We hosted our 14th annual FinTech summit virtually on May 17-18, bringing together 500+ investors and senior industry executives from the US, UK, continental Europe, India, Hong Kong, and Singapore. The event was kicked off by a fireside chat between Vikas Shah and the President of Figure, followed by three panel discussions on cutting-edge topics in financial services with the CEOs of 15 leading FinTechs, who we invited to share their perspectives. We hosted 85 private meetings between investors and the FinTechs showcased at our Summit following the panel discussions.
The entire program with details of all 15 FinTechs showcased are available here, and all four-panel discussions can be watched on-demand here. This viewpoint shares key insights from the fireside chat and the three panel discussions. (Note: speaker quotes are not ad verbatim, they have been paraphrased).
Fireside Chat with Figure’s President
The fireside chat with Asiff Hirji covered a tremendous amount of ground, including the promise and potential of DeFi, its shortcomings, and under-appreciated issues like higher credit risk in DeFi lending which is not reflected in current yields being offered. Asiff eloquently captured several core issues in this space with effective soundbites like “Crypto combines everything you don’t know about Computer Science with everything you don’t know about Financial Services.” He described the biggest advantage of DeFi as having the ability to wrest power away from large corporates and current technology powerhouses, putting it back in the hands of content creators, and better aligning incentives across stakeholders. He also described the much larger potential of NFTs as a powerful method of demonstrating ownership for all types of assets, including securities, real estate, art, and intangible assets like personal data.
Panel 1 - What’s this DeFi Brouhaha? Jaynti Kanani (Polygon), Konstantin Richter (Blockdaemon), Michael Shaulov (Fireblocks), Edward Woodford (ZeroHash), John Wu (Ava Labs)
The first panel began with an overview of DeFi that defined it, contrasted it with TradFi, deconstructed its opportunities, and assessed its challenges and risks. We discussed the specifics of DeFi, how large it is, how fast it is evolving, its market structure, and how the DeFi and TradFi stacks differ. Next, the CEOs talked about the implications of DeFi for financial services, including its impact on intermediaries, and we ended by discussing the challenges facing regulators. Here are key insights and takeaways from this session.
- The recent disruption in the Stablecoin market was a big jolt to the Crypto market. The disruption may impact adoption and growth in the short-term but shouldn’t derail longer-term momentum. Blockdaemon CEO Konstantin Richter said, “this isn’t a hack, the system did exactly what it was expected to do with an algorithmic Stablecoin like Terra which is not backed by real assets like USDC and Tether are.”
- DeFi is a powerful alternative to TradFi with on-chain, tokenized assets, and smart contracts offering an alternative to the intermediary-driven model of traditional finance. Michael Shaulov of Fireblocks said, “the basic idea of DeFi involves smart contracts executing financial transactions autonomously and deterministically without centralized counterparties.” He described the critical custody infrastructure that Fireblocks has built for Crypto and tokenized assets, with 350 of its 1200 institutional clients already working with DeFi protocols.
- The basic DeFi tech stack includes tools, instruments, assets, and companies similar to TradFi, but with fewer intermediaries, lower costs, faster speeds, less friction, and a significantly better UI/UX. Ava Labs CEO John Wu described it as “the base layer is an L1 protocol like Avalanche, then there are DeFi exchanges (DeXes), on top of that is infrastructure from firms like Fireblocks, with identity solutions from providers like ZeroHash above that.”
- Identity and KYC are two big challenges facing DeFi. Solutions like Polygon’s ID perform KYC checks so new customers can be onboarded into the DeFi space. Polygon CEO Jaynti Kanani remarked, “major institutions worldwide are asking for Identity/KYC services so they can provide regular customers access to Crypto and DeFi services.” As such solutions emerge, retail and institutional adoption will grow substantially instead of being held back by AML/KYC/identity considerations.
- DeFi will not replace TradFi completely. Instead, the two worlds will exist in parallel with some financial activities migrating to DeFi, like payments for Web 3 applications. There will be bridges built between TradFi and DeFi by firms like ZeroHash, “whose identity gateway will enable financial institutions to provide millions of customers access to DeFi services,” according to its CEO Edward Woodford.
Panel 2 - Bridging the TradFi/DeFi Divide: Mike Cagney (Figure), Bob Cortright (Drivewealth), Carlos Domingo (Securitize), Gavin Michael (Bakkt), Stuart Sopp (Current)
Panel 2 dove deeper into how the two seemingly parallel universes of Traditional Finance and the fast-evolving Decentralized Finance world will collide, coexist, or converge at some point and how that may happen. The panelists described what the convergence of TradFi/DeFi practically means, what are examples of convergence today, what are the onramps/offramps being developed like Stablecoins, and what the technological and regulatory challenges are in implementing DeFi within the TradFi world. Key insights and takeaways from the panel were:
- Figure’s CEO laid out the two biggest virtues of Blockchain: “the ability to replace trust with truth through native digital assets, and the ability to transact bilaterally without counterparty risk.” The panelists discussed how these two things could rearchitect financial services by creating new marketplace models where one can truly be agnostic to one’s counterparty. There are already examples of this occurring in payments and lending/borrowing, with investments and insurance coming online soon after.
- Making Crypto and DeFi truly mainstream beyond the $250 million people invested in it will require making these products easily accessible through trusted financial companies, FinTechs, or even non-financial firms. Bakkt CEO Gavin Michael said, “we are building soft and easy onramps for consumers to get exposure to Crypto or tokenized assets,” without which they may be hestitant in adopting these products.
- Stablecoins are an excellent example of a crossover product that bridges TradFi and DeFi. Stuart Sopp, CEO of Current said, “there is a strong need to convert fiat dollars sitting in the Fed system to a programmable token, and that link can be a Stablecoin.” The panel said that the recent collapse of TerraUSD and Luna will shake investor confidence, push back institutional adoption, and drive regulatory action but shouldn’t affect the longer-term trajectory of Crypto growth or DeFi adoption.
- DeFi offers higher yields than TradFi due to a Demand/Supply structural imbalance in this market and because credit risk is woefully underpriced. Securitize CEO Carlos Domingo said, “the number of people willing to lend Crypto is dwarfed by the huge demand to borrow Crypto… and instead of paying you in dollars, DeFi firms often pay higher yields in their own token whose supply they control.” The panel had mixed opinions on how long this imbalance would continue and whether DeFi would be able to offer higher yields than TradFi.
- DeFi promises a new way to manufacture financial products by replacing the trust provided by financial institutions (in TradFi) with smart contracts. Ironically, the distribution of DeFi services will continue to require traditional financial institutions and digital players that are trusted by consumers. Bob Cortright, Executive Chairman of Drivewealth said, “the intermediary doesn’t get taken out of the picture when it comes to distribution. That’s why we are experiencing massive demand for our services to power FinTechs like Challenger Banks and digital companies looking to distribute Crypto and DeFi products to customers.” So intermediaries are likely to continue playing a prominent role in the distribution of financial products.
Panel 3 - Building a Better, Fairer World: Andrei Cherny (Aspiration), Donald Hawkins (Kinly), Kalpesh Kapadia (Deserve), Sarah Levy (Betterment), Ham Serunjogi (Chipper)
This session discussed new product development, emerging technology, and the potential for Blockchain and DeFi to address ESG issues, climate change, financial inclusion, and how to serve the unbanked better. The CEOs of Aspiration, Betterment, Chipper, Deserve, and Kinly, began by outlining how DeFi can address the five major shortcomings of TradFi: inefficiency (costly, insecure, slow), limited access (1.2Bn people unbanked), governance (centralized control), opacity (systemic risk), and interoperability (friction in moving funds). They also discussed how DeFi could help meet ESG objectives. Key insights and observations from this panel were:
- A growing misalignment of incentives between traditional financial institutions and consumers is a root cause of TradFi failing to meet customer needs. Misalignment includes very low customer satisfaction scores and a keen interest (especially among younger customers) to try out new providers and new approaches like DeFi. Aspiration CEO Andrei Cherny said, “… a misalignment of interests and values is driving a gigantic crisis of trust in traditional finance.” The panel discussed how DeFi could rebuild some of this lost confidence with greater transparency and better alignment of customer/service provider interests.
- Boards and senior management of financial companies need broader representation from people who reflect their customer base and from folks who have experienced real financial pain that these companies are trying to address. Kinly CEO Donald Hawkins said, “the neo-Challenger Bank model allows serving disenfranchised communities like African Americans, new immigrants, and other ethnicities.”
- Millennials care much more about ESG issues, with climate change in particular, and want to buy services from businesses that are taking concrete action to address these issues. Betterment CEO Sarah Levy commented,“we have received significant interest in our socially responsible investing portfolios, and like many other asset managers and retail advisers, we are expanding our list of investment options driven by ESG considerations.”
- Blockchain, Crypto, and DeFi offer a new set of tools and technology with a new way to manufacture products than those offered by traditional finance. A new crop of companies are building the pipes, platforms, and plumbing to incorporate Crypto and DeFi into next-generation financial solutions. Deserve CEO Kalpesh Kapadia shared how Deserve has partnered with BlockFi to offer over $20 million in Bitcoin rewards for its credit card to customers as an easy onramp into the Crypto world.
- Blockchain and DeFi solutions are already being utilized to lower the cost, time, and friction in payments. Applying this technology to the $750 billion global money remittance business could transform millions of lives as 80% of remittances are spent on four essential needs: housing, food, medical expenses, and education. Chipper is Africa’s most valued FinTech Unicorn, and its CEO Ham Serunjogi shared that “with remittance in some sub-Saharan African countries constituting almost 35% of their GDP, improving this flow of money could make a huge difference in the lives of the most vulnerable people in the world.”