Trading Tomorrow - Navigating Trends in Capital Markets

Blockchain Capital Markets Transformation with Laurent Benayoun

• Numerix • Season 4 • Episode 38

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Is Blockchain steadily reshaping the world of capital markets? In this episode of Trading Tomorrow - Navigating Trends in Capital Markets, Jim Jockle and Emily Drooby sit down with Laurent Benayoun, CEO at Acheron Trading, to unpack how blockchain is driving real-world change in institutional finance. From settlement efficiency and regulatory compliance to the future interplay of AI and blockchain, Laurent offers deep insights into the evolution of market infrastructure and what lies ahead. Tune in as we explore the practical use cases, challenges, and opportunities at the intersection of technology and finance.

Speaker 1:

Welcome to Trading Tomorrow Navigating Trends in Capital Markets the podcast where we deep dive into technologies reshaping the world of capital markets. I'm your host, jim Jockle, a veteran of the finance industry with a passion for the complexities of financial technologies and market trends. In each episode, we'll explore the cutting-edge trends, tools and strategies driving today's financial landscapes and paving the way for the future. With the finance industry at a pivotal point, influenced by groundbreaking innovations, it's more crucial than ever to understand how these technological advancements interact with market dynamics. Hi, I'm Jim Jockle, and today I'm joined by my producer, emily Drewby. Blockchain technology has been gaining traction across capital markets, with some firms exploring its potential to improve infrastructure, enhance transparency and unlock new forms of asset ownership. Whether it's through the tokenization of real-world assets or efforts to streamline post-trade systems, many are asking whether blockchain could offer practical solutions to long-standing inefficiencies.

Speaker 2:

To help us better understand these developments. We're joined by Laurent Benayoun, ceo of Asheron Trading. Laurent brings extensive experience in market structure and digital asset liquidity, having worked with hundreds of issuers and built infrastructure at the intersection of trading, tokenization and technology. Laurent is also a Princeton-educated quant and peer reviewer for the Journal of Quantitative Finance.

Speaker 1:

In this conversation, we'll explore the current role blockchain may be playing in institutional finance and what use cases are emerging and what could lie ahead.

Speaker 2:

Laurent, thank you so much for joining us today.

Speaker 3:

Yeah, absolutely. Thanks for the opportunity.

Speaker 2:

Well, let's start at a high level. What do you think is driving institutional interest in tokenizing traditional assets?

Speaker 3:

Yeah, I think there are a number of reasons. The first one that I can think of is settlement efficiency, you know, improving costs and speed as well. The second aspect that makes a lot of sense is transparency and regulatory compliance. You know, and we can get into the details, but if you have a pseudo, anonymous public ledger, that improves both aspects right. Also, liquidity is definitely an appeal, you know, if we're talking about, like you know, art, for example, fractional ownership, essentially, you know that's definitely something that is of interest. You know you could use that to put up, you know collateral things of that nature, and same, you know, applies to real estate, for example. So, definitely, you know, like efficiency, cost and speed, regulatory compliance and liquidity and fractional ownership.

Speaker 2:

We've heard the art example before on the show. For sure, We've also heard racehorses. People split racehorses Seems to be a popular one too. Now, from a market infrastructure perspective, how is blockchain improving or replacing the legacy systems?

Speaker 3:

Yeah, so like one obvious example would be you know cross-border remittances to see and frankly, partnering, you know, with blockchain companies to experiment and to improve the speed and the execution of those cross-border you know payments. So you know that's. You know definitely something that has been growing over the past number of years and I think the trend is getting there. I even myself noticed that you know settlements are faster and you know, I expect obviously not as fast as you know crypto native settlements, but nonetheless, and I expect that sometime in the future we might we might get very close to that. You know modulo, of course. You know everything that is related to KYC and whatnot, but yeah, what will that mean for the larger industry?

Speaker 3:

Well, it's definitely like an improvement, like from a trading firm perspective, right, one of the limitations that you have, for example, is rebalancing. So rebalancing is essentially like you have, you know, balances scattered across either exchanges or prime brokerages or custodians or whatnot, and by improving the speed and the efficiency of you know those rebalances, you're able to trade more frequently. You have less potential downtime and, as a result, if, for example, from the perspective of a market maker, if you're geared at improving market efficiency, you thus ensure that you're running, you know, most of the time and so you're improving that market efficiency most of the time, so you're online more frequently. Essentially, that's just one example. You know, I think banks will have more visibility into their operations as well.

Speaker 3:

There is a lot of work that is happening, you know back office, middle office and back office, you know, for trade reconciliations, for example, and things of that nature. This could be vastly improved using blockchain, so you no longer, you know, have to call like a trader to figure out you know what certain you know trades pertain to, or like what actions were taken on a certain day or whatnot. You can simply, you know, look at a ledger, essentially, that has recorded all the transactions. So you know, like, from every like institutional perspective, I think that it can only bring efficiency if done properly. Obviously you don't want to use it left and right and I'm sure we'll get to talk about AI, but but you know, same thing, like it's not because it's like a buzzword or if it's like a trend, that it needs to be used in every single aspect of the business, but in the critical ones, I think that it can make significant improvements, absolutely.

Speaker 1:

How do you think institutions are approaching blockchain adoption today compared to, say, just a few years ago?

Speaker 3:

Yeah, yeah, I think I think, compared to a few years ago, we still see the same gradual process. You know, like, institutions are still cautious about it. I think that crypto, back in the day, is used to suffer and blockchain, you know as a whole, used to suffer from like a somewhat poor reputation. I think that this is improving over time with regulation and whatnot, but we still see the same, you know, cautious, step-by-step process. We also see growing use cases.

Speaker 3:

Right, we talked about cross-border remittances, but there are improvements to be made in terms of supply chain. You know healthcare data. You know internal process for you know, for larger companies. And we also see a growing knowledge. Right, Like back in the days, you needed to kind of like hire like an external consultant. I'm not saying that it's not the case anymore, but now you can directly hire, like internally, for your very specific use cases. And also, another point that has changed since over the past couple of years is regulation. So we have a little more visibility in terms of, and clarity in terms of, what the regulation looks like in some jurisdictions not all, but yeah, that's basically the changes that we see. You know more knowledge slightly more visibility in terms of regulation and more use cases.

Speaker 2:

Is there anywhere where you see regulation moving really quickly or in a way that you think is incredibly productive? Any countries.

Speaker 3:

Yeah. So I know Singapore very well because this is where the company is headquartered, I think that. And also I know Europe because some of our clients are based in Europe and so we had to obtain, or we have to apply for, a license, rather in Europe as well. You know, what I see is that, overall, regulation seems to be going in the same direction, so the big picture is somewhat the same. The details, however, are somewhat vastly different, and this can make or break a business, essentially. So what I'm trying to say is that for regulation to be, you know, good, in my opinion it needs to be balanced and clear. Uh, clear for obvious reasons right, when you're a business, the last thing you want is uncertainty, um. And balanced because you want to foster innovation, right, um, in a regular, in a jurisdiction that is going to over-regulate, obviously this is going to be an absolute nightmare for businesses, because then you know there's like not, there's no wiggle room and there's not much you can do. I'll just give one example. So, again from a market maker perspective, we had conversations and productive conversations actually with a few regulators. Their requirements, kind of like industry-wide, was that in our case, we needed to hold 90% of our client assets on-chain. In other words, we couldn't deposit more than 10% of the client assets onto exchanges and hot wallets and whatnot, the the problem with this from a market maker perspective is that when you're getting working capital from a client, you're deploying this working capital for the purpose of liquidity provision, so it's unreasonable to expect that a market maker is going to just hold 90 percent, you know, on chain cold storage, all that um. And so we had conversations with the regulator and we explained our business case and we told them look, it really doesn't make sense unless we ask for 10x what we would normally ask for, which we don't want to do, because then there's also a risk that we're shifting to the client and capital constraints and whatnot, no-transcript when the regulator is actually listening and understands the case that you're making and they're able, you know to, to, you know kind of like amend their thought process when it pertains to the business in question. I think that this is the hallmark of a very you know, good regulator and thus a jurisdiction that most likely will do well.

Speaker 3:

Now there's another issue. So we talked about regulation a lot. There's also the problem of regulatory arbitrage, right? So not all jurisdictions are progressing at the same pace. So Singapore was pretty early. You know Europe also with Mika and whatnot that was signed into law last year and we expect, you know, the US potentially to have something somewhat comprehensive, you know, in the near future. But you know there are other jurisdictions out there that exist where some companies decide to, you know, get domiciled, essentially so that they can obtain either no license or, you know, a pretty light license jurisdictions and continue to operate in a manner that is not necessarily super ethical, let's say, because compliant you might be in your own jurisdiction but ethical is a different story. So, yeah, discrepancies across jurisdictions, some that are ahead, and definitely we appreciate when the regulator is understanding of innovation and business cases.

Speaker 2:

Essentially, Laurent, we've been doing the show for a while and you might be one of the first people to talk about ethics when it comes to compliance. So normally people stick right to compliance, but they forget about ethics. So I appreciate you bringing that up. It's very, very important. They go hand in hand and, you know, I also appreciate you talking about a use case and giving us a real world example. It helps so much for our audience. What are some of the more promising or interesting use cases for blockchain that you're seeing emerge?

Speaker 3:

Well, one that I can think of, or one that I would like to see emerge at least, is, you know, verification for AI generated content. You know we are seeing a lot of you know, like. You know, AI capabilities are essentially growing by the day and you're able to, you know, generate videos. You know audio files, pictures and whatnot, documents and so on and so forth, and it would be great to have blockchain work in tandem with AI, because AI has amazing applications.

Speaker 3:

I'm not saying that everything is bad, obviously, but you know, have blockchain work in tandem to be able to verify either the ownership or, you know, the intellectual property, copyright, copyrights, or you know, like, just like the authenticity of, like, a certain video, because nowadays and I think this, by the way, it could be used, you know, by banks and whatnot you know, banks sometimes use voice recognition, right, they ask you a whole bunch of questions, but then they also take, you know, a snippet of your voice to compare that to, like a previously recorded one, to make sure that they're talking to the right person.

Speaker 3:

Again, this can be, you know, impersonation can happen via AI, and I think that having you know, blockchain, you know, eliminate these issues could definitely be an amazing thing. You know, One trend. Just to go back to your question, though, one trend that we were seeing emerge is tokenization of real world assets, and, frankly, I see this as the future of our industry. So, yeah, this is definitely something that has been growing and that I see as, like you know, continue to grow in the future.

Speaker 2:

Right and Laurent, I just want to go back really quickly to your AI and tokenization conversation. We've heard that before. I think it's fascinating to think about the two together, because so often we think of them as separate conversations and separate technologies. But really more so I'm starting to hear experts talk about what they can do for each other more and more, so it's really interesting that you bring that up. And now your company. I'm going to turn us completely, but your company supported 400 plus issuers. What are the most common challenges these issuers face when bringing tokenized assets to market?

Speaker 3:

Yeah, so I guess more of a disclaimer on my end, but we don't service security tokens, right, but, however, you know, I've heard and this is something that we're exploring again, provided the right licenses, of course, that's something that we're exploring again, provided the right licenses, of course, that's something that we're exploring in the future and that we've been considering for some time now and, of course, as a result, we're getting interested in the challenges that issuers may face in the process of bringing security tokens to market. Definitely, challenges that we see are related to the technology and you know the bridge between what we call tradified, so traditional finance, and decentralized finance, right, and I can come back to that point in a second. The second challenge is liquidity. You know, security tokens are not super kind of like common yet and they're not, maybe not well understood for some reason, and, as a result, liquidity might be lacking compared to, you know, to traditional assets. And then the last point, of course, is the regulatory aspect. But yeah, going back to the first point that I was making about this technological bridge between TradFi and DeFi, I'll give you an example. So someone, let's say someone, comes to us as a market maker and we are able, potentially, to deal with security tokens in the future and they say look, you know, I want to tokenize. You know, like this piece of land underneath which you know there are like X amount of minerals in. You know these proportions and whatnot.

Speaker 3:

As a market maker, when you're bringing the asset to market, of course you need to have some kind of valuation and an initial, like an opening price and whatnot. You need to kind of like understand market dynamics for the asset in question and so on and so forth. But assuming you have all of this covered, really the bridge between the two is coming in the form of okay, well, so what are the mint and burn mechanisms? Who's going to put that in place? Is it you know, like the trading arm, or is it you know, the issuer?

Speaker 3:

And then what happens like, say, like you know how is, like, the mint controlled, for example, how is their physical delivery? So you know you have a whole lot of like logistics and technological challenges that happen underneath. That may not be visible and that's probably a critical one, I would say. Liquidity can be addressed by, you know, hiring professionals. So that's not, in my opinion, not too much of an issue. Regulatory aspect is one that we have to go through. So I would say like the biggest challenge would be that kind of like bridge between, like you know those real world assets and you know the tokenized version of it, like how do you go from the logistics to the technology and whatnot?

Speaker 1:

Yeah, that's really interesting as someone who's involved in algorithmic trading infrastructure. How is AI influencing market making strategies and are there guardrails in place to prevent misuse?

Speaker 3:

Yeah, so I was listening to an interview given by Ken Griffin from Citadel and he was saying and I was surprised by his answer to a similar question he was saying that AI use in trading so far is essentially like speeding up email responses and used to summarize documents. So, and and you know, I also heard a similar story from someone at a top hedge fund who told me that machine learning was used essentially on less than like 5% of the assets under management and it was put on the brochure for investors just to essentially please them. But so, yeah, I think trading uses are somewhat limited for now, and you know like there are many reasons for that and we can go into the details if that's of interest. But one of the reasons would be, you know, the lack of sufficient amount of data on some markets. You know, like problems with overfitting, although this was recently addressed in some papers. But yeah, anyways, from a pure trading perspective, it seems like AI has still limited uses. Ai is very much used for middle and back office tasks and also for some development tasks, like in, obviously, in an algo trading company or a systematic execution a firm using systematic execution you're going to have essentially like your researchers, developers and traders. Typically, that's how it's structured. So research comes up with like the execution logic, passes it on, broadly speaking, to the development team that implements the strategies, builds the connectivity and whatnot, and then traders are using those strategies for P&L essentially. So, yeah, ai would be used potentially in the QD, the quant dev section of what I just described and then related to trading.

Speaker 3:

I think that at least what we are trying to do at the company is we're trying to build agents that kind of like sit on top of the strategies. So, let's say, you have a strategy for liquidity provision, unhedged, you have one that is hedged, you have one that is related to arbitrage, agency execution and whatnot. The idea would be to have an agent sitting on top that would be able to decide which strategy to turn on, according to what market condition, configure the strategy and potentially also monitor the strategy. Now, and the goal of that is essentially to make the quantitative traders life easier Right, not to replace them, and that's going back to the guardrails that you were, that you were that you were asking about, and that's going back to the guardrails that you were asking about. So, not to replace them entirely, of course, but to make their life easier to spot opportunities that they may not be able to spot.

Speaker 3:

So to essentially like further automation. Now, in terms of the guardrails, of course, they're very much human, right, you always want to have an eye on the execution of the strategies. Make sure that I mean it's the same as like when, when trading went from, you know, like manual trading to electronic trading. Right, yes, you can replace a number of traders with one algo, monitor the performance and to raise flags as soon as something goes goes off. At least that's the use of AI that I see in trading at the moment.

Speaker 2:

Yeah, that's great. It's also nice to hear that humans are still needed, right? Yeah, how would you describe the current relationship between blockchain technology and capital markets? I think that's one of those questions where we just especially with what, what we cover on our show. Um, yeah, it'd be good to give the audience just a little bit of an understanding there yeah.

Speaker 3:

So, uh, there's this book I don't remember the author, but it was called uh. It is called uh, crossing the, the chasm, uh. The idea is you have kind of like this like bell-shaped curve for adoption and I think we're still very much like early stage, like visionary slash, early adopters, in terms of what I see. There are so many use cases to refine. You know we've talked about, you know, art a little bit and real estate, We've talked about cross-border payments, you know, and settlement, you know like custody transparency there are so many, you know and other uses beyond, you know, just the financial markets, of course.

Speaker 3:

But yeah, there are a lot of use cases to refine. We're still, I think, at the very beginning and similar to AI. Frankly, like you know AI we're seeing you know chatbots and then we're seeing like image generators and all that. I think that as time goes, more and more people are going to kind of like appropriate the technology and they're going to start building those use cases and soon enough it will appear kind of like obvious for the vast majority of us, and then that's when you have mass adoption. So, yeah, I think it's still very early stage and we kind of like touched upon those use cases, but I'm sure that there are many to explore for builders out there.

Speaker 1:

You know, earlier this year Mantra experienced a $5 billion collapse. Has that setback slowed momentum for blockchain adoption in capital markets? And you know what lessons, if any, can be drawn from that fallout?

Speaker 3:

Yeah well, mantra is a whole story, I guess. But but so the under I don't think that it it questions, you know what happened with with the price necessarily undermines the technology. I think that you know they actually have a use case personally, a use case personally, and frankly, there are a number of projects that are tackling RWAs on-chain, so they're not the only project. Now, the thing with Mantua, again not related to the technology, but if we look from a pure price perspective, from the looks of it again I'm not exactly sure if people know what happened, but it looks like, and again this is speculation there were those OTC deals to buy back on secondary markets. Of course, even if you, when you do this, even if your intention is not to manipulate prices, you're going to have some price impact. You know it would be foolish to say that there is absolutely no price impact. You know it would be foolish to say that there is absolutely no price impact Whether you do it. You know, with taker orders or maker orders, even maker orders would have some impact because someone who was going to sell a certain quantity and who would have, as a result, move the price down as a result of that market order, would have moved the price down less or not at all, potentially, if there was more buy side liquidity. So anyways, that was number one. You know, as a result, positive price impact potentially, and indeed you know, the price moved like between like 10 plus fold I think it was like 9 to 15x or something like that in a few months. Now the claim is that those deals were not done during those few months. Anyways, and then it seems like what precipitated the price decline was the combination of two things a potential liquidation of one or several actors and so unwinding of leverage positions, and also relatively thin liquidity for a project of that caliber.

Speaker 3:

You know, there there's certain relationship between metrics that market makers look at typically. You would look at fully diluted value. You would look at market capitalization, so the value of the circulating. You would look at market capitalization, so the value of the circulating supply. You would look at exchanges on which the project is listed. You know their ranking and a number of others. You know the volume traded per day, assuming that there was no toxic order flow. And then you would look at, you know like, the depth, you know within certain percentages of the price, and it seemed like Mantra didn't have a whole lot of liquidity, given their FDV, given their market cap, given their ranking, given the exchanges and whatnot, and given, you know, obviously the price is obviously tied to FDV and market cap, anyways. So the point being that, you know, price rose on thin liquidity and fell back down on probably equally thin or thinner liquidity.

Speaker 3:

So, anyways, but again I want to emphasize that this is purely price related and it is somewhat removed from the underlying technology. You know, when the FTX story happened, everyone thought that it would potentially be the end of crypto, that reputation would be broken forever. And you know that centralized exchanges, you know, whatever you know, the judgments will conclude but it's not a story about the underlying technology, it's not a story about blockchain, it's not a story about centralized exchanges, you know, because some are doing the right thing. So you know. I think that it's the same thing here for Mantra and RWAs. The technology is still there, it's still promising. In my opinion, the trend will keep going, but for sure, it is a setback for the project, especially because it attracted a lot of attention to kind of like this rapid rise in price and equally, or faster, I guess, decline in price. But that's more related to, I guess market microstructure and certain actors doing potential nefarious actions.

Speaker 2:

So yeah, so we've made it to the final question of the podcast. We call it the trend drop. It's like a desert island question. If you could only watch one trend in blockchain in capital markets, what would it be?

Speaker 3:

uh, ai for sure. Uh, without a doubt. Uh, again, going back to our conversation, I think that there are so many uh unseen at this time and maybe untapped. So unseen, you know, use cases, untapped potential that might appear obvious in the future once we have them in front of us. But for now, only you know like visionaries can can wrap their head around what AI could be used for, and so, yeah, I think there's like more to come for, you know, software for applications built on the software, for hardware powering the software. So definitely, ai is one that would keep watching. You know, we could very much be in somewhat of a bubble, much like the dot-com, but it's still going to be assuming that the bubble was to burst. If we were in one and we were to experience some kind of fallout, it would be good to see, after it kind of settles down, to see those use cases come to mass adoption, because I think it's going to tremendously improve, you know, everyone's life. So, yeah, very, very impatient to see what AI has to offer.

Speaker 3:

There's a question that sometimes I get asked about you know which period of time? If I could, you know, choose a period of time to live in, which one would I choose, and you know, oftentimes it's in like within, like a group of friends or something, and everyone would say like, well, you know, I like the 80s for this reason, that reason, okay, well, I like whatever other period, maybe you know, earlier, later, whatever, I always say the future, because I think that technology is going to evolve. It has been evolving pretty rapidly and I think it's the you know, the speed at which it evolves increases as well, and I just, I'm so impatient to see use cases and see how I can, you know, make use of new tech being developed.

Speaker 2:

So so yeah, I love it Spoken like a true CEO. Well, laurent, thank you so much for joining us on the show tonight. This was fantastic. You know I appreciate you coming aboard.

Speaker 3:

Absolutely Well. Thanks a lot again for for having me. I appreciate the opportunity.

Speaker 1:

All right. Well, thank you so much. Have a great day. Thanks so much for listening to today's episode, and if you're enjoying Trading Tomorrow, navigating trends and capital markets, be sure to like, subscribe and share, and we'll see you next time you.