DeFi allows large-scale multilateral contracts between thousands of parties in a completely transparent way that is guaranteed to be correct. This is a real breakthrough in finance.
The Respada Digital Asset Summit 2020 was held on Thursday, 10 December, by Respada, an invitation-only niche platform providing private market opportunities to the ultra-affluent. The summit was moderated by Paul Veradittakit, Partner at Pantera Capital. Expert panelists included Enzo Villani, CEO of Alpha Sigma Capital, Thomas Stromberg, Partner at Perkins Coie LLP, Kyle Samani, Co-Founder of Multicoin Capital, Marius Domokos, Partner at DLA Piper and Simon Lapscher, Co-Founder of Liquality.
The summit kickstarted with a discussion on how family offices can include digital assets and cryptocurrencies in their portfolio strategy. Talking about bitcoin as the ultimate store of value asset, Villani recommended families to have a portion of their portfolio in bitcoin “either as a pure-play or bonding through a fund, trust or a stock that represents it. There are multiple vehicles in that space and a lot of has to do with management fees and premiums tied to it”. Aside from bitcoin, Villani emphasised the need to invest in blockchain companies and other types of protocols, solutions and applications. Villani remarked that “Blockchain is the most cost-effective and open-source clearing and settlement system for transactions ever invented. It is going to change the world and it is already changing it!”
Domokos added, “In emerging businesses, digital currencies and cryptocurrencies are being used as a storage of wealth to diversify from existing assets, but ultimately the value will be derived from applications”. He further elaborated how “digital currencies and cryptocurrencies are being used as proxies for tokenising or securitising existing assets like real estate or for collateralising debt”. Domokos noted that “as digital currencies scale up in transaction volume, it will become a way to transact at lower fees and to avoid or bypass interchange fees.” In Lapscher’s view, “Family offices, for now, should only focus on bitcoin and understand what it represents”. He highlighted that “Bitcoin is unlike any other asset that has existed. It is not controlled by anyone and there is a global set of actors that play a part in its governance and existence”.
Further, Veradittakit posed a two-part question to the panelists, firstly if family offices should consult fund managers to gain exposure to digital assets. Secondly, what is the recommended percentage of net worth to invest in digital assets? Samani responded, “To gain exposure to bitcoin, you need not pay fund managers. Instead, you can go to Coinbase and buy bitcoin for a pretty low fee”. He further added, “Fund managers make sense if you want exposure beyond bitcoin. Bitcoins provide the thesis for inflation, hedge and digital gold”. From a legal perspective, Stromberg pointed out other crucial questions to consider such as “Who is providing advice and what are the obligations of that person? How are the assets going to be stored and what sort of custodian issues are involved?” Additionally, Samani recommended 1 to 5% of total net worth as a general range for investing in digital assets. However, Villani contended that “If you are a 100-million-dollar family office, 5% is 5 million. Despite the fact that it is centralised, it is an issue of being comfortable enough to hold that amount in an app on your phone”.
Moving onto the topic of regulation, Domokos highlighted that in deals involving large players such as banks, “if you are selling a solution based on blockchain or digital currency, security is one of the major concerns”. Stromberg added “On the one hand, the regulators are very cooperative, they want to listen to what the business model is, and they don’t want to stifle innovation. On the other hand, they are concerned about market manipulation, fraud and other bad actors in the industry so they will look to identify and close down the bad actors”.
The next section of the summit discussed the use cases of decentralised finance. Elaborating on the concept of DeFi, Lapscher said “There are different financial primitives being created that are interoperable with one another. Everything is out in the open built mostly on Ethereum blockchain”. He further credited this feature of DeFi to the evolution of permissionless innovation wherein “A project can do what a bank does with minimal effort, since they have access to open-source tools that have already been built”. Lapscher added, “The traditional finance space is being reconstructed to be more open, transparent, censorship-resistant and accessible”. Samani highlighted “What is amazing about DeFi is, for the first time we can do large-scale multilateral contracts between thousands of parties in a completely transparent way that is guaranteed to be correct. Further, there is no fees beyond the cost of computation and this is a real breakthrough in finance”.
Moving further, panelists assessed the effect of monetary policy on cryptocurrency. Villani remarked that “On some level, bitcoin is a competitor to reserve currency and governments are getting involved in digital currency. It is interesting to see how the decentralised world will compete with the centralised world and how government regulations will try to reign things”. Domokos observed that “Large names in fintech and banking are adopting cryptocurrencies, particularly bitcoin, but the adoption is steady and not exuberant. The increasing value of bitcoin validates this adoption and passes the message that digital currencies are here to stay”. However, Domokos also pointed out that “The real question is, can cryptocurrency and blockchain networks be locked down from an AML and KYC perspective? This will give governments confidence for mass adoption as international payment and fund transfer networks”.
In the final leg of the summit, panelists discussed the current bull run in comparison to the 2017 bull run. Lapscher noted “Firstly there is both institutional and retail demand now at the bitcoin level, whereas during the 2017 bull run, it was mostly retail. Moreover, there is a sort of supply shock with corporations trying to diversify their treasure”. Stromberg agreed “Old-line institutions are realising the need to learn how to use digital currencies and blockchain to make themselves more effective”. “In a way, there is a culture clash between the world of digital currency and blockchain innovators and these rule-based financial institutions. We have been involved in points of collaboration between these two worlds and this will add stability to the usage of digital currencies,” Stromberg added.
The summit concluded with audience interaction and Greg Leekley, Chairman & CEO Vertigo Media and a Respada expert member asked, “From a free-market perspective, what countries do you see getting the early jump? Villani responded, “A decentralised organisation that has no leader and run by code is fascinating. This is why the Panteras, Multicoins and Alpha Sigmas of the world are studying it deeply. You have to look at it from a fundamental standpoint, look at the trends of the market and the regulatory hurdles, but to bet on one country is too risky”.