For those in the business of investing in crypto,silver linings are in short supply,and indeed Trent Barnes,chief innovation officer at digital asset investment firm Zerocap,says the debacle has shaken the industry “to the core”.
Trent Barnes,chief innovation officer at digital asset firm Zerocap,says the FTX debacle has shaken the industry to the core.Supplied
But even so,Barnes believes there’s still plenty to be bullish about in Web3,with Zerocap involved in some innovations in the space,including the first minting of a bank-backed Australian stablecoin,and setting its sights on “tokenising” real-world assets such as shares,art,and real estate.
The Age and The Sydney Morning Herald spoke to Barnes for our weekly seriesYou,Me and Web3,which aims to examine,challenge and demystify the ideas behind the emerging industry by speaking to the people who live and breathe it.
We’ve just had a pretty crazy 48 hours in the crypto space with the near collapse of major exchange FTX. How does that make you think about the market at the moment?
When you’ve been in crypto for a number of years and gone through different cycles,you can see the difference here compared with what happened with Three Arrows Capital,Celsius,and Voyager. They were mainly relegated to specific crypto communities. But FTX is almost like the mainstream face of crypto,particularly for the Western world.
So,it definitely has shaken a lot of confidence within people who are probably not as accustomed to the space and likely don’t have the battle scars of dealing with sort of the ups and downs of crypto.
When you have this creation of wealth on a global scale happening in real-time,and you have someone like Sam Bankman-Fried who has made a lot of wealth in a very short time,they don’t necessarily have the institutional sort of risk management systems in place that we’re accustomed to in traditional markets.
But what this does,particularly in the early stages of innovation in a market,is show that companies such as FTX have laid the rails for future innovation. The FTX issue is going to set us backx amount of time because they were the mainstream face of crypto,but that doesn’t change the broader narrative around crypto and Web3. They were a participant in the space,they are not the space.
Does Zerocap have any exposure to FTT[FTX’s token]?
No. In crypto,there’s this push to scale as fast as you can by some participants by taking on as much risk as you can,and many people only account for the upside. They don’t mitigate or manage the downside risk. So many years ago we brought in people from the big institutional investment banks who have seen the space and have gone through the different cycles,and they helped bring sustainable risk management strategies.
As a crypto investment firm,does this change how you think when it comes to managing funds or advising clients?
Yes,100 per cent it does. But it doesn’t change the way we look at the market because we were big believers in this space. But it naturally sharpens your risk management,your tolerance,and your strategies. They had already been sharpened after Three Arrows. It’s a matter of just ensuring that your ear is continually on the market and that you’re in touch with your counterparties. But it certainly does shake the core of the industry around counterparty risk.
This year Zerocap was involved in launching the first bank-backed Australian stablecoin,A$DC,with ANZ Bank. What was your role in that whole transaction?
Billionaire Binance founder CZ Zhao (right) has pulled an offer to buy Sam Bankman-Fried’s FTX amid claims FTX is on the brink of collapse.Bloomberg
We advised them on the token,we provided custody,a market maker and a liquidity venue service for them. When you’re dealing in ethereum,which isn’t a regulated product,banks can’t hold spot exposure. So they need a counterparty who was able to take on that.
A$DC was largely a proof of concept,but could a stablecoin like that have broader uses for Australian companies?
When you have a bank-backed stablecoin – which is validated one-for-one,can be verified and is under a tier-one financial jurisdiction such as Australia – that opens up trade opportunities and liquidity within the local market. So I think it’s a natural evolution when other companies are looking at Web3 and native payment systems within Web3.
Can something like A$DC co-exist with a central bank digital currency (CBDC) like the Reserve Bank is trialling at the moment?
Theoretically,they can both exist. It may end up as a hybrid model,where you as an Australian resident have an account with both the RBA and the bank. So they can work together,and the RBA may even model its CBDC after a stablecoin. If there’s one out there in the market that is functioning and already has some proven use cases,then why not?
What other areas in the Web3 space are of interest to Zerocap?
We are involved in projects looking at tokenising real-world assets such as shares,bonds and investment vehicles,and physical items such as art,cars,land and real estate.
On these token and NFT projects,we are providing a range of services,including insured custody,treasury management,OTC and market making. Token projects tend to have foundations,treasuries and DAOs that are looking for an institutional solution to work with. As opposed to having funds sitting dormant or needing to sell assets to cover expenses,we can provide structured products to carefully and sustainably monetise their treasuries.
I don’t think major institutions will be able to keep up with Web3,particularly if they’re public companies because it’s a complete paradigm shift. How can you allocate value to the community when your value is locked up in your shareholders?
Another is staking and becoming a network validator. Decentralisation is a key ethos of crypto,and one of the ways to protect this is through participating as a validator. We’re in the process of becoming a validator for key and coming blockchains to reinforce our stance on the importance of decentralisation at a protocol level. We’re also building out the infrastructure to offer this to our clients so that they too can have a positive impact on the blockchains they’re investing in.
How long do you think it’ll be until we see institutional adoption of Web3?
I wouldn’t be able to put a timeframe on it because different institutions and different companies move at different speeds,and they are at different points of the journey. Obviously,for public companies,it becomes a lot harder because of all the approvals that need to happen.
Even in big institutions,there have been a number of different use cases and proof of concepts built out over the years,but they rarely see the light of day because you have to get in stakeholder approval at the upper level. And this is why I don’t think major institutions will be able to keep up with Web3,particularly if they’re public companies because it’s a complete paradigm shift. How can you allocate value to the community when your value is locked up in your shareholders?
So it’s a really hard question to answer,but I think that with the speed that the world is moving on things like CDBCs and the A$DC show we’re going in the right direction.
A key to widespread adoption is that the benefits of tokenisation – more accessibility and liquidity in assets,the ability to fractionalise ownership – are demonstrated. Then that will also allow the blockchain and tokens these assets are issued on to become underlying necessary market infrastructure.
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