Panel | Institutional Readiness: What It Takes to Deploy Stablecoins at Scale

So, we're talking about institutional readiness today. Uh and just to to frame the discussion we're about to have, um we've reached the point where stablecoins have really passed the threshold of viability. You know, they they've reached uh 300 billion in in supply over a sustained period now over over a year or so. Uh and it's clear that stablecoins are here to stay. Um but there are still gaps in the progress that we still have to make uh in terms of operational verification and risk infrastructure.

Basically, from a product perspective, how do we how do we ensure that these products are ready to be adopted uh by institutions for the next scale, the next wave of adoption. So, um the question that we have to answer as a panel today is to address the folks here in the audience as if they are institutions who are on the fence about jumping into uh on-chain rails. And uh what sort of expectations should they have um from the issuers, the custodians, and infrastructure providers. Uh what sort of risk frameworks uh should be in place for them. So, um this panel here is is a really great group of individuals uh that have lived through standards that have have not uh been up to um what we expect.

And uh they've identified problems on how to resolve uh these. So, I'll I'll let you guys introduce yourselves uh now, but um what I what I have respect for in this space is people who take a critical eye uh of how we can be make ourselves better as an industry. And I think that uh the panelists here really embody that. Um so, Charles uh Charles Jensen, would you would you like to start us off?

Sure. I'm Charles uh from S&P Global. We're the leading credit rating agency, the leading index provider. Uh I lead everything related to digital asset.

Um hi, I'm Wojtek Pawlowski, the CEO and co-founder of Accountable. Um, we mainly specialize in in verification of off-chain and and on-chain data for institutions that um that want to keep the privacy with themselves. And we recently also launched the uh vault infrastructure that enables creation of uh tokenized financial products with this trust being um embedded.

I'm Tony, CEO of M Zero. M Zero is a Uh I'm Tony, CTO of M Zero. M Zero is a modular stablecoin platform. We allow other other businesses to launch their own stablecoins and uh being given ability also to pick regulated issuer and switch providers as the businesses evolve. Uh before M Zero, I was also building out foundational infrastructure of DeFi with ConsenSys and Compound.

And I'm really looking forward today to unfold what is behind stablecoin and how to launch and build one.

Uh hi everyone. I'm Charles. Um work with SocGen. Uh for those who don't know what SocGen is, it's a EU uh G-SIB, so large bank. Uh we have retail businesses, we have investment banking, we have insurance businesses, various of different businesses.

We've been active on I would say tokenization and stablecoin for quite some time. Uh we launched our own stablecoins available on public chains uh a few years ago under MiCA uh regulation. Both EU and USD stablecoins. Um and maybe what's different from other banks apart from the side that, you know, we've chosen the the side of stablecoins and not tokenized deposits. But but more interestingly, we've been um quite interested in working on public chains and permissionless transfers.

Um we've launched a vault on Morpho not so long ago. And so, this is the kind of initiative that we've had in the space for the uh last couple of years.

So, the the panelists that we we have here today, um I just want to emphasize that we're uh embodying here kind of the the convergence of TradFi and DeFi. We have uh we have representatives, the two Charles from the TradFi side, and we have the technologists, the DeFi natives, uh Wojtek and and uh Tony here uh from the DeFi side, and we're coming together as one. We also have a couple of uh two two of our panelists are are asset issuers um and are on the front lines of of uh making products that are serving institutions. And we have uh representatives from more of the analytical and verification side. So, we've got a a really uh good lineup here.

Um So, Charles Charles M, I'll start with you with the the first question here. Uh so, since you are um a systemically important bank that you're representing, and um and you're on the front lines of of building products for uh the institutions that want to use them, so when you're when you're working with a treasurer or an asset manager or fund who's coming to you and wants to use your stablecoin, what are the checklist items that uh that they're going through before that idea or that interest turns into deployment?

Yeah, so I'd say you you have to split this uh question in in in in different categories. So, obviously, you have all the operational setup. Um I won't go over, you know, these questions. It's like what kind of wallet, how does it fit my accounting, my tax reportings, my risk, uh you know, monitoring, and things like this. That's usually not systems that we provide as a bank.

Uh so, our clients will use, you know, treasury management services, um sub-party services for various things on their side and the easier it is for them to integrate stablecoin in their existing procedures, processes, systems, the easier it is for us to pitch the product, obviously. So, if they have to onboard new providers, if they have to change their existing processes, if they have to create new reportings or new teams, it's it's usually a hard start in terms of, you know, commercial discussions. Um so, that's like more readiness on their side to accept stablecoin and work with stablecoins. That being said, from a more from a risk analysis perspective on how they evaluate stablecoin and the the way we structured our product since the beginning, um is I mean, we are a TradFi company, so we built the stablecoin with the ID and the same logic that we would build other products for institutional actors. So, for example, one of the thing I usually mention is that in the collateral schedule, um so, obviously, cash deposits are eligible collateral for stablecoins in various jurisdictions.

But, we go a step further. Like, we put a minimum credit rating in the, you know, depository bank that we can use to hold our collateral for the stablecoin. I mean, that's like the obvious maybe with the most obvious like risk analysis that you can make on a stablecoin is like, what is the collateral and where it's held. Um we've all have all have in mind what happened with, you know, some uh issues in the banking systems in the US a few years ago and what the impact it had immediately on the stablecoin market. Um and so, like having a minimum rating on our stablecoin to hold the reserves is like the most obvious things that we want to do and that we did in our structure to give some kind of confidence to our clients that if they buy our stablecoin, obviously, they will have access to the, I don't collateral reserves and reportings, but they know that the risk profile of these reserves will not be worst in the in the in a few days or that we cannot change the risk ratings of of, you know, the the the banks where we put the the collateral.

That's just an example of the kind of discussions we have where we want to give confidence and that even though you have regulations now both in the EU and various jurisdictions and and the US, this kind of additional step to provide um confidence to institutional actors is is is key.

And Tony, you uh you come at this angle of um uh stablecoin asset issuance from the from the technology perspective of building infrastructure that allows people to deploy uh their own stablecoin. Um so, from an operational standpoint, uh what what are you seeing that institutions are requiring um from a technological perspective uh now that they weren't asking for maybe a year or two uh ago?

Yeah, it's really good question. Uh first of all, 1 or 2 years ago, I think we were in completely different space. Uh stablecoins were already very hot, interesting topic, and it was obviously clear that stablecoins is a product which which reach product market fit for crypto. But from another point, it was era of experimentation. A lot of stable A lot of projects were launching DeFi still launching DeFi native yield bearing stablecoins aiming to pass back the yield coming from under underlying treasury bills collateral.

Delta neutral stablecoins were invented roughly 2 years ago. Now, especially post-Genius, we're in completely different space where we all get in more institutional ready, and a lot of things on technological level, on tech and protocol level, is related to how we facilitate the compliance checks. Uh We're building on the token levels now. We're like very precise and we're building all kind of role-based access for the token controls for pausing, freezing, compliance, callbacks. And in addition to supporting and providing our partners with monitoring infrastructure, we're aiming to support all of these checks.

So, yeah, we're getting like DeFi DeFi native getting more much more institutional now. And additionally, one thing I want to mention which is very exciting now and what I see on technological level is that stablecoins from just being the application level, like being a token which is built on top of certain blockchains, sometimes even becoming the foundational protocol level. So, like a lot of So, what I mean by this that even blockchain rails are adjusted in certain cases to facilitate stablecoin payments and transfers. So, we see a lot of new blockchains being launched which are specific for payments and stablecoins. And they include different different very advanced technological components which allow to pay transact with pay for transaction gas in stablecoin itself, allow batch transfer of stablecoins, allow to incorporate some kind of metadata which also allows to reconcile stablecoin transfers and payments with existing off-chain systems.

Account abstractions. So, on technological level on stablecoins are driving the demand. What is also included on the protocol level now, which is very exciting and I think this year and next year we'll see how it plays out.

All right. And Charles J, you come at this from the analytical risk rating side. So, what would what would you say that you find are aspects that asset issuers are are maybe not taking to consideration as much as they should in terms of what sort of standards are are required for for onboarding the next wave of institutions?

So, first a few disclaimer. One opinion now are my own and I'm not part of the analytical group. Now, we got analysts just there if you have question after. But, I mean there's different angle that should be looked at. I won't say if they're not looking at them enough or if they are or not.

But, uh the ability to do redemption and the friction you have under stress, that's something that is important. We've seen there was a limitation in the past. There are solution you we heard many time of of something like proof of reserve, but it's not enough because if you had the money on that day doesn't mean that somebody can change a smart contract to proxy on the next day. So, when you look at the risk of stablecoin in general, you just need to look at everything. It start with the quality of the underlying and that's how the stablecoin stability assessment that we created start with the first score.

Like, what is the underlying? What is the quality of the underlying? And then we look at the next notch, which is all the other factors that should be considered. So, we seen all the hack that we had recently. It's with key management.

It's integration with the legacy tool. There is an issuer that minted 300 milli 300 billion I think or 200 trillions of their stablecoin by mistake with a typo. It was not exploded, nothing happened. But, those are all consideration that you need to have, which well, you have to include the technical technical angle, too. Now, it depends also what you want to do with stablecoin.

I'll share an example I learned about recently, which I think is really interesting. Most stablecoin, where we say stablecoin, we're thinking of the biggest one also being created in a more permissionless way and always with an angle of being used by somebody else. But, there are company right now that are creating stablecoin for themselves to, for instance, uh, when there are big companies, I can't say any name, but they are really big companies that receive payment from all over the world. They have a very expensive payment that they're doing for cross-border, uh, transaction and treasury treasury management, and they're starting to create stablecoin for themselves so that they can replace those services. So, of course, the risk you would look at when it's to serve yourself compared to serve retail or institution would be different, too.

And, Voytek, uh, you have, um, lived through the consequences, uh, of of, um, what what can go wrong, uh, with assets when there's not enough, uh, transparency or disclosures. Um, and so, the question I I have for you is, uh, what is being accepted, um, today, uh, i- in a trustful manner, um, that needs to be, um, uh, alleviated or resolved? What What What should we require more, uh, transparency standards around?

I think it's it's all started in the in the It was, in hindsight, a nice period, maybe a little bit less depressing than at the moment, but 2021, 2022, right? Um, a lot of action, a lot of innovation, um, a lot of fraud, um, with FTX and with with all other parties, but there was one thing in common, right? Like, everybody was a black box, and then it was extremely hard to to know where your money is going, how is it being um, used. And then tokenization became a thing in the meantime, right? And people [snorts] started calling

[clears throat]

lending somebody unsecured basically, which is wiring money to to a hedge fund, and started calling it a yield bearing stablecoin, right? Like hedge fund activity mixed with the world with the word stablecoin usually doesn't work well. So, you know, people started blowing up and these so-called stablecoins were not so stable and we had situations like with Stream Finance and with many other examples where the opaqueness of what happens with the money, where the reserves are, how they are being stored. With regular stablecoins, right? Like it's relatively simple.

You have a bank, right? Like you may have a credit rating and all these different things attached. Usually the collateral composition doesn't change every second, right? And we see that um with all of these products, right? Like everybody's doing something different.

We have clients that are tokenizing receivables on Brazilian grain. And you also call it a stablecoin, right? It's not really stable, right? You can default any any moment there. So, what we are trying to to achieve with our technology is to at least give these people means to prove where is the money, how they are running those trades, are they solvent and broadly speaking, what is the actual performance, calculate and verify the NAV that should live on chain.

And then when you use this token as collateral on Morpho, you maybe shouldn't assume that it's backed one to one at all times as as some parties are doing it, but reflect the true value. And of course it's not easy because as you said, right? Like things are moving every second. But what we need to achieve is to raise this transparency bar higher. Unfortunately, the the market is learning slowly but surely.

Um, curators are demanding that if you're not going to show me how you're operating, I'm not going to give you money. I'm not going to curate um, a market for you. So, things are heading to the right direction. It's still early innings, but uh, but definitely people learn and I believe we were on the panel uh, like a year ago or a year and a half. And um, and things are improving.

Um, that's that's my take.

Cool. So, let's let's talk um, a little bit on the integration side. So, Tony, this one will be for you. Um, when you're when you're working uh, with um, uh, institutions who want to plug into on-chain finance because that's we need to have use cases for for these uh, assets. Um, whether that's for settlement or or uh, lending or um, uh, foreign exchange.

Uh, so, where do you find that there's integration friction?

Yeah, again, second good question. Um, so, obviously, when we try to plug in uh, traditional off-chain uh, tradfi systems with on-chain systems, uh, with on-chain systems, it's the problem is those two are not necessarily compatible, right? They were written down like I'm speaking on technical level, written down sometimes at different points in time with different mindsets and not using a compatible set of standards in terms of accounts, like how assets represented. And also, they're moving even at different speed and latency. Uh, there were a lot of panels today discussing like how we move from T+2 to T+0, which is a fancy word to explain that mostly blockchains is 24/7 infrastructure with like close to instant finality.

And now like if your asset moving at this speed and it's need to be reconciled in existing off-chain system, that's not necessarily will be the case. And unfortunate reality is that like those two systems combined together in some cases will be moving at the speed of the slowest of of two. So this is the one thing where it's like first of all settlement and just ability to move assets need to be adopted. Uh the second one is standards and again trail. For example, one thing we do with VM zero

[snorts]

um we used to do rewards streaming and which need to be mapped to treasury operations. And not necessarily treasury operations support like very sophisticated, technologically advanced methods. So those that's when also systems have to be merged and adjusted and that's what's happening um like we adopting two worlds adapt to each other. And also like it's just a big task for off-chain trad fi system to incorporate on-chain system because it's involves like there is a necessity to work on wallet infrastructure, figure out accounts, like is it is it wallet infrastructure, custodial, non-custodial, what is security operational posture of that. Uh on the positive side I think I things I believe in progress and I think the system which is less less efficient will adjust more to the system which is more efficient.

So that we have the better setup for all of us eventually.

All right. And and Charles you you're obviously beholden to very strict internal requirements and regulations. So when when you are working on uh integrating into DeFi, how do you find frictions in in your your integrations? Where do you find that you need to make compromises and where can you resolve those?

Yeah, so so that that's a tough one. So, obviously although we've been able to achieve some things on public chains and work on DeFi and we actually, you know, made some the uh one of our first transactions was with Maker DAO several years ago. Um it's it's always been kind of a combination of good discussions with our regulators. Like, we cannot do anything or usually you cannot do anything in this kind of environment without a prior discussion and information with our regulators to explain what we would do, how we would do, what kind of risk framework we put in place, uh control and and everything. Um and obviously second part is like the support of the senior management um internally [clears throat] uh without home, you know, none of this would have been, you know, probably possible cuz we need this kind of support to um continue these initiatives and and move forward.

Um that being said, um we definitely need more clarification on from a regulatory perspective. Um that's still quite a big blocking point on from our perspective in terms of adoption. Um what it means for actually, you know, entities to operate on stablecoins, whether they need money transmission license business, uh whether uh we need um bit license in New York, for example, under some circumstances depending on the services we want to do, um whether we need to have a proper custodian when we do like broker-dealer or FCM, you know, activities. So, all these questions are um very specific to our business but really key in order for us to move forward with use cases with our clients. So that's from a regulatory perspective and then you have you know everything else that you know usually people think less about but that are still key in terms of product management in order to to move forward.

So you have like from an accounting perspective, what does it mean? Can I consider the stable currency as cash equivalent in US GAAP? Like we don't have very clear guidance yet. So that's the kind of things that are preventing big firms from moving forward on stablecoin because you know all these small questions are not necessarily answered today on stablecoins. And until we have clear answers and and a clear way forward, I think this this is going to prevent some of these firms to move and integrate stablecoins.

Charles Jay, back to you. So S&P has has done some stablecoin stability assessments and you're starting to actually put those on chain to be actionable in in DeFi. I am curious first part to to hear about the stablecoin stability assessments, how those are different from how you would evaluate something like a money market fund and in particular I'm interested in what's the significance of bringing these stablecoin scores on chain to be integrated into DeFi in various ways.

Sure, so yeah, it's not like a money market fund. A money market fund is a known legal container with regulated entity managing them. A stablecoin plus there's a lot of lack of definition in the field, right? What is a smart contract audit? Who can do it?

What is a stablecoin? Stablecoin they only have in common the fact that they are target a peg. Then at outside from that they are all built in a very different way. So, when somebody come to us and say, "Well, I would like to rating on my stable coin." Uh we can rate stable coin.

We don't have a methodology specifically for stable coin for rating. So, sometime it can look like structured finance. Sometimes can look like uh some type of fund. So, then the analytical side of S&P Global Rating will look at them and come back with if they can be rated and how would be rated. Now, because we had a lot of interest and there was definitely a need for some type of risk assessment specifically for stable coin.

We launched something that is called the SSA that you mentioned, which is not a probability of default like um a rating would be. It's a probability of depeg. So, what is the risk that this stable coin will depeg? You can depeg and not die. So, um so it's made only for stable coin.

We had tokenized money market fund coming and asking for the SSA, but it's made for something that target a peg. The whole methodology is available uh online for free. The report are available online for free. Now, um why on chain? So, as we have more and more agentic AI or just smart contract, we believe that it makes sense that the assessment would be on chain.

So, we started with the SSA on chain because it's a non-regulated product and getting them on chain was easier. Now, it's it was meant as a demonstration of capability. If somebody and some client ask for that saying that, "Well, they are creating this specific product or in some cases stable coin and they want to be taken as collateral in somebody else's app, let's say, and they believe that it would be a differentiator if they could have their rating potentially directly checkable by the smart contract. So, if it's on chain, the smart contract for every transaction can just look at the value and then act depending on if there was a change or not.

Uh Wojtek, this is a big question for you. So, buckle up.

[laughter]

So, what does a a defensible institutional level risk framework look like that doesn't exist in the standard today? And what do you think is uh required to uh to make sure that that gets put in place? What has to happen to get us there?

Indeed, a big question, especially if there is no real framework, right? And um effectively, as I mentioned, because for context, right? Like there are stable coins and stable coins, right? Um we are mainly focused on on the stuff that requires this continuous verification of of what happens with people's money against the liabilities that are basically minted on chain. So, the tokens, the yield bearing stable coins, and all of these type of um tokenized structures.

Um so, there is no real framework, right? Like um couple months ago, nobody even asked for reserves uh as a as a thing to to check it. ETK now was, I think, one of the the first parties um that we're basically working with on on on the same thing to to show more, but it was their decision to do what they they thought that it's going to um it's going to be their edge effectively rather than a mandatory requirement because there is no requirement. Um in our eyes, um a combination of a software like ours that with very high degree probability showcases the the reality of of what happens with people's money, how is it being used and how it's backing the the underlying product is one part of the story. Um that works continuously.

The trust towards this is via cryptography and um and via all the methods that are that are being used to to to assess this um truth um are relatively high or very high. But then it would be good if somebody, let's say somebody like Securitize or or trusted third party, comes in and periodically actually make sure that all of the accounts are plugged into a software like ours and that there is no outstanding liabilities that the software doesn't see and that are outside of let's say our system um and that the software operates basically correctly because we don't have means to um to verify that somebody plugged in every single account uh that they didn't take a loan on a napkin from another party and that simply technology alone cannot um cannot check. And then an audit once a year or whenever that happens um it's also mandatory, right? So, you have like three different clocks with three different um use cases, something continuous, high degree of probability, attested by somebody periodically, and then wrapped up full audit, basically everything that you that you do um during that year that that passed. So, from [clears throat] our side, this is what's going to be the future.

For now, people mainly use some solution like ours because nobody told them that they need to use anything else. And of course, a cost perspective here is also important. You use you use us, you pay X. Then add to it somebody like a trusted third party accountant, you're going to pay even more. And then you need to do an audit once a year.

So, for majority of these protocols that are barely making any money, that's simply not suitable and we wouldn't see new players coming to to the DeFi industry because if they are facing all of these regulations from the get-go, that wouldn't be profitable for them. So, I think with every problem, distress that we are seeing, everything will be improving

[clears throat]

over time. And it's beautiful to see that now when, you know, some protocols have a problem in in real time, people can actually see what's backing them and people are saying, "Oh, yeah, but they're not showing enough." Couple months ago, they were showing nothing and nobody was even asking for it knowing that this is possible. Um, so I think couple of more of Stream Finance FTX-like events and we'll get there.

So, I I started off this conversation talking about the sustained stablecoin adoption that we've been experienced. But, if you if you really look into the details of it, you can quickly see that it's basically a duopoly at this point. There's there's Tether and there's Circle. Um, which makes up the vast majority of stablecoin supply. So, Tony, next question for you is when we look at the actual maturity of the stablecoin space in terms of the diversity that we experience, is this is this just a state of a kind of like early stage industry or what has to what should happen?

How should we think about the risk of this kind of centralization of these two major players? And how does this how does this look when we extrapolate out in the next, say, 5 years or so?

Okay, I'll try to be very brief because networking hour starts soon. Uh first of all, yeah, obviously when I start to work on stable coins, we had the same incumbents as we have now. Like their market share is slightly less, but still they taking significant size of TVL and flows. Um what should change that uh Tether and Circle are not dominant players? Um unfortunately, I need to to say that's not technical.

Like I don't think a technical uh solution will help here. They actually like both I would give credit give some kudos to both. They're working on like very significant interoperability projects. Circle is has like really good CCTP and um CCTP protocol and adding adding a lot of features like fast transfers, forwarding services, recently like gateway to make sure liquidity is moving smoothly. The same for Tether, they're working on where is zero to make sure USDT is expanding via USDT zero now.

So technical side is solved. Um obviously like what should happen for those players to not dominate the market? I think we saw this with genius act um [snorts] when and I like somewhat will disagree with Wojtek about reserve requirements is that after genius there is a clear clear requirement what is genius aligned to genius compliant stable coin is and like if you want to be that at some point you need to you need to have [snorts] issuer who shows that. But also what genius allowed is for fintech to issue their own for fintech to be able to launch their own stable coins. And at some point it should it should take the part of the market because at [snorts] the end of day the find any fintech or business should ask themselves if they rent the infrastructure stable coin like using other stable coin like USDC or USDT or if they want to build their own.

And that's we see a lot of a lot of decision towards owning this infrastructure.

All right, guys. We're getting close to the the end of our panel here. I want to thank all the panelists here for your your insights and and being a part of this today. Last question, we'll just go around one one to the next to cap off this discussion on institutional readiness. If if I were an an institution who's on the fence about jumping into on-chain rails, what what is one thing that you think I should expect before I take the plunge?

And we'll start with you, Charles M.

Um I think you must be very clear on your use case. Uh cuz I mean your whole build out will depend on what you actually want to do with your stable coin. I mean using a stable coin for the sake of using it doesn't make any sense. Sense. So, first, you know, define your use case very clearly and what what you need to have and and why.

Uh very quickly on my side, come with playbook and launch launch plan for issuance and liquidity, right? So, there's issuance part of stable coin, understand what what kind of features you like expect to have in stable coin, how it will be controlled, think about upgradeability, role-based model of stable coin, and potential additional rewards, and how treasury how it's distributed on issuance side, and then liquidity. Kickstart and liquidity of your stable coin. What is your rails? So, ideally have the launch plan and book and fill fill the columns, and then you'll be ready for successful launch stable coin.

Never launched a stable coin, but I would say that focus on security because we recently saw with examples like stable that uh you know, if you're operating your your stable coin with with weak security, then there is no way back and and you only have one shot at it. Um you can for example tie the underlying reserves with the minter. So, there wouldn't be any new stable coin minted unless the reserves are are showing that you can. Um and make transparency your edge, right? Like to take down guys like maybe not take down, but like to gain some advantage over Circle, over Tether.

Show that you can show more. Try to gain trust and yeah, all the best.

If you haven't launched a stable coin now, you should really think if we need one more stable coin. The answer is probably not. But, there are specific use case and I think one of the thing that uh is the topic of the year evolves a new type of yield on tokenized asset. The Vault Summit is tomorrow. You should go there.

All right, thanks once again to our panel here.