Oct 17, 2023

EY global blockchain leader Paul Brody discusses Fidelity Digital Assets utilizing EY's blockchain analytics tool.

Video transcript

Fidelity digital assets is utilizing eys Blockchain analytics tool aimed at enhancing internal risk management. Joining us now to discuss this global Blockchain leader for Ey Paul brody, welcome back to the show, Paul. Thanks for having me again. Nice to see you. All. All right. The first question we asked our last guest was what problem her product was trying to solve? Uh I think it would be beneficial for our audience if you tell us about this tool and what problem its solving for uh institutions like Fidelity. Yeah, absolutely. So, over the last eight years, we have built a whole series of tools for eys uh audit team. We have currently about 60 clients that are using our audit technology and the top priority for them is being able to independently validate data on the Blockchain from their own information. And so in this case, Fidelity is gonna be our first non audit client that's using it for the same thing. So, Fidelity is gonna use us as part of their risk management process for independent, independent verification of wallet addresses and balances initially on the Ethereum and Bitcoin Blockchain and then eventually on other blockchains as Well, so how, how exactly does it work though? For what, you know, give a real world example of how fidelity implements this and, and where, where would, where it's important? So the value proposition, internal risk controls is having an independent third party. Give you the same number that you have, right? It's a little bit like balancing your checkbook. Uh Everybody thinks that they have, you know, they do their own calculation, right? They look at their own process, they look at their own purchases. They say we think we have these assets in this wallet. And what they're asking us to do is basically come back with an independent verification that they can compare the two and say, OK, yes, we agree that you have uh the the we can then validate that. Yes, we have uh the same, we have the same calculations in the same set of risks and assets. Uh And then even we can look thing, look at things like where there is a mismatch between um one calculation and other. How does that work? So without, I don't want to go into too many details about fidelity's internal process. But the key point both for our non ait and audit clients is the same, which is, it's important to have a third party verify your data rather than just relying on your own internal information. What kind of questions are your clients um asking about the industry, especially since we have the Sam Bakeman, uh free trial happening. What are tr five players most interested uh in and what are they most cautious about? So, first and foremost, you know, as you all of your prior guests have talked about today, the market is driven a lot by a certain level of regulatory uncertainty and this is clouding over a lot of people's ST even for industrial applications which is really frustrating. As I like to tell clients, you don't need the S ECs permission to do inventory management or procurement operations or carbon traceability. But what is actually I'm really pleased about particularly for this announcement with fidelity is this is a reminder that even in periods of regulatory uncertainty, if you are careful and thoughtful, you can absolutely build a business in the Blockchain ecosystem in the crypto ecosystem. Uh And you can do it in a compliant way. Fidelity is not the only player in this business. We're talking to a whole bunch of other clients worldwide. And what really characterizes the questions that the clients in the financial industry are asking is what are all the things that we need to do in order to achieve a standard of auditability of verifiability of, of internal operation quality that is equal or better in the world of crypto to what we have in the stratify world. And that's one of the things where, where ey in particular, given our legacy as an audit firm and the work that we do for the financial services industry has a lot of specific expertise. Paul, you know, you're, you're a big thinker. So we're lucky to have you on the show. You know, we've been talking endlessly about the FTX trial, but I'd love to hear you just big picture of you in this, which is basically like, is anything gonna change? Like, I mean, this is very theatrical, it's a very entertaining trial for a lot of people. Um But like, does it like what's gonna change after this? Like, I mean, you know, on the, on the regulatory side, it just seems like there's a lot of people who are like, oh yeah, we knew it. Crypto is a scam, you know, like, I mean, I'm just curious, like what your big picture view on this is, you know, regardless of what happens, it's not looking good for Sam Beman Fried, regardless of what the verdict is, this trial is going to be over in a few weeks. Then what? Well, I have to say I get a little frustrated when I read some of the mainstream media coverage. Uh nobody who loses $8 billion day trading should be called the boy genius, maybe math prodigy with a specialty and subtraction. But I often feel like the, the, the mainstream media coverage is remarkably sympathetic uh to somebody who potentially and I again, in until proven guilty but potentially did something very bad. Um I think a couple of things for the industry. It's cathartic. It is so important for us to see the bad actors punished. This is incredibly uh important action. It sends an incredibly important message to bad actors in the system, which is that even if it has been years since you committed your crime regulators, the authorities will eventually get to you. And that is a very important message. I think it increases confidence, right? If you go back to the global financial crisis more than a decade ago now, one of the biggest complaints, one of the things that really en enraged the person on the street was this idea that criminal activity took place in the financial sector and nobody went to jail. You heard this phrase a lot, nobody went to jail. Well, in the crypto crash, bad actors are going to go to jail. And I think that is very important. And then I think in the longer run, I do hope it will uh clear a path towards um more confidence in the system. Yeah, I think that's true. Although you mentioned the financial crisis and one of the things about the financial crisis is it also brought in a lot of new regulation of the financial system. Some would argue, you know, too much. But you know, I mean, that's, that's the, that's the thing that's kind of missing here because again, and we brought this up with our, our last guest. It's sort of unclear to me exactly what the regulation in the US that would prevent the next FTX is, right? Because this was a NON US exchange. That is correct. However, uh I he didn't bring out something that I thought was actually really important, which is for us customers. If you are investing in the United States and you wish to evade us regulatory environment and do something extra risky, like you want massive level of leverage, it's only available offshore. Uh then you are taking a specific and substantial risk and you are taking specific action to the US regulatory environment. So at that point, if you lose your money in a risky offshore exchange, it's kind of your fault. Um One of the things that we're seeing and you also mentioned it earlier is there are countries with excellent regulatory environments that have done a great job of walling off their customers, even in the case of FDX, I'm actually here in Tokyo right now and Japan is the shining every customer of FTX in Japan got all their money back because the Japanese regulators have a very well defined process, they walled off, they required the walling off of those FTX customers. And as a result, um even though there was dodgy activity happening in an offshore exchange, it didn't affect the Japanese customers of FTX. And I think in an ideal state, American consumers would benefit from the same kinds of protections. And even when things go badly offshore in the same overall company, their deposits and assets would be protected and that would be an excellent outcome from my point of view, you know, uh us t uh Terra Lua was a, was a scam native to crypto whereas FTX uh I don't know if I could use the word scam just yet, but the, the crime if you will was something that was not native to crypto. It was just a classic uh uh you know, uh shell game here. Uh What are your clients worried about when they look at both FTX and Terra Lua, I, what are their concerns in this new environment here? Uh What, what did they express uh is there worry uh with Blockchain. So it depends on the kind of client that you're talking about. So if you're talking about the very large sophisticated banking institutions to a large degree, they see an opportunity. One of the things that's very frustrating about an environment with no meaningful law enforcement is that bad actors actually crowd out good actors. And so if you are the likes of fidelity or Paxos or any of the other leading players, the punishment and ending of bad actors improves your market share. And although it can take several years for markets to recover, when the markets recover, you will have less competition. So that the first thing is our clients, if they're in the financial services industry, mostly see this change in the regulatory environment as a very positive activity, right? It's a, it's an outcome that clears the path for quality. Uh and unfortunately for better or worse, your average customer cannot tell the difference between high quality and low quality from a a backend perspective. So the regulators have to take action to remove the bad actress in the market. Secondly, if you're an industrial client, their concerns are much more operational. So if you think of Ethereum as a lot of our industrial clients do as a computing and product or asset traceability platform for carbon or uh inventory or pharmaceuticals. Then you're looking at the industry from the perspective of um will Ethereum scale will my transaction costs be low enough? Um Your progress uh Your prior guest scroll is a really good example. You know, we estimate for example that we need to bring multiple major industries onto the Blockchain. Ethereum needs ultimately to have a capacity of about 40 billion transactions a day just for industrial users. And so we need more of the likes of scroll demonstrating. You can scale up by a factor of 10 and drive costs down and speed up. Paul. Thanks so much for joining us this morning. Always a pleasure having you on. Thanks for having me. That was the US global Blockchain leader, Paul brody.

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