In a recent interview, Michael Shaulov, Co-founder & CEO of Fireblocks– a digital asset and crypto technology provider – offered his insights into what’s happening now with DeFi, banking, and Web3.
Fireblocks, which claims to be the #1 provider of digital asset and crypto custody technology, advocates that direct custody “allows for greater freedom for new trading options and leading-edge security technologies.”
Michael Shaulov has previously noted that:
“You can think of direct custody as a more sophisticated version of self-custody. Most people think of self custody is using a Ledger Nano to store their asset; but it’s more than that. We’ve seen customers shift to direct custodial solutions to further remove the counterparty and operational risk in light of recent events.”
Shaulov still believes that DeFi is the “ultimate solution.”
He has previously said that “one of the most interesting things the last month showed us is how resilient the DeFi space has been in comparison to the CeFi space.” Shaulov uses Amber Group as an example of one company which said they “would never use DeFi but then became one of the biggest players in it.”
Shaulov also shared his take on stablecoins by noting that we are “enabling people to buy stablecoins.” While he personally thinks you need to be a bank to launch a stablecoin, based on what they’ve seen, there’s “no other path for undercollateralized stablecoins.” He claims that stablecoins are “a crucial part of the infrastructure. It just needs the same safeguards as a bank.”
Our conversation with Michael Shaulov is shared below.
Crowdfund Insider: Why is DeFi the future?
Michael Shaulov: According to Blockdata, decentralized finance (DeFi) could unlock a trillion-dollar opportunity for institutions over the next half-decade. In my opinion, we have yet to begin to understand the true impact that decentralized finance will have on the world’s economy and on innovation. This industry is still in its nascent stages and there is a tremendous amount of room left to grow.
In fact, despite the bearish markets, many of today’s biggest institutional players are unyieldingly pushing forward with testing and piloting a wave of new financial products and services that will include digital assets, tokenized securities, and crypto payments.
DeFi technology was specifically designed to overcome the flaws of administering financial services via traditional, centralized platforms. It also empowers users to truly keep or “custody” and manage their assets themselves, a stark difference from traditional financial institutions. It eliminates typical user fees that banks and other financial organizations charge, and it allows people to hold their money and assets in secure digital wallets, accessible to anyone with an internet connection.
DeFi has also proven to be a commercially resilient and growing industry, especially when compared to CeFi – and it’s winning over old holdouts. Amber Group, for example, is a leading digital asset company operating around the globe. They once said that they would never use DeFi but have since become one of its most prominent adopters.
Crowdfund Insider: How does Fireblocks deal with counterparty risks?
Michael Shaulov: By enabling direct custody, Fireblocks removes counterparty risk from the equation, ensuring that customers are always in control of their assets first and foremost.
Also, in 2020, Fireblocks launched the Fireblocks Network, which was the first and only digital asset transfer network for institutions. The Network added a new layer of security and efficiency for institutional participants, enabling members to find, connect and settle with the largest financial institutions instantly and securely on-chain. The Fireblocks Network completely streamlines and secures the transfer of digital assets between counterparties and exchanges. Through Fireblocks, institutions can access a variety of workflows to increase capital efficiency, reduce counterparty risk and streamline operations.
Crowdfund Insider: How is direct custody a more sophisticated version of self-custody?
Michael Shaulov: Most people think of self-custody as using a cold storage product like Ledger Nano to store their assets offline. This is done to ensure that the assets are secure, but cumbersome if you want to trade or transfer the assets. In comparison, direct custody is much more than that — it provides the highest level of security while maintaining flexibility and efficiency when moving funds around. With direct custodial MPC technology, users distribute private keys across multiple servers in such a way that there can be no singular points of failure in their wider networks later. Clients also have immediate access to the blockchain, which gives them more options for what they can do natively; support multiple protocols, DeFi, trading, etc.
The process of backing up data is also more streamlined with direct custody. For example, on Fireblocks’ side, we can back up all our clients’ private key-encrypted information and create schemes in which they can escrow another party’s right to hold part of the private key in the case that one of the others failed.
After recent market downturns, Fireblocks has seen customers who are hoping to mitigate their counterparty and operational risks by operating with direct custodial solutions. Several of the U.S. institutions that we work with, for example, are now custodying their digital assets and cryptocurrencies themselves.
Crowdfund Insider: What do you think will get us out of crypto winter and what are some of the lessons learned from the most recent downturn?
Michael Shaulov: According to the Motley Fool, it took the market an average of 303 days to reach its lowest point after each last crash, and then another average 945 days from that low to reach its next new high. Since 2011, the crypto market has had four crypto winters that were brought on by market crashes of at least 50%, including the current one.
The most recent peak was last November 10 so, we may be nearing the end.
The industry grew at breakneck speed in 2020 and 2021; moving quickly on highly lucrative opportunities was prioritized over operational best practices. But now, reality has set in and our customers are coming to us to ensure they have the basics right when it comes to their business operations.
Unlike fiat currency, we also have to remember that crypto and digital assets are programmable money. It’s money backed by code, which means that there are certain aspects of digital money that give you greater control and you don’t have to depend on a third party. A few things we are suggesting to businesses to get through the crypto winter:
When changes are happening, be in control of your funds: It is 100% certain that regulations are coming and anybody can be shut down overnight. Be in control and make sure your assets are not on someone else’s balance sheet or wallet.
Review your operational mechanics to minimize risks where you can: Whether you’re borrowing, lending, or trading with a counterparty, review your operations, such as settlement practices so that they’re instant and immediate.
Maximize security to focus on your core competencies: Companies need to do more with less. In order to do so, a little bit more work needs to be done upfront such as eliminating single points of failure and setting up policies and workflow. This allows you to focus on your core competencies while remaining agile and reacting quickly to headwinds.
Crowdfund Insider: What changes do you see coming to the payment sphere?
Michael Shaulov: We’re excited that Fireblocks acquired stablecoin and digital asset payments technology platform First Digital. The acquisition helps support and grow our payments offering by allowing payment service providers and acquirers to accept payments and make payouts in digital currencies.
Retail payments and services are one of the fastest-growing categories in the digital asset space. According to research from Mastercard, 40% of consumers in the Americas, Asia-Pacific region, the Middle East, and Africa plan to use digital assets to make purchases over the next year.
In addition, 93% of survey respondents are considering using a cutting-edge method of transaction settlement for crypto payments. Payment service providers and merchants actively seek ways to support crypto and digital asset payments but are faced with high wallet integration costs, manual KYC/AML screening, and the complexity of timely acceptance of new blockchain payment types.
Crowdfund Insider: What are your thoughts on the market?
Michael Shaulov: I think the last few months were pretty turbulent. Several institutional organizations essentially suffered a collapse and the ripple effects of that were pretty severe. It exposed how ill-prepared for the risk the wider ecosystem was. I think now it’s stabilizing somewhat, but the trading market has suffered a pretty significant impact.
Make no mistake, what’s been happening in the market is devastating for many people, both from a retail and institutional side. However, from the perspective of traditional finance’s adoption of crypto, it’s been interesting to observe how mainstream digital assets and crypto are performing now as compared to their performance during the crypto winter of 2018.
Most financial institutions and corporations now have a more long-term view of their efforts in this space and are investing to ensure that their vision of mainstream digital asset adoption will transpire. Our own perspective is that a significant portion of the world’s financial infrastructure will move onto the blockchain in the coming years.
We’re continuing to support our crypto operator clients as they realign their efforts and get back to basics like reviewing counterparty risks. Of course, we recommend firms double down on areas like self-custody, settlement practices, etc. If anything, the market downturn has emphasized the importance of these areas that we have been preaching about since day one.
I should also note that the news isn’t all bad. We’ve been seeing market traction in areas that have seen a minimal impact from the downturn, like Web3 (especially around NFTs and GameFi) and payments. Other sectors have shown promise too, like stablecoins and tokenization.
To that end, we have a new partnership with ANZ Bank around their Aussie stablecoin, a very exciting development. And, in reality, Fireblocks was born in the depth of the last crypto winter, and the solutions that we’ve pioneered since then were created to manage these challenges. Now, institutions have another historic opportunity to weather this storm, determine their priorities and approaches, and maximize their efforts for the future.
Crowdfund Insider: What can people look forward to seeing from Fireblocks in the future?
Michael Shaulov: We see several trends that’ll drive the next bull cycle.
First, a growing number of institutions are going to use technologies like Fireblocks to tokenize securities and issue private stablecoins. Second, given the incredible amount of funding that is being poured into gaming, game finance (GameFi), and the metaverse, we’re going to see a flurry of popular Web3 apps and games hit the market and public consciousness.
Finally, as a growing number of banks, payment providers, and retailers embrace new cryptocurrencies and digital wallets, we’ll see a full-scale, public embrace and shift towards decentralized finance.