Large traditional financial firms need guardrails in a world of blockchain-based assets, especially given that decentralized finance (DeFi) remains so susceptible to hacks and losses, the head of digital assets at custodial banking giant State Street said Tuesday at Consensus Miami.
Still fresh in our minds, last month revealed a true hack in DeFi, with on-chain lending protocol Drift experiencing a $295 million exploit in early April, followed by a similar-scale attack on KelpDAO later in the month.
Speaking about the future of tokenized real-world assets (RWAs), State Street’s head of digital assets, Angus Fletcher, said the fledgling crypto industry needs to find solutions now. “What are the things we actually need to solve now for a future where we have trillions of dollars of on-chain activity? We need to start unraveling those problems now,” Fletcher said.
For institutions, interoperability between blockchains must be clearly defined and understood, Fletcher said, so that crypto can scale safely.
“There needs to be an understanding of what the legal title and legal entitlement is when you have a token on one chain versus another, on a cross-chain basis. Our customers need to know and understand that. As institutions, it’s critical that we get there,” he said.
The head of the institutional division of blockchain lending protocol Morpho, Dennis Bree, said that April was probably the month that saw the most hacks in DeFi to date. “I think there’s just a general sense of understanding of the security vectors, the underlying assets that are being used as collateral. And we’re starting to see, certainly, that trustees are doing a lot more due diligence when we think about the risk of some of those assets,” Bree said.
The day-to-day barriers to institutional engagement include a plethora of regulatory gray areas, Bree said. He said Morpho has trustees come to them with $10 billion to $15 billion in assets under management to try to understand how a digital vault manages that capital.
“For example, if you have your capital and you put it into a blockchain, you have a receipt token, and instead of the receipt tokens just increasing in number, they increase in value. So how does the CFO of a treasury company think about the accounting treatment of that?”