Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Welcome, everybody, to the DC3 conference. Today's session is going to be about decentralized finance, DeFi, as we call it, challenges and opportunities. So, the DC3 conference is organized as part of the Digital Currency Global Initiative to organize the-- in collaboration with the International Telecommunications Union and the Future of Digital Currency Initiative at Stanford University. Myself, I'm the Director of the Blockchain Certificate of Advanced Studies at the University of Geneva, and I lead the stablecoins, DeFi and NFT workstream of the DCGI. The DCGI has 3 main working groups: Policy and Governance; Architecture, Interoperability and Use Cases; and Security and Assurance. So, today, we are going to talk about decentralized finance, the challenges and opportunities, and we have a great list of speakers, experts in the domain. The first speaker will be Kai Ganter, Director of Chainalysis. Chainalysis is a major provider for analyzing blockchains, which are needed for decentralized finance. Then, we will have the view of Roman Hametner, Director of Regulatory Affairs Advocacy at Mastercard. Then, we'll have Nadia Filali, Head of Blockchain & Cryptoassets Programme at Caisse des Dépôts, which is a major public funding body in France. Finally, we have Lex Sokolin, Chief Cryptoeconomics Officer at ConsenSys, which is a very well-known company that started with Ethereum a good number of years ago. [Operator Instructions] So, the first part will have an introduction by each of the expert speakers, and so, the first speaker is going to be Kai Ganter from Chainalysis. So, Kai, could you introduce a bit more yourself?

Yes, sure. Thanks for inviting me, and thanks for having me. So, my name is Kai, I'm leading the business efforts at Chainalysis for the regions, Switzerland, Liechtenstein and Austria, talking to both financial institutions and public sector customers. As you probably know, if you heard about Chainalysis, we are closely co-working with law enforcement all over the globe and also with private institutions, such as banks and so on. And yes, I just want to highlight some of the opportunities and innovative applications that DeFi can bring to make financial services more efficient. So, first of all, as you are probably pretty much aware, DeFi can increase the accessibility, and this is really one huge opportunity, as it can provide financial services to individuals who may have been excluded from traditional financial systems due to lack of credit history or identification or other reasons. So, this will be a massive game changer for poor countries, or people who didn't have access to financial services before. Also, on the other hand side, DeFi will reduce costs as there will be no need for intermediaries, which for sure will lower the costs for the users overall. And another benefit I personally see and this is also what we are helping our customers with Chainalysis is a greater transparency with DeFi. All transactions are recorded on a public available blockchain, and with that this increases the transparency and also the trust in the financial system, which is a huge benefit. And then also we will have more efficient markets as decentralized exchanges can increase market liquidity and produce spreads, making it easier for users to buy and sell assets. Also, on the other hand side, there are already loads of new financial products, and we will definitely see this during the course of the year, that there are many, many great ideas and projects going on as decentralized lending, for example, or borrowing platforms, stablecoins, yield-bearing assets, for example, which are -- already create financial products, which haven't been there before. Also on the processable side, DeFi can automate processes and reduce human errors, therefore, which also will increase the efficiency. And last but not least, and this is also a topic where Chainalysis comes in and has a main focus on is a better risk management as DeFi definitely can enable better risk management, as the smart contracts can be programmed to automatically execute actions based on pre-defined conditions and this will help the overall ecosystem. Yes, just my few cents on the opportunities of DeFi. Thanks.

We'll go back to questions afterwards. So, the next speaker is Roman Hametner from Mastercard. He is more into the regulations, and so please, Roman give us an introduction to your view on this topic.

Thank you very much, Jean-Marc, and also thanks for having me. I'm working actually in Mastercard's Regulatory Advocacy globally. And so, we are, of course, watching DeFi developments over the last few years quite closely, also with a view of seeing how we might be able to include those in our future business activities. Our view is really, at the moment, it's rather a mix of excitement, but also caution. As Kai already mentioned, DeFi certainly has a lot of potential. Just to mention cheaper, quicker transactions; easier access to financial transactions or services. And often as the main driver of this innovation is, of course, mentioned decentralization, so the removal of traditional centralized intermediaries. Just from that perspective, we think that there should be actually a bit more analysis into decentralization aspects and the value proposition stemming from that. In terms of DeFi, if you look at current DeFi applications and platforms, there's really a lot that drives innovation in these sort of packages. So you have automation of processes such as through smart contracts. You have, for example, tokenization of assets, which certainly brings a lot of value. And then, of course, you have very broad range of different decentralization models. So just speaking of the governance of DeFi applications, for instance, we can really see up until now a very broad range of how decentralized or sometimes also centralized these models are. For example, if you look at who holds -- if developers, for example, retain administrative fees, and therefore, can more or less by themselves rewrite contracts, that actually they're not so decentralized as we might think, and as the name DeFi often suggests. So that's really something we need to have a close look at as this will be quite crucial also for the development of DeFi and its evolution and its overall potential. Having said that -- so we see a lot of opportunities, but of course, there's also a bit of caution. I think we've all heard about the various attacks that have happened and that went unfortunately hand-in-hand also with the growth of DeFi. There was quite a lot of fraudulent attacks, there was sometimes also technological errors in DeFi applications. Even state-supported hacking groups have been involved in carrying out hacks or fraud. So for example, North Korea's Lazarus group, that eventually then also led to not just lots of losses for consumers, which is definitely a very negative aspect, but also to circumvention of sanctions perhaps. So this is really something we would need to overcome to make DeFi overall grow safely and sustainably and to increase trust in the system. Speaking of which, I think also what we can see so far now is that KYC AML protocols are not always very well practiced in DeFi applications. So that's perhaps another area of caution and where we see urgent needs of improvements. I think for my introductory statement, I just want to make sure that, yes, we receive this with mixed feelings. And last but not least, actually I wanted to add, but I will come back to that later that if you discuss DeFi and its potential, you really also have to have an eye on stablecoins and the roles they play in this ecosystem. Up until now, stablecoins are really broadly used as a kind of substitute for fiat currencies in the DeFi space, and therefore risk factors are also closely interlinked. So, if we really want to help DeFi take off and bring out the good innovation, then we also have to have new proper stablecoin -- regulation of stablecoins in place. Yes...

Thanks, Roman, for your view. We have already published a technical report on stablecoins actually from the work we have done as part of the DCGI workstream on stablecoins. So it's a public report, so members can access it, and I think also was a public -- people interested in this topic. So next -- thanks, Roman. Next, we have Nadia Filali, as I said, Head of Blockchain & Cryptoassets Programme at Caisse des Dépôts. She has participated to push the ecosystem in France, and the Caisse des Dépôts has also participated to invest in some of these innovative use cases. So, she is going to give us an introduction to the use cases that she has dealt with.

Thank you, Jean-Marc, and hi everyone. So, Caisse des Dépôts is a very old company. We are launched by Napoleon in 1814 or 1816, so, it's a very old company, and it's a public group. It's a financial public group, so it's something like bank of development in France, but not working only in financing the regions, but also we have a part of asset management for us or for the government. We have also some subsidiaries in transportation like Transdev, in real estate, in insurance, and many things. So we are a large group, and as you said, Jean-Marc, we work on the subject of blockchain and crypto assets, trying to push the ecosystem in France in the beginning with LaBChain and with the consortia in finance, Swiss banks and startups. We continue to work on that also by launching INATBA, it is an association based in Brussels that I have the chance to be the Chair of the Board from one year now, and we are working in different subjects. As a really public financial institution, working on the subject of crypto assets and blockchain is not really easy, but we began to work really practically on crypto asset by being a custodian in France for big public institutions. So we have the status of French [indiscernible]. We work also on the security token side, because for us, we think that tokenization of financial assets is something that will exist in the future. Talking about DeFi matters, we think that there is different opportunities in the DeFi innovation. For example, concerning the loans, or the access of the saving or financing the economy by different type of people because for -- I don't know if you know that we have only 6% of the French population who had security in France, and it's less than people who had crypto asset, it's 10% on the crypto asset. And financing the economy by finances company through the security, I think it's really important. So, DeFi provides something more easier for the consumer to go to finance [indiscernible] companies. Also, because-- not only because the access of the DeFi, but also because you can finance smallest projects by half of security or things like-- so, it could be really an opportunity for the economy to go on that. The point is, for the moment, for a large institution-- financial institutions like us, it is difficult to go on DeFi, not only because of the volatility on crypto [indiscernible], but there is other constraints on DeFi. The first one is the identification of your counterparties and the compliance subject, because for the moment, if you are a big bank or an institution like us, you are submitted to some rules and regulatory rules, and you need to do your KYC-- you need to do your KYT here, because it is different, and for the moment, it's not really secure on that point. But, we trust also because of the development of the SSI, on the self-sovereign identity, and perhaps with the European wallet, the e-wallet, perhaps this kind of contract will be different in some years. Another point that is really important, I think it's really linked with the conference, is that there is a point on the management of the payment. So, for the moment, we find some stablecoins in the DeFi, we saw that there is some program with some of them, that's in this last summer and-- perhaps that, if we can use CBDC for DeFi, for example, would be more easier for institutional to go there and to manage some transaction in the DeFi. Perhaps another constraint -- it is not only a constraint, it is that for an institution-- for the banks and the TradFi, going on DeFi, it is something, perhaps bizarre-- for people who are intermediaries on financial services to go on a system that decentralized the TradFi. So, I think there is also a fear to go on this subject. But, as we saw in the [indiscernible] story of Fintech and digital innovation, it is that it is a better issue to work with the people who are doing the innovation that working against this innovation. It was true for open banking, it was true for-- or other kind of innovation. So, I think there is a way that make us work together, but we need to [indiscernible] on compliance, and this matter on the cash management and the volatility.

Thanks, we have already a number of questions. We'll ask the questions later. Thanks, Nadia...next, we have Lex Sokolin from ConsenSys, and so he is going to give us his view on this topic.

Thanks so much for having me, it's a pleasure to be with the group. I think lots of good points made already. So, my name is Lex. I'm at ConsenSys where I have had a number of roles from running cryptoeconomics, to previously running marketing, and before that, running all of our Fintech products. And kind of prior in the adventure, I was in the Fintech space, building out digital investing companies and started my career at Lehman. So, have the existential crisis of a failed financial institution under my belt, as well as the scar tissue of actually running a company and knowing what that feels like. And I think that this is a really difficult topic without feeling the actual experience of having ever used a crypto wallet, or ever invested in the DeFi protocol. It's hard for me to do a poll of the audience, of how many of you have actually owned a stablecoin or staked something in a protocol, and I think a lot of emotion and pushback and skepticism can be resolved by mere usage. So, if anything, I would just encourage people to go grab the MetaMask wallet and put €100 to work, to understand what's actually going on. As it gets to ConsenSys, we're a company focused on supporting and enabling Web3. So, we're not a financial company or a technology company. As Google relates to search on the Internet, we relate to the architecture underneath Web3 and everything that entails. We have 2 primary motions: the first motion is to help people use Web3, and I'll keep using that term Web3. I'm happy to open that up. Web3 includes the usage of decentralized finance as well as the usage of other smart contracts-based software that is written on to blockchains, that is executed on blockchains, and that has the attributes of economic scarcity and decentralization as core to their functioning. But, anyway -- so, the one thing we do is we help people use Web3 through MetaMask, which is a crypto wallet with about 30 million monthly average users. So, lots of people are doing stuff. Then, the second thing that we do is help developers build on Web3, so that there are things people can do. That means providing infrastructure-- developer infrastructure, that means helping set up and run protocols-- things like Quorum for JPMorgan, or the Palm Network for NFT issuance, as well as contributing to the core Ethereum network. So, that's the motion-- create the ecosystem, and help people use the ecosystem. And then both sides of that equation are open, meaning that there are plenty of other companies that make wallets, and there are plenty of other companies that provide the developer tools and everything in between. So, that's the very biased context I'm coming from. I think if you try to just create a cartooned story of what's happened, it's pretty straightforward, and I'll describe it in the way that I've transitioned into the industry and how I've self-persuaded about why this is important and interesting, and you can now tell that I'm like trapped in the metaverse, and it's too late for me. Maybe some of you are still safe, on the earth, but I'm in the fractal universe, it's too late. So, if you think about the traditional financial services industry, you can think of it as an extension of the real economy-- you have about 20% of GDP, give or take, in finance. If you have too much or over financialized, too many derivatives-- shut the bankers down. If you have too little, then it's a problem-- people are under-banked, there's no access to finance or credit, entrepreneurs suffer, right? So, there's some sort of magic, finance-as-percent-of-economy number, which floats anywhere between 10% and 20%. The-- without a real economy, you just have financial engineering. In our Wall Street world, the value chain starts with manufacturing financial products. Then, that financial product is pushed through some sort of intermediation chain and distributed to individuals, right? So, you have large sales forces of financial advisers, you have large bank branch footprints and so on. In the next wave, recently -- certainly, there are many technology waves in the space -- but, in the next wave, in the Fintech wave, the Silicon Valley approach to building consumer-first mobile products was applied to finance. So, all of a sudden, you take all those bank branches, you take all those financial advisers, you take all of those digital lending officers, you cross them out and you fire them, and you replace them with a phone and a website. And roughly speaking, that's what's happened. It's not exactly what happened, but roughly speaking, the storefront of financial products has shifted to the phone and to the web. You see that with neobanks and digital advisers and digital lending companies and Paytech companies-- you know, Venmo, CashApp, Revolut, Robinhood and so on. So, Fintech has given us digital distribution, but it's given us digital distribution of traditional products. We're still faxing and papering and scanning and doing human labor to manufacture those products. So, the next phase -- that's already happened, it's already done -- is to manufacture financial products in a way that's fundamentally different. So, this is one of the things that blockchain is good for. It's not the only thing, but it's one of the things. So, DeFi allows us to make any financial product -- whether it's a payment or a banking product or a lending product or a capital markets product or wealth management products or an insurance product -- because it's made of software in a, let's say, computationally native way-- not in a way that is sort of glued together with lots of different systems, but in a way that's native to a computing system that melts all the stuff together. So, DeFi has shown us, with very real examples and pretty large distribution, that we can have these financial products. It's also shown us that financial crises happen everywhere, and they look the same and they have the same shape, and so we shouldn't be surprised. So, now we're in a place where we have both the manufacturing and the distribution of financial products digitally. The outstanding question -- for me and that I'm focused on -- is what is the point of finance when it's so freely available? And how does it enhance the real world economy and Web3 economy? So, at this stage, we're seeing a lot of development in the organization of labor, the organization of decentralized autonomous organizations -- which are small businesses in Web3 -- that are ending up using these Web3 financial systems instead of the traditional financial system, because that's where people go and that's where they contribute. So, that's a very short version of a very long story. Hopefully, you imagined it, and I'm happy to open up any of these things via questions.

Myself-- so I noted a few questions already. So, let me ask a few questions to start with question and answers. [Operator Instructions] So, if we go back to Kai. Kai, so, you talked about a good number of issues and also some opportunities. So, could you summarize the challenges that you see regarding decentralized finance, DeFi.

Yes, sure. Actually, I mean, still with all the enthusiasm and opportunity which DeFi brings, there are still some challenges. Some of them have been already mentioned by Roman and the other panelists, but, maybe the major ones from my perspective, are the lack of regulation. Basically, since DeFi is relatively new and also rapidly evolving, there's currently -- from my point of view -- a lack of clear regulatory guidance for many of the activities which are taking place in the DeFi space. This also, on the other hand, can create uncertainty for users and make it difficult for projects to comply with existing laws and regulations. Also, maybe a major issue could be, or is -- however, you see this -- the smart contract security. So, as you know, DeFi relies heavily on smart contracts, which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. However, smart contracts have been known to have bugs and vulnerabilities, which can, at the end of the day, result in the loss of funds for users, which is-- yes, would be a main issue for users and the acceptance of DeFi protocols. Then also, more from an ecosystem perspective, the liquidity is also another topic I thought about-- as many DeFi projects currently have low trading volume and liquidity, and this can make it difficult for users to buy or sell assets at fair prices, which then also can make it more difficult for projects to attract new users and grow the ecosystem. I think these are the main ones I just thought about-- some of the challenges we might face.

So, of course, you underline -- and others underline also -- a number of hacks and issues that happened recently. We have lots of people lost a big amount of money, and we know that Chainalysis has a tool to track what happens on the blockchain. So, of course, it has been used to try to track the bad guys and what happened. But, could you tell us a bit more-- in the future, how do you see the role of Chainalysis? Do you have new services as well? Extended features?

Yes, sure, I mean-- and from our perspective, for sure -- and I'm biased here -- blockchain analysis will play a key part in the future, also within DeFi. We are already addressing them with some of our products, and if you think about your smart contract transactions or smart contract-based transactions, like NFT transfers or so-- I mean, we are already -- and this is kind of a no-brainer-- we are already aware of every blockchain native transaction. But yes, with the likes of smart contracts, and NFT transfers, or other DeFi protocols, it's a little bit more difficult and more complex, as the timeline where a transaction is happening is one of the key factors where you would look at to understand how often a smart contract has been triggered, how often a NFT has been traded, and so on-- and in which time timely manner. We are already addressing some of these questions, which also are coming from police, from law enforcement, when they are tracking down large NFT-related crime cases and so on. So, I don't know if-- I mean, one of our products [indiscernible] to mention here, which actually absolutely addresses these questions, and will play a key role in the investigation and compliance in the DeFi space, yes.

Yes, so, talking about moving towards compliance in the decentralized finance space, Nadia, you underline that maybe-- you said that you think that Central Bank Digital Currencies -- which are detailed in other sessions, and where the DCGI also work on -- could co-exist with decentralized finance. So, I mean, having CBDCs in the Central Finance. Could you try to explain to us a bit more how it would work? Nadia?

Sorry, I was muted. I saw that there is a question on that, and we saw that there is this subject on Terra Luna this year. Really, if we want to try to work on the issue, to have something that-- it is more stable in our transaction, and in the cash-- I would say the cash leg, because I'm working a lot on security. But, on the cash part, working on algorithmic stablecoin, I think it's not a good issue, and there is no guarantee and stability. So, could we use stablecoin issued by some private company, that need to be a little bit huge to be a-- to have a, the great guarantee on fiat money. After seeing that, I think that there is 2 possibilities: using CBDCs, or using what we tried to work on in Caisse des Dépôts -- it is the commercial bank currency. We work, for example, on commercial [ inter-branch telecurrency ] on that, because we know that the guarantees and the token will [indiscernible] on a great level of guarantee, for example -- for sure, if it's the Central Bank -- but also, if it's a combination of big banks or one big institution. Working on that could be interesting, because as we said that there is a problem on the DeFi, because DeFi it's too risky and too difficult for many financial institutions, and because of the lack of the identity solution or anti-money laundering and et cetera, that if you can use -- I said, if you can, because I don't know if the Central Bank will agree to use their CBDC in the DeFi-- it's another point. And so, if you can use CBDC, or Commercial Bank Digital Currency, in the DeFi, you will first legitimize the DeFi more than today for some corporate actors or asset manager of banks, because you will limit one of the essential risk there. You can perhaps try to make more interoperability between the different systems, and I think that one of the points that we need to focus on-- it's not only the interoperability between the different blockchain that you can use or layer that you can use, but also the interoperability between TradFi and DeFi. Perhaps, that could be a good reach for that. Another point is that the-- if we want to make move some consumers or some investors from TradFi to DeFi, their capacity to invest their capacity of saving will be the same. So, it will be some kind of arbitrage between the 2. And we need to [ help up ] to pass from one word to the other word really easily. I think-- I don't know if you are agree with that, Mr. Jean-Marc. [indiscernible]

I mean that's interesting also. I think maybe the possibility on the first country, which will try to bridge traditional finance, or at least its Central Bank currency with DeFi could get an edge compared to other currencies. So, I mean, in a world where there is no-- not only one major currency, maybe, so gives an advantage to the first mover. Yes, then, if CBDC are used in DeFi, so financial institutions would be involved, and in DeFi we also have many times, governance-- decentralized governance, where there is an entity, a type of entity, which is not recognized as a legal entity in many countries that we call the decentralized autonomous organization -- DAO. So then, would you think then, in this case, that the financial institution would also, at some stage, be okay to deal and to interact with DAO?

No, I think for our government, it's going to be really complicated because one of the central points on all the subjects that we talk about around crypto, DeFi, and blockchain, it's the point of decentralization and it's the point of government. And for me, I'm living in France, and we know what is centralization, we know really what is centralization. And there is a big disruption here for people who are deciding things and-- to accept that we can work in the world of decentralization, because if you are talking about DAOs, you will ask the point of the governance, we will ask the point of the responsibility. The first thing that we saw on DAOs was in 2016, and we all know what happened when someone take EUR 50 million out of the system. So, hopefully, the system repair the point, but there is a question of security of the code here sometimes, and there is a question of how you can define who is responsible of the entity of the deal, who is the issuer, who is the investor-- and so, I think, for the moment, DeFi-- it's DeFi for TradFinance, but using DAOs, I think the second level, so, it's complicated. But, we could have also in advantages on financing economy on that point. And we saw that, for example, in United States using DAO to make some first-- financing some new companies, it's not really easy and [indiscernible] negative on that because they [ reclarified ] the point-- on the security point all the way. So, I think it's something that we need to discuss and look at it, but, I think it's really new for the moment, and for example, in financial working group, we are working with ADGM in Abu Dhabi because they are more open on the subject of DAOs and DeFi than the European Commission. So, we decentralized the points...[ action ] on that.