Fireblocks works with many of the largest global banks on Web3 and digital asset projects. Fireblocks' technology underpins many of the top exchanges and blockchains. We recently spoke to Michael on our podcast -- here, we ask Fireblocks co-founder and CEO Michael Shaulov 5 questions.
Your background is in cybersecurity. What's the connection between crypto and cyber?
Michael Shaulov, Fireblocks: The combination of crypto and cyber mostly sits in that infrastructure level of wallet. There are companies that the founding team is similar to ours, but not as many as you would expect, to be honest. There is still some kind of conservative approach among the people that come from cyber – they still view this activity as somewhat more synonymous with the bad actors that were dominating this, maybe a decade ago, for all the ransomware activities. And to be fair, to actually make the job, you need to learn a lot about finance and a lot about fintech to be effective, and to really build the right type of company in this market. Most people just want to stay with what they know.
The most interesting thing for me is basically taking the principles and the deep understanding of the underlying technology, which is effectively built on cryptography that is an entire school of the spiral of cybersecurity, and figuring out how to use this machinery and how to use that infrastructure to solve centuries of old financial problems. Counterparty risk and the movement of assets clearing, those are things that date back thousands of years. Ledgers – all this technology kind of goes back to Babylon. Technology is being used as a way to basically represent financial assets. The most exciting thing for me of applying the know how that I and my team spent two decades on solving problems that are from a very different domain – It's a bit like how people use AI to identify cancer. It's kind of the fusion between those two disciplines.
What's the future of CBDCs?
What is much more appealing for the banks at the moment is what we call tokenized deposits. So effectively, they take a cash deposit and tokenize it. It's still kept under the fractional reserve requirements for the bank. And the advantage for the banks is that it doesn't reduce the leverage in the system. This is why the central banks liked that model slightly more from a scale standpoint, compared to the fully backed.
What does the FTX episode say about decentralized finance?
The main issue that we actually saw with FTX, Celsius, and Three Arrows arose from just very traditional financial counterparty risk problems. Those players were operating with traditional models. Three Arrows was a hedge fund and Celsius is just basically a peer to peer or an aggregate lender. And FTX was a combination of an exchange, and, unfortunately, a market maker that was attached to that exchange. The main issue over there, was as you said: basically some form of governance.
To be honest, FTX was probably much more of two issues that were main gaps. The first one is an inadequate regulatory frameworks that was enforced on those players. And the second issue is the fact that people were really carried away and they didn't activate the minimal counterparty risk assessments that you would apply on those players. Obviously, what we've seen over there is kind of the same scenario we've seen in traditional markets. With Three Arrows, probably the most comparable example is LTC, like Long Term Capital Management. It's almost one to one and. Celsius had huge leverage to a certain extent. It's a bit like Lehman, that basically at some point, you completely lost track and there was a bit of fraud of what was going on there. In terms of their different positions, eventually they reached a point where they just didn't have those positions covered.
And FTX is basically misappropriation of client funds. That's like Bernie Madoff.
What do the imminent changes in legislation and regulation of crypto say about the U.S. blockchain industry?
I would say that in the US, with the exception of Bank of New York Mellon, that is partnering with us on their infrastructure, unfortunately, most of the other players are currently a bit on hold because of the regulatory environment. You are seeing the SEC and the different regulators really trying to prevent the other players from stepping into working with crypto broadly. So the regulatory environment in the US as it relates to institutional adoption and also to consumer adoption right now is a mess. And it's much more political than they think. Honestly, all fingers point back to what happened with FTX and SBF and the political donations and so on.
But stepping outside the United States, we actually see huge momentum in Europe and APAC and LATAM. What we actually see is that in jurisdictions where there is either regulatory clarity, or at least reasonable cooperation and alignment between the regulator and the private sector, things are going really well. We're seeing quite a lot of activity around issuance of stable coins. We're seeing that in Australia and Singapore. Japan is probably going to be next. There’s also legislation coming out of Europe in terms of the banks that are involved there.
What about tokenized securities?
Banks are issuing bonds. For example, We've done, with ABN AMRO, we recently worked on a project that they use our infrastructure. We're doing a really interesting project with the Tel Aviv Stock Exchange that they are tokenizing Israeli government bonds, which is pretty amazing. It's really interesting because they also tokenizing shekels, and they're really actually creating a whole new infrastructure for that.