Who Secures The Assets? Custody, Risk and Confidential Execution

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1. 0:00

   Great last panel. Let's have some fun here, guys. It's a great week in Miami. What do you guys think? Miami so far. I grew up hot. Um, anything other than you got the suit on. Well, I live here and uh so I love it. It's awesome. Best city in America.

2. 0:20

   I I would say, can you imagine the vibes if the market were up? I mean, it's been kind of an incredible week in terms of energy level and uh attendance and all that sort of stuff in a down market. I mean, I think it's been a great uh a great conference overall.

3. 0:34

   Yeah. Yeah. Yeah. Uh market was up a little bit yesterday. I saw Mir was up 16%. Zcash had a ripper. Um okay, so we've got Hodddle, Zod, Bitco Grayscale. Uh we're going to be talking about who secures the assets, custody, risk, and confidential execution. Uh, well, why don't we why don't we go down the list?

4. 0:55

   Um, I I don't think I've had the pleasure to of meet you guys. Um, a aside from Zach. Zach was on our show a little while ago, and I just want to I want to use something that Zach said in that episode as kind of the pretense for custody. Uh, and I think Zach knows what I'm going to allude to because we were talking about the tokenization super cycle. And it really feels like, you know, first we tokenize the assets, they come on chain, they go into all these

5. 1:19

   DeFi primitives, and then all of a sudden you do get this massive repricing because this absolute storm of assets has now entered the arena. Um, and so what was the biggest thing holding that up? Zach said institutional custody. So I want to we we'll go down the list.

6. 1:34

   We'll get custody risk and confidential execution, but just starting with custody, Zach, maybe you could just expand upon this idea of what is currently holding up the tokenization super cycle and why you think it's institutional custody.

7. 1:47

   Yeah, a lot of kind of elements to that story, but just building on that previous conversation, you know, how how we think about it is the financial system. I mean, that's what we're rebuilding is the the financial system that connects savers and investors or people that have capital to lend and people that need capital to borrow. And so, we can tokenize assets all day long, but if there's not a way to bring the capital uh uh deployers, the savers, the

8. 2:10

   people that are investing these funds onchain effectively, there's no uh point to it. And so one of the things that holds back this wave in our our view is just we're not quite there yet for you know the big boys of institutional finance to be uh h you know doing self-custody having their own wallets.

9. 2:27

   Um the infrastructure is almost there but certainly it's not deployed at scale. When you go into Morgan Stanley you go into Wells Fargo and you go into other partners they're still very much at the ETF. uh they want that custody uh provided for them in the form of the ETF and they want um the wrapper to go in traditional brokerage accounts. When we when we get there, when we get to the point where we have institutional wallets and and self-custody, we're going to be able to unlock the

10. 2:52

    tokenization wave in a much bigger way in our view. Yeah. Um okay. So, so setting the stage here, you know, we've now got almost all of the pieces where we're ready for trillions or more in assets. Um it feels and I mentioned this earlier it feels like we've got this three-headed dragon Zcash near and hyperlquid. Um using these as sort of the the fora as through which I think a lot of people are kind of looking at and entering the ecosystem. You know we've got a varying

11. 3:21

    set of approaches. Zcash got you know shield in we've got zodle here you know and hyperlquid's got you know their approach and deposits self custody and such. And then we've obviously got the more institutional front when we're when we're looking at, you know, kind of the the landscape here. How do we ultimately get these things all composable? I think that's where we really start to unlock what, you know, the, you know, the value proposition of this new financial system

12. 3:46

    can really do. Um, maybe we'll, you know, Tony, we'll start with you and we'll kind of come down the line. Privacy feels like it's it's in the room with us all the time, but we can't really see it. We don't quite know how to integrate it. you know, if we can get to a point where, you know, we we leverage the the the privacy of Zcash in addition to these other assets, everything becomes composable together,

13. 4:06

    feels like that's a massive value that's unlocked. Maybe you could speak to how you guys have approached this at Zodtle and how we can bring privacy to the rest of the ecosystem. Yeah, that's a great question. um Swedle, one of the things that we did to really um you know bring Zcash to other ecosystems uh was we integrated near intents. Um, and obviously it's topical here and Alf just had a good talk on it,

14. 4:30

    but um, you know, historically um, Zcash has always had like really groundbreaking tech um, zero knowledge proofs, you know, we implement those back in 2016. Um but I think it was a little bit um isolated in its own ecosystem and um so now with with near intents and one of one of the features I'll call out is is cross pay because this plays into a commerce but um if a vendor or if uh my friend only you know

15. 5:00

    wants to accept USDC or Bitcoin or ETH um within Zado I'm able to you know store my wealth shielded in Zcash and I can pay them um exactly the amount in whatever currency they they want. Any currency that's supported by near intents and that's a big deal. Um you know it's kind of like meeting meeting people where they're at. Um if if you look at you know Agenta Commerce or whatever if I have an agent out there

16. 5:25

    that I want to go make a purchase on Amazon or go book a flight and you know they don't accept Shielded Zcash. Well that's that's fine. U through our our partnership and your intents were able to um those payments can be executed as well. Can can I just pile on one quick thing on Aadel? Not not to hog the mic here, but um I mean I', you know, think about it inbound as well. Everybody that has spent some are doing, but I just

17. 5:48

    like to pitch, you know, think about it inbound as well. Everybody that has spent some time in crypto has some assets scattered all over different chains. You probably got some BNB chain stuff. You probably got some Avalanche stuff. When was the last time you looked at these assets? you know, Zodel and Zcash can be a private hub for your onchain wealth. You know, clean up your onchain life and bring these with near intense into a shielded pool and then,

18. 6:14

    you know, who knows what you might do with that those assets in in the future. But what a great place to sort of hold these zodle is mandatory self-custody um auto default shielded assets. You can kind of sweep up your onchain life into a shielded pool. To me, it's like a great use case of both of these tools, the wallet, the chain, and uh and your intents.

19. 6:32

    Yeah. All right. That's right. I just love it. I had to had to get that pitch across. Good pitch. Um, we so at Hodddle actually we have we have have some unsolved challenges which we're waiting for, you know, some evolution to happen in the space. We we do tokenized hedge fund strategies which means that people can access them you know onchain as well just directly uh on our website you know the auto protocol. Um, but one of the you can also see if the onchain perhaps somebody could see all of your holdings.

20. 7:03

    You can also see if the smart contracts that are executing trades what they're executing. Now obviously reverse engineering that is difficult um and might not be worth it but um there there's a challenge there that as you know we get more consolidation in the market there's less and less strategies less funds um that are providing those strategies then it'll make more economic sense to try and copy or reverse

21. 7:28

    engineer um uh and frontr run them. So we're looking forward to actually seeing how we could work with near as well and eventually uh if there's a standard that's developed uh there's like some standardization in the space about how uh we expect privacy to work like in Tradfi you know there's different types of certifications and comp socks compliance and other standards if that

22. 7:53

    comes to digital assets and it'll be great. Yeah. But ultimately who you know who hates privacy is regulators. So like when we think about the evolution of where we're at now, like if at BO right we're an OCC chart bank, we have seven regulatory licenses globally, hundred billion dollars in assets. Um two years ago we couldn't get a bank account. So like when it came to you know regulators of people coming to us and say hey you know we want to hold

23. 8:21

    these assets we want to deploy these sort of things. OC's at the time we're state chart trust um a difficult thing tell us about these transactions like we have we we could privacy was kind of a a difficult thing we didn't support a lot of the tokens cuz you know regulators hated it and we were trying to run a business and so now we're at a point where like privacy is becoming you know

24. 8:44

    there's always uh the fund running and all these sort of things but from a custodial perspective it's really difficult because we don't want clients well we don't want people to look at Bitco wallets and say we can understand and start tracing these like we want to think we're thinking about ways that we can can shield for lack of better term these sort of positions but at the end of the day you know having even this conversation is a little bit more privileged than it was a year and a half

25. 9:08

    ago. So, so before we get too deep into this confidential execution realm, let's just come come back to the custody conversation. You know, when it comes to the institutional custody, Zach, you mentioned, you know, this is kind of holding up some of this tokenization super cycle, especially having an on-prem solution for these things. I mean, Nathan, would you argue that, you know, we actually have it solved.

26. 9:28

    Bitcoin and see Pico wallets. I mean, like, we get wallets that are tagged, like people can see transactions of some of our largest clients. If you're a a large organization, let's say VC shop that owns a sizable portion of an asset, if you put that into an environment, no matter how many wallets you split it up into, they can see the base and they can start tracking those sort of things. So

27. 9:52

    it's really hard to actually you know we have you know clients who own sizable amounts you know the lowflow high FDV sort of positions and and it's really hard to get away from tracking that now in the world of publicly traded companies like you can't just sell off a position and not tell anybody if you have a sizable position. So like there's some things around privacy maybe being not the greatest solution cuz it's it is

28. 10:17

    trying to shield from like what's going on in the market if you are a key decision maker or position in that in that holdings. But like ultimately for us like we don't want we don't want all our wallets to be exposed not because we're trying to hide things but we're trying to we are trying to create some level of confidentiality internally. Um, Zach, just to just to kind of come back here, like, you know, what what do you

29. 10:38

    currently see with Bitco as just a custody example, right? There's there's lots of institutional custody providers, but we got Bitco Nathan's here on the panel here. So, like, shout out Bitco. Shout out Bitco. Um, what so what what could we do? like how do you how do we overcome this uh this current uh environment of custody and ultimately reach the catalyst of unlocking this this next we're really getting there and you know really shout out to Bitco a US publicly

30. 11:08

    traded company leading the industry in this kind of stuff uh uh groundbreaking in in many ways and uh you know Mike is an OG and somebody who I think is very thoughtful on all the uh complex issues around this topic um look I think for me the answer is kind of a demand pull thing. You have to have a reason for uh institutional capital to get on chain in in the first place. What is the asset that they want to go get? Uh you know

31. 11:32

    Bitcoin was a kind of a start of that process. Uh can we make um uh unique types of token tokenized assets or unique tokens you know like say the tokenized galaxy uh share uh example you know something that only exists on chain. I think that ecosystem will grow a lot and we'll it'll be a demand pull thing. institutions will say, "I gotta get on chain because I have to get that asset." We're not quite there yet, but I think that is the thing that ultimately forced us so forward.

32. 11:57

    Um, and then obviously, you know, we've talked about privacy, confidentiality as it pertains to custody as well as execution a bit, custody as well. The part the boogeyman here is the risk like, you know, we've seen far too many hacks over the last, you know, even call it call it weeks to months. Feels like it's increased the it's accelerated. Um, we know that there was this massive buy hack a while ago. by you know culminative you know hacked assets maybe

33. 12:21

    it's not the biggest in terms of you know what we're on pace to this year but the amount of protocols feels very very vulnerable um how do we overcome this it feels like if we stick to our roots and we're decentralized maybe we can prevent a lot of this but I'm just you know curious does h how how does it start at the custody layer or is there something else that we can embed into this ecosystem risk controls asset controls

34. 12:45

    that ultimately mitigates a lot of the risk that we're seeing right I mean, in our case, I think we recognize that it's it's it's the biggest risk and it it it might actually get worse because of what we saw with like drift and the social engineering aspect because as more people actually get involved in DeFi and digital assets, but especially the DeFi side of things, then there is more potential targets. So

35. 13:10

    you have a and also the the equation is um control versus you know uh versus kind of uh so if you have more control maybe you can prevent a hack but then you also have control so you could be a perpetrator like a bad actor or insider risk. So there's there's both of those things. the insider risk could be mitigated if if you know governments decide that okay just because you have

36. 13:36

    control doesn't make something a security because right now that's one of the big like um you know pillars of how you avoid having your protocols token be considered a security is can you control or do you have discretion or authority over like trading for example that happens in if it's a vault product in that vault so protocols try to eliminate the control factor but by doing so if there there is a hack, they essentially

37. 14:01

    have no choice other than maybe to shut it down. So, I'd chime in and say that um you know, privacy isn't about hiding anything. It's really about um mitigating your exposure. Um and it's just it's hard to hack what you can't see. Um at at the end of the day, you know, if you can't see balances, if you can't see transactions, it just um your transaction graph is really your risk exposure every every time you're making public transactions on chain. um you

38. 14:32

    know with with AI it becomes trivial to track patterns and to track balances and um and so like as as I think Alexir was talking about earlier um you know it's in our normal daily lives like when I go buy groceries at the grocery store I'm not you know showing the cashier my account you know my account statement and all my transaction history but when you're transacting on chain on a public ledger you are doing that and it does make you a target.

39. 14:59

    Yes. Um and as we approach this you know from you know we're seeing more of these uh products in terms of RWAS tokenized you know products kind of going starting with stable coins treasuries kind of going down the risk curve there is is there creative ways that we can you know we can get creative with custody with privacy in which you know maybe there's limited movement of the underlying but you know we have very robust and liquid products. There are versions of some of

40. 15:29

    that today in a centralized fashion, right? So like different custodians have different methods. I can speak to what Bitco does where you have something called the go network where it's essentially an omnibus wallet. So it's you have one wallet address and because we're a bank, we can segregate on all books and records. So ultimately you let's say you have counterparty A interacting with counterparty B and we're selling between those folks. The asset doesn't actually move on chain. It just moves on books and records. That's

41. 15:52

    great if you're on BO, but if you want to transact outside BO, the asset has to leave. So, you know, it's these are these are some of the things that we've done to try to help mitigate some of the questions earlier, which was like, you know, not seeing all these positions move all the time. But as soon as you need to leave that environment, you're going to see the transaction happen. So,

42. 16:08

    we do things like that. But outside of that, um, yeah, I I know we got some things to add. I just want to build on this by saying this is going to continue to be like we're seeing more institutions enter the space. This is only going to be a a growing issue of fragmentation.

43. 16:23

    Just want to put put that out. Yeah, absolutely. One I think example of course uh of a way that you can provide liquidity to these assets while keeping custody more secure is the ETFs. Uh this is one of the reasons that they're a solution. Only a portion of the ETFs need to be kept liquid to meet creation and redemptions. Much of it can be kept in cold storage and as long as there's a buyer and seller on uh ready at at the current price, you actually don't need

44. 16:48

    to create and redeem all day long. It's only when there's a kind of big imbalance between buyers and sellers. So there's a lot of volume that happens on an exchange order book on the ETFs and there's no coins moving on chain. When you look at the Bitcoin blockchain, uh active addresses are actually trending uh down. And of course, this is a question about the the health of the ecosystem, but part of it is just the

45. 17:12

    ETFs. There's a lot of volume that's happening in a a secondary uh market doesn't need to be transacted on chain. And yes, that means there are fewer active addresses, but it also means like users are able to get liquid access to Bitcoin without taking any new uh custody risk. In that sense, it's providing a service.

46. 17:29

    I'll just share something that I've been tangling with personally over the last, you know, few weeks here as we've seen more of this progress. Um to to take an asset that's native on chain, put it into an ETF, but then tokenize that ETF. It feels it feels convoluted.

47. 17:45

    How can you guys help diagnose this? like what is this ultimately the right structure? I'm just No, it's not. Okay, that it feels it feels like it shouldn't be, but maybe we can understand why this is happening now and maybe how how we can improve from here.

48. 18:00

    I'll just add one one thing. So, in the long run, uh no, it doesn't make sense to uh move something in crypto, put it in a trady wrapper and then move it back to crypto in some conceptual sense. Why why are we doing that? That being said, I think there probably is a little bit of room to to do something and that's because the trady stuff has something to offer uh crypto. What could that be?

49. 18:21

    Well, maybe it is some kind of cross-chain custody. Uh you know, you could hold a multi-token exposure, for example, without having to use bridges. Uh you could have a index pricing methodology and automatic rebalancing and and those things are not necessarily available on chain. You could have audit uh and other compliance uh types of functionalities. And so um you know some of these things are kind of exports from uh tradi to to crypto and so maybe uh

50. 18:46

    tokenizing an ETF could make sense in some narrow cases once they become available on chain these things then yes in the longer run I couldn't agree more these things are ultimately all moving onchain as a a temporary uh solution though doesn't it come to a question though like why the products were created in the first place right like so if you look at let's look at like asset management as a whole right so be before I got into crypto however many like years ago I worked Transameric capital

51. 19:11

    on the wholesaling side. So if you take an asset like Bitcoin where what if your adviser at Mailins, Wells Fargo, wherever, you can't allocate to that your systems aren't set up for it. If you're an RA, you're not going to build, you're not looking for custodians because you're scared shitless of the space. So like ultimately you're like, okay, I am comfortable with an ETF structure. So, you know, start off GBTC and some of these assets that ultimately got you exposure using a vehicle that

52. 19:35

    they're comfortable with and they can get their compliance departments and risk and hold it at Pine and all these other things. So, then you take that and you expand it onto other assets, ETH, soul, so on and so forth. So, now allocators can go into it. The next kind of leg of that in some ways is, you know, there's obviously the tokenized asset and I'll come back to that. But

53. 19:51

    then you have digital asset treasuries where you say, okay, ultimately I want to get exposure to an underlying asset, but I don't want to own an ETF. I want to own an equity position, not an ETF position and I buy a DAT. Then why just quickly why why might someone want an equity position and not an ETF?

54. 20:06

    It could be investment policy statement on how they actually structure funds or how they can like what type of assets they can hold. Like so for instance, how is a digital asset treasury quantify as an equity position or is it quantify as a as a cryptocurrency? Like if I'm a large cap equity, if I'm a midcap equity manager, a small cap like I can't buy, you know, the NEOT, I know S couldn't make it today, but the NEO DAB, but I can buy his I can't buy the NEO asset,

55. 20:32

    but I can buy the NEO debt because it's an equity. So it's a different way to get exposure. That's kind of how I thought 2.0 and then the whole kind of death thing kind of went a little sideways. And so the ultimately what led into now we think about the tokenization of like why do you tokenize Nash? Well, if you tokenize Microsoft and Apple and these sort of stocks, who are the users of that? It's typically people who can't open a US brokerage accounts. It's somebody overseas. It's in Africa, you're in Europe or whatever else. And

56. 20:56

    so ultimately like if you bring the ETFs back into these tokenized structure again, why are you doing that? Is because you want to borrow against it. and so a D5 pool, a lending pool and you want to do it natively. Is it because you can't actually get exposure in the in the US markets because you sit somewhere where that doesn't really exist? And so like ultimately I think to your point like people creating products just to create products don't make any sense. But like there is a reason why

57. 21:19

    some of these going to be if you think about it kind of like at the end of the day who's the allocator? Um thi this occurs in my mind Tony you know like as you think through the evolution of assets and obviously you guys are geared towards Zcash but circling back to custody a bit you know I I think we will see tokenized equities for all the reasons that Nathan mentioned you know

58. 21:39

    access um as well as DeFi composability these sorts of things what what does asset breath mean to someone like Azado you guys are you know primarily focused on Zcash maybe more broadly focused on privacy is there components that we can of privacy in particular that we can apply to a tokenized Microsoft equity.

59. 21:58

    Is that even in the realm of possibilities? What you guys are thinking? Yeah, that's a good question. Um, I think at, you know, like I guess like you said, Zotle is a Zcash only wallet. Uh, we allow swaps in and out of other currencies. If you look at just the underlying technology with zero knowledge proofs, um, you know, zero knowledge proofs are just a way to prove something without disclosing counterparty information. um whether that's for on the Zcash blockchain for

60. 22:25

    example, you know, it's there's a transaction hash, but there's no sender, there's no receiver, and there's no amount. Um so, you know, it's not something we're really focused on at at at this time, but if you think think about um something like tokenized equities, like it would be a way to prove ownership without disclosing um you know, additional information.

61. 22:47

    Um, yeah, I was actually going to say you're basically you're basically centralizing trust in the protocol rather than in everyone, right? Is that is that accurate? Yeah. Yeah. I mean trusting Yeah. trusting code, trusting the protocol versus uh trusting, you know, uh different counterparties. Yeah. Yeah.

62. 23:08

    Um thinking a bit more about I'm curious about the ETF wrapper here like around some of these assets. Does it is there a regulatory component? You know, there's obviously things up in the air with the Clarity Act and whatnot, but will Zach, do you think we'll see something where, you know, we get some exemption where, you know, it becomes more accessible to just go directly to these assets on chain?

63. 23:31

    We do need some regulatory clarity to unlock all this stuff. Maybe going back to the example of why why might you tokenize an ETF or or something else? I think a lot of good examples have been brought up. Maybe it's composable in DeFi. can trade it on an AMM but only hypothetically actually that that is not actually uh allowed uh in the current system a decentralized exchange would have to be some kind of a broker dealer and and meet some certain standards. So

64. 23:57

    one of the reasons that tokenized assets onchain don't be see seem to be maybe doing as much as we would imagine. You know it would it would seem like if it were fully unlocked there would be a richer ecosystem of tokenized assets and really that is a regulatory barrier. we need some kind of exemption uh so that uh say a tokenized asset, a tokenized stock can be traded in an AMM uh pool.

65. 24:19

    That is not the case uh today. So that'll that'll get pushed forward over time, but we're not quite there yet. So you know what what should somebody like Grayscale do? You either um you know do something now just to have a toe in the in the water, but it's not actually uh going to be a big business very very soon. So, you can either do something now just to to have it done or you can kind of wait for that clarity and then

66. 24:42

    execute at that time. I think really that's where we're at. We're not totally ready uh to see the tokenized asset uh uh vision come to life and and we're we're getting close, but we need some of those further regulatory unlocks. Just to add, uh, I I hope what Zach is saying comes true because we have to do some convoluted, you know, things to allow basically a user that invests in a vault

67. 25:06

    that's actually an equity strategy. You have to then take the deposit offchain and execute through like a, you know, prime broker um, to buy whatever equities and other instruments are part of that actively managed strategy and then do the whole thing in reverse if they redeem. And so the two solutions would be just have all equities tokenized or um have a custodian that's both a traditional finance custodian and a digital assets custodian at the same

68. 25:36

    time. Maybe it exists. Um but yeah, that would be what we would love to see happen. We're working through trying to hold, you know, traditional traditional structures, right? So like we're cryptonative in the sense that like we really good at holding digital assets. we have the ability to hold securities, right? So, we're working through things like that, but it's, you know, it's an operational thing. It's structurals, but I mean, and now you're you going to have device, you're gonna have those large names looking at us to

69. 26:06

    use info. So, come I'd imagine that there's a lot more demand, you know, kind of to to your point once you have the custody structure. what what are some of those conversations like? You know, h how much have you looked at expanding the asset universe beyond cryptonative tokens to more, you know, RWAcentric to unlock some of this more native tokenized equity composability.

70. 26:32

    We bought a company a few years ago called Brassica, which is a transfer agent. Um, so we've been down this path for a while. We, you know, brassica today has its own licenses and it can hold, it does hold traditional traditional um right now BO bank and trust is continuing to try to think through how we do that. And we've we have some ideas in place and now that we're public, I'm a little less of what I can and can't say. And so, but ultimately what it leads to is you that

71. 26:58

    are holding we are think it's very important for us to be able to do both just like I think the the the ones that are holding traditional today thinks it's important to hold digital. Yeah, I I'd imagine a lot more companies are thinking in this direction. It it feels like we're, you know, no longer just, you know, a cryptonative ecosystem and then, you know, tradi ecosystem as they call it. This is just finance. Uh we're going to just have finance companies.

72. 27:22

    This is just a finance event, a finance conference. Miami is a finance city. Guys, thank you so much for listening, watching this panel, being with us here today. Uh and uh yeah, give it up for our panels. Thank you so much, guys. Thanks for having me.

73. 27:34

    Thanks, guys. of the punch.