future of.chainlinkChainlink: A Fireside Chat With Sergey Nazarov and Nitin Gaur on the Future of Financial Markets

umbrella network vs chainlink chainlink sergy toilet future of.chainlink Chainlink: A Fireside Chat With Sergey Nazarov and Nitin Gaur on the Future of Financial Markets

[Applause] great uh thank you very much for joining us nitin um really appreciate you taking the time to speak with me I know you guys are doing a lot of interesting things at State Street and that you have a lot of you know thoughtful views because youve been in the blockchain industry for a while and in the capital markets industry so Im just going to kind of jump into the questions and make sure we can get to all of them so the the first one I have is you know you envision blockchains and tokenization playing a key role in capital markets I would like this Id be thrilled to hear what youre seeing now and you know what led you to the idea that Capital markets need tokenization and blockchains and and things like that so first of all thanks thanks for the invitation love what youre doing with oracles and now proof of Reserve uh certainly very important so its a story I was working on payment tokenization 2011 2012. so payment organization what do you have on your Apple device Apple pay is behind the scenes payment organization I was leading the mobile payments for IBM at the time I met like 65 different payment service providers around the world and Bitcoin kept popping up as a disruptive Force but also in terms of what can we learn from the protocol came back to Austin which is where I lived is my hometown its three months heads down figured the whole thing out and it clicked long story short its been good 12 plus years that Ive been at this for some time and I left IBM about a year and a half ago where I worked on the protocols working on Securities consensus mechanisms and everything else moved into understanding as to how we can modernize the existing Financial system so I joined one of the largest financial institutions in the world which is where I work now at the State Street so fantastic journey I just think that we viewed this and Ive written about this extensively is theres a journey that the industry is going through at the moment which is Shifting to tokens you know from from where we were to digitizing the financial markets and I believe for us to be able to take the next leap is shift from digitization to tokenization and that is a massive shift but it also solves a lot of problems that weve been talking about in the industry for quite some time yeah makes sense Im Im seeing a lot of a lot of that myself I think it starts with tokenization because thats basically custody and the thing that Ive seen in defy um and you know I think you and me have also weve been working on this for for over a decade more or less not necessarily D5 because it didnt exist that long but weve kind of seen the evolution um and I think tokenization is really the beginning and once people have custody of assets I uh do you agree that then they move on to do things with them like they move on to make more Advanced Financial products is that what you think will happen next after people have custody of tokenized assets let me take a step back so again because I think its important for audience to understand how the existing Financial systems work weve heard this in media weve had many of the officials talk about the fact that our system is digital and I always refute the fact that if youre simply converting something into a Excel spreadsheet or PDF its not necessarily digital and the narrative should be that instead of focusing on digital transformation which has been the journey from the last 20 years to move that Focus to transforming digital what do we expect from digital what weve seen in crypto and blockchain ecosystem is exactly that those handshakes that we do between smart contracts ability for me to be able to lock tokens provide rules these are all digital the shift from digital transformation to transforming digital itself and so from that perspective our financial system is a fragment of various counterparties that helps us move the asset that helps us do things like payments so whenever you buy and sell an asset it has to go through a series of things and these have evolved over hundreds of years because of things like what we have seen with the recent past of last years of what I call contagion of incompetence the FDX and so on and so forth and so from that perspective I think that the first step is to token as an asset and I have broadly classified the industry into three eyes which is infrastructure the rails blockchain and DLT systems is the infrastructure that moves the asset and then eventually tokenizing a asset so what weve learned from crypto in the last 14 plus years is what what will that look like if we were to take an existing asset class your equities your bonds your ETFs tokenize these assets can be adhered because the tech is the same behind the scenes can we then take these instruments which is the second eye and use the same technology to move assets at that point youre achieving the efficiencies that weve been talking about the industry for quite some time and the third eye is data which you cannot ignore as youve talked about in your presentation is theres a lot of data that goes into making decisions whether its opportunities whether its risk whether its compliance so the third eye is data which is natural part of blockchain ecosystems so this infrastructure instruments and data to meet presents that Amalgamated opportunity for us to modernize the existing Financial system and Ill say one more thing before I pause is whats interesting to me is you have this edit speakers three trillion dollars which is today is like little over a trillion dollars this is crypto industry and then you have the 471 trillion dollar existing Financial assets give or take a trillion depending on the day yeah just give or take a trillion give or take a trillion because its the scale is huge the question then becomes when these things converge and its using the same technology set I think thats where it gets really interesting I think yeah it makes sense you you see what I mean like with capital markets give or take a trillion like the whole industry we have right now its true so its uh its its quite a bit of money I or value at the end of the day I I think um you know if if we get past the stage of custody where Banks start making their own D5 Financial products or Banks and custodians like youre seeing with some banks starting to make stable coins and so on um do you think that of that 471 trillion a large percentage of it will be converted into the crypto format of these more Advanced Financial products so custody is a business activity safekeeping of an asset and theres a lot of functions that happen in the industry things like collateral management borrowing and lending which are happening in our pools today so amms and liquidy pools and lending pools are doing the same function the notion of custody at that point in our case becomes asset blocking mechanism the surfacing of self-custody versus you know having a self-hosted versus a custodian host of wallet and so on so forth so custody the context of custody in traditional Finance ties to the fact that we need a third party to keep the asset safe so things like FTX elements dont happen but youre keeping the custody and claiming a few things and same thing with accounting so somebody else costing the asset somebody else accounts for the asset its the investment manager does that does the dealings you have the broken dealer in between and thats a complex web of existing Financial system so custody is a small piece of it but custody is Central to the whole thing so all this 471 trillion that I was talking about is custodies between all these Global custodians that actually keeping the and they they then become sort of the globally systemically important financial institution because they are now holding all these assets over time and the question then becomes is again for you to have a sustainable functional markets you need to have faith in this market both in terms of the fact that your transaction will go through this is where you have talked about determinism and probabilistic models so the industry has to be deterministic to say if the transaction actually happens it will clear by the end of the day and so to support that statement you have to rely on all these Market utilities that support that mechanism and if we are aspiring to digitize and tokenize uh the world that we have today you have to understand the flow of those utilities the market incentives behind them and what who are you disrupting what is the rent that youre taking away from the industry and creating new intermediaries from from that process so there will be new intermities as as you have seen Ill pause here yeah yeah makes sense um yeah I think the the the Global Financial system has been kind of built on layer after layer of ideas and theres ideas um connected with other ideas that you know another idea is and and basically that creates this web of as you call them utilities and theyre sometimes known as market infrastructures and theyre sometimes known as rails and and so on and so on um I think that smart contracts provide an opportunity to rethink that architecture from from the ground up but I think that those utilities and and Market infrastructures still have a role to play um as long as they can provide their services in a cryptographically guaranteed form so you know one good example that I mentioned in my presentation was was the Libor rate which was manipulated and that affected 300 trillion in assets and result in over 10 billion in fines and thats thats an example of a very simple single piece of data that essentially in your explanation is the market utility that got manipulated and and then you know the new version of the library isnt that much different frankly they they increase the amount of banks they changed a few things they changed the person who cut the entity that calculates the rate but its still open to the same possible manipulations and so I I think the the thing that um the cryptocurrency industry and the smart contract industry affords us is is the ability to offer even those utilities a way to reinvent how they do things so so Things become more reliable does does that make sense well it does to an extent because look weve been using Ive been working with financial services pretty much all my career weve been using cryptography for the longest time in financial services all the back and these are its a different type of Photography in the sense that we are protecting again accounts and information and it goes into hsms so its not new per se I think its the ecosystem and the transactionals so blockchain is a transaction system using cryptography where we have used in the past is a different context were simply using that for encryption decryption account management so on and so forth versus applying cryptography for for transaction system per se and I think to your point um the premise of any fraudulent activity and that happens in crypto world as well right it all depends upon devising of a structure so Ill give an example all the rock pulls hard and soft rock pulls but that weve experienced theyre not code default they were something that was injected and theyre actually transpired later on from a rockpool perspective and any of the code sort of analysis wouldnt have gone in that model so I think what youre saying makes sense and I think taking the notion of smart contracts which to me applies as a business Logic on this transaction system makes sense and those become digital intermediaries of sorts in this newer world that were envisioning and how do we ensure that there is governance of those digital intermediarys that theyre not doing rockpools theyre not involved in themselves in ascertaining the movement of asset and ensuring that the right Rules of Engagement are followed for instance right right and that all the utilities and all the systems that are powering them also meet that standard because you need to meet that standard for both the contract and the utilities powering the contract correct so you cant have something like a Libor in this new system correct great makes sense um the the other cat theres a few other categories of things that Im interested to hear your views on among many others is a cross chain so do you see a world where there will be multiple chains in the traditional Capital markets you know there will be a chain for uh one custodian another bank counterparty a chain for clearing and settlement system and then all those chains will have to interact with each other in a cross-chain system um theyll have to communicate theyll have to send events to each other do you view that as as a big part of the puzzle I I absolutely do it I think whats interesting is uh when we were having this blockchain labs in IBM and were looking into this of course we are serving the worlds 90 percent of worlds Banks we came up with this whole notion of permission blockchain so that is us guys and and now its karma that now Im having to deal with permission versus private blockchain which is basically the public versus permission blockchain thats where we are so lets look at this right so day in day out Im dealing with investment managers who have and every financial institution has some blockchain work whether its happening in a incubated project inside or youre dealing with some public blockchain which is what weve seen the project guardian so we look at project Guardians brilliant project Mas Singapore where you have three financial institutions who are trying to be able to use the same Protocols of a and uniswap to be able to bring the D5 protocols in the traditional financial institutions but when Im dealing with our customer base which is asset managers and investment managers they all have their projects and they all have the flavor of blockchain per se and interoperability is not just something that I see I think its an imperative its its something thats urgent something that we need because at that point in time Im dealing with customing an asset it has an underlying asset that it represents a tokenized form I dont really care if its an avalanche Solana or or ethereum or eventually Bitcoin at some point I do want to be able to provide a service of accepting those assets so as an asset servicing entity I dont think you have a choice you cannot dictate party X party y because there are all kinds of exactly what you cant do today in dictating the technical standards that they maintain whether its email or whether its sort of movement of SFTP files that they go into certain formats you can agree on formats which is industry standards and I think that that interoper video and Ive always had this multi-chain perspective that you have various different chains there will be no one chain that will rule them all whether its personal preferences whether its specificity that a specific asset class provides I think those are really really vital things for us to know and one of the biggest things that Ive been focusing on for a decade now is interoperability not just the protocol level but also ensuring that the Integrity of the asset as it moves from one chain then the chain is preserved which as you know is a Herculean task because the verification validation system is still closed and confined to a single chain yeah yeah so yeah so theres so theres two very big big things that you said there that I wanted to get on more briefly if we can one thing um was that yeah there needs to be standards right so there needs to be a standard way for messages and commands and events to move across multiple chains and that the banks and the institutions once that standard is established they will just use it because the theres a kind of network effect there where once the most amount of counterparties use that you know standard it becomes like email or FTP or or just the way to transact and the way to move move around that value does that sound right yeah absolutely and I think theres a data standard and so my my thinking as we transition as Im envisioning this whole world that you need to have a future proof infrastructure so today the entire financial industry runs on messaging standards so ISO 2022 as a payment standard thats graphics and you have all these ISO standards that send information about an asset As you move the asset you have Gateway that move these messages and as we build this new system it has to be dealing with the old which is ability for them to handle messages but they should also be able to handle tokens and to build that system will give you that interoperability into people say at the end of the day I have to account for these assets no matter which shape or form they come into the system or leave the system and I think that is where the sweet spot is that you have to have some standardized mechanism so while we cannot agree on the protocol standards there are standards for asset classes how does you how do you represent an asset in data form and thats where I think we can put our energy in saying that the traditional Finance can come into these rails by or this infrastructure to be able to understand those those mechanics yeah absolutely I dont I dont think were going to be getting rid of the old messaging systems or the old backends or even the Cobalt servers or any of this stuff people have been trying to get rid of that for decades they still dont have a way to get get rid of it and the the only real option is to get those systems that you defined ISO 20 to 2 standard or others to interface efficiently with multiple chains and in that efficient interfacing you will eliminate the friction that Banks institutions have for interacting with chains right and by eliminating that friction youll get that you get more of that 471 trillion into the system and then the that Rising tide floats all these boats correct I mean uh ideally once you all would like to collateralize your Bitcoin and be able to borrow and lend against it without going through a series of usdc and providing exchanges in the system and I think if you even if you look at stable coin and eventually cbdc is conversation that were having with 90 of global banks these are tokenization of Fiat barring the local boundaries and this becomes exponentially difficult when you cross border and so many of the Israel whatever building like any of the global layer one blockchain are truly Global Systems they are Global infrastructures so the Rules of Engagement for ether holder is the same whether in Vietnam or United States which is not the case so I ideally I would like to Envision a world where these the fifth taster class so there are four asset classes that generally the entire financial industry is classified into and you have the fifth asset class which is crypto in general right and so I think ideally we should be able to learn the best of bring from both sides and be able to see where the convergence is because our financial system while its painful and its evolved it has to keep up with the digital times uh and yeah its low but in many cases it has served the purpose until now meaning to modernize it I think yeah yeah I completely get get what youre saying uh you know cbdcs is another interesting topic where people have different views on it um I think the tokenization of all this stuff will to a certain the degree create some governmental controls that some people may may or may not like and and to another degree it will increase the amount of value that can efficiently flow into both the traditional Financial system and in and and more importantly into the crypto system and those cbdcs I think will also need to be part of this messaging standard correct or not part of it but they will need to utilize something of that of that sense right and so I dont think that a messaging standard I think it also covers treasury management basically it doesnt just cover the Securities or the Commodities industry basically this messaging standard across chains because if cbdcs all have a different chain its really just the same problem right its how do I transact from my treasury into a commodity out of a commodity into a security across five chains through a single messaging system that makes it simple from for my back end to do that as a bank or institution sure I think so Treasury any financials every financial institution every every corporate has to have treasury right and treasury interfaces with every facet of a business payments coming in payments going out accounts payable accounts it all hits into your overall treasury pool the question that becomes now is you have the existing rails the Swift the achs which is message based and it has its own pluses and minuses mostly now its the fact that we had we are far along it was great 30 years back but its not great anymore because we have something better to look forward to so how do I deal with the best chip the payment instructions coming in but settlement happening the next day versus stable coins the cbdc coming in and having instant settlement so how to reconcile the velocity of movement of money which is a massive treasury challenge for if youre in Bank International institution because at that point you need to make sure that you have healthy liquidity which is also another concept that we need to for a different different day different time different stage understand what liquidity means in crypto industry percent so those are spot on that its not just about tokenizing the world and moving it on the rails these are true business challenges and we havent even talked about taxes and accounting because you still have to do that in the in the real world at some point right so yeah yeah makes sense great so I think were on the same page all the stuff you said about messaging and then I said you know thats what were working on with ccip to make sure that you can have a single messaging standard with one interface to all the chains whether its commodity security or a treasury related thing so that you can do that through one messaging system just brace yourself I was much younger when I took on this job look what happened to me I know what you mean man believe me um the the the other thing that you mentioned thats very interesting is about proving things so the the the thing that we were discussing briefly before the cross chain question which I think is is a fundamental question right because banks are not going to live on any one chain theyre going to have to transact with hundreds of chains because you know different geographies different counterparties different settlement systems so on and so on um but then even as you transact with those other chains you constantly need to prove things to them thats right right because once again the chains they dont know what the nav of something is they dont know what the valuation is they dont know what the state of an asset is they dont know um you know what the proof of Reserve status is and so in addition to to transitioning all the information between the chains and allowing you to basically move things between them as you move things between them would you say that its important to keep those records consistently updated about things outside of each of those chains right is that a critical component 100 in fact I think the reason why you have delay in moment of asset is because consistency consistency is sort of the Hallmark of the industry to ensure that two books are consistent before the asset can take the next hop they have to reconcile it on these things and I would also say if youre referring to proof Reserve is that where youre going with this thats what Im so the thing is I build a payment system in 2019 it was it was meant to do both send messages and send stable coins and working with a entity a nevada-based entity where we looked into saying hey we do we do need to provide this result because again were working with as a technology company were working with banks so we have to do everything in a regulated form of fashion man you had to hire one of the expensive audit firms to do these audits we had to do that we had no choice because again were dealing with you know regular institutions so at the time we didnt have the term proof of reserve and the same entity eventually hired the adrenal sort of entity to be able to provide this quote-unquote proof of reserve for stereo stablecon ecosystem approval Reserve is the Hallmark of these fragmentation that exists today the fact that you have the various different entities who are either accounting for your asset or who are watching for your asset or costing your asset at the end of the day they vouch for it and then watching especially is saying I have the book Reserve so when we digitize these things this is what I was saying that youll have new intermediaries that you have newer proof of Reserve entities will say now that Ive tokenized these assets Ive tooken as Fiat Ive tooken as stablecon as you know and cbdcs and you have tokenized lets say existing real world assets now do I rely on the same audit firms and how if all theyre doing is scraping the chain and giving us the information can I not automate those functions and provide a mechanism where suddenly now I can trust the system that there is proof of reserve and I dont have any collusion which is what happened in many of the fortune activities I think right because the audit firms do it on an annual basis and the proof of Reserve automated system can do it on a second by second basis right but first of all and second of all who knows whats going on there or it can be event based every time you move it could be could be any anything you want based yeah and and so do you see Oracle networks as uh as that possible agent thats going to process all that so I I think por is more valuable to me than your initial vision of what you have with oracles uh even though I think Reserve is out of an oracle yeah youre relying on that Oracle and the Oracle does align the reference from all these areas and the fact that you have multiple chains you would need some sort of an interface that doesnt you know that provides that technically it sounds very choppy but I think in many cases if you have the right protocols in place thats doable but I dont really care which in your own and I think taking a page from Circle usdc they didnt even care about solving the interoperability between chains they said the other issuer you redeem the asset with us well provide an API and well issue the asset on all these supported chains so if you want to move an asset from polkadot to Stellar you can use an API Ill burn the token here and issue the token here so I still maintain that consistent Reserve that I have I think thats just easier than fighting the interoperability challenge though so these abstractions the interfaces I think is a is a near-term solution then we achieve the true interoperability of asset because I think one thats untenable near term because technology is not there yet but I think having interfaces will give us an Avenue that as long as it can trust the interface I should be able to provide that asset asset you know a certain of certainty of availability that asset which is what reserves would be right makes sense so instead of just trusting an institution if the interface to approve a Reserve System was clear and simple enough then that could create additional risk management for you it could just prove yeah and reduce the risk and allow you to settle faster not so bad but if you look at any of the swim Lanes of this financial institution that when an asset moves it has to update lets see where consistency comes into play accounting system tax systems it has to update your book of records your investment Book of Records all these updates today happens through complex and Investment Systems so if Im dealing on polling event-based management then I have real-time visibility of these assets which has a whole new opportunities space especially in terms of how we manage our collateral how we borrow and lend for instance so I call them Financial Primitives so these are basics of money you either save money or you spend money or you borrow money you lend money so these are Primitives that the entire products that we that the industry relies upon is built upon these borrowing and lending and collateral type models yeah makes makes perfect sense so I I think what were saying is blockchains are great they allow quicker and more efficient settlement in order for them to really really take hold in capital markets they need to get connected because value is going to have to move across them to provide real value to that industry and then in addition as they get connected as all the assets move and all the financial products interact with each other across chains theres going to be a need to key to keep everything updated because if you dont keep everything updated then youre not going to get the benefits of the consistency and the speed that you get from the blockchain right so you dont just need a blockchain you need connectivity and you need to keep everything in the blockchain updated in order for it to have that speed and consistency basically the value to to the capital markets theres no way I can not agree with that I agree I think the whole thing is you do have these you know what I say that blockchain has solving the issue of two constructs time and Trust time is sense of immediacy so this whole notion of two-pronged systems or multilateral systems that built so in this case you know and the trust is the fact you have so many trust intermediaries can we trust the trust protocols that provide the same level of trust or maybe some digital intermediaries and Ive always compared this moniker of what internet has done for information blockchain will do for things of value if you look at that information networks removed information intermediaries no one goes to travel agents anymore but you do go to any other n number of travel websites but they give you more than just booking a ticket they give you a travel experience they curate your whole thing they give you One-Stop shop but theyre still digital intermediaries and I envisioned that world in some sort of some some form of fashion so thats the transformation agenda for large financial institutions to say we have the practice we have the discipline we have the risk models can we not digitize these things and provide that as a service and extend that model so its less about fighting crypto but its more about adopting what we can do from adopting the tech and making the system better absolutely I completely agree I I think its just making everything more secure and automated because the encryption guarantees and the reliability guarantees of blockchains and smart contracts and oracles allow you to do that right you basically get to a place where you dont need people to triple check everything or you need to wait three days for the other system everything just gets signed oracles verify a few things blockchains you know do enough confirmations and and you can settle things out in a couple of minutes or seconds instead of a couple of days yeah and therefore that you know you dont need a travel agent anymore you you you just have everything in a reliable technical interface and every intermediary uh every information in the media that was between you and the green screen is gone at the end of the day because weve taken that interface move on to web giving you a better UI ux right that is not up to standard of the newer model the web through your conversation youre having it was good for it has evolved over the past three or four Decades of that uiu experience So and Ive learned one thing Im not going to disagree with you on this stage Ive seen you angry uh sorry Im not theres no way Ive Im sure you all seen that too not not a public spectrum of that here Im just kidding of course yeah its fine look I just really care about this stuff and Ive been spending every every waking moment on it for the for the past couple of years and so and Im also not a super duper patient person I I need things to happen because we we have to get going and um you should work for a bank for some time and see how no I could I could not I would not survive in a large in a large structure internship come on I couldnt I would never me will figure out I would never make it I would I would go straight to the guy at the top I would show him a diagram program and I would say we need to eliminate this this itll take you three months to figure out who the guy on the top is it wouldnt it wouldnt take me three months it would it might take me like a week to figure out how to get to him through security but I I get to him and hed have a meeting with me somehow and then I would be fired its not that bad I would be fired same goal but but luckily for me you guys do that so I dont have to and so all I have to do is provide the technology and everything everything can work um but but yeah I completely um I completely agree agree with what youre saying um I think that all of this will really just become one thing and and the travel agents I think they do have a place in it if they start a travel website right so I think everybody in the capital markets has a place in this cryptographically guaranteed world its its just like the internet right if you ignore the internet you didnt do so well and maybe you even closed down um and if you went from being something that was brick and mortar and you started a website you did even better than before yeah so I think its really the same type of choice absolutely and you know I started this journey in 2012 2013 where we were told dont mention Bitcoin any of your blockchain conversations and Im like how the hell do you do that how do you not mention Bitcoin when you talk about blockchain per se and now we are and the beauty of where we are today is that its no longer about financial institutions versus crypto its every financial institution thatll compete themselves in the same Tech so to me the conversation were having in Congress Micah the regulatory framework around this every financial institution making and we have Franklin Templeton sort of both here that was never seen before for for an institution to come here I think all this is progress and itll take some time maybe not at your speed uh we do have something called a regulation that we have to get approval from a little small little thing but uh its progress we should talk about that I definitely feel the progress and I really appreciate you coming on stage and no no thank you working on this for so many years and Im excited to see the Global Financial system become better and I think thats at the end of the day what everyone wants and I and I want to thank you for sharing your views today with us thank you and congrats on all your achievements with oracles thank you thank you Explore the future of financial markets and how leading institutions are leveraging blockchain technology in a conversation with Chainlink Co-Founder Sergey Nazarov and State Street Global Head of Digital Asset and Technology Design Nitin Gaur. Consensus 2023