Public Blockchains as Financial Market Infrastructure

Transcript

Next up, we will have Dr. Kristoff Pua, the center of expertise lead for digital assets at UBS Bank speaking to you about if public blockchains as financial market infrastructure could be real. If a bank like UBS at the Swiss conference asked this question, probably we all need to listen. Please enjoy. Christoff, please welcome. >> Thank you. that. Thank you. Do I just Okay. Yeah. Hi everybody and thank you for that um great introduction. Uh it's a pleasure for me to be here and to be able to talk to you about I think um

what is a super important topic uh for for the future. Right. I want to do three things. Um the first one I want to give you a little bit of an overview on on on how I see this entire topic in the context of financial market infrastructure. So the second thing is I want to give you a whistle stop tour of all of the initiatives that we are uh running and then I want to take the majority of the time to drill down two real world use cases that show you exactly how powerful uh this uh this technology actually is. Before I jump in maybe one important thing I'm going to share some views with you here today. um they are my views, not necessarily those those of the firm. Right? And with that out of out of the out of the way, um

what I want to do is just jump straight in. Now, every time we talk about digital assets, right, the first thing that happens usually is we get dragged into conversations around uh cryptocurrencies, Bitcoin and EA. And of course, they're super important in this whole story. But as we've heard a number of times today already, uh this story is significantly bigger than that, right? It's it's really underlying it's it's it's a potential transition from the current very centralized um I think relatively heavy financial market infrastructure to a much more decentralized one probably more prone to innovation and so on. Now um that is driven by blockchain and what we've seen

over the last uh I don't know year or so is that public blockchains are inching to the four and we're seeing that uh they're becoming increasingly relevant and of course they're powered by crypto. So that closes the loop because I think what we are at the beginning of is a kind of a gradual um merge of traditional finance and and and I call it crypto finance. And I think increasingly we're going to see um securities and money on these public blockchain networks and and you know this is already playing out today. Now a lot of people were surprised that qu how quickly it happened. I heard somebody just in the earlier panel say regulation clearly that's that was one major uh piece of this. Uh but I think that if

today you had to redesign financial services or the infrastructure from scratch you would not design it like on the left hand side. Right. And then on top of that, um, blockchains, in particular, public blockchains have a number of attributes that make them particularly prone to disrupting the way we do business today. Peer-to-peer exchange of value, programmability at asset level, AI coming into the mix with automated agents that can start sending money across the globe. I'm not going to spend any time on this. You've probably heard it all before. Um, and then last but not least is something that we talk a little bit less about still is digital ID. And the moment we have digital ID and it can be stored in a decentralized

wallet, well, that has the potential to then just drive this entire new paradigm on steroids. Right? So that's how I see it. Um, just a whistle stop tour as I said of um of the some of the projects that we're running. Um I I guess before I I do that in reality the question is how do you engage right because the the issue is nobody knows actually where this whole space is going to end up um so what we've decided to do uh at UBS is sort of uh engage around a strategy to build optionality so that we can cater afterwards for a variety of outcomes and you'll see here we've got uh worked on

debt products on funds uh on digital gold We have obviously worked also on a range of digital money initiatives, tokenized deposits, CBDC's and so on. And we launched a few years back already um our UBS tokenized service where we have launched a structured product um money market funds, crossber repo and so on. structured products. When I mean a structured product is not structured products with crypto underlying but actually structured products with for example currencies underlying. Right now, one of the things that we have done right from the start and this goes back to even 2020, we always started to be interested in working on public chains.

And the reason for that is because in order for a shift in financial market infrastructure to happen, what you need is to have significant benefits. And actually, if you drill deep down, despite all the challenges, these benefits are actually in public chains. doesn't mean that they'll win completely, but I mean they'll be an important part of the story. Now, um I want to the two two use cases, right? This one is about uh bringing capital markets on chain. It's a it's a it's 2023 we did this, so it's a little bit dated, but as you'll see, it's highly highly relevant and was incredibly innovative at the time, even I think for today actually. Um what we did is we

actually did a repo transaction across three regulated financial institutions, three jurisdictions with money on chain. Uh fully regulated transaction and it was live. Um I am a strong believer in live transactions because they actually focus on the objective to get things uh done and you learn an awful lot more. I get sometimes asked why we did this. We did it because it was hard to do. We actually didn't know whether we could pull this off. Um but we did know that if we did we would have significant learnings that we could then transpose into some of the commercial work that that we're doing. So, so that's the the sort of in a nutshell the transaction

and please don't get scared when you see what's on this page. But actually blockchain is one of these things I heard plumbing before, right? Blockchain is one of these things if you don't understand the plumbing and how it works, it's really really challenging afterwards to actually innovate on that. So I want to walk you through some of the the the main steps and and then are some of the advantages. The first thing is we issued some assets. So UBS issued a bond, a UBS bond on public Ethereum. Uh we issued a tokenized well deposit token. It was a claim against UBS on public Ethereum. Um SBI digital assets uh issued a stable coin. It was one of the first stable coins issued under the new financial law there. And what we

then did is we opened the transaction, right? We did the repo and these are the purple arrows. So what UBS did is we sold the bond to the to to to SBI digital assets who repoed it immediately uh sorry we sold the bond to DPS who repoed it immediately with SBI digital assets and then who paid us in a stable coin right up until that point fairly plain and vanilla. The second piece the green the closed leg was I think quite exciting actually because we request the redemption of the bond. The bond then actually searched all the wallets that you can see on this page to identify who the holder was. Um the holder was in

that um don't know in the um repo trade smart contracts that you see at the center of the page at the bottom. The bond then instructed the deposit token to transfer into that repo smart contract. The trade was um was uh the the the trade was matched. the money was released to SBI digital assets and the bond was cancelled. So if you look at this uh sort of 30,000 feet up, the bond acted as its own paying agent and basically uh redeemed itself, right? Which is pretty exciting stuff. And if you look at this the benefits T plus0 I'm told by my team that this takes some is usually T plus 10, right? we um had

very low cost and this was three years ago and you know what the costs on the gas costs were on Ethereum today this would be significantly less if you put a layer two on there would be even be less right um fully automated that we've heard no bespoke integrations we had no integrations between the three uh institutions it was all connect to Ethereum connect the smart contracts and it was done and then neutral infrastructure So no CSDs, no intermediaries, nothing. It was pure peer-to-peer, right? So pretty exciting stuff. And the question we then asked ourselves is, you know, how can this play out? And you probably have seen this sort of uh new potential

business stack that you could have many times. And when I um look at this stack, I kind of think two things, right? The first one is that TRDFI professionals need to sort of realize that once the B base layer changes, the plumbing changes, absolutely everything on top has the potential to change. Now, of course, that has huge potential, right? You can do a lot of new stuff, but if you don't adapt, well, then you also could be severely disrupted and some roles may or may not in the future disappear. when it comes to sort of DeFi and crypto professionals, I think this

has also an important message which is a financial system built entirely in a permissionless way without um any sort of uh uh access controls and and and IDing and so on. Um I don't think personally I don't think that's going to happen. I don't think it's desirable. And I think the message from this is we need to work together in order to kind of build the system of the future if this is going to be um uh efficient uh and and have uh the potential that it should have. Now let me run you through the second one because now the the the transaction before is is one that we did and it's parked now and we transformed

some of the learnings into some other work that we're doing and this is one of them. Now this is one about funds, right? Um and as we all know uh tokenized money market funds are one of the uh fastest growing uh tokenized asset classes on chain. um they have the potential to bring really this sort of always on finance and you know three 24/7 365 we know it works beautifully for crypto but when you actually start doing this for a fund you start to realize that there's a number of steps in the value chain that are actually pretty tricky to resolve

for right you have media breaks in the middle and um so you see the value chain here even if you manage to tokenize the fund settle and transfer it in between there's still faxes I mean you know when I started working on this I it took me a while to come to terms with the fact that we're still sending faxes and emails right but we are right so what we decided to do is to uh try and digitize that out and uh we did really broadly speaking two things um the valuation phase of the fund so you need to have real world data. The valuation phase of the fund we brought on chain um and we worked with chain link on that to do it.

And then the order placement um and the unitization so calculating how many shares you need for certain amount that was then completely done or set up in a in a smart contract. It's our digital transfer agent protocol. And once we have that so this that piece the middle piece is still in pilot phase but once we can bring that really into production then we have an fully endto-end uh issuance and redemption system for funds which is really um I think fantastic it needs a bit of work but this is what we are uh working uh towards now you know the the the question is scaling right um and I always have been asking myself that for quite a while now is is

you know how do you scale and I put up on this page a list of stuff that needs to be resolved um before this sort of before public blockchains can really operate at scale uh for regulated financial services. The first one and this was one of the biggest challenges that we have on on all of this work is digital money. Um the two examples that I well the second example I showed you really uh we're still settling uh or or or the the money leg is still done by traditional rails right but is stable coins right you need money and uh securities on the same chain and at the moment the only one that seems to work is stable coins but at the same time uh

central bank digital currencies tokenized deposits could in the future become on contenders but it's a just literally a question of design principles right so money uh digital identity I've already mentioned uh we permissioned the access to all of our we permission the access to all of our work using whitelisting mechanisms they work but they're not as scalable as they could be as soon as you have a digital uh identity token in a wallet you can then have the actual uh asset that interacts with that token and you could have kind token embedded processes, right? It's feasible. Um, standards and regulations. I won't sort of go into that because I think we've been through

that. It's certainly a thing that we need to resolve. There's the topic of privacy. I don't think anybody wants to see their private financial affairs uh publicized on a public blockchain. So, um there's the question of zero knowledge proofs that is coming to play in here, but that's something that needs to be resolved. Security. I think banks are incredibly good at that. But I think there's also the fact that uh this is new, right? And there's new risks uh that need to be managed. Uh and it's going to take a little bit of time before before everybody gets really comfortable with putting larger sums of assets on these chains. And then there's the question of interoperability. Um it is unlikely, I think, that one single

chain is going to win. And as a result, by default, you're going to have to have um bridges. Now, that sounds like a lot. Uh and it is, but one thing I've learned in the last years that I've been in um this space is that the industry is incredibly good at innovating and they do it really fast and I think these problems are going to be resolved. Now, in the end is what I said earlier. What we need is traditional finance specialists. We need uh call them DeFi specialists. We need regulators, policy makers, academics to work together in order to turn this into something that's scalable, viable, where also people are

incentivized or organizations are incentivized to use that new financial market infrastructure at scale. And on that note, I want to thank you for your attention. I hope you enjoyed this and wish you a nice afternoon.