Hi guys, welcome to the Fintech Coffee Break. I’m your host Isabelle Castro. This year DeFi seems to be going through a bit of a dip amid regulatory concerns of the crypto industry and the broken trust following the failure of large CeFi players last year, it looks like development has slowed. However, large financial institutions and fintechs are still engaging in the blockchain space, which had me wondering what is going on with crypto and DeFi? Is it over or just begun?
I brought Matt Homer of the Department of XYZ back on the show to talk about it. Matt has travelled a lot this year to different conferences around the world engaging in the global sentiment. We discussed the shift within the crypto adoption and the position of decentralised networks.
Matt Homer 0:51
Hey, I’m good. How you doing Izzy?
Isabelle Castro 0:53
I am good. I am really happy to have you back on the show. And I’m looking forward to picking your brain. Because yeah, DeFi has gone through. I mean, you can correct me if I’m wrong, but from my angle DeFi has gone through a tiny bit of a slump in some aspects, but not so much in other aspects. And I really don’t understand what’s going on and what that means for just different companies in general. So I mean, you have been travelling around a lot in different countries. I know you went to a kind of a Chatham House rules, DeFi retreat in Brooklyn in August. So you’ve got a lot of insight here. So to begin with, is DeFi. Dead?
Matt Homer 1:52
Well, yeah, I mean, so like, I think it’s great to it’s great to chat, of course and be back on on the podcast podcast, I think that I don’t think the DeFi is dead, I think I have more conviction and DeFi that a lot of other areas. For a couple of different ways. But I think if you I mean, I think if you just take a step back and think about kind of where we are now, right in terms of the state of the industry. I mean, the DeFi activity, DeFi volumes, total value lock, like all those metrics are down for sure. Right? And have been sort of in a depressed state. Now for a while I think it but if you look at how DeFi some of the DeFi protocols anyway have performed throughout the last 12 to 18 months. And you compare that performance to their centralised counterparts, I think it’s actually been like a pretty powerful demonstration of how resilient and effective DeFi can be. So for you, if you look at the lending space, right, and you think back to, you know, Celsius and Genesis and Voyager, right, and some of the names that are now of companies that are now going through bankruptcy proceedings, who are leading centric, are leading lenders in the space, but like, just traditional lenders, right? And you compare, like that experience with the experience of, say, like an Aave. And it’s really stark, right. So like, as those companies were, you know, veiling protocols like Aave were continue to continue to function as they were, as they were designed. And I think a large part of that is because and this isn’t true, I wouldn’t say for like, every protocol, I think for like the tried, the kind of the tested ones, right there. They can’t be cheated, right or not as easily cheated. And so, yeah, I think from that perspective, of like, we’ve seen, like our real validation of of like, what what DeFi can do and but yeah, I mean, I think we’re, you know, everyone is sort of I think the challenge has been around it continues to be around adoption really, right. And, and what use cases is DeFi going to enable that extends beyond DeFi Degens, right? But that like, could benefit like normal people or institutions.
Isabelle Castro 4:49
Okay. Okay, from that. I have two ways that I could go. So I’m gonna go down both of them. But first of all, I want to kind of like discuss crypto lending, because you bought out crypto lending at the moment, like, especially I don’t know, is it been a month? Since quiet? It was? Yeah. Coinbase said that they were going back into lending, institutional lending, but still. And then you got tether that said that they’re going to start lending again the other day. So there seems to be like, after this whole kind of thing in Central, like CeFi kind of thing last year, with lenders in the space, it seems like people like CeFi is slowly slowly coming back to the lending space. I know defy like Ave particles were working. But it surprised me that given this was only a year ago, that whole space blew up a bit that these CeFi entities are coming back. Kind of what’s your take on this? Why are they coming back already? And do you think it’s a good thing? Really?
Matt Homer 6:11
Yeah, I think I have sort of very mixed feelings about it, frankly, like, I mean, it is coming back. I mean, I see it to actually like, you know, not just kind of with established players, like you’re talking about, but also, like at the earlier stage, as well, and we definitely see it coming back. I think it’s coming back. Because there’s always going to be I mean, it’s just sort of like lending is an inherent part of financial services, right? And like, if you have an asset, you want to be able to use that asset, right. And then, and one of the main ways you can use digital assets is as a form of collateral to borrow against. So I think it’s sort of natural that it would that it would come back, I think the question is, like, how are we going to do it better this time? I think there, I think there will be more of a, I think there is more of a focus on on risk management and doing it, you know, in a, you know, in a in a safer way. But we know, I mean, we you know, I mean, if you’ve been in a space for a while, you know, there’s gonna be like a range of actors, right. And you’re also gonna have like, folks enter who, you know, offer, you know, wildly under collateralized loans and right, especially if you believe that we’re in an environment where crypto prices have bottomed. And they probably bought him I mean, they could bought him some more, but they probably they probably more or less bottomed. If you believe that, and then then you probably also believe that, you know, they’re gonna sort of gradually go up. And so that I think will, you know, is also something that will fuel more activity in the lending space.
Isabelle Castro 8:01
Of interest interested, because, obviously, these there were DeFi protocols that have worked throughout for lending, and continue to work. These are all collateralized, right, completely collateralized? There’s no, yeah,
Matt Homer 8:20
yeah, I mean, I think for the most part, I mean, the big established ones are collateralized. The real question is like, how, how over collateralized? Right. Like, how, to what extent are they, you know, continuing to, like, revisit their assumptions. But yeah, I think in most instances, they are, they are over collateralized. Right. So if you I mean, the the idea thing, right, that you you say you pledge one BTC. Maybe you can borrow up to? I don’t know, let’s just make up like 50% of that, right. And then as the price of BTC, fluctuates, like you may be asked to make, you know, to contribute more capital. to your, to your position, right, if you go above that 50% LTV, right.
Isabelle Castro 9:18
Okay. Do you see there’s always gonna
Matt Homer 9:20
be I mean, like the challenge of lending, right. And this is why like, I think like regulation could is so important, right, is that there’s always going to be sort of, you know, competition to offer the highest, the highest LTV right or you then or even under collateralized loans.
Isabelle Castro 9:46
Yeah, I mean, there’s like, in such a kind of emerging market, I can still call crypto emerging market. There is that kind of what’s it like? They want to innovate, they want to do something different. They want to be changing it up. So I can’t like coming from my angle, which I I’ve got some insight into the DeFi, but not as much as you in any in any sense. It seems to me that just over collateralized lending, even though it’s proven to work in the defy setting, it seems, I don’t believe that it’s going to stay there. Just because people want to innovate. I mean, to me,
Matt Homer 10:38
yeah, I think like, people want to push the boundaries. And like, I don’t know, I think I mean, to some extent, mean, it’s gonna happen no matter what I mean, especially if we’re talking about a permissionless space. Right, I think what’s important is, you know, providing people, options, and like the ability to differentiate between them, right, and understand the risks they’re taking on.
Isabelle Castro 11:09
In your kind of travel, that you’ve been doing over the past couple of months. Has there been like, Have you had any conversations about the lending space? And it’s been?
Speaker 2 11:27
I mean, it hasn’t, I mean, it’s something I’m starting to see. I mean, it hasn’t been something I’m really focused on, right, from an investment perspective. So it’s more something that I just sort of see, seeing start to emerge. But, you know, we’re seeing other interesting trends in the, in the DeFi space. You know, for example, like, you know, like real world, the tokenization of real assets. And obviously, that’s like something that you focused on and with the podcast and a number of other other guests, but that’s, I’d say, within the DeFi space, like, what’s what’s exciting right now, I think it’s, you know, people are reinventing stablecoins. Like, that’s, that’s why there’s, you know, you’re seeing sort of many different types of stablecoins. You’re seeing tokenization of treasury bills, and those are sort of similar concepts, right? Because often, what people are trying to achieve their is enabling, like a stable, an interest bearing stablecoin, in a way, right, and doing that through tokenization of T bills. And then there’s a real question about what’s like, what’s next beyond that in DeFi right, like, what’s the what’s the next big thing that’s going to be tokenized, at least from a real world asset perspective? Right. And there’s a few there’s a lot of disagreement. And around that, and but also around like, you know, permissioned versus permissionless. I mean, these are some of the things that we’ve, you know, people have debated in this space for a very long time. I think I’ve also seen, I mean, there’s also some really interesting other developments, though, like related to, like on chain compliance, right? And how could you kind of implode impose a compliance regime within a decentralised network. And I think all of those are important, right? Because they are, you know, contribute toward making the space more more trusted and more comfortable for everyday people. I mean, the other big, I think the other big thing that I think is sort of a recognition now is that, you know, during the height of the last cycle, everyone was talking about wallets. And there’s sort of tonnes of different wallets. And now there’s more of a focus on account abstractions, like abstracting all of that, you know, behind the scenes and enabling people to use defi without even knowing they’re using DeFi.
Isabelle Castro 14:04
Okay, so kind of like, is this where kind of real world assets? Real world asset tokenization comes into it? Do you think?
Matt Homer 14:13
Well, you sort of need both, right? I mean, it’s sort of like, the other side of the coin is like, you’ve got like, the asset or whatever it is that like the thing that you’re interfacing with, and then you have, like, the way in which you’re doing it, right, like where you’re holding it, or how you’re moving it. And that’s, and that’s where account abstraction, I think could be potentially really important in terms of enabling, you know, not requiring people to sign up for, you know, a Metamask account and like, figuring out like, their keys and where their keys are stored. And, you know, and all of that just kind of making that much more simpler. I mean, there’s trade offs, of course, right. And like, I think what matters is is optionality for users. Right? And that there are, I think, if if this is going to be kind of I mean, my My view is that defy, will become is sort of like what cloud was to financial services. And that it will eventually become the sort of underlying infrastructure that is just sort of accepted and everyone uses, but there’s gonna be a lot of variety and how people use it right. And some people will want to maintain full control and use have their own wallets and control their keys and other people, you know, may be comfortable with, you know, having a better user experience and giving up some control in the process.
Isabelle Castro 15:49
Yeah, because I mean, like, yeah, you mentioned adoption and kind of like the working towards adoption of kind of crypto technologies and DeFi in general, but every step towards adoption, from where I’m standing, looks like a step away from decentralised. Finance. I don’t know whether that’s think conclusion that is actually reality? Or do you really, is there still,
Speaker 2 16:21
I mean, that’s, that’s, I don’t know, I’d say that’s definitely like front and centre, like paying a lot of different conferences and gatherings that have happened recently around UPI. Is that right? And it’s sort of the philosophical debate around like, well, what is what does DeFi mean? And it’s sort of a type of thing that can mean different things to different people, right. And for some people, what it means is, is control like your ability to control your own assets, it can mean sort of privacy, it can mean anonymity. Right. And for others, it may be it may be more about, you know, efficiency, automation. And, but ya know, very, very much so I think you’re right, like, we’re, you know, we’re, that tension is always going to exist, I think that’s it’s actually sort of a really healthy tension. But I mean, if you think about it, if this is sort of an underlying this is going to be an underlying technology for a lot of financial services, then it sort of makes sense that you could use it for, you know, all sorts of different things and, and use cases or whatever, right, and that you would have sort of divergent, divergent opinions.
Isabelle Castro 17:34
I mean, your What’s your stance on all of this as, as an investor and as someone in the space? Are you kind of supportive of the fact that it’s just being adopted in the first place, and therefore the centralised aspect? Like, I don’t know, why you went into defy in the first place? Maybe that will inform kind of?
Speaker 2 18:03
Sure. Yeah. Well, I mean, I’m interested in I mean, my focus is really on new financial systems, which could, I mean, DeFi is just one piece of that. Right. But I mean, there’s sort of a lot of other interesting parts of that, that are emerging. And, you know, I mean, my view is that you will have is that people should have options, right? And that you will have probably very different flavours of DeFi right. And you’ll probably use DeFi. Even if you don’t know you’re using it, right through like an institution you’re already using. I mean, like a Pay Pal, right? I mean, Pay Pal launched their, their stable coin is that evolves and grows. More and more people will be will be pulled into the into the space. But I mean, I think I do think I do think I actually I, you know, I I do think that the some of the original values and principles are important, right. And the ability, I think, like this decision is initial vision of enabling a peer to peer people to interact and engage in financial services directly without intermediaries. That’s really like the big question. Right. I mean, and that’s, I mean, I think that’s still what really gets me excited. I mean, if you think about the history of money and financial services, intermediaries have been a part of that, you know, since the beginning, I mean, they’ve been a really critical part of it. I think what’s interesting about DeFi is that it’s sort of it’s creating the possibility that we may have gotten to a point where we can evolve beyond the need to have an intermediary and that would be truly trance informational and and or the intermediary is different right to the meat intermediary becomes the protocol or the technology as opposed to an organisation or an individual, I think in an environment where I think a lot of too about, like demographics, and I think that just the the world is changing, and and, you know, trust is sort of, at an all time low. And I think against that, that backdrop, you know, giving people the ability to exercise greater control over their finances is really is not only kind of exciting, but that will probably be really important. I mean, like I so I’ve grown up in a world that for the first half of my life, I’d say like maybe a little bit more than that, like, like the world was globalising, right, like the Berlin Wall came down. The you know, the US started engaging more with China and like, like, the first half of my life is like everyone in the whole world was like borders were just became much more open, and you could travel anywhere, you could work anywhere. And it feels like we’re now that that is now reverse. Right. And it’s becoming, you know, the world is becoming less globalised. And so, you know, in that context, giving people the ability to, again, like exercise more control over their money, I think is is probably like a humanitarian issue, actually, in some some instances.
Isabelle Castro 21:44
That’s a really, that’s a really, really interesting point. I mean, carrying on from that, what do you think is the maybe we’re moving away from DeFi at this point? What do you think is the kind of catalyst the driver behind this deglobalization, then?
Matt Homer 22:07
I think it’s I think it’s just I think it’s rational behaviour by countries to like, try to retain, like, their position in the world. I mean, I’m talking mostly about, like, I think, like, there’s a strong desire. Yeah, just I think, again, it’s sort of rational, I think, for the US to maintain hegemony over the world and like, it’s, but that’s really, that’s really hard to do, right. I mean, they’re not that immediately, just whatever the history of empires, it’s really, it’s very hard to kind of retain that position of primacy. And so I think you had that you had a multipolar world, right? During the Cold War, and then you’d had kind of the, you know, more of a multipolar world, but really, with like, the US setting the agenda. And now I think it’s yeah, we’re probably moving to a, a multipolar world in which there’s just greater competition for for power.
Isabelle Castro 23:16
I mean, it’s kind of crazy. Well, you can say something. No, not good. Okay. It’s kind of crazy. Because I mean, we’ve never been more connected, right, on a digital level. Yeah, on a digital level, we’ve never been more connected yet. We’ve got this thing which is polarising people. And it just, it doesn’t make sense. To me, personally,
Matt Homer 23:39
yeah, that’s what I mean. Like, I think there’s like sort of person to, I mean, people within the diplomacy space, People sometimes talk about, like, person to person diplomacy, right. And, like, it’s the right I mean, it’s sort of interesting, right? Because in some ways, we’re, like, super connected, like on a personal level, and yet at the geopolitical level, like, becoming more, you know, more fractured. And, but, but like, just the fact that we have kind of these peer to peer technologies, and it’s not just talking about kind of blockchain or defy, but like communication technologies, right, or other technologies, you know, to what extent mean that becomes sort of like its own vector of, of influence or power. Right. And and which I don’t know is, you know, which hasn’t really existed before. And yeah, so I don’t know. I mean, I think I think these things are interesting to think about, but I’m not also not a geopolitical expert.
Isabelle Castro 24:40
I mean, nor my is. No, we, we finance people, right? I just want to come back to kind of DeFi navigating regulation. I mean, we talked about kind of like in the US, obviously He’s got this kind of push against crypto technologies. But also like in, I want to turn to the MiCA regulation, because this is something that is in place, and it’s gonna come into effect. But you’ve got DeFi, I read an article the other day, I think it was I think it was even Binance that was worrying about this. You got these DeFi entities, Binance isn’t DeFi, but they’re worrying about and they are trying to operate within the European zone. But I think part of MiCA says that you have to be registered in Europe in order to operate within Europe. I mean, how are they navigating this? I know you were in France, maybe they talked about it?
Speaker 2 25:53
Yeah, I mean, well, I haven’t. I mean, it’s an area that I’m trying to get smarter on candidly, but like, I think that my understanding is the DeFi is sort of not really part of mica yet. And that it’s seen as like, that’s, that’s what’s gonna be next. Right? Like, but what I’d say like, generally is I think that the so yeah, I’ve been, when did we last talk? Was it like, in June or something? Or no, it was would have been like, may or April?
Isabelle Castro 26:25
Yeah. Because consensus was, yeah, it was in May, it was May, because we, we,
Matt Homer 26:32
since I’ve been trying to spend a lot more time in other parts of the world, for a few reasons. I mean, like I’m trying to get, I’m trying to just get a sense for like, where, like the founder talent is, is emerging, and like, you know, just like kind of what the regulatory frameworks look like and have was in the EU and France, as you mentioned, and then more recently in Hong Kong, and Singapore, and the approach, and a lot of these methods say they’re sort of three approaches, I’m saying from regulators. Like one approach is, like, let’s like ban the space. It’s sort of like a prohibition strategy. And I’d say like, that’s the that’s like, not that many countries, it’s mostly just like the US thing. And it’s not everyone in the US, too. It’s just like certain certain regulators. And then the other approach is like, let’s regulate, like, we don’t know whether this is good or bad or whatever. Like we don’t like we don’t have an opinion that’s just filled with regulated because people are, are using it. Right? I’d say that sort of like, my sense is, that’s the approach and the EU is like, having met with some regulators, as well as their it’s like, no one. Regulators are not saying like, we think this is the future. They’re just saying, like, this exists, and like, our job is to deregulate, right, so we’re gonna do that. And then the other approach is more like, let’s embrace it, right? And let’s, let’s use this as a competitive advantage to grow our economies. And that’s what you see in places like the UAE and Hong Kong. But I think most people, my sense is that most like defy is still it’s not the low hanging fruit, right? Like if you’re gonna regulate this space, I mean, you regulate parts of it, but like, the, the low hanging fruit, like for regulators, right as and this is what you see, sort of, I think, globally, even to some extent in the US is like stable coins is kind of an initial place, right? It’s sort of an obvious, it just looks and feels like traditional financial services. So you see regulators almost everywhere, kind of looking at that. And then after that, it’s it’s around, you know, exchange activity custody, you know, disclosures, and putting aside whether, like how you ended like taxonomy issues, right, like, is it the Securities and commodities at something else? And with that, the focus is really on centralised actors. I think defi is going to come next. Where we’ve seen regulators get active and defy so far is around national security concerns. Right. So here in the US, you’ve seen some actions related to that were in North Korea sort of the seems to be kind of like the primary vector of concern there because they’ve apparently like gotten quite good at being able to you know, pilfer funds through through whatever source of money through defy and then launder the money through defy so those are the that’s that’s probably the area that to the extent I mean, it’s a big question like how would you even regulate, defy like, given that it’s decentralised and regulation is based on an intermediary or do you I mean, should you even regulate it right? I mean, like if it if it truly is peer to peer then Like, you know, you know, should, should it even be regulated at all, or should two consenting parties be able to do you know, whatever they whatever they want. But the I think this national concerti national security concern is a real one, at least here in the US and that aspect of it. So knowing that that relates to really sort of like KYC and AML. And like, geofencing, and that sort of activity, and that that will be. But that’s, that’s more I mean, so far, it’s been more enforcement related, as opposed to regulatory, regulatory focus.
Isabelle Castro 30:42
Okay. Well, I mean, that kind of makes sense, if they can see that there are these flows that shouldn’t be there. I guess that makes sense that they need to, like they’re going to enforce it. And then regulation can come after? That’s kind of what they do in general. Isn’t that like the whole? Right? Sure. Of course. Exactly. I mean, with you, were there any other kind of main focuses? A main areas? I mean, you touched on the tokenization of real world assets? Slightly. So is this the kind of next big thing do you think? The real world assets,
Matt Homer 31:29
I mean, that I’d say there’s a lot of people who want it to be the next big thing, I want it to be the next big, I think it’s sort of inevitable, like, frankly, like, and just that all assets will be tokenized. I think like just that just sort of consistent with the evolution of money, throughout its entire existence, that, you know, assets become more fungible, more, easier to move around, more efficient, etc. So, I think you did, I do think it’s actually inevitable. I think the question is really around the timeframe. I mean, there’s a few questions. So it’s like, how quickly is that going to happen? And what order is it going to happen? And then where is it going to happen? I mean, by where I mean, like permissioned versus permissionless, versus like, you know, whatever, something in between, or something entirely, entirely different. There are some really bold predictions that exist that have been issued by, like, gadfly, institutions like Citi, and others that are projecting by 2030. The projections are that by 2030, between like five and $15 trillion of assets will be tokenized, which is pretty mind blowing, right to think about. And like, I mean, it’s even I mean, even that lower estimate is kind of remarkable, right? And it will probably move already, like currency was the first right, so in the form of stable coins, and I think people are, you know, there’s reason to believe that that will that will continue. And, but yeah, I mean, I think that kind of lumped in treasury bills, like money or Near money, right, it’s sort of like an initial has been the initial where I’m seeing the initial buckets, and that will probably be like most of what’s tokenized in the short term. And then after that, like, I don’t think they’re I don’t think anyone really, I think they’re just competing ideas right around, will it be after that? Will it be other sort of assets that are liquid and non volatile? Or will it be the assets that are actually like, highly illiquid, and therefore could benefit a lot from tokenization? Right, so like real estate, so that I mean, that’s been like, I think a debate over the over the last couple of months at various various places is around that, right, I think real estate’s a good example where you’ve seen a lot of efforts already to tokenize. Real Estate, make it fractional, right. Provide more liquidity to the the owners of of that real estate. But is that is that really going to be the thing that sort of, you know, takes off next? I don’t, I don’t know.
Isabelle Castro 34:25
Okay. Okay. I’ve got one more question for you. Okay. Sure. Yeah, I know, we’re running short on time. One more question, personally, as an investor, where’s your focus for the next kind of year? Are you allowed to tell me that, or is that a trade secret?
Matt Homer 34:43
Yeah, well, I mean, I’m really focused. I mean, I’m really bullish on stable coins and, and tokenized real world assets. I mean, those are those are kind of the tour’s I’d say like the other area is just our is like distribution. Right. So one of the challenges we have is that it’s something we’ve kind of always talked about. It’s just like, we need more people in this space. And when I look at projects to invest in, like, a big question I’m asking is like, does that? Who’s the market for that? And is it only serving like the existing set of people already in the space? Or is it something that like, opens up an entirely new market? So, like one example, there would be their digital identity. And there’s sort of a lot of interesting things happening in the digital identity space. It’s a space that people have been trying to crack for a long time. And we’re, we’re seeing lots of sort of, I think we’re starting to see like, like, lots of interesting ways of doing that.
Isabelle Castro 35:56
Okay. Okay, I’m gonna stop you there, because, okay, yeah, otherwise, we could go on for another hour. And my podcast is not supposed to be an hour. But thank you. Thank you for coming on the show again.
Matt Homer 36:13
Yeah, it’s been great to chat.
Isabelle Castro 36:15
Yeah, good to chat.
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