Capital Markets Are Going Onchain

Cuy Sheffield  0:00  

Kai, welcome to Tokenized, the show focused on stable coins in the institutional adoption of tokenized real-world assets. I'm Kai Sheffield, head of crypto at Visa. No, Simon today, he's on a plane, and when you hear the stories today, the irony is not lost on us, that he's not here to unpack them, but stepping in for him is the fantastic returning guest co-host, my friend Noah Levine, partner at a 16 Z Crypto. How are you doing today? No,

Noah Levine  0:35  

doing great, excited to be back,

Cuy Sheffield  0:36  

and also joining us is the returning Eric Saranecy, co-founder and head of network strategy at Digital Asset. Welcome back, Eric. Always fun to have you on.

Eric Saraniecki  0:48  

Thank you very much. Great to be here.

Cuy Sheffield  0:49  

And then last but not least, making his debut, Theo Golden, Head of Digital Assets at Bailey Gifford. Thanks for joining us. Theo, how are you doing?

Theo Golden  0:58  

I'm great, thanks for having me along.

Cuy Sheffield  1:00  

Awesome. So, before we get into the show, there's one quick thing I need to say. The views or opinions of our contributors today are their own and do not necessarily reflect those of the companies they represent. Nothing we say should be taken as tax, financial, investment, or legal advice. Do your own research. All right, let's get into the stories. So, the first story is Intercontinental Exchange and OKX expand access to tokenized equities with a joint venture co-chaired by former Governor Cuomo, so this will enable OKX customers in the US and internationally to access ICE futures in New York Stock Exchange tokenized equities markets. ICE invested in OKX at a $25 billion valuation earlier this year, and this company is going to operate as a US registered broker dealer and futures commission merchant. Eric, let me start with you, as kind of my go-to guy on all things tokenized RWA. Like, help us unpack this. What does this mean? Is this something that is a surprise or expected, or how do you see the role that ICE is playing and going down with with OKX,

Eric Saraniecki  2:01  

yeah, I mean, this is largely speculative, because there's not a lot of hard details on what they're going to do with this yet, but I think it's pretty interesting to see that there's a, there's a clear recognition that there's a set of skills and distribution and ecosystem that a very legitimate established participant like OKX, has in the on-chain world, and then similarly a really strong partner. I was actually trading natural gas when ICE really emerged and dominated that market and stole a ton of market share away from NYMEX. They're a very formidable organization, so they understand what it means to be aggressive, innovative, and bring products to the market and custom build for what people need, so the combination is a very, very clever one, in the sense that it's very complimentary. Exactly what they'll do is still TBD. I'll just say that where I think there is the biggest opportunity for innovation in the space is probably in this prime broker FCM zone. A lot of people are looking at the CSD, and saying, "Ok, well, DTC is coming online, that's going to change the world. Well, only if you're ready to. So, imagine you're a prime, and you don't know how to do bilateral intraday 24 by seven margining. Well, it doesn't matter that you can do it technically at the lowest layer, you're not prepared to do it, you don't have the machinery to do it. Now, conversely, someone like an OKX is doing regular 24 by seven settlements for the derivatives trading that all clears through Clear Loop right now, so they know that market in and out, they have that muscle, it's not necessarily what they're going to do, but it's a good example of complementary skill sets, and at that enablement layer, that FCM prime broker or broker dealer layer, that's where there's a real opportunity to be tech forward, innovation forward, and I think that they'll probably figure out what the right space is for them to play as they explore that a little bit, but that's a, that's a very strong combination from my perspective.

Cuy Sheffield  3:53  

Yeah, super interesting. It feels like the last few months tokenized stocks on crypto exchanges have been one of the major trends, and we covered the SpaceX story a few weeks ago, and just how much demand with, I think, it was StockX that people were trying to buy SpaceX, then they weren't able to. So, Noah, how do you think about the state of tokenized stocks and equities? Like, where are we today? And is this just becoming a table stakes product that every crypto exchange needs to have a play to support equities, and in addition to crypto assets.

Noah Levine  4:25  

Yeah, that's a great question. I mean, I think we've seen a large growth of tokenized stocks, especially to Eric's point, more from the crypto wall and an exchange model seeing players like Ondo and X stocks who are effectively creating sort of a wrapper where you buy stocks, you put it into an SPV, you tokenize that and distribute it, and I think what's really interesting about this story is we're starting to see the major exchanges, like the nices of the world, who are actually starting to enter in and see distribution not only through their existing players but also through exchanges and wallets, in doing so through really a full stack platform with the FCM and the ability to do features. And derivatives, I think my question for the group, you know, Theo or Eric, is obviously OKX is a global crypto exchange, is predominantly retail, you know, as we think about the benefits of tokenized stocks and these assets, do we look at it more as an accessibility play or is this a back-end efficiency play? You know, really curious, your thoughts on that.

Theo Golden  5:22  

I think what we're kind of seeing is a bit of a dispersion, as Noah's kind of a point pointing towards, which is kind of this kind of offshore SPV play, which is kind of funneling dollars into US financial markets, which otherwise would have been precluded, and then we're kind of seeing this onshore play, which is much more of a backend operational or resiliency upgrade, so to the access and distribution point, and the 24 by 7365 point, like the on those and the X stops of the world are completely dominating that, and particularly for retail, that they're less bothered by, you know, things like shareholder voting and governance, etc. They just want access to things that they couldn't buy before, but I see this play from ICE and OKX as being a bit of a meeting of minds, and obviously, as Eric says, we haven't got a huge amount of detail about what's coming, but if a bit of a meeting of minds about how can this be institutionally ready for players, maybe like a Bailey Gifford, where we're a big buyer of US stocks. We will interact with ICE regularly. Well, this can be an operational upgrade or an access point. And I don't think it's uncontroversial to say for institutions 24 by seven isn't really attractive. Like, no one wants their portfolio managers working over the weekend. They probably can't afford to keep them paid over the weekend, but what they want is fast finality, and what they want is better operational excellence, and they want less slippage costs, and they want, you know, hopefully cheaper, or maybe in self-custodial custody. And I see this player is really tapping into that, and I think it's evident that you're kind of, yeah, as I say, you're seeing this bifurcation between an onshore and an offshore market play.

Eric Saraniecki  7:00  

Yeah, I don't know that I agree with all of those statements. I think that I've generally rejected the access as being all that interesting, like that was clearly the benefit of a stable coin. Zero friction access to US dollar has incredible reach and demand. Equities are largely available to anybody with an investment account just about anywhere on earth, whether that's the underlying a CFD, you know, it's not hard to get access to US equities, but I think it's a necessary first step. Where I think that the innovation is really lacking is the increased utility. One example of increased utility is 24/7 trading, and so there, there is sufficient demand for off hours and on the weekend trading, that, that, that is getting it going, I think the real unlock for equities is going to be in the sec lending space, I think that's where there's been far too little innovation, and especially at the retail level, and another area that I expect there to be an incredible amount of innovation is in structuring, so if you think about, like, what a money market fund is, or an ETF, it's a wrapper under this collection of underlying, where someone may not have the time or interest to put together their own portfolio of stuff, and that's a real service to the end client. But I'm kind of a particular person. There's a few single name stocks. I don't care how popular and successful they are, I don't want them in my portfolio, and as a result I don't hold a lot of this sort of passive length ETFs for the markets to my own personal detriment, because I just don't want any exposure to a few of these names, and I'm not buying these things at a large enough clip that it would justify the unit expense to create an SMA just for me, but if you imagine that all these stocks are online and the spot markets are sufficiently on chain liquid and deep that enables the whole lending ecosystem that enables a whole structuring ecosystem. Maybe I could put together a relatively small SMA that is, hey, I love this ETF minus these two names, rebalance, boom, and I get it right. So I think that that's where the unit economics, and like I was saying before, at like the PB at the dealer at the FCM level really only work for the top of the market, and they don't work for the retail side of the market, and this sort of spot liquidity is just, it's the necessary first step to get you to those other opportunities, and I just want to make one other comment, you know, I think that when you look at who's really doing this the best in my opinion. I've been really impressed with the backpack team. I think that this interoperability between the DTC layer and the TA layer and the token layer is really important, because you're going to get for the foreseeable different utility from being on different ledgers at any given time. So, being able to go between them safely, securely, without second guessing whether or not something's fully backed is going to bring a lot of confidence to enabling those, those benefits. So, you know, maybe a totally open Morpho-like lending ecosystem makes a lot more sense to get built on a permissionless wrapper of the of the asset, maybe like an institutional sec lending single. Market makes more sense to be on the TA ledger, trading at NYSE, and clearing NSCC makes more sense to be on your broker-dealer DTC ledger. So, just like being able to move across those things seamlessly, and then benefit from the differing levels of innovation and utility you're going to find in the different ecosystem is really great. And from what I've seen, it looks like Backpack has probably done the best job of that, and in the market,

Cuy Sheffield  10:22  

the personalization point, I think, is super interesting, and we've talked about this a lot with stable coins as an example of lowering the barrier to entry to building financial products, so now you have this explosion of their new neobanks every day, and you could create verticalized neo banks for specific segments, but sounds like what you're saying, Eric, because, like, being able to customize and personalize financial products, that if you could have an ETF that is exactly designed for an individual customer, that there's no way that that cost structure would exist, and then there's this aspect of lending, which feels like that is one of the single most interesting use cases that, when I think about most of the retail investors that I know at a small scale, they don't think about the stocks and the equities that they're buying as assets that you could then collateralize and borrow against, that just hasn't really been possible, and it's almost like crypto is teaching people once you own an asset, you can lock it up in something like Borfo, and you can borrow against it, and so then there's this question of why can't I do that with my existing equities, and there are a lot of people with equities portfolios that don't want to sell. So, Noah, how do you think about the retail customer product opportunity as you see tokenized stocks in many different forms become created. What is it going to take to unlock? I can then go in and borrow against my Nvidia stock, and maybe I only want to borrow a few $1,000 and I could do that 24/7 from more football instead of having to go and have a certain amount and go to my prime broker, and like that experience just doesn't seem accessible for most people.

Noah Levine  12:00  

Yeah, yeah, for sure. I mean, I think a takeaway that I was getting from Eric's commentary is it does feel like, to an extent, what crypto is partly doing is it's democratizing access to traditional prime brokerage services to retail users. I think this is a lot of, you know, why we're seeing a lot of growth in platforms like Hyper Liquid, and so I think, you know, that's probably an important read through in what's happening, I think, on the lending side, that you know, and again, curious, what everyone else thinks, but I think the biggest challenge so far has been sort of the fact that a lot of these assets, unlike crypto assets, have whitelists, have compliance requirements, it's a little bit challenging to enable a collateralized loan against a tokenized asset when you don't know if it's legal on the other side for the liquidity providers to come through and do so permissionlessly, so I think you know there's a huge opportunity to your point to enable people to borrow against a mixed range of assets and borrow against their, you know, things like stocks, but I think the biggest challenge and the reason why we haven't seen it grown so much is it's still a bit confusing in terms of the compliance obligations and where does the actual market liquidity come through, so you know I'm curious, you know, from at least from Theo's perspective, you know, how you guys are thinking about that, and how you see that evolving going forward.

Theo Golden  13:08  

Yeah, I think I mean this is something that you know the digital asset guys and Eric's team have absolutely smashed in terms of creating that kind of repo back end of the work they've done with Brodridge, and kind of setting governance controls, and then replicating governance controls, and then surpassing excellence and execution excellence. So, I think that's just something they've absolutely smashed, and I think, yeah, as you look at kind of more holistic retail access, it's something that you know a lot of these regulated securities require compliance controls. You need a beneficial owner for a security, and we're moving in a direction where hopefully at times we'll, you know, a self-custodial smart contract will be able to hold regulated assets, but we're not quite there yet in terms of particularly onshore assets, and I guess the other component here is, yeah, as you say, you need a complete white list kind of closed loop, particularly in borrow lend, so you need both the vol curator and the liquidator and the original client to all be whitelisted, and so that kind of limits the flywheel effect, even when there's, you know, great liquidity on both sides, and so these things will improve as we go along, and I think it's also why there's a bit of a right to win for some of these kind of web two and a half apps where they're essentially enabled kind of mass or scaled KYC AML that kind of DeFi mullet play that you're seeing at Coinbase and more for integrations, etc. and will likely see from other kinds of super apps and neobanks, but this is why it's quite, I think, they've got such an incredible opportunity because they can be that onboarding process and they can also be the kind of front end architecture for a lot of these things. It's coming, it's just moving slightly slower than I guess perhaps some of us would have liked.

Cuy Sheffield  14:49  

Eric, how far are we away before an average customer can get a loan against $10,000 of their equity and do that 24/7 Yeah, and is it going to be crypto exchanges that are going to be the interfaces for that, or is it going to be more traditional brokerages that use this technology?

Eric Saraniecki  15:10  

I think it's there, man. I mean, I think that it's there today, not at the scale that you know it'll be there in six months or in 12 months, but it's certainly the early green shoots are there now, and to your point that you made earlier, Kai, about leveling the playing field. I had this love-hate relationship with the robo advisors. I think it's a great product idea. I think it's a killer product idea. It's just like here's a really simple little algorithm that is going to optimize your portfolio for long-term cost and compounding effects, et cetera, et cetera, et cetera, but when you look at the actual financials of those companies, they are massive bureaucratic orgs, because they have to be a bank, they have to be a broker dealer, they have to take custody of your assets, et cetera, et cetera, et cetera, but what's really cool about what we can do on chain is really separate this notion of ownership from control, and if you can start to do that, well, the robo advisor can become, you know, a six kid and a dog startup again, and the economics make sense. Also, I strictly prefer that, like I would much prefer to keep my money in a too big to fail bank and in a really classical old school custodian at the DTC, where I know they have, you know, over a century of hardening their sort of safekeeping practices, and then benefit from the direction of some new way to utilize my assets, and so, you know, your DeFi mullet point, I think that there's a lot of that, and I think what's taking time is that getting all the plumbing in place and being fully compliant, because you're dealing with securities or, or things like that, it just, you really can't get it wrong. There's no room for error for getting it wrong, and so people are being very thoughtful and conscientious and intelligent about it, but you're already seeing this happening, and I think it's only going to accelerate as companies that are maybe an AI native ecosystem can actually access scale of assets and provide a lot of innovation without having to go through the full overhead of becoming my depository and counterparty to everything that I do. So I think it's already there. I think the acceleration is going to be mind blowing over the next 12 months.

Cuy Sheffield  17:23  

Unbundling the robo advisor from the financial account, I think, is a really fascinating concept that should enable a lot more innovation

Eric Saraniecki  17:32  

in payments way longer than we've had it in securities. Right, you guys have virtual accounts, you kind of figured all this stuff out, the neo banking stuff figured it out on the banking side, but we don't really have the equivalent on the security side, it that's what's really starting right now, like kind of the equivalent of what your security's virtual account would be, and that's part of also why it's taking time, like you probably remember Kai, like at the very beginning of that ecosystem, the first to do it was like a little bit out on the edge of pushing the boundary of what's possible, and kind of establishing the model, and you know, there's just a lot of making sure you don't end up in jail, sort of stuff, and that's where a lot of people are right now. So, but on the other side of it, the innovation, the growth is unbelievably fast.

Cuy Sheffield  18:13  

Theo, I wanted you to cover your story as well on the second story of Bailey Gifford launches UK's first native tokenized fund on Solana and Ethereum, so love your comment on the last one. And then tell us more of what you all are doing in the space, instead of me reading the press release,

Theo Golden  18:29  

for sure. For sure, I was just.. I was gonna echo all of Eric's X for you, and I think one thing I would just add on the on the kind of robo advisor thing, I think the biggest opportunity in tokenization is that we have unitization, particularly in funds. What tokenization doing is doing here is programmatic unitization, and that's the unlock here, which is that that rover advisor piece. We, I would completely agree with Eric, like maybe it is six people and their dog, but like that's the unlock here. We've, it's able to personalize at scale, not scaled costs. I completely echo his views. So, yes, what are we doing? I mean, for those that don't know us, we're Baillie Gifford. I'm the head of digital assets at Bayley Gifford, and we're kind of a near 120 year old asset manager based in the UK. I guess we're probably most famous for our early investments in kind of high growth equities, Tesla, SpaceX, new bank, etc. and we cross both private and public equities, and but we're also a fixed income house, a multi-asset house, and I've been at Bailey for nearly five years, and actually one of my first investment recommendations was to buy Ethereum on the investment case of tokenization and tokenized assets. Now we weren't able to buy Ethereum in our funds for the reason that it wasn't allowed by the regulator, but I think the conversation went something along the lines of, if we're not allowed to buy it, then we'll darn well build on it. So that's what we've been working on, is building essentially tokenized funds. Now, what's relevant about the launch of Bailey Gifford Enhanced Yield, which is our kind of our first publicly available token. Fund is that it's something called fully native, and what we mean by that is that, unlike other tokenized funds that you see in the market, where it's essentially like Noah was describing earlier, for the tokenized equities, it's like an SPV wrap or a beneficial ownership structure, where you're happy to take an extra layer of cost, an extra layer of counterparty risk, often from from a startup, you just own the fund, so the fund is an onshore. In this case, it's a UK use, it's a UK version of like a mutual fund, and instead of issuing shares, it just issues a token, and there's no kind of extra intermediating layer of counterparty or risk, counterparty risk, or cost. And the second component is that what's really transformational about what we believe about this product is that it uses the blockchain as the legal source of truth for who owned what, so that the record of ownership, the transfer agency records are the blockchain, and what that means is that when you transfer the asset or you use it as collateral, whatever it is, intraday outside of that once a day sync that happens in the normal transfer agency process, those transactions are held to be legally true. They are legally valid, and what that means is you're not taking operational leverage each day between those daily syncs in the fund registry with an off-chain books and records like you have with most other fund tokenized funds in the world, and so this is, in our view, like the first fully native, truly native tokenized fund, and it's come out of the UK onshore regime, and I guess the last component to mention is we built it to feel like a proper tokenized asset, so we have permission to accept USDC for in-kind subscriptions and redemptions, so you never have to touch fiat as a client, and then the other components are that we are offering up to 10% of Nav T plus zero liquidity, and that's only possible when we use stable coins, because of the cash mechanisms on the back end that we can offer T zero redemptions, which is incredibly exciting. The last thing to say is the reason why we've gone to such pains, and I can tell you, some blood, sweat, and tears went into this one. To do it in this way is because we have a very high conviction view that anything we do in digital assets must be as good or better than what we do in our traditional book of business, and that's because people in the crypto space deserve the same respect as our current clients.

Theo Golden  22:25  

A client is a client, and we should be delivering the best we can. We don't cut corners just because we're innovating on the technology, and so that's why we've gone for, as I say, this onshore product where we were trying to deliver the same or better than what we have for our existing client base. Otherwise, our existing client base will never touch a tokenized asset, right? That's the role that we have to play. We need to bring them on chain.

Cuy Sheffield  22:50  

Yeah, super interesting. And congrats for kind of a market first. So, it sounds like the target customer is someone on the more crypto native side that's already on Ethereum, Solana, they already have USDC, and so being able to meet them where they are. No, we've talked about this for a while, of like, how do you think about the tokenized real-world assets in the stage today being built to give crypto investors access to traditional assets, kind of where they are today, versus tokenized assets focused on existing investors, and like some of the challenges of being able to build across those, those different markets.

Noah Levine  23:29  

Yeah, it's a great question. You know, I think this is something that I would be very interested in, kind of going deeper down, is like, you know, who the ultimate net buyer is in terms of putting it on chain and giving direct access to crypto investors, I think it's sort of one of those things where today there's obviously a lot of venues of which you can get yield. We've talked about a lot about Morpho on the show. We've seen products like Biddle and some of the tokenized money market funds. What I think is particularly interesting about this, and Theo, in your articulation, is kind of it feels like we're going from what looks like cash equivalents and moving to more actual actively managed products and actively managed funds that can be done on chain. I guess my question is from the perspective of a consumer and specifically a crypto investor. You know, where do you see benefits for that coming through?

Theo Golden  24:14  

Yeah, it's a great question. I guess I'll take the crypto consumer piece first. I think the key thing for us is about offering something which is tangibly helpful in a broad portfolio, so you take kind of USCC and stuff like that, where it's kind of an option strategy. The yield on those products can be highly volatile, right, because it's basically, you know, options carry strategies. A money market fund is offering a relatively low yield, but it is stable, and it is cash like in its cash, essentially the Bailey Given Enhanced Yield Fund is that kind of somewhere in the middle, it's that kind of stable six to 7% average investment grade portfolio, which is able to kind of just eke out that excess return and be part of a more holistic portfolio, so it's. It's there to kind of, I guess, what I like to call it, like an anchor yield for people who are looking to do on-chain yield allocations and strategies in terms of the net benefits. I think the most important one is coming down to the structuring, which is that I think I'm a bond investor, so I think about everything in sharp ratios, right? And so I think about some of the RWA that we're seeing in the space right now as being very bad Sharpe ratio trades, because yes, you're getting yield, yes, you're getting, you know, a money market fund yield, but actually the risk you're taking by buying it is absolutely massive, just because you've got a AAA asset, if you put it through a triple C transfer agent, it's a triple C asset, and that's a really, really important thing to remember, and so it's really important to me that we bring high Sharpe ratio portfolios and products on chain, and that's, and that's what we're trying to do here. So that's the first piece. The second piece is, and we're working towards it in terms of collateral or borrow, lend, all these things, and I guess the other side is to your point, Noah, about this actor's management, which is like Betty Gifford, we only do active, and I think the piece here is about, particularly with fixed income and yield, it's a much more agile asset class. It's a bit less like equities, when you can just buy and hold the S and p5 100, and it's just compounds over time, and active can give you those big kickers. Fixed income is a much more complicated asset class, and having that active management, particularly in terms of both credit curves and credit risk curve, and also in terms of the rates curve, is really important to allow people to responsibly have access to those higher spread, those higher yielding instruments, and that's why we focused on bringing an active product on chain.

Eric Saraniecki  26:37  

One of my favorite tweets I've seen in a long time to your comment, Theo, come to DeFi, where yields are consistently lower than Sofr, and you lose 100% of your money once a year.

Theo Golden  26:47  

It's such a good tweet. Oh my god, it's

Eric Saraniecki  26:50  

perfect. And yeah, I have two questions for you, Theo. Like, so one, my favorite, my other favorite meme is the where does the yield come from, Goose. So, like, where does the what is the better than so far? Is it lever? And then the other is you were talking about using about 10% of the nav is available on T zero. Is that your balance sheet that you're extending out, or are you able to do primary market on Tzero?

Theo Golden  27:15  

Two absolutely excellent questions. So, the first one, yeah, where's the yield coming from? So the underlying portfolio is a long only bond portfolio, it's 50% government bonds and 50% corporate credit, so it's real governments, real countries, no leverage,

Eric Saraniecki  27:33  

though you're not, you're not okay, no, because I hold a lot of levered long bond funds, so I was just curious if it was one of those,

Theo Golden  27:39  

no, we're there's FX overlay, so foreign exchange overlay, which is used to hedge, so I guess you could think about that as being leveraged, but we're not taking, you know, we're not taking leverage positions in cash bonds, no, this is this is a cash bond portfolio that we own the nominal, so yes, to that point, this is really boring plain vanilla fonts. It's about as unsexy as this is

Cuy Sheffield  28:05  

what DeFi needs. Boring is good, that's the point.

Theo Golden  28:10  

Yeah, make boring sexy again. And then the second component to your question, yeah, so the 10% now. So yeah, basically the we have a credit facility where we borrow against to enable, I'm renting

Eric Saraniecki  28:23  

your balance sheet. If I do same day,

Theo Golden  28:25  

yeah, renting the funds balance sheet, and it comes from, I won't say which one, but a tier 1g-Sip bank that we're borrowing against. And essentially, but I guess if you think about it, there's no, there's no price risk in that for us, it's just a cash settlement risk.

Eric Saraniecki  28:39  

No, no, just curious, if you'd figured out how to do primary, instantaneous, and atomic with the delivery of the cash,

Theo Golden  28:45  

and yeah, so we're working actually on a really exciting project on that, which I will keep - hopefully that will be in another press release, which will be able to announce soon, but we're working, working on that piece, and to your point, Eric, like earlier, like the prime brokers are getting there, yeah, but a lot of them are particularly the ones with the massive balance sheets, they're still trying to work out, like, what's that operating stack look like, like, where's their custody, which stable coin do they want to make markets in, but we're getting there, is, I guess, at least the conversation is happening now,

Noah Levine  29:17  

yeah. Kai, one question for you, I mean, obviously, I think the entirety of the episode so far has been talking about tokenized assets, whether you know funds or stocks or bonds. I'm curious, you know, obviously there's a lot of opportunity with the crossover with payments. I'm curious, as more assets come on chain from a Visa point of view, where do you see potential opportunities, both for Visa, but just in payments in general, as we continue to see these products come into market.

Cuy Sheffield  29:41  

I love this intersection, and it's one of my favorite things about the broader blockchain and unchained space, is that you're seeing these worlds come together, that capital markets people and payment people, like, are not spending that much time together normally, they're just two entirely different systems, and so I'm really interested to see. What are the use cases like, if you can solve the T zero, of which we're gonna have to have a whole deep dive episode on, like, how do you enable T zero? What are the different approaches? What are people doing? I think it's going to start first on the B2B side, where I think just the amount of working capital and cash that businesses are going to need to have is going to significantly decrease over time, and I think that's a great thing that businesses should be able to manage their corporate balance sheets as efficiently as possible, earning as much yield as possible, and then when they need to make a payment, they should be able to convert into a stable coin or a cash-like instrument to be able to pay, but not have to sit on cash that isn't earning yield, and I think that ultimately the same thing could end up happening to more retail consumers, of the amount of just working capital cash in your bank account can go down if all of your assets can become a lot more flexible and the ability to convert between them, so I'm incredibly excited about it, but it's like there's so many building blocks that have to happen first, and I think it's going to take some time to get there. So I want to move us on the next story. Before we get to part two, let's hear from the sponsors that made Tokenize possible.

Sy Taylor  31:16  

This episode, if it's not obvious, is brought to you by our friends at Visa, a global leader in payments, Visa's tokenized assets platform, VTAP, uses smart contracts and cryptography to help banks bring fiat currencies on chain. VTAP allows financial institutions to issue fiat-backed tokens, improving financial efficiency and enabling programmable finance. You can check out the links in this episode's description to express your interest in VTAP. This episode is sponsored by Stripe. Internet commerce is evolving pretty rapidly, and agents are now becoming economic actors. They're managing spend and transacting autonomously, and stablecoins are becoming the default for them to do so, thanks to their programmable, instant, global, and low-cost nature. With Stripe, your business is ready for this new agentic economy. Accept stablecoin payments from agents, equip your agents with wallets, and issue stablecoin back cards, so they can spend all through a single integration from Shopify to RAM businesses, trust Stripe to get ready for agentic commerce. Learn more@stripe.com forward slash crypto. Tokenized is also sponsored by Fireblocks. Fireblocks is the stablecoin infrastructure of choice for global businesses, from Visa to wallpay to bridge to revolute with over $100 billion in monthly stablecoin volume, Fireblocks powers stablecoin strategies at scale with infrastructure that enables PSPs, fintechs, remitters, and banks to issue, move, hold, and manage stablecoins. It's all done securely at scale with secure built-in compliance with Fireblocks. You get complete control to build your own stablecoin orchestration layer, create payment accounts, manage liquidity, and access on and off ramps in over 60 currencies. Makes it easier for you to build and scale and expand your business globally. Learn more@fireblocks.com@firebox.com

Cuy Sheffield  33:25  

All right, so for the third story, Simon would love this one. We're gonna need a whole rant from him on it, but the Bank of England backs down on strict stablecoin holding limits, and so the initial plan was to impose 20 pound limits on individuals, 20,000 pound limits on individuals and 10 million pound limits on corporations. Instead, the Bank of England is creating a temporary issuance guardrail, meaning the cap of the total circulation of any single systemic stable coin would be 40 billion pounds. They've also lowered to 30% the amount of backing of assets in deposits at the central bank, there's some evolution in how yield is treated, so Noah, at least start with you, of like, how should central banks outside the US view stable coins? Walk me through, like, the logic of why would Bank of England want to impose limits, and then what impact would that have if they do?

Noah Levine  34:21  

Yeah, for sure. I mean, I think the original plan here, in terms of setting per user limits on how much stable coins you can hold, very much comes across as a fear around deposit flight, and so I think the shift towards doing it in terms of the macro or the total makes a lot more sense, because it doesn't become very prescriptive on a, you know, some people are going to want more and some people are going to want less, while also I think accomplishing what they want in terms of ensuring that this doesn't lead to a massive amount of deposit flight. You know, I think most of the central banks are obviously, you know, have mixed views on stable coins. I think on the one hand they're worried that if their entire market becomes either dollarized or that stable coins take over everything, they're going to have a lot less control. Role of their local currency, whereas on the other hand, I think they recognize that there's a massive opportunity to increase how much they can partake and be active in the global economy, and especially in more of the emerging markets. We've seen this play out where a lot of businesses are finding tremendous amounts of efficiencies using stable coins, whether it's for cross-border trade or even just for accessing dollars where it's otherwise challenging, and so I think the big question that these central banks need to ask is, what is your strategy going to be? I think on the one hand you could take a very strict approach and say we're going to almost make it illegal to access stable coins, and one benefit could be maybe they don't need to worry about some of those consequences. However, I think on the other hand they're potentially limiting the opportunity for innovation in the market, so I think there's going to need to be some sort of a balanced approach, you know, maybe something similar to what the Bank of England is doing, but I also think there's a tremendous opportunity to embrace local currency stable coins, where up to this point, you know, almost was it 9596 97% of all stable coins are dollars, we've seen a lot of activity in the market of new issuers coming out and doing local currency stable coins. I think that unlocks opportunities like access to interesting yield opportunities, almost like a basis trade on some of these currencies, as well as opportunities to engage in on-chain FX. And so, you know, I think for the Bank of England, like in this announcement, I think one of the parts of the announcement was that stable coins can be used as pre-funding for FPS, and play a role in that, and you know, I think that is a tremendous approach, where we've already seen stablecoins have a tremendous amount of product market fit in in reducing the amount of pre funding you need. So, I think a balanced approach is what's going to be important, and I'm glad that the Bank of England has sort of evolved their view and taken a more pragmatic approach to this.

Cuy Sheffield  36:40  

Eric, I don't know how closely you followed this one, particularly the backing of these. My understanding, there was a proposal before that 100% of the reserves were going to have to be held at the Bank of England backing a stable coin, so it was always like a synthetic CBDC. Now it sounds like they're lowering that to 30% Like, what advice would you give of, like, how do you build a stable coin ecosystem in the UK, and like, is this the right policy approach towards that?

Eric Saraniecki  37:09  

Yeah, I think that's great. Question, it was actually going to be a very similar comment I was going to make on the end of the previous segment. There are these predictions about stable coins in their terms of their TVL just going through the roof, parabolic. I actually don't think that's true. I think that if we really get everything right about rewiring the connection between capital markets and payments, that cash becomes a just-in-time concept, and like what everybody is really missing is this interaction between the bond and repo market, and it's permissionless expression, which is the stable coin or a deposit, and if you can nail that interaction, and this is something we work on a lot, and feel is going to wake up and come over to Canton, we'll do this primary market stuff with him soon, but if you can get that right, then I always think about the pre funding that we do today is necessary evil, I need cash on a Saturday. I'm delivering that through Visa, you know, at the point of sale, in like a co-pay scenario. That, so, like, this, this delivery of cash is a necessary evil to this pre-positioning. But if I could do it with what I call, like, a financial capacitor, so I could do it with a treasury, I could do it with a fund, and then I could just in time the cash that I need at the point of sale, when we get to that level of utility and velocity, then I think universally you will see that people sit in very little cash, very very little cash, and so, yeah, I think the TVL for stables is going to grow in the foreseeable, but I think that if we're actually delivering utility, we will then see very spiky changes in it, depending on what's going on for the use of any given participant, and I think that the right place to do this is in the primary markets, not in the secondary. The secondary is where you get all sorts of liquidity traps. The primary, if I could face the issuer, give them a gilt and get a stable, and vice versa, that's going to be the right mechanism. So, what would I do if I were bringing a stablecoin to market today? I would first and foremost focus on the back end of my asset, which is very much an afterthought for a lot of other participants, and the back end is where I have my cash deposits, my treasuries, my reverse repo activity, and I would build all of that to be natively on chain first, connected to actual DTC originated assets connected to trade web venues, Broadridge venues connected to all the institutional liquidity providers, because then I have a 24 by seven velocity creation redemption mechanism against the actual underlying capital markets mechanism that that stablecoin relies upon, and the reason that I would focus there is that I, in my opinion, that's the right focus for a stable coin, is focusing on the utility of going in and out of these two forms of money and focusing on the velocity of that, and I always like to give an example. Imagine if we're going to start doing margining with stables, and I want to go to a prime, and I want to deliver a couple yards of a stable over a weekend, they're not going. To be willing to take stablecoin issuer risk over a weekend at that size, I just don't, I really don't believe it, you know. I lived through Lehman going bankrupt on a Sunday afternoon, so you need to be able to exit these things 24 by seven at your full scale primary market scale, and that increases the utility of your, of your money, and I think we have this artificial low glass ceiling on the value of stable coins today. It doesn't have a lot of capital markets applicability, precisely because the back ends are not capital markets on chain enabled.

Eric Saraniecki  40:33  

You have this like impetus mismatch, you have a 24 by seven front end, you have a Monday to Friday nine to three back end, and that creates a massive friction where Theo has to go borrow someone else's balance sheet to try to bridge the gap, and he's constrained, and that's that's a fundamental failing of the design of these products that we can now fix, you know, like we were fixing this very actively in the Canton ecosystem, there's a good example of the expression of tokenized treasuries and the repo markets that we're trying to bring broadly to all the ecosystems.

Cuy Sheffield  41:02  

Yeah, super interesting. I want to get Theo's thought on, like, the context in the UK in the regulatory environment, what the Bank of England is doing, and then your reaction to Eric's comments.

Theo Golden  41:12  

Yeah, sure. And I'm sat in Edinburgh today, which is obviously the home of proper banking, so happy to fly the home flag, if that makes sense, just to Eric's point, that I agree with so much of that. I think, particularly around the stablecoin float piece, I think the really important piece I think a lot of stablecoin issuers forget as well is capital markets are a completely different beast to payments in so many regards, and the reason I say that is because a lot of, for example, cross-border flow doesn't happen in spot, it happens in futures, forwards, swaps, etc. What Eric is really, really alluding to in really explicit terms is the backing of those assets are incredibly important, and if I want to, for example, I report in US GAAP, and I have loads of euro revenue exposure, I need to forward hedge that, and I'm just not really going to use a stable coin. I'm not going to have a non-yielding asset, a stable coin to post as collateral for that position, and I need that position. It's not a just-in-time payments thing, it's not a, it's not a payment, it's insurance. I'm locking in an FX rate, and so I think Eric is so banging on the money on that. It's the backing is one of the most important pieces, and for stablecoin companies to go from being just simply nim businesses to being like a fully integral part of the financial system. The backing components of that is just going to be integral. So I wholeheartedly agree with that. The other thing, the other thing around the capital markets piece, I would just add as well is like the burn fee, now the burn fee is less of an issue for payments, it's still an issue, but it's less of an issue, particularly when you're comparing it to the existing rails, right? But the burn fee is a real issue for capital markets. The idea that I would take a 510, basis point haircut on a position, particularly when I'm fighting for a basis point, is not really comprehensible, and so when stable coins are coming for the capital markets play, any efficiency you bring is not going to beat that five basis points burn fee, and when I go back into fiat, and it's an artificial hurdle, it doesn't need to be there.

Eric Saraniecki  43:17  

Oh, I disagree with that, Theo. Go for it, go

Theo Golden  43:20  

for it, go for it. So,

Eric Saraniecki  43:21  

in my opinion, there's an existential problem with the business model of stable coins. Put Tether aside, because they have nailed it, like their business model is access, right? So everybody other than Tether, that somehow didn't catch lightning in a bottle that way, the way that they monetize the stable coin is the float.

Theo Golden  43:36  

Yeah, yeah, inherently,

Eric Saraniecki  43:37  

and they're not getting transaction fees, which is where they should be monetizing the stable coin. It should be oriented around velocity, and they are struggling to find the way to monetize transactions. You can't in a permissionless setting. I can't take fees directly from this user, plus it's hyper competitive, et cetera, et cetera, et cetera. Now, let's give a little head nod over to Kai over here. There is someone that figured out how to do this on the back end, it's called Interchange, and this is exactly what we built into the Canton network. So, all the network fees everywhere other than Canton, I always say it's like double dipping. Validators get the emissions and the fees, and in Canton, the fees go to the thing you're interacting with. It's literally Interchange. Okay, you don't need more than emissions to incentivize the infrastructure to exist, the fees go to the thing you're interacting with, and it's done in a really kind of clever, indirect way, so that you're not directly getting paid by the by the user of this, so you don't have a direct relationship with the user, but absent that interchange mechanism, finding the long-term sustainable business model for stables has been tricky, and that is a very intentional gate to keep you in the TVL. So, completely agree, it's not arbitrary, it's not capricious, it's existential, and you know they're going to have to start to go in the direction of the networks that offer things like interchange.

Theo Golden  44:56  

I completely agree with that, and essentially the transaction has they. Have got used to the transaction itself being a public good, if that makes sense, because you're not happy to pay a transaction fee, but I was just going to the UK piece, if I may, just very briefly, I've seen a lot of response from the industry around the 40 billion cap, and people thinking that that's kind of unfair around this kind of issuance cap. One thing I really want to stress to listeners is, like, I think we should think about the current BOE policy as a bit of a one-two punch in terms of this interim policy is pretty good, like it's pretty decent, like the 30% at the bank, like it's not perfect, but it's pretty darn good, and what it does is it, it also enables us to leverage the controls that exist in the banking universe and start to slightly extrapolate them out into the stablecoin universe at the same time as keeping people comfortable about systemic risk and a credit crunch to borrow to essentially like lending on the other side of deposits, I think we can all agree that if a sterling stable coin issuer gets to 40 billion in the next 12 months, we will all be absolutely ecstatic. So, like, let's be patient, it's a one-two punch. Once they're at 40 billion, I'm sure it will evolve trust. Like, I don't know if Eric, you would agree with this, but like stable coins, are they're a code, they're a programmatic means of payment, but they are not divorced from trust. Trust is still integral, an issuer is still integral. Yes, you're taking on potentially less credit risk because you're not taking on like a bank balance sheet lend position, it's one for one pegged, but you're still having to trust the issuer at the end of the day,

Eric Saraniecki  46:43  

and they're underlying custodians,

Theo Golden  46:44  

exactly. You're

Eric Saraniecki  46:45  

taking a lot of implicit depository risk. I mean, there's a lot to it, and you know, we've lived through it in a lot of different contexts, so it's not even a theoretical.

Theo Golden  46:53  

Exactly,

Cuy Sheffield  46:54  

I wanted to come back to the burn fees as well. Noah, like your perspective on it, feels like people are starting to look at burn fees as like a limiting factor on the stablecoin ecosystem, and my starting point was, well, if you don't have burn fees, you know what stops someone from showing up and redeeming billions of dollars, and isn't there a cost to the underlying issuer around how to maintain the liquidity, and what that looks like, but like, what's your take on burn fees, and as a limiter, and like, where that might go, as well as the previous conversation.

Noah Levine  47:23  

Yeah, and I think, like, you know, part of the rationale for burn fees from the issuer is, obviously, you know, there's no minting fees, right? You want to make it as easy as possible to expand the supply of the stable coin, and you want to make it at least somewhat prohibitive to get out of it. But I think, in the fullness of time, like, we're going to see burn fees largely go away, and I think that's going to come with increased competition in the stable coin space, and also to the point that as a lot of the take rates in the business model of this sort of comes down, it's going to be harder and harder to justify paying those fees, and you know, especially in capital markets and in payments to Theo's points, like where BIPs really do matter, you know, paying five to 10 BIPS is a lot, and I also think, too, it's.. it becomes challenging in terms of how you actually forecast, you know, now because they people have burn fees, it's like it becomes this whole new lever in terms of your costs that you have to take into account. So, I think over time that's likely probably going to go away, but then I think at the same point, too, to Eric's point, it becomes challenging to see where stablecoin issuers actually make money. I think one point that wasn't even brought up is the other thing that's different about interchanges, obviously the networks determine what the interchange rates are, whereas with a lot of the reserves, the interest rates drop by 50% half of your revenue goes away as well. So I think there's a lot of variability there that makes it challenging, and so I think for me it's a question of as I look at some of the bigger stablecoin issuers, that's not named Tether, you know, it's a big open question in terms of where do they monetize if they can't get it from burn fees, and if, if you expect there to be volatility in terms of interest rates, value-added services is probably the first thing that comes to mind, but obviously I don't think there's been a tremendous amount of success there, so you know it feels like what we're seeing, and we're seeing this also, I think, at the blockchain layer as well, there may need to be more vertical integration, where rather than just being the stable coin issuer, they get into orchestration, they get in, they start doing first-party products, and try and own more of the stack, but I think it's an open question of once you do that, does that limit your ability to be a network, because now you're effectively competing with players that otherwise would be supporting the growth of your stablecoin.

Eric Saraniecki  49:20  

Yes,

Cuy Sheffield  49:21  

and for the record, Simon says that he's glad to see the Bank of England and moving, moving in the right direction. We're gonna have to wait for his, his rant. Unfortunately, that's about all the time that we have. I feel like we could talk for hours. We need to go much deeper in a format with this, this incredible guest. A few stories we didn't have time for Coinbase AWS, they enable publishers like CloudFront to charge AI agents using the X 42 protocol. Noah and I could talk forever about X 402 and kind of the future business models, so we'll have to do that another time. Big shout out to Ethan and Alium, they just raised 40 million in series B funding. Huge fans of them, they've been an amazing partner. MoneyGram is becoming. Solana Validator Moon Pay with another acquisition, so much news happening in the space, but thank you all for joining. Noah, where can people find out more about you?

Noah Levine  50:10  

I'm at N Levine 19 on X.

Cuy Sheffield  50:12  

What about you, Eric?

Eric Saraniecki  50:13  

Oh, me personally, hit me at that at Wisarn underscore real on X.

Theo Golden  50:18  

All right, and CEO

Eric Saraniecki  50:20  

Tradify Man, LinkedIn is the only place that you can find Theo

Theo Golden  50:23  

DF Golden on X, but I am, I am unfortunately a LinkedIn man. You can take the band out the suit, but you can't take the suit out the man,

Cuy Sheffield  50:31  

a LinkedIn man. We get, we got plenty, plenty of LinkedIn folks on the show, so I got to get more active myself on LinkedIn. I've been slacking, spending too much time on X, but thank you, everyone, for listening. If you like the show, please subscribe to Tokenize on Apple, Spotify, wherever you get your podcasts, and please leave us a review, give us feedback, helps others find the show. Thank you all. Bye for now.

Unknown Speaker  50:54  

Bye.