and coordinated with events, and that creates a flywheel of demand. So it’ll bring more generic participants to that network because they might be drawn to one of those apps or one of those connected use-cases. And that flywheel is really important primarily for the utility of our customers and their customers. I think if you really want to get widespread adoption, it starts with everybody benefiting from the deployment of that technology. So first order benefits tend to have potentially narrow benefits, but meaningful enough to prime the pump. The secondary benefits of starting to connect these use-cases together create the flywheel. And then I think the tale of real utility to all the market participants comes when you start to see incredibly, unimaginable innovation on top of that, that I can’t think of what it might be today. But once I start to bring this ecosystem of interoperable assets together, and access has been improved for innovative organisations, what do they do with that? That’s that third order that’ll start to come on the back end of it. We see previews of this in other networks, but just in, I would say, less consequential asset classes. I don’t take anything away from the other networks. They are massively successful in what they are trying to achieve, more often than not borderless censorship-resistant money or fully transparent bearer assets. I don’t think that maps well to real world assets and capital markets, but you can start to see those first, second and third order benefits and what people are doing with it. And again, it just serves as really good inspiration to say how do we bring the benefits of something like all of the DeFi [Decentralised Finance] and the DEXs [Decentralised Exchanges] and the interoperability across apps on the O1 of an Ethereum or a Solana, to a responsible ecosystem where everybody controls their apps and their system and they can meet their regulatory requirements and still get those second and third order benefits. I think of it as just using a lot of that as inspiration, but making sure that we carry the key requirements forward to actually enable our customers to come in and actually get that experience.
43:49 Yuval Rooz: And I think maybe I just want to add something to what Eric said, because I just think it’s so critical this point. When Eric uses the word requirements, and he uses it because that’s what we do on a daily basis, but I think that it’s those requirements … How can you actually achieve atomicity while still complying with regulatory requirements like privacy or confidentiality of private information, or data residency or GDPR [General Data Protection Regulation]? Those requirements, although they sound trivial, is extremely challenging to do. And that’s really why it’s taking us so long to build Canton. So when you ask, `What’s the difference?’ I think in most technologies today, we actually think in all of them, you have a decision you have to make. Do I want to have interoperability or do I want to have privacy? You just can’t have both of them in any other network. The reason is it is not easy to build a system that can fulfil all of these requirements. Now, a lot of people will say that they do because why not? But in our opinion, Canton is really the only network today that could meet those requirements.
45:15 Eric Saraniecki: Yeah, I mean, I think it’s a little bit stronger than opinion. You could pretty objectively demonstrate how, you know, being on some form of privacy is actually extremely transparent to participants in other systems. And, you know, we’ll get into bridging, I think probably, you know, a little bit later in the conversation. But bridging is not the same as an atomic update across, you know, two systems. So, yeah, it really is in a league of its own in terms of capabilities, but because we set out to design for the requirements of those specific demanding customers.
45:47 Dominic Hobson: Well, Eric, you bring up the question of bridging, and I think the interoperability problem is usually framed in these terms. If I might put it crudely, people see all these assets being issued onto different blockchain protocols. They’d like to be able to port those assets between those different protocols much more easily. Secondly, they see all these traditional assets have been issued onto different networks. So not only is it difficult to move assets between blockchains, it’s actually difficult to move assets between blockchains and traditional markets, and vice versa. So bridging is one of the answers which was invented to address that first problem and was found not to be entirely satisfactory for reasons which I think are quite well known. So what’s the contribution Canton Network is going to make to that problem? The ability to port assets between blockchains and traditional markets.
46:44 Eric Saraniecki: So I’ll just start by maybe trying to address the bridging topic in general. So you said invented… Bridging has existed for decades, both in the custodial form of Clearstream, Euroclear, custodians, global custodians, sub-custodians. The concept of I hold something on this register and I give you a different form of it on that register, and I promise the link between those two things, has existed for decades, maybe longer. And that’s one form of bridging. The other being more of a message, `Hey, I’m going to tell you to do something over here at the same time I tell you to do it over there.’ Messaging has also existed for decades, if not longer. There’s nothing new here under the sun in terms of connecting two different types of systems. I go one public ledger to a private ledger, two private ledgers of the same kind. It’s all the same. My tools are some sort of intermediary, holding something on one side and giving me something on the other, or some sort of technology trying to coordinate the updates on the two system. But there’s no way to guarantee that that intermediary hasn’t absconded with your assets, and there’s no way to guarantee that message is going to achieve the outcome that you want it to in a coordinated way across those systems. It’s not atomic, it’s not guaranteed to complete. And so we’ve lived with this risk for the past many decades. It is what causes this natural minimum latency in our system. This T+1 [Trade Date Plus One Day], T+2 [Trade Date Plus Two Days] latency is explicitly because we’re trying to coordinate people through messaging and reconciliation and bridging in messaging will perpetuate that on a go forward basis. We’ve seen already in many instances in the public networks where that has happened. Either we have someone standing in the middle that has been printing something on the other side more than what they actually hold on one. We’ve seen many instances of that over the past decade in the public networks. Or that the message bridges don’t work the way that you expect. And you get these opportunities to exploit that and you’ve stolen money or printed money or inserted yourself in different ways. So if you cannot guarantee that atomic action across those different systems, you have not reduced the risk that we already carry today. And that’s fine. I’m not saying that’s like bad. There are many reasons that we would still want to continue using those capabilities going forward, but there’s really nothing new to do here. People are innovating on how to reduce some of those risks, which is interesting. It’s an interesting problem, but it’s reduced, not removed. And so anytime you’re talking about going from system of type A to system of type B, it doesn’t matter if it’s blockchain-to-blockchain-to-traditional, traditional-to-traditional, you really only have those two options. We don’t have a lot to contribute there, we don’t have a lot to contribute there, just as very few have anything else to contribute there. We’re equivalently good or bad at that as anybody else. You want to move something from our system to your system, interact with an external system, we have all the exact same capabilities to do that as any other technology on earth, and we’re not against it. But what we wanted to highlight is how once you are in Canton, we do have differentiated interoperability. We do have two apps that are completely on their own blockchain, totally permissioned, however they want, built in completely different ways, zero standardisation on how the asset behaves, zero standardisation of onboarding models or data models. And still I can build one atomic update across those N apps – not even two, N apps – into a single transaction. So we wanted to demonstrate where we can differentiate, where we can make a difference and where we cannot reduce reduce but remove that interoperability risk down to zero. And you know, of course it’s interesting to do these other things on the edges between these systems, but we don’t have a lot to contribute there more than anybody else in the past 50 or 60 years.
50:36 Dominic Hobson: If I’ve understood you correctly, you are looking with the Canton Network to replace the traditional system, if you like, of moving data from one bank’s system to another bank’s system, perhaps in the form of a standardised message type, a SWIFT message or FpML, or FIX message, towards a world in which all the latency and all the reconciliation problems the present system creates go away, because it’s a kind of atomic, simultaneous update of a ledger which everybody shares. It’s the blockchain dream. And do put me right if I’ve misunderstood what you’re saying. But one word you haven’t used, and maybe that’s because you don’t need it in this simultaneous update, is the word `standards.’ In other words, does the network of networks which Canton Network represents need standards? Does that simultaneous, atomically settled update need standards? Does it need ISO 20022 or SWIFT?
51:32 Eric Saraniecki: Yeah, yeah. So, yes and no. So I’ll give you both answers. I’ll start with the no. There is nothing technologically that requires any standardisation across apps to get interoperability in Canton. So I could have two completely different data models and asset definitions composed into a single atomic transaction. But there are real benefits to standardising those definitions, but not required. I think that’s the big difference between Canton and the Internet, and other things too. If it’s required, you get into this morass of governance problems. Who sets that standard? How does it evolve? How do I use it? How deep does it have to reach into my application for me to be compliant with it? And if you’re trying to say everybody has to be the same, I think there’s an extreme inertia to making that happen. I think that’s part of why those standards are just at the edge. How do we communicate with each other and tend not to go beyond that, into the systems themselves. The benefit of having that standardisation is, again, if you look at something like what’s taking place for DeFI [Decentralised Finance] in, like an Ethereum or a Solana L1 [Layer One], if you have the standardisation of what an asset looks like, then anyone that has built some third-party service, that compatibility is already there. So standards are an accelerant to an ecosystem, as people are building assets and bringing information and creating third-party services. That’ll just kind of help all these complements of services fit with each other better with less effort. So we get to benefit from each other, but there’s no requirement that they be the same to get those interoperability properties. So yeah, I think. I think that’s probably the most straightforward way to put it.
53:17 Dominic Hobson: Yuval, the entities that are involved in the Canton Network are pretty eclectic bunch. You’ve got some very large global firms, BNY Mellon, Goldman Sachs, Deutsche Börse, Microsoft, involved, but you’ve also got a lot of other smaller organisations which some people won’t have heard of. Some of the more informed people, of course, will have heard of them. But it’s, as I say, a pretty eclectic group of participants in the project. Does this question answer itself? Do you kind of need everybody, all shapes and sizes involved for the thing to work? Or does it tell us something else, that eclecticism?
54:06 Yuval Rooz: The answer is you don’t really need everyone to make it work. At the end of the day, it’s kind of like I gave that example about the physical commodities. They definitely do not have the entire market, but, you know, the participants that are participating are already seeing the value. So the answer is kind of very similar to clearing. When you see the most benefit from clearing is when the entire market goes through a one clearing party. But it doesn’t mean that if you had half of the market, you wouldn’t see a risk reduction as a result of central clearing. So it’s very similar here that, yeah, you can see the benefits from a portion of the market. But I will caveat that with as long as you are not forcing participants that want to participate in this market not to run everything twice or double, because then the cost of doing everything twice is higher than the benefits that you are going to see. That is why earlier on I said there is a big role for custodians or some of the existing providers, how to connect their clients to this new world without making major changes to the way they conduct their business today. And if you do that successfully, I think you can actually see the adoption happen incrementally because every incremental joiner will have an incremental benefit. But you don’t need to have everyone to see some initial benefit.
55:44 Dominic Hobson Eric, as Yuval has just said, you don’t need everybody involved. But clearly the success of Canton Network does depend upon network effects, and network effects what will drive its success. Am I right to think like that?
55:56 Eric Saraniecki: Yeah, like I mentioned before, I think that those are the accelerants. But even if we just had a kind of collection of diasporas of just like these little silos of doing something, there’s still tremendous value to be gained there. So it’s just about how large is that utility to the participants and the tail of that utility is connected to the network effects, yes.
56:17 Dominic Hobson: And do you expect the Canton Network to evolve into something similar to what the International Monetary Fund (IMF), the Regulated Liability Network (RLN), and most prominently the Bank for International Settlements (BIS), have described as a “unified ledger” or a “single programmable platform”? This idea seems to be gaining some traction.
56:39 Eric Saraniecki: Yeah, I think what’s tricky about this expression is that I do not anticipate that there will be one single physical ledger that everybody evolves into. Again, going back to that Internet analogy, it’s actually an extremely physically fragmented system. Even though virtually it feels like one place for us, logically it’s one thing, physically it’s `N’ things. I think that if you want to look at how these ecosystems will evolve, they’ll have to follow a similar pattern, at a minimum for scaling and control purposes. Yes, I believe that we will ultimately see that this becomes one unified virtual system for coordinating these types of assets. But that does not mean that everybody comes and acts on the exact same physical instance. And I think just like … My favourite way to try to explain this is imagine that we had both the Fed [Federal Reserve Bank] and the DTC [Depository Trust Corporation] do something in one of these blockchains. And then they said, `Well, we need to be interoperable.’ And they chose to be on the exact same piece, like the one deployed ledger. Well, the question starts to become, `Well, who governs this?’ And either the Fed just took over governing securities or the DTC took over governing the US dollar. So both remits would become much, much larger than they are today, or it would turn into some sort of joint governance, which is even more confusing, one legal body versus one federal body. The governance problems, when you talk about sharing the exact same instance of something, is where I think all these shared systems start to fall apart. You will have to allow them to be completely segmented, governing their own system 100 per cent on their own, in order to even enable them to come into these ecosystems. I think that strict control and governance problem is what drives this physical fragmentation. And then you need to make sure that you can tie it all together so that they’re interoperable together. So, yes, but I’m careful to say that it’s at the virtual level, not the physical level.
58:54 Dominic Hobson: Before we leave the Canton Network, just one last question about it. You obviously had this pilot test. It’s been successful. The 30-odd firms which took part, as Yuval says, are starting to see the benefits of that. So what happens next? What’s the next development for the Canton Network?
59:13 Eric Saraniecki: So all the infrastructure that we used to demonstrate the interoperability is going to go into production this summer. We technically used the test net instance of it for what we did here in the pilot. So that’s all going into production within the next few months. And more of those applications that we demonstrated in the pilot will also go into production. In conjunction with that, we’ll start to demonstrate how in production tying some of these apps together can create meaningful real-world impact with the launch of this going deeply into production.
59:54 Dominic Hobson: Just to round our conversation off, could we talk about just a handful of some of the larger industry challenges and opportunities that are out there? And the first one that occurs to me, talking to a company like Digital Asset, is smart contracts. DAML’s obviously, as you pointed out, this smart contract language. If we’d had this conversation a year or two ago, we’d been talking about the hackability of smart contracts. Is hackability still a problem in smart contracts, or has that gone away?
01:00:23 Eric Saraniecki: I think it’s kind of blaming the wrong party. So any bit of code is hackable, of course. But I think the mental mistake is saying the code is law, and I’ve written this smart contract and I gave it to this pool of third-party validators, and they blindly execute the logic that’s in this code and that’s what’s right. And so I think everyone’s saying, `Oh, well, if we can just prevent smart contract hackability we’ve solved this problem.’ I just think the premise and the set-up is wrong in the first place. So first and foremost, you need to say, `Well, how do I safely control the assets I’m putting into these ecosystems? How do I prove and demonstrate that?’ And of course, you’re always going to have attackers. You need to guard yourself against it. But I just think this, throw it into the pool and the code is law, I think that’s just such a played-out [idea]. It makes sense in very narrow use-cases, but definitely not for real world assets.
01:01:15 Yuval Rooz: I want to add to Eric, because I think there’s another component that people just need to accept, and this is maybe in crypto, where most people think about these instruments as bearer instruments. And guess what? If you want things to be bearer, accept the risk that when the bearer instrument gets moved, you lost them, right? And I think that’s really where we disagree. Financial services … If we are going to move financial services to become … back to the mediaeval times of everything is bearer, just accept that you’re effectively introducing a significant amount of risk into the system that, in my opinion, overtake the benefits in many multiples. So, first of all, I think that this idea of thinking about code is law, everything is bearer, is just a very bad idea. And Eric is right. Whenever you have technology, people will find vulnerabilities. People found vulnerabilities Internet protocols when they were being used 20 years. It was only 20 years when Google found that overflow bug. Things will happen. And I think that all we’re trying to do is we’re trying to create more deterministic systems, that when you go to court, you have more evidence to prove who’s right. I always think about this analogy to DNA. DNA does not make you guilty just because your DNA was at a crime scene, but it gives more evidence to the legal system to make a determination. So this idea of saying code is law, to me, is just very backwards. We’re just trying to create much more determinism in the system that when issues happen and you need to make decision, you have much more fine-grained evidence on what has transpired and who’s right and who’s wrong. But the legal system will still be the one in certain cases that need to make the decision of who’s right, who’s wrong, what needs to happen.
01:03:27 Eric Saraniecki: Yeah, I mean, can you imagine a world where if you lost your house keys, you lost your home? It doesn’t match to users’ expectations, this sort of bearer instrument world, and a lot of the technology that exists in these public crypto networks is built around public, permissionless, censorship-resistant money. And then if you’re trying to take a real-world asset and jam it into those pipes, that doesn’t necessarily map well together. That doesn’t necessarily work well together.
01:04:00 Dominic Hobson: Yuval, if we look at some of the things we’ve talked about today, the pilot test, for example, the need to focus on real world assets, you know, where the low hanging fruit is, if you like. I sometimes wonder if that, because it implies … This incremental approach, that you follow the path of least resistance, if you like, to try and bring about this world of digital assets. Now, is that the only course we have, and is it the best course we have compared with a massive transformative switch from the technologies we’re using today to the technologies whose power and benefits you’ve both described very lucidly and at great length today. Where do you sit on incrementalism versus Big Bang, if you like, in the march towards a digital asset universe?
01:04:58 Yuval Rooz: Back to the point about ASX. If this is kind of where we want to … Because I think it’s a good opportunity to reinforce: Big Bang creates big expectations. The probability of meeting big expectations in today’s world, where our attention span is probably 30 second clips. Thinking about when you run these kind of podcasts, coming up with what are the 30 seconds where you feel like the good content? Big Bang just sets its expectations, in my opinion, in an unrealistic manner. And therefore we are relative creatures. We always measure success of things relative to our expectations. So if you have a big bang approach, your expectations are going to be very big. And the ability to meet these expectations, in my opinion, is slim. And therefore, on a relative basis, it will always be somewhat of a fail. And therefore I actually think shortening the approach of delivering value, creating realistic expectations, your ability to actually create a positive feedback is much higher. So it’s not always a possibility, but where it is a possibility, you would always see us focus on how to deliver some value as fast as possible to create this positive feedback loop with our clients.
01:06:33 Dominic Hobson: It’s a very wise observation that about how humans always measure success or failure against their expectations, no matter what those expectations, how realistic those expectations were. I think it’d be very useful to apply that to the geopolitical state of the world.
01:06:51 Yuval Rooz: I will not comment on that, but you are correct.
01:06:53 Dominic Hobson: But talking of geo, if not of geopolitics, obviously businesses are not the only actors on the stage where the drama of digital assets is being played out. The policymakers and the regulators are there as well. And although there are some signs of a kind of convergence across the major financial jurisdictions in how things will be seen legally and how things will be regulated, is the differences – and these differences exist obviously in the traditional markets as well – how large an obstacle do regulatory and legal differences between different jurisdictions play in slowing down, retarding progress towards a digital asset future? And how do you advise the industry to adapt to and manage that problem if it is a problem?
01:07:49 Yuval Rooz: I think this is the most important question, and I think that this is where our industry has got it wrong. So I think that this would be a good place to finish such an important discussion, because I think that what the industry has done against its interest is come to regulators that have been working on an industry that have been formed over 100 years and say, `You’ve all gotten it wrong, we can do it better, different.’ And if you don’t understand the responsibility of a regulator and you don’t understand kind of the amount of capacity that they have to do things, that is extremely frightening and you need to understand that, kind of back to your previous question about incremental versus Big Bang, when you come and say you’ve gotten it all wrong, we can just do it completely different, you’re just going to get a very nervous regulator. And I think when we approach, when we talk with regulators, for the most part, our view is that you could meet all regulatory requirements today with this technology. And we actually come into it with quite a lot of empathy and appreciation for the challenges that it requires or the challenges that are faced by regulators. I think that if you approach regulators this way, I personally have experienced a very open-minded people that really want to see innovation, but also understand what are their challenges and day job duties that they still have to comply with and are being held accountable. And I think that when you take that approach, and again, I don’t think that’s necessarily unique to regulators, but specifically with regulators, because of their job, I think you will find a very open door and people that want to listen and actually want to see innovation happen. I actually think that this technology could make the day job of a regulator much more efficient. If you could actually start being able to observe the financial system in real-time, rather than in batch files that come to you later on, which are harder to analyse, I think there’s quite a lot of opportunity for regulators as a result of this technology. But if you sell it as we’ve gotten it all wrong, and let’s just restart and do it all over again, I think you’re just going to get the appropriate response.
01:10:19 Eric Saraniecki: Yeah, they’re very good at understanding. You may be reducing risk A, but introducing risk B, and they’re more accustomed to thinking that way. And often people lead with just, `Hey, I’m reducing risk A.’ So you have to think of the whole portfolio, of what that regulator is looking at and the institutions that participate in these spaces, you need to think about as a portfolio effect. Have you reduced the risk for everybody involved? That’s not always true when you apply some of these other technologies to what they do.
01:10:49 Dominic Hobson: One final question for you, and I promise it is my last question. Apart from interoperability, the biggest obstacle to progress towards digital assets is the lack of a digital money on-chain. The cash leg is still missing. We have Stablecoins. We have a handful of tokenised deposits. We even have some central bank digital currencies, probably not in the currencies we use much in the financial markets, but they do exist and projects are in hand to create more. But none of these have yet solved that basic problem of money being available on blockchains in true, genuine digital form. These things have become politically quite contentious. Some of them are pushing, of course, at the regulatory boundaries which exist – what we’ve just been talking about there. What are your views on the creation and the implementation of digital money on blockchain networks?
01:11:51 Eric Saraniecki: We should start here. I think we have slightly different views, but I think that it’s really critical that we get, at a minimum, a wholesale central bank digital currency (CBDC) that can be used in our capital markets. And the way I sometimes try to explain this is just take the existing Fed [Federal Reserve] boundary and just bring it into the interoperable ecosystem. Don’t change its governance, don’t change how it runs, just upgrade the underlying tech to make it possible. Because then, when we’re talking about all these different asset classes that we can coordinate in the system, then the dollar moves with it side by side. And the dollar that is considered the settlement version of the dollar, the Fed’s wholesale ledger. I think that going back to the bridging discussion before, what’s difficult about some of the Stablecoins from a capital markets perspective is that these things are derivatives. A bridge is a transformation. Money held here, created over there in this form, someone has transformed that. And we don’t really have the current regulatory guidance to make that an acceptable transformation for capital market settlement. So I think that actually we’ve done a decent job technologically of demonstrating what dollars in these systems can do. And people have experimented with different forms of permissioning them in different ways. And I think that’s a solvable problem. The hard part is getting the regulatorily allowed, balance sheet appropriate version and treatment of these things to use them in capital markets. And the party best positioned to do that, I think would be the central bank in a way that does not increase its remit or increase its boundary of governance.
01:13:37 Dominic Hobson: Yuval Rooz and Eric Saraniecki, both of Digital Asset, thank you very much for taking the time to share your experience and your ideas with the members of Future of Finance. Thank you.
01:13:47 Yuval Rooz: Thank you Dominic. Thanks.
