From Protocols to Products: Turning Digital Asset Innovation Into Institutional Reality

Transcript

Hello. I guess you can hear me. Um Hi. Nice to meet you all. Small audience here. So, thank you very much for having me today. Thank you very much for the organizers and I guess the sponsors if anybody is listening. My name is Ami Nagata. I am the managing director of Luxembourg at Zodiac Custody Europe. We are a Oh, that's loud. Um so, we are crypto custodian.

We have a license for as a MiCA CASP in Luxembourg. And Hi. Hi. So, talking about Zodiac Custody. You may not have heard of us, but you have surely heard of our shareholders. We are held by major banks such as Standard Chartered Bank, Northern Trust, Emirates NBD, National Australian Bank. So, a lot of major banks across the globe.

So, what this means is that we are crypto native company cuz we started as a crypto custodian, the project itself, who speak and understand the language of financial institutions. And this is in this context that I'm going to talk about from protocol to products and how to turn digital asset into Sorry. Digital asset into institutional reality. So, over the past decades digital asset has become from moved from experiments into a parallel financial system.

And today we have protocols that can move values instantly. It can automate financial processes. It can create liquidity. But still most of the institutional capital is not there. It's not flowing into the protocols. And it's not because there is no innovation. There's not enough innovation. It is more because the infrastructure around the protocols are not institutional ready. And here today I'm going to explore with you what does it actually take to turn a protocol into a product that can be used by

institutional clients or by institutions. Oh yeah. Here you go. So, we're going to start with a gap. What's missing? What are we trying to bridge? So, protocols are powerful thing. We have we can do anything we want. But institutions don't only operate in technical environment. They operate in a world of governance, accountability, and risk management.

So, there is a fundamental mismatch. For example, in protocol trust is placed in codes. Accesses are permissionless. Um assets are self-custodied usually. And everything is transparent on chain. Whereas in institutional requirements trust is placed in governance. Access needs to be controlled. And assets needs to be segregated. And everything needs to be auditable and accountable.

So, that is why protocol cannot be just like that a product that is used that can be used by the institutions. And despite all the innovation the institutional adoption is not there yet. So, now we're going to talk about what's needed in between. So, today I'm going to talk about four things. Control, custody, operations, and regulations. Those are the four layers that will bridge the gap from protocol into a product.

These are not just nice to haves. It's more of a conditions for the institutions to be able to adopt these protocols. And I'm going to look at it one by one to see how is it actually delivered, how each items are actually delivered in the real life context. So, the first layer of the bridge is control.

Control is not only about managing the access. It is about governance. And institutions need to define who's allowed to act under what kind of defined governance. They're allowed under what condition and with which approvals. So, in addition to access, we need structured workflow, segregation of duty, and also multi-layered approvals.

We call it usually four eyes principle or sometimes six eyes principles. And also more and more they're looking for features like white listing so that all the transactions are happening only within the predefined parameters. There's no sudden movements that anybody can just make. Everything needs to be defined. In short, so all these controls are ensuring that all the actions that are taken are intentional, authorized, and traceable.

So, that's the control layer. Second is the custody layer. So, custody is about safeguarding the assets at the institutional level. This is just like your banks holding your cash or your fiat. There are there are rules there. First important point in custody and especially in the crypto asset world is obviously key management. We need to make sure how the keys are generated, how it's stored, how it's used, but we're not talking about the technology here. We're more talking about in terms of governance. How this

flow of key management is governed within and how it fits within the existing institutional governance structure. And second part is about segregation. So, in traditional world segregation in the finance world segregate the assets has to be segregated. It cannot be commingled. Meaning the firm's assets need to be very separate from their client's asset. And obviously from client's A's asset needs to be also segregated from client's B's asset. This is to make sure that the risk management framework is

properly in place and also there is legal clarity. And then more and more institutions are looking at insurances, an additional protection layer to make sure that the operational risks are mitigated. And they want to be sure that the assets are recoverable in any stress scenario. So, those are the custody layer where that's a this these this custody layer is transforming all the cryptographic ownerships into more of an institutional grade ownership or asset protection.

And then we're moving on to the third layer, which was operations. So, in this stage or this layer, all the executions become scalable and auditable. First of all, there needs to be system integration. Because usually all the existing financial institutions, they have all the systems, they have all the tools that are very difficult to change. They cannot be replaced easily. It takes years to even make small tweaks in their existing flow.

Still, all those old systems need to be speaking with the new technology. So, integration is key. How we make sure that the the connectivity is there. And also there's life cycle. So, all the trades like transfer, execution, settlement, all that life cycle needs to be handled seamlessly within the platform. And also more very importantly, reconciliation and reporting.

In the traditional world, everything needs to be proven at any moment in time. The record is complete. It is accurate and it's aligned with other things that we're saying. Or we're seeing. So, reconciliation is a must. And then comes reporting. It is one thing to have all the transparencies on chain because that's something we have already. But it is a another thing to have it in a structural structured data, usable data Because institutions need to have the data to be or to be able to make all the internal reporting, external reporting, client reporting, regulatory reporting. So, it's not

enough just to have a a transparent information on chain. They need to be able to see that in the in the format that they're used to. So, these are the operational layers. I'm just checking the time. And um so, that's the third layer. Last but not least is the regulatory layer. So, since MiCA has come into life, um institutions, financial institutions in Europe, um started to look more seriously into crypto asset or digital asset.

Before, they were interested, but they were not ready to make the move. Because the regulatory environment in Europe was very fragmented and uncertain. There were national um regimes, fast regimes. They were different depending on the country where you go. The rules were different. And rules in one country may not fit the other. And they had to abide by every single different country's rules, which is not sustainable. So, since MiCA came in this allowed us to to to have a level playing field.

And then it it is a key layer for the institutions to have trust in in this industry. So, first one comes with authorization. In other words, license. So, license is required obviously if you are serving European clients, if it is an activity defined under the regulation. And from our experience, so our company Zodia Custody, we got our or CASP license last year in December. Before that, when we were speaking to clients, they would say, "Okay, that all that's all great, amazing. Um looks nice. Where is your license?"

So, we would say, "Yeah, it's coming. You know, we're we're in the process. It's going to be there." They're like, "Okay, great. Um come back to us when you have the license." Obviously. Because they cannot risk working with a player who may not have the license. Since we got the license, things turned, obviously. The the conversations are becoming easier. And things move forward much faster. And license is followed by regulatory oversight.

So, all the licensed entities are overseen by either by, well, for the time being, all the national competent authorities authorities. For us, it's CSSF. It can be AMF or other national regulators. Or it could be ESMA. Uh we'll see what happens there because there are discussions going on. But in any case, they will have full day or someone will have full oversight of all the activities that are defined in within the regulation of the licensed entities. This should not be regarded as a burden per se, even though it is heavy.

It is more regarded as kind of a security feature, let's say. Um to make sure from the user point of view, to make sure that all the licensed entities are doing their jobs properly. Because obviously the regulators are there to check if we're doing what we say we're doing. And then here also the third point is auditability. So, in traditional finance world, we need to be able to um audit everything. And we need to demonstrate who did what, when, and how.

And everything needs to be traceable. And this is enabling external people to place trust in the scheme. Obviously, we should not forget about AML and CFT. This is the fight we've been fighting for some time now. In the crypto world, in Europe, we started looking at AML/CFT around 5 years ago with the fast regime. It continues, obviously. All the transaction monitoring, travel rule, KYC, AML. So, that continues.

So, ultimately, the adoption of um digital asset is not only a technology decision. It is more of a regulatory decision for institutions. And if I dig a bit deeper in to the rules or regulations within Europe, it institutional trust exists or can be placed in protocols when there's framework around it. So, in Europe, we have a very strong um regulatory foundation, as we all know. They we love regulation, don't we?

Um so, there's MiCA, which is uh placing legal clarity on who can do who can provide what services related to crypto asset. DORA, one of the favorite topics of all the financial institutions It is defining how we can be operationally resilient while providing services related to crypto asset in this context or any financial services. Also, in Europe, we have this DLT pilot regime that allows the financial institutions to explore um to to make experience in a controlled

framework. It's like a sandbox. So, I'm going to talk about also Luxembourg because we are based in Luxembourg. Luxembourg, I'm not sure if you are aware, but um they've published their first blockchain law in 2019, which is rather early. And first of all, it was to recognize um blockchain to record or transfer securities. And then they issued a second one in 2021.

It is to enable settlement on the blockchain. Third one was 2023. Allowing issuance directly, natively on the blockchain, like security issuance. And then the most recent one was in 2024. It is aligning all the blockchain laws to MiCA. And then also clarifying all the roles and the players and the infrastructure around the securities and blockchain. So, CSSF has a very good experience on blockchain or the technology. They were also one of the first movers to accept crypto exchanges as a financial institution. They gave the payment institution licenses to um the exchanges like uh Bitstamp or

Bitflyer in 2017 around. And then so, and and also it together with all the experience they have built during the fund um services, they are very credible um regulator. And also, as a country, Luxembourg has a very good financial ecosystem. It started developing uh as a financial hub since 1960-70. And then since then, it it uh expanded the ecosystem in the investment funds area, private banking, asset management, and more recently in fintechs or digital asset, we've been attracting a lot of

big players in the market. I need to rush. And so, this is allowing uh the country or Europe to attract more institutional participation with regulatory confidence. So, to conclude, um so, digital asset or the protocols are solving a lot of technical challenges. And now real challenge is not about innovation, but it is it is about how to place trust in these protocols. And turning protocols into institutional products, we need all these four layers that I covered today. And once these are in place,

the protocols can be adopted by institutions and there can be a massive scalable adoption in the market. Thank you very much for listening. I'll be around if you want to discuss.