Santiago Velez on security tokenization and blockchain interoperability in 2021

0:01i'm ashton addison from event chain for investment pitch media and fintech news network and today on blockchain interviews we have santiago velez the co-founder and r d division lead at block digital santiago welcome to the show and thanks for taking the time i appreciate thank you for having me i'm really excited to dive into our discussion today and i want to start with and i know that

0:23you are actually a nuclear engineer by trade which is which is awesome but when you found bitcoin and ethereum you know you open that door and it sucked you right in and i i had the same so i'd love to start with a little bit of your story in when you first realized the potential of digital assets and what you saw in the tech and what keeps you hooked into this industry

0:44um i think for me the the most compelling thing obviously was the price action you know it was just this idea that uh there was this new asset class you could invest in it uh you could see very large gains but over time actually as i've learned more and more about the technology and the whole asset class i've just been just sucked in by the the narrative

1:05really the philosophical implications of the tech um to me are even bigger than the price action at this point uh in fact i would say that i i would i think that most of the world's on this trajectory now and there's uh a number of things that are intersecting which are all leading to the space so this to me is the most exciting place to be right now i can't imagine

1:31you know any other technology or industry or field that would be as compelling and as interesting there's just so many different aspects that keep me sucked in so um engineering's not enough it's a combination of the the politics the philosophy the technology uh and where we are kind of in history so i think it's a super unique uh point in time i consider myself very

1:54yeah it's really interesting and and i love the honesty and it really the price action does get a lot of people involved which is great but a lot of people then do stick around for the tech and the ones that realize that this technology is so revolutionary it's you know the internet 2.0 with money plus a million other things right and what usually gets people hooked in is

2:13is bitcoin at first and then those who open the door into ethereum smart contracting platforms and all of these other coins you know there's so many different hundreds of protocols that are working on different things but there are a lot of people that are bitcoin maximalists or you know they think that bitcoin is of obviously it's the largest market cap in the space

2:33but that the other protocols and and functionality that's being built with this technology doesn't really provide a lot of value and they seem to brush it off you know i really i'm a big advocate for ethereum and the kind of technologies that they have and what they're working on um do you see that as uh irrational thought that you know bitcoin is is

2:53really the only thing there is and and what do you see most that you're interested in and what's providing value in the industry that's not a part of bitcoin yeah so uh you know i think there's a lot of truth to some of the criticisms of uh people in the bitcoin community that are levied against alternative projects simply because they tend to not really

3:18solve a unique problem or they are you know scams or in some cases they're uh they're really misrepresenting um what it is they're they're doing uh to investors and so from that perspective you know i agree that it there should be a lot of skepticism applied to projects that are not like bitcoin because bitcoin does have some tokenomic properties which are unique

3:42and make it um you know it was the first and it has some very compelling narratives that other projects just can't compete with that being said i think it's a it's a uh it's a missed opportunity by a maximalist quote unquote to discount the possibility that this technology can be applied in other frameworks because the the way i see it is one of the

4:05revolutionary discoveries of bitcoin was this idea that as human beings we can trans transact uh peer-to-peer without a third party intermediary and you know currency certainly is not the only use case where that applies i think any business or in human interaction that has counterparty risk is a candidate for using this technology to mitigate um the underlying risks so to me that

4:32has value and it would be a shame to only apply it to bitcoin uh and in fact i would even add that originally bitcoin was this peer-to-peer currency system and there was discussions around uh store value narratives and so forth but uh it's in itself has transformed as to what it most likely will end up being which is kind of like a global settlement layer um

4:56so it's a little disingenuous to just say okay there's only that narrative and all other things should be discounted so i i agree with you i share your your your view on um the value that these other ecosystems or projects offer yeah and i i love that santiago and i do like your your point about the skepticism because you know similar to the dot-com days

5:18when whenever there's price action and things then you always have people jumping in that are trying to make a quick buck as well and it sort of discounts the underlying technology that actually has value because some people are just there to take advantage of it right but there actually is some underlying value in there and there's a bunch of different

5:34industries right now you know ethereum it looks as though as it continues to grow uh with the smart contracting uh that it will eventually affect almost every industry but there are a few that are they're working towards first to sort of revolutionize the financial industry and and money and tokenization and i want to touch on tokenization because as the financial

5:59industries transform into a more digital and internet based security tokenization of stocks and bonds and derivatives in the whole stock market it has a huge potential to transform the entire way that the financial industry works and security tokenization became a hot topic in 2018 there was a lot of security token conferences that were popping up and

6:22i was going to them and you know it seemed very early stage and there's been a few exchanges popping up but there's also been a lot of you know hurdles or talk but not a lot of action you know have you been following the security tokenization space what do you see the potential there and is there a reason that you see that you know it hasn't really come to fruition yet and of

6:43course everything takes time but i'd love to hear your opinion on that um i think that's a perfect use case actually uh securities and uh securitization is massive because obviously it represents all the other asset classes you know from equities to real estate or bonds gold uh i think that the technology got ahead of the regulations and that's one of the reasons uh

7:06unfortunately that icos gave a bad name to secure the tokens security token offerings um and it just goes to demonstrate that you know bitcoin won't be the one chain that does everything for everyone right there's an incredible amount of inefficiencies in the capital markets from capital creation you know venture capital raising and then managing uh

7:29equities all the way across and securities all the way across the supply chain you know there's so much inefficiency that occurs on the back end that people are unaware of in the financial system that this technology is is a perfect candidate for disrupting that uh so you know the thing that i think has held back stos in particular is the idea of regulations right and

7:51it's not that we lack regulations it's that the developers of these um technological frameworks you know an sto token for example did not take into account in the ico stage this regulatory layer that needs to sit on top this compliance and that every jurisdiction has their own uh uh regulatory idiosyncrasies right you have to consider whether you're going from the u.s market

8:14to a singaporean market or chinese market what the local laws and regulations are so i think in that case the technology got way ahead of of what the regulations require and and it kind of illustrates that the global financial market is very disjointed there's a lot of walled gardens there's a lot of friction and therefore it's amenable to using this a technology

8:37to solve those problems right this this means this is a real problem solving in terms of uh lower costs uh uh more direct value transfer between corporations and their investors uh more efficient management of securities uh throughout the whole life cycle so that's what i feel the lesson learned was from icos it just went too far ahead on the tech and now finally the regulations and

9:02compliance are catching up and we're seeing some uh very significant firms enter into that space in a big way so yeah it's promising to see more institutional interest in that and you know it's interesting you mentioned the disjointed global capital market system and a lot of these other economies around the world outside of america are taking those steps to be progressive

9:26and to try and introduce a tokenization and integrate that into the stock market you know i was recently speaking with the gibraltar stock exchange which has blockchain and security tokenization integrated into the exchange and with this increased globalization and lower barriers to entry of global markets it seems like the financial regulators that are

9:52willing to take those steps and do things quicker the money money can just move borders and sort of move outside of america to different spots um and do you see that as like america not really being at the forefront of this because maybe it will take a little bit longer on the regulatory side and money may move elsewhere or um how do you see that playing out

10:16uh it's possible i mean any any institution whether it's a government or a private corporation etc that doesn't take advantage of a disruptive technology is bound to be kind of disintermediated um in the in the defense of u.s capital markets it is the deepest and most liquid markets in the world the dollar is still the world's reserve currency uh so the idea that this

10:38technology will very quickly kind of disintermediate the u.s capital markets i think is is unlikely however i think that uh those jurisdictions that do start adopting this technology and building it into their local securities markets uh they're gonna they're gonna take market share right they're gonna be very attractive for both innovation and capital uh to seek those places out

11:02and basically perform regulatory arbitrage right so if we have technology that makes things global uh but the regulatory frameworks are taken care of by the the technology then there's no reason to remain in the united states and so that's that's a that's a loss on the united states side so um you know there is a need for regulatory improvements i think in the united

11:24states for more clarity around some of the use cases in the technology particularly on the payment side i do think there's plenty of clarity on what a security is and how to construct it and that's kind of one of the problems on the tech side is that you know uh particularly like in the d5 space or an interior space the the engineers who develop these

11:47markets and these smart contracts they're they're essentially reimagining these systems uh in in an entirely new way right and they're they're approaching it from the mindset of an engineer and solving it as efficiently as possible the problem with that though is that the capital markets are this long historical evolution of you know mistakes you know

12:08regulatory changes to correct those mistakes and and so you have all these uh uh protections in place to ensure that you know bad things can't happen so i think that's that's something that uh developers should revisit rather than just escaping to smaller jurisdictions it's really trying to work within the existing regulatory frameworks and and building a

12:31compliance layer on top uh i think along with that comes identity comes you know kyc aml um accredited investor status all of these things that if you really want to bring in a lot of uh capital to the space and you want to see it grow you need to speak the same language that the incumbents the traditional markets speak and that the regulators speak and i

12:56think that actually in terms of disruption i think that's that's even greater disruption because we'll all be the beneficiaries of it while still having those protections that are so important i think a lot of people in the ico boom uh got burned right and it left a a very bitter taste in their mouths and it set back the movement for a period of time because uh it

13:19carries with it a stigma to this day this idea of tokenization so uh had we approached it in a more compliant manner i think we would have avoided that but nevertheless that's one of the lessons learned and i think the the industry pivoted very quickly and now we're seeing some of these products come out that are are going to be regulatory compliant

13:39now the d5 space again is showing us that the technology way outpaces the uh the regulatory framework so i'm excited to see what happens there but i i i have a feeling we're going to see some surprises yeah the d5 space is just super exciting you know the the value locked into these liquidity protocols just in the beginning of the summer of 2020 was about a billion dollars

14:01and now it's over 11 billion dollars you know more than 10-fold increase in just a short amount of months and it really it because of this growth in the price action there is a lot of speculation that's built into that and it may be overvalued but and there's also money being raised in the way that icos we're sort of raising it where there's really not that

14:22much regulation and it's really just engineers that are trying to rebuild the new financial system but it really doesn't have to go by the regulations if they don't want to because it's sort of small at this point compared to the size of the capital markets but at the same time defy you know the the vision of defy is to be able to have interest bearing accounts for people

14:44that are unbanked or to be able to get micro loans when you don't have access to uh you know banking infrastructure in a developed world so as it stands right now do you see d5 moving in the right direction to be able to actually fulfill that for people or is it does twists need to be made to really ensure that it's protecting people as you say with the

15:07regulatory side yeah well i mean i think in general i would make the statement that uh blockchain technology and these different ecosystems ethereum being one of them are excellent essentially sandboxes for experimentation right you know trying these these things out these new financial instruments uh experimenting with them and seeing what the implications of them are one of

15:29the things we've learned the lessons from d5 is you know the need for auditing smart contracts and making sure that uh there's oversight in their construction and that you can anticipate its behavior when it's you know unleashed in the wild because some of these smart contracts have flaws or vulnerabilities it's not a flaw or vulnerability in say the ethereum virtual machine or

15:49the underlying blockchain those work perfectly fine it's a flaw in the logic structure or someone finds a way to exploit them so you certainly wouldn't want to take this to large populations of unbanked the the people who need financial services the most in a rudimentary or unfinished way so i look at these ecosystems as you know experimental labs where we're trying new and

16:13different things and that's where i feel the regulators could play a really significant role is by lowering the burden of compliance to the point where you can experiment rapidly and you can see uh pace of change grow and then once the products are well thought out tested and verified then creating the channels where you can distribute them globally because

16:36i do think that one of the failures of uh you know the modern financial system is that it's left so many people behind in emerging markets uh you know that access to capital access to loans micro loans payments all of these use cases you know even bank accounts uh there's just billions of people that have been left behind and that to me represents a huge untapped

16:59market i think that's going to be the market for the 21st century in terms of growth so if blockchain starts building tools that solve real problems for people in these markets and the incumbents do not then you're going to see their disruption right they're not going to be the beneficiaries of that of that exponential growth in the 21st century that's just my

17:21opinion yeah that's that's great and that sort of reminds me of you know one of zuckerberg's quotes of uh fail fast and fail forward right and and once you can get these little flaws out of the way then you can figure out how to do it right and you can build the system that that actually protects people and is what people need and you know we're running

17:39uh short on time santiago but i want to ask you what are you most excited about for the digital asset space moving into 2021 and throughout next year i really like the the projects that are building interoperability frameworks in other words this idea not just of composibility within ethereum which is a very important concept also uh you know the idea that you have

18:02building blocks and you can put them together to create new and novel use cases but also interoperability cross-chain uh cross-chain smart contracts abstractions of smart contracts onto business logic so you can operate on multiple changes at the same time the reason the this excites me is because one of the problems of business problems in selecting or

18:25using this technology is that there's no clear winner or losers yet we're so early that uh you know you run a risk as a corporation building on a particular platform and because of the complexities of the technology it's very difficult for like a cto of a corporation to say you know we're going to build on ethereum and it's going to be there exactly

18:45in the way we imagine it in the next 10 years and so this is kind of the the time horizons that corporates are dealing with they're not building for six months or one or two years and as you know the space changes rapidly like at lightning speed so the idea that you can build frameworks layer two essentially on top of blockchains that abstracts away all that

19:06complexity and makes it easy for businesses to enter the space without being essentially stuck or build their house on on sand that to me is very exciting i think it's going to see the next wave and then of course you know interoperability between traditional forms of capital or you know like rtgs systems for central banks or uh uh even blockchains all these things interoperating together

19:31that to me is what i see as the future and that's very exciting and that sort of reminds me of you know being able to remove those intermediaries in terms of the currency exchange as well right now different blockchains you need a centralized exchange for the most part to swap coins between different exchanges and once we have that and blockchain interoperability you'll

19:54be able to make those decentralized swaps and and not have that counterparty risk and really bring bring the power back to the users themselves and i like what you mentioned about businesses as well you need to future proof your business if you're building on experimental technology that's only been around for a short amount of time anything could happen to that technology

20:13right and you really need to be a business maximalist not a blockchain maximalist and be able to pivot based on the businesses and the environmental changes and i think that a lot of businesses in this industry are doing that and um it's the way forward and um yeah so we're out of time santiago but i really appreciate you coming on i will leave the links to your socials and your

20:32companies in the description box below as well for the viewers and all the best moving forward with your work in the digital asset space and let's follow up in the near future i appreciate it thank you very much for having me you