Bangkok-headquartered Siam Commercial Bank (SBC), Thailand's oldest and one of its largest banks, has entered the decentralized finance (DeFi) space through Compound Treasury, the lending platform's institution-focused service.
The bank's digital venture arm, a subsidiary called SCB 10X, launched in early 2020, will deposit funds into Compound Treasury, a type of institutional wrapper that uses custodian Fireblocks, the companies said.
The service converts U.S. dollars into fiat-backed USDC on Compound, allowing institutions to earn fixed annual returns of 4%. The size of SCB 10x's allocation to compound Treasury was not disclosed. An assessment of the platform by S&P Global earlier this month found that it "had only 20 clients and $180 million invested at the end of April."
Large institutions, including banks, have their eyes on the DeFi space, with services like Compound Treasury and Aave Arc offering a viable entry point.
SCB 10X has been an avid VC investor in crypto and is also involved in building infrastructure in the space. The bank's digital division has been figuring out how to actually participate in DeFi since last July, explained Mukaya Tai Panich, chief investment officer at SCB 10X.
"We're not just an investor and builder, but we also wanted to leverage this kind of disruptive technology, especially for use in a bank," Panich said in an interview. "We think Compound has created a regulated instrument that is very simple to understand: U.S. dollars in, U.S. dollars out with a fixed interest rate of 4%, so institutions don't have to worry about how to deal with crypto."
SCB DeFi
It took some hard work to convince SCB's board, as well as the bank's more risk-averse treasury management team, to participate in DeFi, Panich said.
One sticking point, he said, was the issue of capital guarantee (when a fixed-income security guarantees a minimum return equal to the investor's initial investment, regardless of the performance of the underlying assets).
Panich, who had gotten to know Compound CEO Robert Leshner over the past few years (SBC 10X hosted a couple of virtual DeFi conferences), was able to get a dialogue going to try to meet the bank's requirements.
"We talked to Compound about the 'principal back' guarantee that was required by our treasury team. At first, Compound didn't offer that. But lo and behold, after many months, they offered a principal back guarantee," she said.
A security and compliance layer was provided by crypto custody firm Fireblocks, which also offers the whitelisted Aave Arc DeFi service to institutions and has been working with Compound Treasury since late last year.
"We're seeing more and more high-level institutional clients using the DeFi service," Michael Shaulov, CEO of Fireblocks, said in an interview. "We think things like Compound Treasury and Aave Arc are definitely stepping stones to get them familiar with DeFi, and SCB has always been at the forefront of innovation, so we're excited to see them move forward."
Compound Interest
Compound Treasury is not an approved loan pool like Aave Arc, Shaulov said. Rather, it's an operational layer that USDC ties into the approval-free compound protocol, which is monitored by analytics software to ensure nothing malicious is happening in the loan pools, he said.
SCB's Panich said this is clearly an important move within institutional DeFi, but sentiment has soured recently, particularly with the collapse of Terra's UST stablecoin and credit protocol Anchor. (SCB 10X invested in Anchor's seed round).
"It's unfortunate that this whole thing happened," Panich said. "But I think in some ways it's also good because the education of regulators, board members and people at the top management level has suddenly been accelerated by I don't know how many years. I think that's a silver lining."