ConsenSys is the leading Ethereum software company. We enable developers, enterprises, and people worldwide to build next-generation applications, launch modern financial infrastructure, and access the decentralized web. Our product suite, composed of Infura, Quorum, Codefi, MetaMask, and Diligence, serves millions of users, supports billions of blockchain-based queries for our clients, and has handled billions of dollars in digital assets. Ethereum is the largest programmable blockchain in the world, leading in business adoption, developer community, and DeFi activity. On this trusted, open source foundation, we are building the digital economy of tomorrow. To explore our products and solutions, visit www.consensys.net

Thought leader
Lex Sokolin is a futurist and entrepreneur focused on the next generation of financial services. He is the CMO and Global Fintech CoHead at ConsenSys. He focuses on strategy and product development across Fintech, Decentralized Finance (DeFi) and DAOs (Decentralized Autonomous Organisations), public and private enterprise blockchain solutions, and emerging crypto asset classes.

Previously, Lex was the Global Director of Fintech Strategy at Autonomous Research (acquired by AllianceBernstein), an equity research firm serving institutional investors, where he covered artificial intelligence, blockchain, neobanks, digital lenders, roboadvisors, payments, insurtech, and mixed reality. Before Autonomous, Lex was COO at AdvisorEngine, a digital wealth management technology platform, and CEO of NestEgg Wealth, a roboadvisor that partnered with financial advisors. Prior to NestEgg, Lex held roles in investment management and banking at Barclays, Lehman Brothers and Deutsche Bank. He earned a JD/MBA from Columbia University and a B.A. in Economics and Law from Amherst College.

Lex is a contributor of thought leadership to the Wall Street Journal, the Economist, Bloomberg, FT, Reuters, American Banker, ThinkAdvisor, and Investment News, among others. He is a regular speaker at industry conferences such as Money2020, LendIt, Schwab Impact, In|Vest, T3 Enterprise Edition, and Consensus. His writing is publicly available at lex.substack.com.

Q&A with Lex Sokolin

How is DLT and Blockchain reshaping wealth and asset management? Where is the industry today and how do you foresee things changing in the future?
Over the last two decades, the value proposition of wealth management has been shifting from access and enablement to partnership and advice. Access to traditional investment packaging, represented by the global asset allocation indexed to market betas, has eroded in value and become commoditized. Waves of technology innovation have automated the packaging and trading of the ETF, the algorithmic trading and rebalancing of the combined portfolio, the alpha derived from tax-loss harvesting alpha, and the performance reporting capabilities of private banks. Today we stand with wealth management neatly wrapped into our phone, trillions of assets ready to pour over into lowestprice asset management product.

In this context, wealth managers have several axes of differentiation. One is to enhance the human relationship with broader types of advice, moving from the mere investment recommendation to financial planning, tax structuring, as well as the broader category of services and life planning. In this regard, advisors become the financial therapists their clients need to not make behavioral mistakes. Another path is to carve out alpha in investment management. While alternative asset classes like hedge funds, funds of funds, or private equity have powered a narrative for differentiated returns in the past, they are not indexed to the core driver of the human journey through time – innovation and technology

And so, it is time to look at digital and crypto assets, and the operating infrastructure on which they travel. Novelty is a conversation starter, and a way for financial advisors to deliver a fresh perspective to something many retail clients now care about. Retail ownership of crypto native assets like Bitcoin and Ether is now in the double digits, and certain institutions and endowments have taken steps to incorporate correctly packaged and regulated product into their broader asset allocations. The value chain of custody, exchange, settlement, and digital wallet has been built, tested, and is on the brink of broader launch by industry heavy weights like NASDAQ, the Intercontinental Exchange, and Fidelity among others.

Wealth managers are downstream from the capital markets product manufacturers. They require familiar permutations and product structures which plug into familiar technology, investment management, and client reporting platforms. This has shielded the wealth manager from engaging with an asset class that their clients are already exposed to, and thereby have in their portfolios. However, waiting for several more years is simply not an option. Companies like Coinbase boast over 30 million users and over $30 billion in assets under some form of custody or management. Investment software derived from roboadvisors and implemented on public blockchains now hold over $10 billion in cash equivalents and $2 billion in collateralized obligations. Demand is there, if you know how to interact with the emerging world order and discover value for your clients.

Let us separate out two key issues. The first is the crypto asset class itself, and its novel return characteristics, correlated with generational philosophies and technological evolution. The second is the financial infrastructure on which such assets travel – defining what is a stock, money, or a loan. Unlike traditional systems, which treat ownership of assets as an abstraction with a claim on another party in a value chain (e.g., a CUSIP or a ticker in a custodian system linking to a CSD), blockchain systems implement actual digital property rights in relation to the asset in question. Such rights allow for immediate economic activity, global decentralized markets, third party loan underwriting or margin trading, and access to bespoke interest rate products only accessible on public networks.

Such novel and powerful infrastructure implies major efficiencies and innovations in the function of an investment manager. Alternatives and specialty finance investments, like real estate, private equity, and small business financing, have a path to being managed as smoothly as publicly traded stocks and bonds. Today, powerful software allows for the tokenization of such assets – essentially refactoring paper into fractional, digital alternatives – in an accessible and repeatable manner. Building a self-rebalancing portfolio composed of new investment opportunities with access to emerging secondary markets is the reward of engaging with this ecosystem.

While there has been a narrative about compliance and regulatory oversight in the space over the last several years, the truth is far more nuanced. As in any quickly evolving industry flooded with investment capital, human nature can turn to the dark side. Yet, blockchains provide us with auditable, transparent records of the actual transactions and money flows that have taken place since the inception of the network, while retaining pseudonomy for the user. Many projects have also implemented privacy and permissioning that is consistent with the standards of our industry. All this to say that blockchain based financial infrastructure is likely to create a better regulated, more compliant financial sector than what was possible before.

Wealth management is about helping people live their best financial lives and achieve positive personal outcomes. Digital assets and decentralized finance are pulling millions of users into a new type of financial experience, one which leaves behind much of the middleware and inefficiency of the 20th century. The enterprising financial advisor will engage deeply with the promise of the future, while staying grounded in the timeless principles of prudent money management and diversification. Nothing ventured, nothing gained!

What solution(s) does your company offer that wealth and asset management firms should consider?
ConsenSys has developed the ConsenSys Codefi product suite to help wealth managers, family offices, and private banks access the innovation happening in blockchain-based finance and digital assets. Codefi is a short-hand for commerce and decentralized finance, and is intended to make it easier for advisors to explore, experiment, and integrate emerging asset classes. The suite is modular and covers functionality from the issuance and distribution of digital assets, to software for trading in emerging digital markets, to compliance and KYC requirements, and data, risk, and analytics overlays.

Wealth managers may be interested in helping their clients own (1) crypto-native assets, like Bitcoin and Ether, or (2) alternative securities that have been structured into a tokenized form. A token is a digital representation of what could be any asset class, from traditional equities and fixed income, to private equity, real estate, and specialty finance. An increasing number of asset managers and primary issuers are using tokenization on Ethereum to streamline asset and stakeholder management, reduce costs of data reconciliation, stand up modern market infrastructure, and connect to a global group of traders and investors. Wealth managers looking for new clients and bespoke investment opportunities can work with these counterparties for the benefit of their clients through our software products.

Another key feature of the Codefi suite is focused on the networks and protocols that are generating new financial exposures and uncorrelated alpha. In particular, the last year has seen strong growth in collateralized and structured products in the Ethereum ecosystem. There are opportunities to generate high yield from providing assets to be held as collateral, or for trading on margin, or to collect market making fees from adding liquidity to trading pools, or to create derivative exposures to crypto native assets. The same type of activities that capital markets participants perform in equities and fixed income have been launched for digitally-native commodities like Bitcoin and Ether. Clients of wealth managers should hold an appropriately risk-adjusted amount of these assets in their portfolios as a hedge to inflation and recession.

Benefits
Underneath the software is a core concept of the digital asset, hosted on an open source, globally secured financial infrastructure called blockchain. Digital financial instruments offer the following business benefits:

• Authenticity and scarcity: Digitization ensures data integrity, and enables asset provenance and full transaction history in a single shared source of truth
• Programmable capabilities: Code that addresses governance, compliance, data privacy, identity (KYC/ AML attributes), system incentives and features that manage stakeholder participation (for voting and other rights)— can be built into the assets themselves
• Streamlined processes: Heightened automation increases overall operational efficiency. It enables realtime settlement, audit and reporting; and it reduces processing times, the potential for error and delay, and the number of steps and intermediaries required to achieve the same levels of confidence in traditional processes
• Economic benefits: Automated, more efficient processes trigger reduced infrastructure costs, operation costs, and transaction costs
• Market reactivity: Digital securities allow greater customization than standardized securities and can be issued within shorter timeframes. Issuers can create bespoke digital financial instruments directly matched to investor demand.
• New products and markets: Secure, scalable and rapid asset transfers, fractionalized ownership of real-world assets, tokenized micro-economies, and more.

Together, these benefits result in more accountable transparent governance systems, more efficient business models, improved incentive alignment between stakeholders, greater liquidity, lower costs of capital, reduced counterparty risk, access to a broader investor and capital base, and access to all other digital financial instruments.

Codefi is an easy to use blockchain platform that streamlines the asset issuance and lifecycle management process, as well as delivering a secondary market for trading. Our permissioned platform also allows users to easily share information between internal entities or external counterparties. As an example, French real estate fund management company, Mata Capital, looked to blockchain technology to modernize and optimize the processes of distributing fund shares and maintaining its investor registry.

With asset tokenization, Mata Capital aimed to enable greater participation in real estate investment by decreasing the costs associated with investor registration, investor onboarding, and subscription operation. The long-term vision is to reduce minimum investor subscription amounts from €100,000 to €1. With the reduced costs and increased digital functionality of blockchain, Mata Capital south to attract a wider and more diverse pool of investors to real estate asset investments.

To achieve this goal, Mata Capital partnered with ConsenSys Codefi to issue security tokens for three separate funds worth a combined total of €350m. The first of these tokenization projects entailed ownership of a planned 11-story hotel currently under construction on the outskirts of Paris. The resulting €26m issuance is the among the largest real estate tokenization projects in Europe.

Deployment and future development
The software suite can be deployed as a private labelled user experience, or a via a set of application programming interfaces into an existing technology integration (APIs). Our team has deep experiences consulting for large global financial institutions and can provide bespoke design and implementation services should those be required. Whether your wealth management firm is looking for an out-ofthe-box solution for a proof of concept, or to launch a deeply connected system with reporting and trading, Codefi can solve the problem and create an exciting investment opportunity for your clients.

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