SEC Unlocked Tokenized Stocks

Sy Taylor  0:00  
Welcome to Tokenized, the show focused on stablecoins and the institutional adoption of tokenized real-world assets. I'm Simon Taylor, your host, head of Market Dev at Tempo, and author at FinTech Brain Food. And joining me again is Kai Sheffield, head of crypto at Visa, and also congratulations, man, father of two. How are you doing, my friend?

Cuy Sheffield  0:18  
Thank you. I am in in the trenches, in in the baby trenches, just trying to trying to get by, but having a great time. It's good to be back on the show after a few weeks. There's so much happening. We've got some awesome guests, you know, some announcements to cover. Let's get into it.

Sy Taylor  0:33  
Yeah, well, let's do that. But we got to welcome our guests first. Returning to the show is Nikhil Chandoc, who's chief product and technology officer at Circle, how you doing, Nikhil?

Nikhil Chandhok  0:42  
Good. How are you?

Sy Taylor  0:43  
Really good, man. You've got some news this week that we'll get to, but I've also got a welcome, long overdue debut for Simone Maini, who is CEO at Lipstick. Simone, how are you doing?

Simone Maini  0:55  
I'm great, Simon. Yeah, it's great to be here finally. So thanks for having me.

Sy Taylor  0:59  
Long, long, long overdue. Really happy to have you. Before we jump into the news, I've got to remind viewers and listeners that views and opinions of our contributors today are their own and might not reflect those of companies they represent. Please don't take anything we say as tax, legal, or financial advice. And of course, this podcast is sponsored by Modern Treasury. First story this week: The SEC has granted a five-year exemption for tokenized U.S. stock trading two days after the Clarity Act failed to advance in the Senate. This is a temporary conditional relief allowing certain on-chain venues to offer trading in tokenized U.S. listed stocks using automated market makers and liquidity pools, aka DeFi. Anyone? There are two exemptions: one from the legal definition of an exchange, and another for the definition of dealer. Both last for five years. This is going to be really interesting. Tokenized shares must give holders the same rights as the equivalent conventional shares. Hello, Robinhood, and trading access must be permissioned, even though the smart contracts run on a public permissionless blockchain. So I'm actually going to start with Kai on this one, and since you're coming back into it and you've not had much sleep, I'm just going to ruin your week, but we've been talking about this theme on recent shows quite a bit about tokenized stocks. There's obviously there's some disappointment around clarity, but this is next best thing for tokenized U.S. stocks.

Cuy Sheffield  2:33  
Yeah, I think first it feels like we should just expect news and releases from SEC like every week going forward, that there's just now that we know clarity isn't going to happen, I would imagine that there are a lot of things that they're kind of taking into their own hands, saying we're going to give the market guidance on on how we want this balance between innovation and experimentation with having some clear guard roles in place, and so there's going to be a lot of news for this show to cover of just all the releases that the SEC puts out, the the thing that that stood out to me here is, again, just in the past few weeks, it feels like we've seen like tokenized stocks move into much more of a more mainstream kind of retail type of market. Given what Robinhood has started to do, now we've talked about the different types of tokenized stocks and how those don't actually give you the same rights as the actual share that's that's issued on chain. But the concept of a tokenized stock seems to be taking off. There's a lot more momentum. There's a lot more developers building around it, and then you have DeFi infrastructure like Uniswap that is now being used to trade tokenized stocks, and so it feels like just the volume of AMMs, these automated market makers trading tokenized stocks, is going up into the right. But the rules around what does it mean for an AMM to trade tokenized stocks-that doesn't seem like that's been clear. And so my understanding here is this is the actual share that's issued on chain version, not the synthetic version that this is covering, and this is a permissioned AMM where you could have Uniswap with something like their with the V4 hooks, where you could permission who the liquidity providers are to enable that as market infrastructure, which is very different than the entire permissionless DeFi ecosystem emerging around some of the Robinhood tokenized stocks, and so I don't know how this is going to play out, but it's just great to see more guidance and this balance of innovation with some rules around it.

Sy Taylor  4:29  
And Simoni, I think given what your business has done for a long time around the crypto market, interested in your perspective of what this might mean for you, your business, and and sort of risk in this ecosystem.

Simone Maini  4:42  
Yeah, for sure. So, look, I completely agree with Kai. We should expect to see a lot more of this. Like, very unsurprised to see Chair Atkins coming out with this today. I think also the CFTC. I'm. This is all pretty live, but I think the CFTC have put something out today as well. So, I think this is just going to be a bit of a fire hose where they're going. Really, be looking to bridge the gap now between clarity failing and providing as much of that clarity and guardrails as as they can. The hope is obviously that this encourages a lot of those institutions that were waiting for clarity to start participating, nonetheless. And in many ways, this is not at all different from where we've been for the last seven, eight years or so. We're going to see rulemaking proposals. You know, I think that the chair has said today that they want this actually to be a permanent thing, but they're going to put this out for solicitation and input from the industry. So, you know, it'd be great to see a lot of participation, a lot of experimentation. There, it seems like, and again, this is all quite new, but it seems like this is being positioned as a sandbox. And when it comes to the risk question, really, what they're saying is, within these guardrails, come and have a go, come and test the the boundaries and give us feedback. For us, that means partnering with these financial institutions, just as we have been all the way through their digital asset journey, to get a little bit more kind of on the riskier end of things for them. There's a huge upside to how much they're going to be able to see on chain now, but also a big burden of having to look at that activity in real time,

Sy Taylor  6:21  
Nikhil, I know the Clarity Act and working with institutions was something that Circle's been following closely for a long time. Your read of kind of where the institutional mood is following the last couple of days on on some of this stuff, and and more broadly zooming out to the general trend of institutions and tokenized stocks.

Nikhil Chandhok  6:42  
I think everybody is trying to figure out like how it's going to work, right? I think everybody understands that this is how you'd want to settle things. This is how you you'd want to have your markets operate 24/7. But I think the core infrastructure to sort of like bring that up is just coming online right now. So I don't know about this today's SEC ruling. I haven't kept up, like I said earlier. But from my perspective, just as the core financial infrastructure of like the U.S. stock markets is going to get upgraded in the next two to three years, right? Like it's going to be on on chain. It's gonna be there's gonna be new sort of like models of like managing risk. All of that is in front of us. So like that's where we've been focused. Like I think we announced Arc yesterday, and like some of our partners on Arc are like focused on that. Broadly on Clarity itself, like I think Clarity solved a different problem than tokenized stocks. Clarity was around like capital formation, creation of tokens more generally. I think tokenized stocks is the right thing to do anyway. I think like having these instruments on chain, having settlement on chain, having some of these newer forms of like market structures, taking advantage of like what is one of the best sort of assets in the world. It works both ways. These assets can take advantage of these new market structures, and these market structures can take advantage of these new assets. So, so yeah, I'm excited to see what happens.

Cuy Sheffield  8:12  
Simon, do do you have a view on like one thing I still struggle with is it feels like AMMs, these like automated market makers, are like one of the biggest innovations that has come out of like the crypto trading ecosystem, and you know all of these long tail tokens that have emerged. Like the way people buy them is through some type of AMM, whether Uniswap or some of the the other exchanges. Are AMMs going to have a big product market fit inside of traditional capital markets. Like, are there use cases where AMMs make sense? Is it just like long tail liquidity, or it's it's actually less efficient? And so, it hasn't been clear to me. Is the reason that AMMs aren't adopted in traditional capital markets? Is it that the regulatory clarity isn't there, or is it that they don't solve the same types of problems that crypto kind of needs? This very long tail liquidity approach that you know TradFi doesn't need. So, do you have a take on that?

Sy Taylor  9:11  
Yeah, it's a very different type of buyer, isn't it? In in traditional markets, you might have 20 Wall Street firms that represent 95% of the retail and institutional market, and those 20 firms. If one of them moves a position, you can kind of figure out who moved that position on an AMM pretty quickly. And so, you don't want that. You want more privacy, and you definitely want SLAs, and you want uptime guarantees, and you want a whole bunch of different requirements for how custody works, and you're probably regulated yourself. You want to know who your counterparties are. You probably have a bilateral deal with them, and so I think it's more interesting to watch what Robinhood and Coinbase are doing here. As soon as this news came out, Coinbase was out on the. Instream business news talking about we don't do synthetic stocks. You know, it's all about tokenizing the real equities themselves. Then you've got to consider the DTCC is coming into the space. To me, that space is probably breathing the biggest sigh of like, ah, finally we got some rules versus the AMMs themselves who maybe help spread tokenized stocks into geographies outside the U.S. especially into long tail markets, as you sort of alluded to. But for the domestic audience, the requirement set is so different. The capital markets are so deep, so liquid, so mature, and the requirements are so mature that I really think it's different. I mean, does that resonate with Unicil? I heard you sort of agree. It

Nikhil Chandhok  10:41  
does, yeah. Most of what I have seen in these capital market use cases is very similar to what you're describing. Like these, you have these dark liquidity pools. You have RFQ-based systems. You have very strict requirements around like quotes and and guarantees around like how your data is treated. All of that doesn't carry over into an AMM. AMM works well when you have like a long tail of like you have a million tokens. Somebody's got to provide liquidity against them. There's got to be a place to discover that liquidity, and you got to price it out. And like, and these are smaller orders too. Like for these large orders, like AMMs just don't work. But I am not an expert on AMMs, and I haven't really, but they came about in the crypto ecosystem for a reason. Is my take, and I don't know how much they carry over directly to replace like what is already there as far as like U.S. capital markets go. If the AMMs are about like increasing access to U.S. stock, I don't know how this ruling affects that. So, but broadly, I think we should believe that more people in the world are going to be interested in participating in U.S. capital markets. It's a great thing for the U.S. It's a great thing for these people around the world, and so I see this as a step towards that. Right? Like, so let's let's just keep marching on that road, and like every sort of win we can get along that road is a good thing for us,

Sy Taylor  12:02  
and I see it as a trade-off, right? So perhaps the long tail gets the advantage one of going into more markets, but also two permissionless innovation. So I can combine that tokenized stock with something else, a debt instrument with blah blah blah blah, with some earn instrument, which you're already seeing happening in the Robinhood ecosystem, and I can do securities lending and that sort of thing, and so this this petri dish for innovation stays stays really really interesting,

Nikhil Chandhok  12:28  
and that is exciting. I think that's the sort of like capital efficiency that smart contracts like unlock the 24/7 settlement unlocks. So I think that's where the innovation is. You're right. Yeah,

Sy Taylor  12:38  
I'm just going to briefly move us to the next story, Nikhil. While while I've got you, because you've had quite a busy week. Circle launched Arc, mainnet with USDC used for its transaction fees, on-chain lending and trading, and a founding validator group including BlackRock, Visa, and Mastercard. Why don't you tell us about this, Nikhil? Who's Ark for? What's it doing, and how's it been?

Nikhil Chandhok  13:01  
Yeah, we had our launch event yesterday here in New York, and I think it's a fulfillment of our vision of what comes next for chains. And when we're saying we're launching a new chain, we're launching a whole platform, right? Like, so we're not just launching the l1 chain. The l1 chain does include a set of like known validators, but outside of that, it is a permissionless chain, and so in that way, it is more like a traditional chain than not outside of the validator set. On top of that, we have a bunch of functionality that we are launching, like our interop stack that is CCTP and such carries over to Arc. We have new SDKs, like we're calling it Arc app kits that launch along with that, and then we have something called Arc Studio, which allows you to use a coding agent to deploy contracts on Arc and Arc portal, which is a fun way for people to discover what's possible on Arc. So in many ways, we've taken what is traditionally done when you launch a new phone or like a new device, and you sort of think through not just like what goes on to the chipset, but all the way to the user experience, right? Like you want to make sure that every part of the stack works really well, and so we have built every part of the stack. Each part of the stack is individually composable with other parts of like the crypto ecosystem, so it is it doesn't create lock-in for developers and users, but you know we want to compete on functionality, and that functionality is like USDCS gas, which has its own benefits. I think most people of your show will understand that it has sub-second finality, so you can you know our day one data are suggesting that we're finalizing blocks in half a second, and those blocks are final. They don't get reorganized. We have privacy as an opt-in feature, so you don't have to spend a ton of money and to get privacy or like go through a mixer, which was sort of like you know traditionally how privacy was done. And so we have new new ways of doing. That I already talked about speed. I already talked about gas. We have a whole agent stack that we're launching on Arc that allows for agents to get discovered on Arc. We have new agent wallet features like nano payments and gateway that are coming forward onto Arc as well. And we we also launched another thing which we're calling Agent VM, which is a new thing we're excited about, which is a way for your agent to get like trustworthy computing done on Arc. So your agent comes in and says like, "Hey, I have this encrypted data. I want to make sure it's executed by a machine that has these characteristics. Can you do that for me? And we demoed something. We're excited about like going and exploring that space, so it is a platform. It is a chain. It's a set of known validators. It sort of brings our experience operating USDC and all this infrastructure to this new ecosystem. And so, and the customers we have 100 plus like customers going live yesterday, and so yeah, I'm excited about it. Like you know, we've had zero downtime. We are up and running and serving real traffic and real customers. So,

Sy Taylor  16:09  
congratulations, number one, and number two. Really interested in Timony's view because you are somebody who's seen a lot of chains and a lot of challenges, but there's some trend at the moment towards more institutional validators towards trying to solve what's your what's your view on Arc and and things of that nature kind of evolving.

Simone Maini  16:31  
Yeah, sure, Simon. So look, we're good, long-standing partners of Circle. So for us, seeing the mainnet go live was really exciting. We've been working with them through the test net phase from a compliance monitoring and coverage perspective. One of the things Nikhil obviously covered that's really interesting to us is the privacy features, and that being an unlock to a lot of institutional interest and and folks just generally getting much more comfortable with their activity being on chain. That's an interesting challenge for us that we've been working on both when it comes to Arc, but other chains that are out that have more of these privacy features now built in right from the start. As Nikhil said, you know, not having to kind of go towards the mixing route in order to to look for that privacy, but actually having a way for there to be you know view keys as it is on Arc for the right participants to be able to actually see what's recorded on chain without that being universally public. So that's the next iteration for us when it comes to developing our blockchain coverage. How do we make sure that we are able to just develop our coverage in a way that means that we can still confidently understand who's who on train, where those movements are going between? That's one evolution in a long, you know, history of evolutions. You know, when we we started for a long time, it was just Bitcoin, it was just Ethereum for us, all Bitcoin and Ethereum like chains. Then there was an explosion of chains, and that was a huge effort for us. We stood up an entire kind of part of our engineering team that just focused on how do we keep up with the firehose of requests from customers around chain coverage, token coverage. I think we are definitely seeing a slowdown in just the proliferation of that, but we're now seeing these new features coming in. So our goal is always to make sure that we can provide you know as much coverage as we possibly can. So yeah, now big spike that we're doing is on you know how do we address this privacy angle while still giving regulators the comfort they need to be able to know what's happening.

Cuy Sheffield  18:44  
Yeah, congrats, and like it seems like it's just it's an enormous lift to try and get a chain and ecosystem off the ground. But I think there are yeah it's been great to be a design partner. There are a number of advantages that that Circle has you know with the demand for USDC. One of the things I was most excited about was just trying to build more of a on-chain FX ecosystem and seeing stablecoin issuers outside of Circle representing many different currencies across the world that have participated and been part of kind of the early pilot of at least even before mainnet. So, how do you think about that as a use case? And then, like the other big news around Taiza Pay, like you've had Circle Payment Network. Yeah. Now you have Arc. Can you help like unpack of how do those pieces start to fit together on the the payment money movement side?

Nikhil Chandhok  19:37  
Yeah. I mean, look, there are 16 stablecoins on Ark, and they are not all issued by Circle. Like Circle issues, like USDC and EURC, and then there's a bunch of other stablecoins for other countries. If we squint and look into the future, like three years from now, five years from now, there should be less of an exception and more of the norm that. These stablecoins exist on chains, and there are like essentially FX markets that are created for these stablecoins on chain. We also launched a stable FX protocol that allows, which is an RFQ protocol that allows for you know, if you want to make a swap between say USDC and an international currency, you're able to put your quote out on chain. You're able to escrow your funds, and you're able to get the funds without any risk to your capital. And so, I am very excited to see where that goes. Like, obviously, like these stablecoins internationally have some time to adopt in terms of them getting embedded in the economies around the world, but it's a start. And and so I don't think there's another well I don't know 100% but I think like we we probably have the most number of stablecoins match and like the deepest liquidity pools for these stablecoins right now, and then how does it connect to CPN and Tai Pay? Like I think in many ways you can imagine a future in which the swaps on CPN are done in like local stablecoins, like you know, if I'm going to let's just pick on the Philippines, I'm going, I'm use a Filipino peso stablecoin and I want to swap into it, and then the final fulfillment is in a local bank account, and that's where Taiza Pay helps us. It's like the last mile fiat trails, they have all of that. They also have a ton of stablecoin volume today. Like I think they started out being a fiat fulfillment sort of PSP that serves primarily financial institutions, right? Like so, they don't go and acquire merchants; they go and acquire financial institutions. So there's high overlap between them and our customers. We are also in the business of serving financial institutions and giving them infrastructure, and so there is a vision of the future which says like, hey, all of this international transfer of money and settles in stablecoins and local stablecoins, and the end user or the deepest markets are in stablecoins, and the end user may still want like fiat for some portion of the world or some set of users in some portion of the world, and we need that capability. And I think like Tai is there to like help us draw on that. They're also growing really fast on the back of their stablecoin volume. They're growing 100% year over year. We want to make sure that we are able to accelerate that growth. So we saw a possibility of like increasing that growth rate, like and like by working together, so I'm excited for what comes next. Yeah, like in terms of using CPN, USDC, and ARC together to do everything from cross-border payments, payment settlement, to like you know actual novel smart contracts that are generative, that are driven by agents, that may or may not have like a fiat settlement part to it. So it's it's a pretty wide like landscape of things we can do now. And as a product person, it's just exciting to have like so many things to work with. It doesn't matter what the customer wants; they want fiat, they want stables, they want instant settlement, they want competitive rates, and we are able to like sort of compose all of that. And at a speed that is a that has surprised even me. Everything moves faster these days, but like it is truly moving really, really fast.

Sy Taylor  23:13  
It's incredible. Congrats again. I'm sure we're going to hear a lot more about all of these products in the near future, I think stablecoin volume is in hypergrowth mode across across the ecosystem. But unfortunately, I've got to pause us here while we take a quick break and hear from our sponsors. Thank you very much to our sponsors for making the show possible. And the next story this week is about S and P Global agreeing to acquire Open Zeppelin. This is expanding its risk assessment capabilities into the security of on-chain finance. So, for those of you don't know, Open Zeppelin provides widely used open-sourced smart contract components alongside security reviews, developer services for anybody who's kind of building on chain, according to the announcement, its contracts underpin more than $37 trillion in value transferred, and the company's completed more than 900 security engagements. Open Zeppelin will keep its name and operate as its own business unit, and the agreement is subject to closing discussions. We didn't get a price. So so interested in the security ecosystem, Simone. Like this is the other side of the coin, I guess, to what you you do. But what do you think about somebody like S and P moving into this space? What does what does that mean for for the for the ecosystem?

Simone Maini  24:40  
Yeah. So those guys have been making some moves, right? They invested in Kaiko as well earlier this week, I think, and now this announced acquisition of Open Zeppelin. We're really starting to see this trend, though. And just to throw in an elliptic one, you know, Nasdaq invested on our round earlier this year. We're seeing lots more of these traditional. Players really start to place their bets now. So maybe Open Zeppelin wasn't the most obvious place for S and P to go, but when you really start unpacking it, you can start understanding how these things start coming together. This looks like a big strategic play from them putting together, understanding what's going on and and kind of validating that smart contract inside the wrapper of the overall ratings that they're they're doing, we can kind of tie this back to the first topic that we talked about about the SEC's innovation exemption and the importance the role that the smart contracts are going to play there. You know, S and P having a piece of that and being being right in the middle of that by by sitting over the Open Zeppelin brand that that are going to play a very important role in validating those is yeah when you think about it it's not that surprising that they're they're making a play like this.

Sy Taylor  25:58  
It sounds illogical, but you make a good point. It it sort of gets more logical the more you think about it, and I wrote this down earlier, and it was in my show notes, and I just realized, oh yeah, that that that does actually compute. When you buy a tokenized fund today, you need somebody to underwrite the risk of that fund. Like that's kind of something you're looking to an S and P to do.

Simone Maini  26:18  
Yeah,

Sy Taylor  26:18  
do you not actually want them to assess the risk of the smart contract at the same time. That makes sense. Sorry, Kai, I stepped on you there. You were about to say

Cuy Sheffield  26:26  
it's it's really interesting thinking about what does the the future of smart contract auditing look like as more and more assets come on chain, and you know we've engaged with Open Zeppelin. I think it's a an amazing team. They've they've been a leader in the space, but it feels like the the typical smart contract audit, it's it's almost like a consulting business of a crypto native team builds something, they take it, they get it audited, and then they you know put on their website, oh, these contracts have been audited, and Open Zeppelin has has become a brand in the crypto space. Of you know, there are some DeFi users who might look and say, "Okay, I'm more comfortable, you know, providing liquidity here because I see that it has been audited from Open Zeppelin. But it's been this like very, very crypto-native kind of technical piece where it's mostly like early adopters. It feels like that that brand could continue to grow, and you know, S and P with with what they do of providing ratings and and trust, like being able to trust that you know someone has you know done a full review of the smart contract and underwriting that I I think is going to be really important. And then what does this mean for insurance? Of you know what happens if something does go wrong? Of you know if you have been audited by a leading auditing firm, can you then go and get insurance policies? And it's just all these. When I when I think about DeFi and just how Wild West it has been for so long, where there's some smart contract bug, oops, all the money's gone. It's just like that. That doesn't work in traditional capital markets. Like that's just that that's not an acceptable outcome. That like some engineer made a mistake, all the money's gone, and so it's like you have to kind of rebuild this trust stack. And I think Open Zeppelin, you know, has a big role to play. And I I love this this move from SAP and like S and P, you know, to be able to leverage kind of their brand, their distribution, yeah, as as a part of it.

Simone Maini  28:17  
Yeah, because they're they're basically all about trust, authority, right? Like that's that's how everyone thinks about them in in the traditional space. And as you say, this is not going to stay as a very crypto specific thing anymore. They're putting that S and P wrapper around this. It is just another form of due diligence, discrete due diligence that S and P are going to fold in to the overall ratings. It's going to sit in the ratings business, and I wouldn't be surprised if we see see more of this.

Sy Taylor  28:46  
Mikhail, your thoughts, and I'm interested as well with the the sub story here. They bought they invested in Kaiko, which does a bunch of digital asset indices, which feels very core to what S and P has always done.

Nikhil Chandhok  28:59  
Yeah, I mean, like look on the Open Zeppelin piece. I mean, having a repository of like open source contracts like is valuable. Having a team that understands how to audit contracts is valuable. I also agree with you, Kai. Like you can't have like an oopsie, I fat finger deleted like a billion dollars happen, and so, but like as like you know, as these AI models get more sophisticated, like you know, as all of these things, like like I think every responsible form at this point is like using AI to sort of manage the risk on their side, and so I think we're just seeing like a desire to sort of like build more trust in the ecosystem, and so I see this as just a progression on that. Like it's sort of like it's like hey, they have the assets now to go do that. They're going to utilize the humans and the AI together with those assets to go build more trust in the ecosystem. We have like more. AI, like this, is one of the things we did in Arc Studio. You can come and deploy contracts with us because it's hard to deploy a contract. Like you don't know how to like construct one, and and verifiability of contracts is still a hard problem. Vitalik wrote about it yesterday, right? Like and so so I think this is all in that space, and it's exciting because I think we're going to move from like these few 1000 contracts, a few 10s of 1000s of contracts, to like 10s of millions of contracts because all contracts can be generative now. You and I, your agent and my agent, can have a generative contract for a custom exchange of value. So, like, how how do we operate in that world? So that's a whole new set of problems that are that are coming. So yeah, I I don't know. Like, this whole space is it's just day one. Like, I think like is this contract safe is a weird question to ask. Like, maybe it is. Maybe it is like you know we are looking at these big funds and like trying to make sure that these big funds or like whatever else like S and P is underwriting have well-ordered contracts, but we're going to be in the millions and millions of contracts world very very soon. So every Venmo arrangement is a unique contract in my mind. You and I are going to Taiwan together. Let's make sure we sped up groceries and rooms, and that's a unique contract. And so like how is that all going to come about? Like it's all smart contract to me, and it today it is all designed as like oh like if I have my agent and your agent and they both live within the same database, then we can make this work. But like as soon as they escape their databases, it's my agent is on one system and your agent is in another system. We're going to probably come up with a new way of like interacting with each other. It's going to be on chain. It's going to be. It's going to need some automated like auditing of the contract. So it's just super exciting. Maybe a future business opportunity for Simone as well as she thinks of expanding. Yeah.

Cuy Sheffield  31:54  
Simone, how how do you think about the future role of of regulators? Of I'm really interested in like how how do regulators you adopt new technology to do their jobs better and in a more efficient way? And it it feels like on chain you know compliance has been one of the first areas where regulators have you know adopted tools like elliptic you know to be able to to monitor illicit activity. You know, do you see regulators adopting you know tools monitoring smart contracts and smart contract risk and and getting kind of more knowledgeable there? Like, what what does the regulator look like in 2030? You know, for this world where more and more assets move on chain, I

Simone Maini  32:37  
would love it to look like extremely like tech enabled. You know, and and I think we are quite far away from that now. I think that there is definitely a desire to be there, but the existing frameworks, the examinations, you know, all of that operates for a kind of compliance and risk infrastructure that was built 20 years ago, even further back than that, and you know Nikhil was talking about agents transacting with agents. Like we have no rules, regulations, oversight frameworks really that can do that today. And speed is going to be everything here because things are moving much faster than they ever have done, and the the the kind of compliance frameworks, the risk frameworks that exist today for for securing things, protecting things, are just not going to be. That we can see already they're not fit for purpose, right? Like just the the volume of AI enabled attacks, whether it's sanctions, evasion, money laundering, smart contract hacking-like the the scale, the velocity, the complexity is is just on a on a different level at this point. You know, one of the things that we're trying to do at Elliptic is establish what should those guardrails be when it comes to building Risk management agents, because that's what we're building right now. What we know is that we cannot wait for the regulators to write those rules for us. Otherwise, we'll be waiting another 10 years. So, so we're essentially working with with the industry, and we're partnering with Circle. They're in our agentic design program right now, co-building agents with us to help make sure that their compliance infrastructure can scale with the volumes that they're going to see coming out, Circle and many others. And I think that's a reality that that compliance teams and regulators really need to quickly wake up to because it's happening right now.

Sy Taylor  34:39  
Yeah, I've spoken to a lot of former regulators lately who are trying to work with their former colleagues to adopt some of this stuff because you know you sort of you go out into the wide world and outside the regulator you get yourself your first Mac and you see your eyes are open to what's possible all of a sudden when you're not trapped inside of government systems and. Honestly, you're better off in a compliance team at the moment because you've got better team tools. You can use AI and agents and all of that sort of stuff to try and do your job and do it more effectively. But you can't necessarily do that if you're inside the regulators. So it's a different challenge for those guys, Simone.

Simone Maini  35:17  
Yeah, I think that the desire is there, largely speaking. You know, from all the conversations that I've been having, it's really there. But there are so many constraints around what what they do, what they use, how they work. That there is a lot. I think there will become a lot of frustration, as you say. A lot of folks that are leaving now see, you know, what is possible. But I think that it is also incumbent on us as an industry to to say like this is the direction of travel. This is how we're going to make sure it's safe and auditable and explainable and all of those important things. And there's a human in the loop and and so on. But we cannot wait. Otherwise, compliance infrastructure isn't going to scale with the volume and complexity of of what the threats look like.

Nikhil Chandhok  36:01  
Well, one of the good things about like blockchain infrastructure and True for Arc as well is you have audit trails, like you have all of this stuff, like you know, and you can build automated systems to like to essentially observe for these behaviors, which I'm guessing, Simon, you guys are doing right. Like, so it's actually better on blockchain systems than it was on other systems. Yes, volumes are going to

Cuy Sheffield  36:23  
go

Nikhil Chandhok  36:23  
up tremendously and are going up tremendously. Number of actors are going up tremendously, but you can do things like you can give prominence to the actors, you can give work histories to the actors, you can say like, well, I can harden my infrastructure because every time a new actor comes and tries to interact with me. I will have them prove like you know a lot many more things than if they were they have already done a bunch of work before that I can like go verify on like an arc chain or something else right like so there's all of this like new primitive available all of this all of these new actors coming online at the same time, but they're like one of the advantages for the crypto ecosystem that I think we underestimate is that for this AI transformation, we have all the right primitives to enable a sound transformation of all the software that has already been written so far. Okay, we have we have crypto we have cryptographic proofs to prove who you are? We have cryptographic proofs to prove your work history. We can we can create like escalating defense mechanisms to depending on like you know the quality of proofs you're presenting, the quality of provenance that you're sharing with us. So we haven't even started. Like I think like sort of crypto's been on the other side of like this AI revolution, being like oh maybe like you know it's it's not exciting as a technology anymore. The first place where crypto interacts with AI is that we are hard money, and and so to like if you want to interact with money, you you have to sort of like you know embrace the systems that we're building, and then beyond that, like it is all like money is just the beginning of what is trust, right? Like so you have other trust like primitives that can be built, that can be proved, and crypto have all the primitives to do that. So I am very excited to move away from like this like doomer AI sort of narrative to a world in which like we harden our systems and utilize like what is the best of crypto to do that. And I'd love to do it like you know more broadly with other partners like Simone, because we're like that's the opportunity in front of us. Like we are waiting for this moment. Like we have like these incredible chains with like incredible TPS, and here come the actors, and and and and we can we can we can now now start building systems that remove risk and create like more capital efficiency.

Sy Taylor  38:41  
Big picture wise, we're in this interesting time where AI is probabilistic, and people worry about hallucination or doomsday scenarios. And what do you have is this phenomenal deterministic state machine that uses cryptography to transition state. That is a the giant giant auditor in the sky, blockchains. The way I used to describe this to people in 2014 15 when they were new to blockchains is like imagine a golden source record of every transaction, an auditor in the sky, and you can make change, and it's a golden source, so it updates every single time, but there isn't a single point of failure. If I was to describe that technology to you and say it was a blue blue blah, you would tell me that you want it. But because I say it's a blockchain, you go, "Oh, I'm not so sure about that thing because it comes with this like crypto baggage. And that was how I blockchain pilled a whole bunch of people in the mid 2015s back when I worked at a bank. But it seems now I don't have to do that because our next story, dang it, I do need to move us to the next story, dude. Moving on, moving

Cuy Sheffield  39:49  
up.

Sy Taylor  39:50  
No, yeah, sorry, but I do need to move us to the next story. BlackRock has won approval for a tokenized Hong Kong dollar money market fund with subscription. And redemption using standard charters backed HKDAP. So this regulatory approval came out on the 10th of September for the HKD liquidity fund, its first tokenized money market fund in Asia Pacific. It's going to invest in short-term Hong Kong dollar instruments, including government bills and deposits. Eligible investors will be able to subscribe and redeem using conventional money. Number one, tokenized deposits or regulated stablecoins, including HKDAP issued by Standard Chartered. So so interested in this because Standard Chartered are going to act as custodian, fund administrator, and trustee, and this is approval ahead of launch. And Hong Kong is just fascinating to me right now because it's so well strategically placed. Standard Chartered again, fascinating. Nikhil, I think they directly mint USDC, if I'm not mistaken, as well, your thoughts on this and sort of some of the big names coming into this space and the the 24/7 money movement side.

Nikhil Chandhok  41:09  
Yeah, I think it's exciting. Like, look, there's going to be more instruments like this. We talked about like S and P buying, like Open Zeppelin. Like, there's a whole set of instruments that are going to get created, like that do this. Like we have one in the U.S. It's called sorry for ex-U.S. customers. It's called USYC, and and I'm guessing I don't know the details of the story, but I'm guessing this is something like that. And for most customers, the value in USYC is like the liquidity that you can get against USDC. Like you can go 24/7 liquidity against USDC, and where USDC becomes sort of a stable coin, like a payment token, and then USYC becomes like a yield betting asset that performs like a money market fund. It's good to see this innovation sort of moving to other currencies, other parts of the world, and and yeah, I mean, like BlackRock are huge actors. Like they they don't get into a space unless they see real possibility of success, and and and so and they are you know they're investors in Circle, they're partners of Circle. So like eventually, I'm hoping they'll bring this to work as well. Although I don't know the status of this one. So

Sy Taylor  42:20  
yeah, Hong Kong's such an interesting place, Simone. Your your thought on like other types of money coming on chain and kind of the the arrival of these institutional axes.

Simone Maini  42:33  
Well, look, I think that's what's so exciting about this, right? If we just keep zooming out and reminding ourselves that it's pretty extraordinary that BlackRock partnering with Standard Chartered to bring this on chain. Like this is not something that was a given until very recently. I think in Hong

Sy Taylor  42:48  
Kong. Well,

Simone Maini  42:49  
in Hong Kong, exactly. I was going to say if you then kind of think about what someone, you know, a country being very clear about this is the regulatory framework we want, and getting that done, and creating that environment where where the likes of those guys can come out and say we're going to do this, it's it's really a huge milestone where we kind of add all of this together and look back on things that were that were really transformative for the space. So I think that alone is is obviously super exciting, and very much hope that they'll they'll be bringing that to to other markets. You know how much this is coming from Standard Charles's client base, for example, saying you know we want to be able to have our money at move rather than so much, you know, at rest. A lot of this demand is really coming bottom up now, and it's it's impossible. It's interesting that if you

Cuy Sheffield  43:46  
just trace like BlackRock's history in in the space, I mean, when they launched Biddle, I think it was March 2024. Like that was a major turning point, and that was one of the first tokenized money market funds from like a major major brand. I think that was one of the biggest kind of news of the year. That you know, I remember that was the time when you know we didn't know if institutions would be able you know to build on top of public permissionless chains, and so the fact that Biddle was yeah sure it was gated at the smart contract yeah for you had to be KYC KYB, but you could still access it on Ethereum. That was a huge deal, and then now they launched two additional funds in August. Now one in September, and so you've got you know the the potential of these money market funds being used as you know reserves for stablecoin issuers. I think that's a super interesting use case. Like you know, Nikhil, I don't know how you feel about this, but when you think about what stablecoins will look like in the 2030 s, shouldn't the entire reserve management just be on chain and just be able to have money market funds, tokenized deposits, and be able to move much more efficiently between the stablecoin kind of digital cash with. The underlying assets that are backing it, and so I wonder for this Hong Kong use case, with all of the activity and innovation around tokenized deposits and stablecoins that are starting to to kind of emerge in Hong Kong, will this product be one of those reserve assets? And to do this, and I don't think it gives the details of how much liquidity, how the 24/7 mintum redemption would work, you know, between stablecoins and the money market fund, but I feel like that there's just going to be so much interaction between those those two products.

Nikhil Chandhok  45:35  
Yeah, look, we do it today between USYC and USDC, and not everything is on chain, so we there are like there are challenges to liquidity management. Like we want to make sure that like we sort of like when you come in redeem USYC for USDC, we want to make sure we have enough USDC to give it to you. And and and when you come in and subscribe to USYC using US USDC, we can also like make that like seamless. I don't know what the architecture is in 2030, Kai. Like I am just finishing the work to catch up to Genius, which I don't fully comprehend. If it if it like sort of like contemplates the scenario that you're describing, like in in terms of all everything being tokenized deposits and everything being on on chain. I don't know the answer to that question, but like I'm excited about Genius. Like it's four months away. We'll have real stablecoin money OCC supervised in the U.S. and and so and we're we're gonna be ready for that, like you know, and then like from there, if there is a move to like evolve genius into like having stuff like that is everything is on chain and like you know everything is fully visible at all times. I'm I look forward to that future because it is a more transparent future than we are at right now, but yeah, it's hard for me to speculate so hard because yeah, you gotta appreciate my position because I'm like, man, we just we're just getting to genius. We're just

Speaker 1  47:11  
like like

Sy Taylor  47:14  
don't make me do the next thing. Just just let me help you. Can I just do the thing? Yeah,

Nikhil Chandhok  47:17  
can I just like can I have a moment like please on like Jan 18th, 2027, when Genius goes into effect, I don't hold me to that date. But I think like that's what I'm working towards, and once I have it, then I I would like to take a week, and then I'm coming. All right,

Sy Taylor  47:34  
we're gonna bring you back on the show. All right, deal. We'll come back to you with the sort of early February.

Nikhil Chandhok  47:40  
Let me just get through Genius. Let me make sure, like you know, we're fully Genius compliant. Like we're out in the market. We're supervised by the OCC. We've had we've figured out how to like you know solve all for the all the exams that the OCC is going to give us, and and then and and then yeah. And then what I want to happen, what I want to happen is like for the rest of the world to sort of like come along with genius because like a lot a lot of the world looks to the U.S. to like in terms of like what is good and what is not. Well, sitting in the

Sy Taylor  48:12  
U.K. I can certainly say I'd like some movement, Simone. I'm sure that's something you share as well. Absolutely, but very quickly on this story, I mean, just if you want to save it for February, we can. But my perspective on this is, you know, as you say, the redemption side of USYC is where it is because a money market fund is ultimately buying treasuries, and it has those on 24/7. Whereas in the UK, what they're looking at with Digit, with HSBC and Elseg is the direct issuance of gilts on chain, and that is, to my mind, going to be that would be enormous because now you have end-to-end 24-seven capability all the way up through kind of the the the kind of the government itself, and with the Bank of England, you have something that next generation RTGS is is trying to get as close to 24/7 as possible, or at least enable money systems that are to transact with that digital guilt. So the the UK maybe sort of the the tortoise and the hare situation here. It's it's like annoyingly slow, and then maybe maybe come next year. But maybe that's the persistent optimism in me. Someone maybe I've been waiting too long, and that unfortunately brings us to all the time we had for this week. Couple of stories we didn't have time to cover. Deutsche Bank is preparing to launch custody for Bitcoin, Ether, and stablecoins for European corporate and institutional clients this year. Hey, every bank's getting in on that act now, and of course, just announced Tempo passed 2 billion in 30-day TPV. So yay, good go team tempo. All right, thank you very much, everybody, for listening and watching. Kai, if people want to find out more about you, where do they go to do that?

Cuy Sheffield  49:52  
On X at Kai Sheffield and visa.com/crypto.

Sy Taylor  49:56  
Niko,

Nikhil Chandhok  49:57  
I'm on X at Chen. C H A N D H O K

Sy Taylor  50:02  
and Simone.

Simone Maini  50:03  
Best place to find me is on LinkedIn.

Sy Taylor  50:06  
All right, and you'll find me at S Y Taylor on all of the socials, screaming into the void@fintechbrainfood.com, and of course at tempo dot x y z. And you'll find a lot more of this podcast if you hit that subscribe button. Please do it right now. Don't wait another second. If you're watching on YouTube, please like, subscribe, and spam everyone you know to do the same comment, reviews, all of that kind of stuff helps. That will help you find a lot more of this show in the future, and we hope you will. Bye for now.