The World’s 6.6 Trillion per Day Forex Market Will Migrate On-Chain – Lalo Bazzi

Stablecoin adoption has soared, with a market worth that has risen from roughly $10 billion to over $100 billion. Stablecoins are now the crux of lending and credit markets, whereby yield is over 100x that offered by savings accounts at banks. Users may mint, trade, and lend stablecoins while accessing crypto assets from multiple blockchains – all on a single platform, the exchange. We must also remember that every single person on earth wishes to manage their own private key.

Ishan Pandey

Crypto Veteran. Tokenization, DeFi and Security Tokens – Blockchain.

Ishan Pandey: Hi Lalo Bazzi, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind Onomy Protocol?

Lalo Bazzi: Hi Ishan, thank you for the invitation! I formerly worked at Fidelity Investments, followed by Microsoft as a cloud strategist for government agencies. During my time there in 2017, the blockchain hype cycle led me down the blockchain path in the enterprise world – where I met fantastic future team members from Nvidia, AMD, Cisco, Google, and others. We went full time into blockchain in 2018 to build cryptocurrency mining hardware (like Bitcoin ASICs), garnering immense infrastructure support from miners situated globally with resources such as data centres, fiber networks, and highly efficient energy sources.

The bear market lasted far longer than many anticipated, leading to mining no longer being as economical. Many of our partners were looking for additional revenue sources and use-cases for their infrastructure, so our team pivoted back to our roots – the cloud. We set out to build a decentralised cloud network that we bootstrapped using our previously-acquired partnerships.

This is where we built many of the great technologies that power Onomy Protocol, including Equity, our custom consensus mechanism, and Natural Rights, a non-custodial private key management and device authorisation suite that leverages proxy re-encryption to enable a single sign-on the non-custodial wallet to manage assets from multiple blockchains.

We came to be through our belief in three fundamental truths. First, the new paradigm of finance whereby national currencies will migrate on-chain is not only inevitable but imminent. Second, stablecoins are the vehicle that will onboard liquidity from traditional institutions with significantly less friction. Lastly, with many prominent and talented blockchain ecosystems, the future of decentralised finance is cross-chain.

With our technologies and beliefs, the protocol set out to bridge traditional finance and decentralised finance by leveraging the proliferation of stablecoins by bringing Forex on-chain through a cross-chain DEX with a hybrid order book & automated market maker solution. Users may mint, trade, and lend stablecoins while accessing crypto assets from multiple blockchains – all on a single platform, the exchange.

Ishan Pandey: Over the last year, Stablecoin adoption has soared, with a market worth that has risen from roughly $10 billion to over $100 billion. In your opinion, what has been the primary driving force behind this sudden explosion and what regulations are we going to see around stablecoins?

Stablecoins are going to change the financial markets how the internet changed our society.

Lalo Bazzi: Volatility – many would-be entrants to the crypto market are hesitant due to the immense volatility in the crypto market, despite seeing immense value in the underlying technologies. Stablecoins rid of the volatility concern and give access to the new paradigm of finance.

Other than protecting one’s portfolio against volatile losses, stablecoins are also growing in utility.

Stablecoins are now the crux of lending and credit markets, whereby yield is over 100x that offered by savings accounts at banks.

As programmable money, on-chain fiat representations (like our Denoms) are used to build autonomous financial products and innovative markets, with significant yield opportunities offered to liquidity providers, yield farmers, and participants in the DeFi lending market. All of this is made possible as stablecoins become a trusted medium of exchange.

From a regulatory standpoint, opponents in government believe stablecoins will weaken the power of nation-states, their currency, and central banks. Proponents of government believe that establishing a worldwide, accessible, and inclusive network of stablecoins will strengthen the currencies themselves and be highly beneficial for financial inclusion. The shared goal is KYC/AML on the on and off-ramps between crypto and fiat on either side of the coin. Innovation will be rampant during this period of regulatory ambiguity. As regulation steps in, innovation will be confined to only those who are compliant. The biggest winners will be those who can balance compliance with the fundamental beliefs of an open and permissionless system.

Ishan Pandey: According to you, what can potentially prove to be more advantageous for the existing cryptocurrency ecosystem in the future, let’s say 5-10 years down the line – Stablecoins or central bank digital currencies (CBDCs)?

Lalo Bazzi: I believe that stablecoins privately issued by compliant DAOs with adequate and transparent reserves will not only co-exist with CBDCs but capture significant market share as well. CBDCs truly legitimise the cryptocurrency ecosystem in a manner that accelerates adoption globally. We must also remember that not every single person on earth wishes to manage their own private key – CBDCs will likely be the choice for this group, whereby Central Banks will likely manage accounts. Of course, this is the antithesis of many fundamental beliefs and values held firm by proponents of an open and permissionless system! A very insightful speech by Federal Reserve Vice Chair for Supervision Randal K. Quarles about CBDCs and privately issued stablecoins can be found here.

Ishan Pandey: DeFi was introduced as a relatively new concept that is rapidly gaining traction worldwide today. What are your views on FATF proposed recommendations that bring DeFi DEXs under the definition of VASPs?

Lalo Bazzi: The FATF’s recommendations geared towards virtual asset service providers (VASPs) apply well enough within centralised frameworks, where a singular governing entity retains control over the functionalities of the offered products but also over users’ deposited capital.

However, the further you go on the decentralisation spectrum, the more difficult it is to understand how these recommendations could be translated into actionable law. The newest FATF recommendations specify that a business entity develops decentralised protocols, but this is not always the case. Any natural person located anywhere in the world is able to deploy a smart contract onto the Ethereum blockchain, whilst collaborative contribution-based efforts have led to the inception of the most popular DeFi protocols out there.

Thus, there is significant confusion regarding who can be categorised as a VASP. For instance, in a decentralised autonomous organisation (DAO), numerous contributors are operating in unison for product development, pooling their collective resources. Some DeFi protocols reward contributors and participants in governance tokens, giving them decisional authority over future decisions. In this case, are thousands of governance token holders actually VASPs? Is a one-time code contributor a VASP? How about financiers then? How do you define who needs to comply and to what extent, and how do you enforce compliance in a decentralised organisation? The FATF’s recommendations also discuss categorising those who directly or indirectly earn revenue generated by the protocol in question. Does this mean that tens of thousands of liquidity providers would be subject to VASP legislation?

Furthermore, the FATF discusses imposing KYC/AML regulations on DEXes, yet another objective that’s difficult to attain given the pseudonymous characteristic of blockchain-based transactions. Would a DeFi protocol have to automate KYC by whitelisting addresses? If so, this brings additional risks of abuse in terms of data management. Similarly, forks of popular protocols can be deployed overnight by anonymous teams anywhere in the world, so enforcement is not only tricky but, in some cases, downright impossible.

We seek to work with regulators and to remain compliant to provide stellar service to both retail and institutional users, but doing so requires a collaborative hand-to-hand effort with regulators who must understand the true complexity of the DeFi market, and consequently, issue applicable regulation that does not hinder innovation.

Ishan Pandey: The Cajee siblings who owned a South African cryptocurrency investment platform suspected of being a Ponzi scheme, has disappeared with an estimated $3.6 billion in Bitcoin. From a regulatory standpoint, what new reforms do we need in the crypto spectrum in order to curb such mishaps? Further, how can investors be educated to reduce such kinds of fraud in the industry?

Lalo Bazzi: It is truly unfortunate and upsetting that these events happen. Regulators should issue protective laws and should attempt to find offenders, regardless of whether they target centralised or decentralised cryptocurrency services. It is bewildering that these scams can grow to such size, reminiscent of the Madoff days. We must also agree that traditional institutions are not immune to cyber-attacks, phishing, social engineering, and many other attacks prevalent in the financial industry as a whole that cause massive losses to users.

As you pointed out in your question, the ultimate solution is individual education and research. I urge everyone to truly understand the products and services they are using and remind everyone of the famed phrase “not your keys, not your coins.” When operating in the cryptocurrency world, keeping custody of your private key will protect you…