11 months ago
Part one of a two-part interview: Lex Sokolin talks about his journey from pre-2008 investment banking to the center of today’s FinTech and blockchain action – and why DeFi infrastructure is needed.
Lex Sokolin is a futurist and entrepreneur working on the next generation of financial services, with a conviction that DeFi infrastructure is needed. He is the Global FinTech Co-Head at ConsenSys, a blockchain technology company building the infrastructure, applications and practices that enable a decentralized world. Lex focuses on emerging digital assets, public and private enterprise blockchain solutions, decentralized finance and autonomous organizations.
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. Lex is a regular contributor to leading publications like the Wall Street Journal, the Economist, Bloomberg, FT, Reuters, American Banker, ThinkAdvisor and Investment News. He is also a sought-after speaker at key industry conferences. Blocks99 had the pleasure of speaking with Lex in October 2019.
As I understand, the 2008 financial crisis came shortly after you began working on Wall Street. Of course, the crisis also inspired the Bitcoin concept. Please talk about what it was like to be at the eye of the storm and what learnings you took away from the experience.
The first role I had was at Lehman Brothers, which was in many ways a learning experience. I was in a strategy function that went across the investment management business and asset management. We also had some one-off private equity funds. I joined in 2006, which was probably the peak of pre-08 finance. The business we were in had very little to do with assets related to housing, interest rates, money market funds and people’s belief in the ability to pay things down.
But it was amazing to be there with Lehman at the time and be so close to its collapse, because you saw how people thought about the world and how confident they were about the different outcomes they expected. I remember, in 2008, after Bear Stearns had collapsed and Lehman was in the news all the time about being the next one to go. Our stock price had fallen from something like 120 down to 20 dollars. People were still bullish about the company, buying more stock and thinking it was a great opportunity. And they were doing this in very senior roles with multi-million-dollar holdings of restricted Lehman stock. They were buying more because they had this one construct of this company and its inability to fail. And when it did, I think the lesson – I’ve taken away several lessons.
One is around the human behavior and idiosyncratic outcomes. So, just because something has been one way in the past doesn’t mean it will be the same in the future. And there are things that happen at the gut level, like we believe that firms will be bailed out and that because we got through the 90s we’ll get through the 2000s. and then there are things that happen at a very personal level, like the fact that Hank Paulson was a Goldman Sachs executive and everybody in the room around him was a Goldman Sachs executive when the decision whether to do the bailout was being made.
Broadly speaking, just thinking, “I’m going to pick the right stock or make the right career move” – these things fall apart very, very quickly. For me it was fortunate to go through that and get that experience early, and I think it’s what undermined my belief enough in the fanciness or correctness of financial institutions to be able to go out and start my own FinTech company in 2009.
You have been at the center of the action in FinTech since its early stages. What do you see as the biggest milestones in the industry?
It’s a difficult question, because FinTech is not really an industry. It’s sort of painting finance with the same brush across all the different sectors. You could talk to people in 2012 and 2014 and they’d say, “FinTech is nothing new. In the 70s, 80s and 90s we were building technology for finance. And now it’s just something trendy.”
There’s a place to look in the numbers that contradicts that. It’s pretty straightforward. If you look at private venture capital that’s going into the economy overall, in 2008 the percentage of venture capital going into finance floated around four or five percent. And if you look at GDP for financial services, GDP that goes into finance is somewhere around 15 to 25 percent. So – you can do the math – between 2008 and 2019, the percentage of venture capital that’s flowed into financial services has gone from five to somewhere around 17 percent globally.
So there’s been a kind of catchup in terms of all the financial factors, whether at the distribution layer, around the customer, the bank branch, the lending officer, the claims officer, the insurance salesperson – all of these functions are going away, contributing to unemployment and transforming into mobile phones. Whether it’s at the manufacturing layer, the portfolio manager or the insurance underwriter, the loan officer and loan underwriter – these things are now moving to artificial intelligence and the cloud.
Regardless of where you look within financial services, all of these things are subject to the same digitization forces that we see in other industries. From entertainment and music to retail and healthcare and our social policy itself, that transformation affects finance in the exact same way.
So all the symptoms we’re familiar with – InsurTech, blockchain, AI – all of these are just a catchup in terms of innovation in financial services. The thing I’ve enjoyed from being on the edge of where finance is going, maybe being early for the things I’m interested in, is seeing that there’s only one direction things can go: there will be more software, not less, in finance and the role of the human being is changing. So I think it’s fairly easy to take a position – a tech-first position or an API-first position or blockchain-first position or mobile-first position. You pick the theme. Eventually the world just comes around to that. Because unlike natural environments, technology development as a whole is a much more dynamic being.
You are a co-head of ConsenSys Codefi, a newly launched project of Consensys focused on tokenization, emerging digital asset classes, crypto payments and revenue management as well as decentralized finance networks and digital asset offerings. Please talk about this company, the role it’s playing in DeFi infrastructure.
ConsenSys has gone through multiple versions of the crypto digital asset ecosystem. It grew out of the largest open-source, programmable blockchain to date, Ethereum. Its early work has been to commercialize development on Ethereum and encourage people to build apps through a venture studio model. It then spent about a year-and-a-half building out an arm that was focused on consulting and that was helping large institutions figure out ways to deploy those apps.
In today’s environment, it’s far more important to build the systems that are doing the work. ConsenSys Codefi is a 100-percent-owned division of ConsenSys focused on four core areas of use cases. For most technologists, whether they’re working at financial incumbents or whether they’re open-source developers, the blockchain layer is fairly complex. So we want to make it much easier to leverage Ethereum in whichever version of the world you can develop on it.
So we’ve developed Codefi as an operating system with four modules. Number one is assets, everything around traditional assets, whether they’re securities or commodities. Assets have a lifecycle – they’re not just issued and gambled away on speculative markets – there are things you can do with them. Our assets module is around sustainable tokenization.
Number two is payments, focused on cashflow engines and programmable money movement within blockchain networks. It’s focused on fiat-to-crypto on- and off-ramps and interaction with incumbent financial systems – what can we do with blockchain that we couldn’t with prior infrastructure.
Number three is networks, around markets and decentralized finance, where most of our DeFi infrastructure activity resides. We think DeFi is one of the leading edges of what Ethereum and programmable blockchains can deliver. And we think it’s our third go at decentralized autonomous organization – the first being venture capital with the DAO, which was an existential crisis for Ethereum itself. The second being the proliferation of Initial Coin Offerings. That was damaging for a while, but not as damaging as the DAO. And we saw the collapse of that asset class. Decentralized finance today is primarily collateralized lending, married with the stablecoins. Even though there’s been a lot of growth in the sector, I really think it’s important to protect that growth and make sure it’s responsible, risk-aware, and that these companies have a path toward institutionalization.
Number four is data analytics, where we have a module focused on KYC and AML as well as risk management and anything you might want to know about activities in your blockchain network. So assets, payments, networks and data are the four focal points of Codefi’s initial offering.
You’ve talked about growth in decentralized lending, a key area of DeFi infrastructure. What are your thoughts on the potential of decentralized and peer-to-peer lending for positive social change? Is this another reason why DeFi infrastructure is needed?
I think it’s massively important to put the DeFi infrastructure in place. What motivates me in what we do is the operating improvement to the financial services industry. Today the manufacture of a financial product is on bespoke rails depending on what instrument you’re talking about. Loans, equities, deposits, real estate and payments all travel in completely different systems that are not interoperable. So you constantly have abstractions of the financial product. How do you go from money movement to a bank account? How do you go from a bank account to an investment account? What if you buy a private security versus a public security? What if you buy a bond or a bond fund? Etcetera, etcetera.
To me the operating improvement is much more exciting than the question of should I or should I not buy Bitcoin or the Ethereum token or some other token. I think the ability to create this common, global, open-source infrastructure is really fantastic. And I think getting lending right is a really interesting entry point.
There’s a whole bunch of reasons why lending is dangerous. The first is, it’s much easier to get people to borrow money than it is to get them to invest it. So there are questions around default, which is a large part of what killed the peer-to-peer lending industry in China, on top of fraudulent players. Default has also put a lot of pressure on Western digital ledgers. So I think lending is a great way to incentivize people to join the ecosystem, but on the other side you have to be very careful about risk.
With DeFi lending you don’t have underwriting risk necessarily because you’re collateralizing all your loans. You’re putting in Ether tokens and getting DAI or some other stablecoin related to the value of your collateral. If the value of the asset collateralized falls, you lose access to it. So it’s much more like margin lending.
If you think about the world and solving the problem of people having access to credit, it’s really unlikely people will be able to collateralize. If they’re in a place where they don’t have access to a bank account, the idea that they’re going to have some cryptocurrency to put into a contract to get stablecoin is super unlikely. So I think we need to bring real underwriting into the networks, which is hard because you need to be able to reach into fiat accounts or otherwise into that person’s valuables in order to protect for the moment of default.
So there are a lot of operating problems, but if we just make incremental progress in DeFi infrastructure, over the years these things will get better and better.
Read part II of this two-part interview here. Subscribe to our newsletter and follow us on social media – Facebook Linkedin Twitter – to be the first to read the latest and most relevant blockchain and digital asset news in the European and Southeast Asian regions, interviews with top industry experts, as well as provocative opinion pieces and brief introductions to key blockchain topics.