July 15, 2021 • 12 mins
In the first episode of our series, host Adam Rodricks, National Lead, Digital Services is joined by Kareem Sadek, Partner, Technology Risk Consulting; Kunal Bhasin, Senior Manager, Technology Risk Consulting; and Mitchell Nicholson, Senior Consultant, Technology Risk Consulting for a conversation on how the crypto industry has evolved to where it is today, the general state of the industry, and what’s to come in this four-part series.
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Episode Transcript
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(00:00):
Hello everybody and welcome. I’m your host, Adam Rodricks and today, I am elated to welcome you to a special KPMG PodBytes series entitled ‘The State of Cryptoassets’. I’m joined by my esteemed colleagues in Technology Risk Consulting, Mitch, Kunal and Kareem. Welcome everyone. Can we start off with some roundtable introductions? We’ll start off with you Mitch. Please let everyone know who you are and what you do at the firm.
(00:26):
Thanks Adam, I’m Mitchell Nicholson. I've been with the firm for a few months. I’m very interested in crypto and have been in the space for a while. At the firm, I try to get involved with everything crypto.
Hi, Adam. Happy to be here. This is Kunal Bhasin. I'm a Senior Manager in our Risk Consulting practice and I co-lead our blockchain and cryptoasset efforts across Canada alongside Kareem. I've been in the crypto space since 2015 and am happy to be working on it full-time at KPMG.
(00:56):
Hey, Adam, it's Kareem Sadek. I'm a Partner in our Technology Risk Consulting practice. I co-lead our Risk Consulting blockchain practice along with Kunal and I am very lucky to be joined by my esteemed colleagues here. Of course, Adam, nice to be talking to you again.
Yes, and I should say Kareem, you're back by popular demand because we worked on another podcast series on project risk services; it is actually one of our channel’s most successful. Shameless plug, but I encourage our listeners to check it out if you have not already done so. Now that I've got that out of the way, let's get to the matter at hand.
(01:33):
I feel like in today's world, I cannot go a single day without hearing about some form of cryptoasset. I know I'm not alone, whether that's Bitcoin, Ethereum, NFT’s and even Dogecoin. Based on the conversations that we've all had, I know that these examples only scratch the surface, so let's get right into it and hit the ground running. Can you start off by elaborating on what the term cryptoassets encompasses?
(02:01):
Yeah, absolutely. I'll start off with the easiest part of it – what people commonly know as cryptoassets. Cryptoassets have their roots within Bitcoin. This was the first system to allow users to transact value peer-to-peer without reliance on a trusted intermediary. That's what everybody knows about cryptoassets. Since 2009, Bitcoin has expanded significantly in value and it's peaking at one trillion dollars of market capitalization. Let me repeat this again for anybody that had any doubt about cryptoassets. I repeat - it peaked at one trillion dollars of market capitalization in May 2021 - that's incredible.
(02:46):
But let's go a little bit beyond Bitcoin. There's a diverse landscape of assets now. Other blockchains like Ethereum, Polkadot and Solana have alternative designs to achieve different objectives versus Bitcoin. This encompasses a lot of the questions that people would have asked of Bitcoin; this may include higher transaction throughput, shorter settlement times for usefulness as payments, or even allowing for programmatic money, where users can conduct more complex transactions for exchanging value between each other.
(03:27):
That is so cool. Any other comments anybody wants to add on that? Mitch?
Yeah, I’ll follow up on Kareem's last comment there about programmatic money. Bitcoin is about transferring value, sending Bitcoin from myself to you, Adam, for example. With programmatic money and smart contracts as the tool that enables that, Ethereum and other blockchains that have this feature allow for much more complex transactions. From there, users can actually write code and build applications that are native to a blockchain. We also get composability, where one smart contractor application can interact with another; you can think of a borrow and lending application interacting with the trading application. This feature mirrors the peer-to-peer transactions of Bitcoin but extends the functionality quite a bit.
(04:23):
Some other examples beyond borrowing and lending include token swapping, or buying other tokens in a decentralized fashion, or insurance; if there is a risk that a smart contract may fail, you can buy insurance that is paid out through a smart contract rather than a trusted intermediary.
I’ll add another thing to the whole ecosystem of cryptoassets which is also enabled by smart contracts (04:43):
stablecoins. These stablecoins are tokens that are native to the blockchain and represent dollars that are held in deposit at a financial institution. Think of it as an organization which is a stablecoin issuer
(05:26):
Rather than relying on a traditional financial market infrastructure for a settlement of transactions, stablecoins settle on public blockchains. The benefit is that this allows for settlement of claims 24/7, 365 days a year, and in dollars; this is innovative technology that's out there and that's been enabled by smart contracts and blockchains.
(05:58):
There are questions about how you can trust, how you can be transparent, and how companies can actually rely on these stablecoins being pegged one-to-one on their bank account dollars. We will be discussing that in in one of our future episodes on proof of reserves as well.
(06:19):
Wow to start, and forgive me if I sound mildly overwhelmed, but there are so many ways that we can take this conversation. Mitch, maybe you can elaborate on decentralized finance, more colloquially known as DeFi.
Yeah, my pleasure. Like you mentioned, it's something that has been in crypto for the last few years, but really has its roots in last summer, the summer of 2020. From there, we saw applications start to really emerge. Like I mentioned before, it's about composability, the fact that applications can work together and reference each other because all of the code is stored on the blockchain. You have one network that is able to be interoperable and from there, other developers can build further applications on top of them. You can almost think of it like money LEGO.
(07:13):
As decentralized systems, a very important element is governance. Once these smart contracts are deployed and once the applications go live on the block chain, any updates to the application have to be done in a decentralized way and through that, we have governance. There are governance tokens that allow users to vote on certain updates or proposals to various applications. You can think of this kind of like shareholder votes in traditional finance with public equities.
(07:50):
What we've seen is that DeFi applications have vibrant communities where users are suggesting upgrades, deliberating on forums, and then ultimately voting with their tokens and having skin in the game. You have users in control of how the protocols or the applications evolve. Those who are most affected by the updates and upgrades have the most influence on it, which is something I think is quite remarkable.
(08:17):
Oh, that is so interesting. In addition to being interesting, money LEGO is also our KPMG phrase of the day, so that worked out very nicely for us. I want to take a step back now to the overall cryptoasset industry. Forgive me for asking what I believe to be a loaded question, but how has the industry evolved over this past year?
(08:38):
The industry has been matured substantially since March of last year when we all saw COVID-19 hit the entire globe. What that resulted is unprecedented fiscal stimulus resulting in expanding central bank balance sheets. We saw negative or low interest rates, the rising as an inpatient. All of these macroeconomic environmental factors resulted in many institutional investors expressing concerns of inflation materializing in real sense; this has led to many investors thinking of and considering Bitcoin as a store of value because of its inherent scarcity. It has been compared to the likes of gold. There are other productive cryptoassets, like Ethereum and other blockchain protocols that Kareem had mentioned earlier, which are able to offer yields and generate cash flows for these investors in this negative or low interest rate environment. So, it is something that we've seen evolve since March of last year substantially and at a much higher pace.
(09:55):
Hold on, I don't think we're actually doing it justice. Let me chime in in terms of adoption because this is so important. I'll try to split it into different ways. I'll talk first about overall adoption. We’ve seen adoption by corporate treasuries, family offices, hedge funds and even some of the large insurers that we know of from years before. As a result, traditional financial service providers, such as financial institutions, asset managers, and even firms like us are seeing ourselves expanding our products and service offerings to cover things as it relates to crypto in general.
The most important part (10:36):
let's talk about some of these crypto-native firms. These crypto-native firms have matured substantially. They've been hiring industry experts, meeting regulatory requirements, and now they’re offering institutional grade services too. We've seen some of these firms go public with their stock trading alongside traditional financial institutions, so that's great when it comes to adoption. Overall, we've really seen the cryptoasset industry institutionalize – it’s an investable, alternative asset class with many different opportunities to gain exposure to offered products and different services. This has been incredible in terms of adoption over the past little while.
(11:30):
That sounds amazing. Unfortunately, we are out of time for today’s episode. I want to thank our three guests, Kareem, Mitchell and Kunal for taking time out of their busy schedules to be with us in studio today. Join us next time on KPMG in Canada’s PodBytes series entitled ‘The State of Cryptoassets’, when Kareem, Kunal and I will be joined by Edwin Isted for a discussion on digital asset custodianship. Once again, I’m Adam Rodricks. Thank you so much for listening and we’ll see you next time.
Hello everybody and welcome. I’m your host, Adam Rodricks and today, I am elated to welcome you to a special KPMG PodBytes series entitled ‘The State of Cryptoassets’. I’m joined by my esteemed colleagues in Technology Risk Consulting, Mitch, Kunal and Kareem. Welcome everyone. Can we start off with some roundtable introductions? We’ll start off with you Mitch. Please let everyone know who you are and what you do at the firm.
(00:26):
Thanks Adam, I’m Mitchell Nicholson. I've been with the firm for a few months. I’m very interested in crypto and have been in the space for a while. At the firm, I try to get involved with everything crypto.
Hi, Adam. Happy to be here. This is Kunal Bhasin. I'm a Senior Manager in our Risk Consulting practice and I co-lead our blockchain and cryptoasset efforts across Canada alongside Kareem. I've been in the crypto space since 2015 and am happy to be working on it full-time at KPMG.
(00:56):
Hey, Adam, it's Kareem Sadek. I'm a Partner in our Technology Risk Consulting practice. I co-lead our Risk Consulting blockchain practice along with Kunal and I am very lucky to be joined by my esteemed colleagues here. Of course, Adam, nice to be talking to you again.
Yes, and I should say Kareem, you're back by popular demand because we worked on another podcast series on project risk services; it is actually one of our channel’s most successful. Shameless plug, but I encourage our listeners to check it out if you have not already done so. Now that I've got that out of the way, let's get to the matter at hand.
(01:33):
I feel like in today's world, I cannot go a single day without hearing about some form of cryptoasset. I know I'm not alone, whether that's Bitcoin, Ethereum, NFT’s and even Dogecoin. Based on the conversations that we've all had, I know that these examples only scratch the surface, so let's get right into it and hit the ground running. Can you start off by elaborating on what the term cryptoassets encompasses?
(02:01):
Yeah, absolutely. I'll start off with the easiest part of it – what people commonly know as cryptoassets. Cryptoassets have their roots within Bitcoin. This was the first system to allow users to transact value peer-to-peer without reliance on a trusted intermediary. That's what everybody knows about cryptoassets. Since 2009, Bitcoin has expanded significantly in value and it's peaking at one trillion dollars of market capitalization. Let me repeat this again for anybody that had any doubt about cryptoassets. I repeat - it peaked at one trillion dollars of market capitalization in May 2021 - that's incredible.
(02:46):
But let's go a little bit beyond Bitcoin. There's a diverse landscape of assets now. Other blockchains like Ethereum, Polkadot and Solana have alternative designs to achieve different objectives versus Bitcoin. This encompasses a lot of the questions that people would have asked of Bitcoin; this may include higher transaction throughput, shorter settlement times for usefulness as payments, or even allowing for programmatic money, where users can conduct more complex transactions for exchanging value between each other.
(03:27):
That is so cool. Any other comments anybody wants to add on that? Mitch?
Yeah, I’ll follow up on Kareem's last comment there about programmatic money. Bitcoin is about transferring value, sending Bitcoin from myself to you, Adam, for example. With programmatic money and smart contracts as the tool that enables that, Ethereum and other blockchains that have this feature allow for much more complex transactions. From there, users can actually write code and build applications that are native to a blockchain. We also get composability, where one smart contractor application can interact with another; you can think of a borrow and lending application interacting with the trading application. This feature mirrors the peer-to-peer transactions of Bitcoin but extends the functionality quite a bit.
(04:23):
Some other examples beyond borrowing and lending include token swapping, or buying other tokens in a decentralized fashion, or insurance; if there is a risk that a smart contract may fail, you can buy insurance that is paid out through a smart contract rather than a trusted intermediary.
I’ll add another thing to the whole ecosystem of cryptoassets which is also enabled by smart contracts (04:43):
stablecoins. These stablecoins are tokens that are native to the blockchain and represent dollars that are held in deposit at a financial institution. Think of it as an organization which is a stablecoin issuer
(05:26):
Rather than relying on a traditional financial market infrastructure for a settlement of transactions, stablecoins settle on public blockchains. The benefit is that this allows for settlement of claims 24/7, 365 days a year, and in dollars; this is innovative technology that's out there and that's been enabled by smart contracts and blockchains.
(05:58):
There are questions about how you can trust, how you can be transparent, and how companies can actually rely on these stablecoins being pegged one-to-one on their bank account dollars. We will be discussing that in in one of our future episodes on proof of reserves as well.
(06:19):
Wow to start, and forgive me if I sound mildly overwhelmed, but there are so many ways that we can take this conversation. Mitch, maybe you can elaborate on decentralized finance, more colloquially known as DeFi.
Yeah, my pleasure. Like you mentioned, it's something that has been in crypto for the last few years, but really has its roots in last summer, the summer of 2020. From there, we saw applications start to really emerge. Like I mentioned before, it's about composability, the fact that applications can work together and reference each other because all of the code is stored on the blockchain. You have one network that is able to be interoperable and from there, other developers can build further applications on top of them. You can almost think of it like money LEGO.
(07:13):
As decentralized systems, a very important element is governance. Once these smart contracts are deployed and once the applications go live on the block chain, any updates to the application have to be done in a decentralized way and through that, we have governance. There are governance tokens that allow users to vote on certain updates or proposals to various applications. You can think of this kind of like shareholder votes in traditional finance with public equities.
(07:50):
What we've seen is that DeFi applications have vibrant communities where users are suggesting upgrades, deliberating on forums, and then ultimately voting with their tokens and having skin in the game. You have users in control of how the protocols or the applications evolve. Those who are most affected by the updates and upgrades have the most influence on it, which is something I think is quite remarkable.
(08:17):
Oh, that is so interesting. In addition to being interesting, money LEGO is also our KPMG phrase of the day, so that worked out very nicely for us. I want to take a step back now to the overall cryptoasset industry. Forgive me for asking what I believe to be a loaded question, but how has the industry evolved over this past year?
(08:38):
The industry has been matured substantially since March of last year when we all saw COVID-19 hit the entire globe. What that resulted is unprecedented fiscal stimulus resulting in expanding central bank balance sheets. We saw negative or low interest rates, the rising as an inpatient. All of these macroeconomic environmental factors resulted in many institutional investors expressing concerns of inflation materializing in real sense; this has led to many investors thinking of and considering Bitcoin as a store of value because of its inherent scarcity. It has been compared to the likes of gold. There are other productive cryptoassets, like Ethereum and other blockchain protocols that Kareem had mentioned earlier, which are able to offer yields and generate cash flows for these investors in this negative or low interest rate environment. So, it is something that we've seen evolve since March of last year substantially and at a much higher pace.
(09:55):
Hold on, I don't think we're actually doing it justice. Let me chime in in terms of adoption because this is so important. I'll try to split it into different ways. I'll talk first about overall adoption. We’ve seen adoption by corporate treasuries, family offices, hedge funds and even some of the large insurers that we know of from years before. As a result, traditional financial service providers, such as financial institutions, asset managers, and even firms like us are seeing ourselves expanding our products and service offerings to cover things as it relates to crypto in general.
The most important part (10:36):
let's talk about some of these crypto-native firms. These crypto-native firms have matured substantially. They've been hiring industry experts, meeting regulatory requirements, and now they’re offering institutional grade services too. We've seen some of these firms go public with their stock trading alongside traditional financial institutions, so that's great when it comes to adoption. Overall, we've really seen the cryptoasset industry institutionalize – it’s an investable, alternative asset class with many different opportunities to gain exposure to offered products and different services. This has been incredible in terms of adoption over the past little while.
(11:30):
That sounds amazing. Unfortunately, we are out of time for today’s episode. I want to thank our three guests, Kareem, Mitchell and Kunal for taking time out of their busy schedules to be with us in studio today. Join us next time on KPMG in Canada’s PodBytes series entitled ‘The State of Cryptoassets’, when Kareem, Kunal and I will be joined by Edwin Isted for a discussion on digital asset custodianship. Once again, I’m Adam Rodricks. Thank you so much for listening and we’ll see you next time.
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