On Ep. 58 of Tokenized, Cuy Sheffield, Head of Crypto @ Visa, is joined by Sam McIngvale, Head of Product @ OP Labs and Lesley Chavkin, Ribbit Capital to discuss agentic commerce, traditional AI vs agentic AI and more!
On Ep. 58 of Tokenized, Cuy Sheffield, Head of Crypto @ Visa, is joined by Sam McIngvale, Head of Product @ OP Labs and Lesley Chavkin, Ribbit Capital to discuss agentic commerce, traditional AI vs agentic AI and more!
Timestamps:
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Music by Henry McLean
Cuy Sheffield 00:10
Welcome to tokenized. The show focused on stable coins and the institutional adoption of real world assets. I'm Kai Sheffield, head of crypto visa. I'm your host for today, as Simon is Al hosting his inaugural conference nerd con. I heard it was a blast. I'm bummed I couldn't be there myself. But joining us in his absence are a couple of great guests. First, we have Sam mcinvale, Head of Product at optimism labs.
Speaker 1 00:36
How are you today? Sam, what's up? Kai, I'm doing great. Excited to be here. Great
Cuy Sheffield 00:40
to have you and Leslie chavkin, former head of Global Policy at access and recently joined rivet capital. Congrats on the new role. Thank you. All right. One quick bit before we get into content, I need to remind you that the views or opinions of our contributors today are their own. Do not necessarily reflect those companies they represent. Nothing we say should be taken as tax, financial investment or legal advice. Do your own research. And two, I need to remind you, this podcast is supported by
Sy Taylor 01:06
centrifuge tokenized. Is brought to you by our friends at centrifuge. Centrifuge exists to bring institutional grade finance products fully on chain. Centrifuge is a full lifecycle defi platform, from asset creation and structuring to defi integration, and it's cross asset by design. What that means is they work across private credit, ETFs and equities, making your financial products much more accessible and much more efficient. This is the tokenization you keep hearing about, unlocked for all asset classes by centrifuge.
Cuy Sheffield 01:48
Thanks so much to our sponsors. Let's get into it. So for the first story from Fortune crypto, Ave launches a high yield product on the App Store. So this is a new consumer facing Ave app users can earn a minimum of 5% up to 9% with bonuses in interest on their holdings. Can deposit money with a bank account or debit card. Balances will also be insured up to $1 million which is one of the first insured products that we've seen. This comes from their corporate treasury, but we're excited to see what happens with the broader insurance space. So maybe Sam, let's start with you. Of like, what's your impression with this product? Have you played around with it? What are you seeing with the next generation of these stablecoin native Neo banks now using protocols like
Speaker 1 02:36
avec? Yeah. Downloaded the app yesterday, still on the waitlist to start earning some yield, but was excited to check it out. I'm not sure if it's appropriate to call this a defi mullet, still, since it's sort of like a defi company through and through, but very much view this as a trend we see happening across the space, which is financial products, in this case, checking account or high yield for a savings account, really. I guess high yield savings account are better on chain, and we think that it makes a ton of sense for ave to start to expand the distribution they have using their back end on chain, high yield savings infrastructure to as many folks as they can fully expect. The optimism perspective here that as Ave gets traction with this app and bringing more deposits into Ave via direct to consumer, they'll probably move to their own infrastructure, their own chain at some point, so they can further customize the experience they're delivering to their customers, and then start to bolt on ancillary financial products. That's exactly what neobanks and fintechs do. They start with one wedge and they bolt on stuff around it. We think Ave has a really interesting wedge to potentially go down that path.
Cuy Sheffield 03:35
Is it on a single chain today? It seemed like part of the value proposition was abstracting blockchains away entirely. Leslie, have you played around with it yet? Like, how do you see like, this value prop of not having a consumer have to get their own self, custodial wallet, go to a decentralized application, figure out how to interact with it, just trying to bring this holistic experience together.
Speaker 2 03:58
So I have not played around with it myself, but I think if you talk to policy makers and regulators about the defi space, what they'll tell you are you have these two big barriers to wider adoption. One is the complexity issue, and two is a trust issue. And I think one, you are starting to see something like this. It moves to addressing that complexity issue. You don't have to be a really, really sophisticated user in order to sort of get into the defi space. And then also, I think that trust component, right? So if you're not very familiar with this space, you may think about hacks and losing tokens via a bridge hack. I think here, what you have is something really cool with this. I think they call it a balance protection mechanism, which is what they're calling the insurance, where it gives a little bit of certainty and confidence to the user, it feels more similar to what you would expect with a bank with FDIC coverage. So I think that's really great in moving this to those who are maybe less experienced in the space, more used to traditional. Financial Services. Yeah,
Speaker 1 05:01
this idea of like, almost like a private version of FDIC is really interesting. I want to get more into the details of how it works. I haven't gone through like, so it's from their balance sheet. Sam, have you seen any other forms of defi insurance? Do you think this is a big unlock? Was it like Nexus mutual? They were doing some coverage was like a very crypto native thing. What do you think that the insurance value prop here is going to do? So it's interesting. I think insurance is probably relevant to folks that are already crypto native and are aware of risks and defi. I don't think it's relevant to net new users that are less familiar with crypto and chasing yield. And I think if you look at the success of Robin Hood gold, for example, in driving cash deposits to Robin Hood, because they're paying a really high rate to those users, clearly, like you are able to go aggregate deposits, there are people that want to chase yield on their cash, and so apps can win deposits by putting out high rates. I suspect that the users that are seeing the headline rate and are moving cash balances around to capture that are probably not super into insurance. They're probably just looking at this as a financial product that is going to be akin to what they might earn in their Robin Hood gold account, for example. And so, well, I think the insurance is probably highly relevant for those of us already in crypto and sort of understand that there's a lot of risk under the hood. I think it's rush relevant for net new users. So I think the question kind of here is like, who is Ave going Ave going after? Are they trying to bring in net new users via this owned nice defi mullet surface that abstracts blockchains and other stuff under the hood, or are they trying to play for, you know, all the existing assets? I think it's the former here, in which case I think nice to have some insurance. Maybe some folks read the fine print, but I suspect it's mostly going to be the headline rate that is driving traction here?
Cuy Sheffield 06:42
Yeah, it's really interesting from a regulatory perspective. We're used to, like the first version of defi, it was like a self custodial wallet and then a decentralized application end to end. And sure, you had to on ramp sometime before then. But everything that you're doing was on chain, every entity there was not really a regulated entity. It seems like Ave has taken a strategy from my understanding of Ave is actually going and getting licensing in certain markets. I think they have some licensing in Europe today, and they're trying to collapse this together, of like you could have a regulated entity that can do the on ramp and can do that really efficiently, but then you still have this on chain back end. Leslie, what are you seeing again, when you talk to policy makers? Are they starting to understand the distinctions of where is the line between a regulated on ramp provider and then a protocol? How does that evolve over time, and is it starting to become more well understood why the whole thing just shouldn't be regulated, and that there's some value of having a protocol that is technology, but it plugs into a regulated on and off road.
Speaker 2 07:55
That is a great question. In fairness to policymakers, I think a lot of strides have been made in the past few years in terms of their basic level of understanding and wanting to have protocols that are able to operate without the kind of regulation you would see on the traditional side. But I think if you're familiar with what's happening right now in Congress around market structure, discussions that question around, do we do it? Deal with defi? If so, how do we do it? Is very much live, and I think that tells you that it's still an open question. So I think this is like a great opportunity for those in the space to try and get into offices and show how this works, to make sure that they are understanding the differences in each part of this ecosystem.
Cuy Sheffield 08:43
I thought I saw there was a draft bill. I think it was out of, like, the Ag Committee, yep. And there was a defi section where it was left blank. We're, like, is that right? Like, what is going on there?
Speaker 2 08:54
You're exactly right. That's what I was getting at. And I love it. So I mean, to their credit, I think what they're trying to do is put out this discussion draft into the world to actual folks in industry to get their input. But it is hard when you see a draft come out that literally has a placeholder for defi that says, like language coming right, or a placeholder for illicit finance. You know, I think that shows you sort of how much work there has to be done for them to really understand it and create a regulatory framework that
Cuy Sheffield 09:25
works. Yeah, is defi the right term Sam. I'm biased here. I've been trying to go on this crusade of like, less regulatory facing, but more when I talk to banks, I just have a very hard time describing decentralized finance and defi has this like crypto ethos that I think of like a Justin Sun poster of like dare to defy now, when on chain credit, on chain lending, how to use blockchains and smart contracts as a technology, it doesn't have as much of that crypto component. So. We're seeing that resonate more. Like, how do you think about the overall narrative and storytelling and framing that the industry has of like, how does this go from crypto into a much bigger market? Are you with me on the on chain versus defi, or do we have to keep the defi? I'm with
Speaker 1 10:15
you. Actually, you interviewed Paul a couple weeks ago, and he was sort of lamenting the use of this word permissionless. And I think it's kind of the same thing. The language that we found resonates best with sort of fintechs, banks, existing financial institutions, is just financial infrastructure or financial technology. We believe, and like I think we can assert that crypto rails are better financial infrastructure, better financial technology to build financial products on top of than anything that's existed prior. And there's a whole bunch of reasons for this. They're 24/7 they're natively audible, they're natively cross border. They're also very composable. You can pull something like Morpho running on the OP stack and use that very quickly to set up a crypto back loans product, versus building a proprietary, siloed back end to do all that work yourself. Crypto rails, financial infrastructure, I think is a better way to call it, just enable better financial products on top and when we start with sort of like that premise or that principle or that foundation, I think it's very quickly we can get through to fintechs, banks, higher level folks, because we can convince them that they can build faster and better essentially, can build better and more quickly, financial products on top of these rails that doesn't carry any of this, like baggage, or I'll use the sort of like negative connotation that I think traditional finance often puts on, permissionless, decentralized defi et cetera, because they don't understand, necessarily, who's interacting with that or what's going on. But all the controls exist today for them to deliver the products with the guardrails that are needed, and so just sort of flipping that around using some different language to your point, Kai, I think goes a long way in helping to move these conversations
Cuy Sheffield 11:53
forward. One of the things I love about crypto is it's part ideology and part technology, but it seems like the danger of that is, with ideology, it can be this very binary thing, either you love it or you hate it, either agree with it or you don't. It's like, do you fit within that ideological, like mindset of what it's trying to do? And that seems like a harder battle, where, if you just say, this is technology, it's neutral. It's this thing that exists that does these functions that might have a broader appeal, rather than it being more partisan. Do you agree with the ideology or not? Are you seeing that distinction and like in the regulatory space Leslie, are people, as they get smarter on the technology starting to lean more towards that, or is it still very much being driven by the ideology, and particularly the existing administration that happens to resonate at least with parts of
Speaker 2 12:50
it, actually think it's driven by the utility that regulated players are seeing in this space, right even when it was really difficult under the last administration for regulated institutions to engage in any kind of activity on permissionless chains. They were interested, right? But they were prevented by their regulators, who said, This is too risky. We don't know enough about this now you see that you have a different regulatory environment, and those institutions are really the ones that are pushing regulators, just like the crypto native industry is doing, to be open to this, to experiment with it. So I think it's actually less about the ideology, and more that they see some real business use case here, and they want to move forward with it. And I think for a lot of big institutions, there is this sense of FOMO, for lack of a better term, that they were really kept out of this experimentation for quite a while, and now they're having to play catch up, so they're trying to go in there as fast as they can to see what's possible
Cuy Sheffield 13:50
for sure. So moving to the next story from everywhere, figment open trade and crypto.com offer 15% stable coin yield product for institutions, the structure earns around 15% annually by staking soul and using perpetual futures to neutralize price volatility. Assets are held in segregated custody by crypto.com aiming to meet compliance standards and reduce counterparty risk. Sam, can you explain this product to me, how does this actually work? Have you seen anything like this before? Like, for the basic Lister, like, what is this?
Speaker 1 14:27
I'm not sure I'm smart enough to explain this product. I guess my first thoughts here, 15% seems like a high number. You tend to not see that in those sort of, like traditional instruments that you might use to go get yield. But clearly there is some game being played here, which is crypto institutions want to aggregate deposits. And I think this is very similar to, again, how a existing bank or existing Fintech is going to go out and aggregate deposits, and what crypto.com and the other folks that are launching this product are saying is like, we are willing to pay a high price to bring on institutional deposits onto. Our platform, and so how exactly that's happening under the hood with Solana staking and perpetual futures, it sounds like maybe they're combining the yield from both of those to get to 15% I'm not exactly sure, but that's a high number. I wouldn't be surprised if that is subsidized in some way, because crypto.com and other folks involved here want to go out and aggregate deposits they're willing
Cuy Sheffield 15:19
to pay for them. So we've talked a good amount on this show the past few weeks about on chain lending and this idea of using stable coins in vaults as a savings account and being able to lend in stable coins, we've talked a lot less about staking and staking Native Assets like soul, which seems like that's part of the component to this. Leslie. How do you think about this mechanism of staking, and where that is from, like an institutional standpoint, it started as, like a very crypto thing that you have an end retail investor that holds a token that now they're staking. Are institutions now going to be staking more? Are they getting comfortable with it? What does it mean to stake
Speaker 2 16:05
so I'm glad Sam said that he also doesn't know what's happening under the hood, because I read it as a mere policy wonk. And I was like, This is what is over my head. But I think, I think basically the takeaway for me, of that is it's not the institution itself. They're kind of like one step removed from all of that, and it's a more simplified process. So they're relying on these institutions to do the staking. So I think when you think about that, it's more these institutions are interested in getting in that space, maybe not doing it directly themselves, but doing it in a way that's more simplified, there's transparency in the system. To me, it strikes me as not quite as fun and adventurous if you were a retail user in the staking space, but maybe more institution friendly, is what this announcement has set up.
Cuy Sheffield 16:55
Maybe let me try and take the risk of let me see if I could explain it like, let's try. We're we're gonna do it live here, and you all can correct me. I may be entirely, entirely wrong. So that's a caveat when I read this. The first thing I think about is that staking is this interesting, new crypto, native business, an opportunity to generate income. And the way it normally works is you go and buy a token, so I have to buy soul, and then I use that soul to participate in validating transactions on the network, or I use my soul to vote for validators who validate transactions on the network. And when I do that, and when those validators process transactions on the network, they earn transaction fees and rewards from the network paid in the native token soul, which then comes back to being deal. That is how a traditional staking product works. However, I would imagine, from an institutional standpoint, part of the challenge of it is it's hard to look at that as, oh, I'm just earning 8% yield in dollars, because you have to buy this native token which fluctuates in price, and then the income that you're earning is happening in a native token which fluctuates in price. And so it's actually kind of just, it's a bet on the token. And so it seems like this might be an attempt towards, can you take the mechanisms of staking and smooth out the volatility, so it looks more like an income producing kind of internet bond where you could stake, which is generating yield, but then have some hedging of the price of the asset, so it doesn't matter whether the sole price goes up or down, you're still earning more of a steady yield. That's how I would read it. Sam, does that make any sense? Like, do you agree with that? Like, do you think that might be what's happening here? Yeah, I think
Speaker 1 19:00
that was a great explanation, especially with the shorting the perp to sort of smooth out some of the volatility from the Native Asset. The other, one of a couple other implications that come with staking is there's typically a liquidity premium that you're going to pay as well. So if you're going to stake, your tokens are going to be locked up for some amount of time. It might take you some time to unlock them, depending on the nuances of the protocol. So again, if you're an institution here, you're looking at like all of this volatility, but also now in a liquidity premium, or liquidity premium going the other way to go capture this yield. And so it feels like maybe this product is also trying to smooth some of that as well, where it's USDC in, USDC out whenever you want, which I think takes away some of the the inherent disadvantages there. And it sounds like this is all wrapped in, not sure if it's exactly regulated, but some sort of institutional, friendly custody platform, which obviously is going to be key to whatever, whoever these depositors are, whatever their mandates, legal structures, et cetera, are. And Leslie, I'm sure, can chat way more about this than I can, but that's going to be key to a. Allowing them to deposit into this structure and capture that
Speaker 2 20:02
yield. Yeah, I was just about to say what Sam said. I think it's that consistency piece. But also this seems like a regulated entity friendly model, in that the I saw@crypto.com is going to be ensuring that customer assets are segregated from corporate assets. They're going to have some compliance features. So I think all of that would sound very attractive to an institutional player that wants to be in this space.
Cuy Sheffield 20:26
What's the current regulatory thinking around what it means to run a node? I remember a few years ago, there was this real question as some institutions were looking at setting up nodes on blockchains. Of is there risk of this is unlicensed money transmission. You are processing transactions on a network. You know someone is sending you a transaction. You could argue you're verifying it. You're processing that transaction, putting it in a block. Like do you need to register? Do you need to know who's sending you that transaction. Do you have to KYC them? There was this question of, Okay, what if someone in an OFAC sanctioned country sends a transaction to a node, and it's a large entity that's running that node, and you process that transaction, and they see that you process that transaction, do you have liability for that? And now, over time, it seemed like we've gotten to a point where there's more comfort in recognition that processing transactions on a blockchain or operating a validator node is not money transmission, it's more you're checking the signatures, and if you don't process it, goes to the next node and that will process it, and so You're like participating in this consensus mechanism rather than just being an individual payment processor. And so is it clear, like our large institutions, do you think they can participate in validating without having that being treated as money transmission? Or is that still like an open area that hasn't really gotten the clarity
Speaker 2 21:58
it needs? I think we will see some clarity on the legislative side. And there's been a huge evolution in the past few years on this in a really good direction. Because if you think back a few years ago, Senator Warren had a proposal out there that any node operator would be a money transmitter, right? And you saw some of that even under the last treasury department, they had a list of proposals on illicit finance that they sent to the hill, and it included something very much like this. And rightfully, it got the industry very, very, very concerned that you don't hear as much anymore. And I think it's because right now, you have market regulators, you have a Treasury Department, you have Congress that generally are moving in the direction of, this is not money transmission. This is a, you know, a note or, you know, validators just providing this one specific service. They're not the same as a money remitter. So I think we're going to see that spelled out in legislation and already kind of in that same vein, or the current drafts of market structure have clear developer protections in there, so they can't get prosecuted as money transmitters. So I think we'll see that broaden to node operators as well. So moving in the right direction, I think we will have clarity.
Cuy Sheffield 23:16
Yeah, arguably, it seems like this is a make or break for the viability of public blockchains in the sense of or at least in the United States, of wherever it's regulated. If every node was required to register and to KYC every wallet entity sending them a transaction before they verify and like check the signatures, that seems like that just wouldn't be feasible. There'd be no way to really do that. And then, on the other hand, it seems like the other issue, that was a really big question I used to get all the time, even a year, year and a half ago, was, what about paying on the other side of this? What if you're using a blockchain and you pay in a gas fee, do you have to know who's running the node that you're paying it to. What happens if the node that you're paying to is being operated in a sanctioned country and you just paid gas and your transaction was processed by them? What does that mean in the obligations and there were financial institutions that were concerned about paying a gas fee and not knowing who the node was. Then there were questions about, okay, well, are there structures where you would only submit transactions through a verified node, but then that kind of breaks how a blockchain works. And so, Sam, do you agree that, like that? That's kind of an existential area. And then how do you think about this in the context of layer twos as well, where now you've got this role of like a sequencer? And so it's like, kind of a node, but it's, it's not necessarily like a big network of nodes. And how do you see this
Speaker 1 24:44
playing out? Definitely agree that this issue has the potential be existential for public blockchains, and it's really interesting because we don't pay or worry about or have any of these concerns to like, ISPs, right? That form sort of the backbone of the internet. I think there's many other analogous internet protocols that. It's none of these concerns, you know, I've ever come up with, or maybe they did 25 years ago and got squashed, but probably because the speculative nature of crypto, or maybe some of the nuances of how these protocols work, there's a little more like money miss in terms of how we think of them, which maybe has led us a little bit down this path. Hopefully, though, we can get back to this just being like basic internet infrastructure, at least at least at the protocol layer, and not have to worry about some of these concerns. With regards to layer twos, we think layer twos and just most blockchains going forward, are going to try to be the best of both worlds. Anyone running a blockchain, so not a public blockchain like Ethereum or Bitcoin or Solana, but someone choosing to run a blockchain as back end, likely for products they're delivering to their customers, what they really want is control to deliver the best product experience they can to their customers. They also have compliance requirements, privacy requirements, all sorts of other stuff they have to deal with. But the best way to deliver really like uncompromising UX is probably to invest in a really beefy and bespoke sequencer, and that's going to be a single point of control for the chain. The flip side of this is at least, if you're an l2 builder on top of Ethereum, with that single, Beefy, bespoke sequencer, you can still inherit all the decentralization properties of Ethereum. So you can kind of get the best of both worlds, where folks can, you know, have all the crypto ideology that they want, and, you know, sort of get transactions included on that l2 by leveraging Ethereum decentralization, but then also the entity operating that chain can deliver the really specific experience they need to build a great product for their customers.
Speaker 2 26:29
And I would just add I was previously at an l1 chain, and this protection of open, permissionless networks was so important, because if you impose those kind of compliance burdens that would go with being a money transmitter on nodes and validators, it would be totally crushing, and it also really undermines the spirit of open public networks. You want to bring in a diverse set of nodes and validators, right? Geographically, all types of institutions, individuals, you really lose out on that when it actually kind of limits it to big institutions if they have to get on board these very extensive OFAC compliance monitoring programs, it's just not needed. One and it's irrelevant. But two, I mean, it's just not possible. So it really would destroy the growth of these networks,
Cuy Sheffield 27:19
for sure, super important topic before we move on to part two, where we discuss war news, we're happy to remind you that this podcast is sponsored by Visa.
Sy Taylor 27:30
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. Stable coins are building blocks for borderless financial services making money move around the world as easily as data. With stripe, you can use stable coins to reach untapped customers, reduce cross border fees and settle payments in minutes instead of days. Best of all, it works the same way that stripe products do, by API or in the stripe dashboard, meaning you don't have to worry about the intricacies of which blockchain, which wallet will you custody from Shopify to vercel. Global businesses trust stripes complete crypto solutions to unlock new markets and reach more customers. Borderless finance built on stripe. Learn more@stripe.com forward slash crypto.
Speaker 1 28:49
All right, jumping back in from everywhere. Alibaba to use jpm, Connexus to tokenize Dollar and Euro payments. Their global business to business platform will utilize tokenized deposits backed by fiat currencies such as the US dollar and the euro to streamline cross border payments. In partnership with JP Morgan, Alibaba will initially focus on bank issued digital tokens rather than stable coins for regulatory and operational clarity, and may explore stable coins in the future. Sam, what do you think about tokenized deposits? It seems like jpm jpmd on base, which is an OP stack chain is was one of the biggest stories in the past few weeks, and now you've got major, major partners like Alibaba, committing to using the jpmd product. How do you see tokenized deposits playing out, and what role did it play? Yeah, real quick. I just wanna acknowledge a trend, which is financial companies and products are moving on chain. We believe most large financial companies and products are gonna run their own chain, but clearly there is a trend where just financial companies and products broadly are moving on chain. I don't think anyone's gonna fight me on that. On the show with regards to deposits versus stable coins, it's really interesting. I don't actually know the numbers here, but I'm guessing there's way, way, way, way more bank deposits in the world, and I expect that folks like JP Morgan, Alibaba, who have banking entities that have large bank deposits, sort of look at the TAM available to them of doing something with their existing bank deposits, versus doing something with stable coins, which is going to be a net new product that they need to drive dollars into and say, hey, it's way easier for us to move in size with this product we already own and control, have existing distribution and users for. And so I think it makes a lot of sense for existing large banks to start with tokenizing deposits. I suspect there are probably like parallel, but slightly different use cases for tokenized deposits on chain versus stable coins on chain. And I'm not really sure that I have a good view on which one is maybe more relevant in the future. But just like today, cash exists alongside bank deposits, which exist alongside stable coins, they're probably all going to be there. I don't think one is necessarily going to win out. I'm just excited to keep seeing large financial institutions move on chain. I think that's a trend that is good
Cuy Sheffield 31:04
for all of us. I was at the Singapore FinTech fest last week and jpm Naveen there, who leads Connexus, they did the first live transaction of jpmd on base, on stage, and then we had a panel right after him, and so to see one of, if not the largest financial institution in the world transacting on base, paying a gas fee in eth to be able to send a deposit token, jpmd, from one address to another, was pretty cool at a conference run by a regulator like if you would have told me, like two years ago to the earlier discussion, would banks ever be able to use a public blockchain? I think that seems like it's such a strong signal that jpm has gotten comfortable actually representing their deposits on a public chain. I also saw, Lisa, if you said that OCC confirms Bank Authority to hold certain crypto assets to pay gas fees. Like that was the question of, what does it mean if jpms to buy some eth to pay their gas fees? And like, How complicated is that going to be? So what do you think about just the significance of this product in jpmd going live on a public chain, and do you expect other banks are going to follow? Is every bank going to have their own tokenized deposit. And how do you see the distinctions between the deposits and the stable coins?
Speaker 2 32:26
I wish I could see a chart of how many times banks talked about tokenized deposits before and after the genius Act passed. Because I feel like once it was passed and it was like, Who needs stable coins? We're going to tokenize deposits. But I think I was Sam that I think they're fundamentally different products. It's not a one or the other, and they can coexist. And I could see tokenized deposit existing within a bank's ecosystem, right? When it moves outside of JP Morgan and goes to another institution, I think then what's where you may see some frictions that may be a better use case for stable coins, right? But I think generally, it's a good sign that the banks feel some pressure from innovators and they want to be more active on chain. I think that's good, and I also think it opens up more opportunities for bank crypto partnerships. Right now, there's a lot of posturing. You see banks putting out press releases every other week about what they're doing in this space. But I think for a lot of them, they know there's some ground to catch up on that they've sort of been behind the curve in this space, and the way to get ahead of the curve is maybe partner with some crypto natives and be able to start issuing tokenized deposits to get into stable coin. So I think we'll see that more and more.
Cuy Sheffield 33:39
Yeah, it seems like it's clear that a bank can issue a tokenized deposit on a public blockchain that can then be transferred between their customers and jpmd, as I understand it, it has an allow list in the smart contract, so it can only be sent between customers that they have directly onboarded. What's less clear to me is, can a tokenized deposit be transferred outside the bank if jpmd wanted to? Could they just take the allow list off of it, and could they let a jpmd deposit circulate globally, the same way that a stable coin would and be traded on an exchange and not be tied to a customer, and I haven't really gotten a definitive answer from anyone that yes or no, like today, it seems to be no that, like a deposit has, like a very clear legal structure, and you're onboarding a customer and you're providing deposit, and just using a blockchain as another database doesn't mean you just onboard anyone across the world without doing KYC on them first before giving them a deposit. So I think that's been one of the questions. And then on the other side, if deposits are included as one of the high quality liquid assets that you can use to back a stable coin, and banks, under the genius act, can technically issue a stable coin, couldn't you? Theoretically? Have a bank issue a stable coin that is just 100% backed by deposits. And so, like, what's the difference between a bank issued stable coin, 100% backed by deposits and a tokenized deposit? Sam, how do you unpack like, some of that, will that crossover happen? Will jpmd Go to beyond just their
Speaker 1 35:19
corporate customers into retail or beyond the walls of jpm in the future, I think I'm going to tag in Leslie for some parts of this question, because I think she's going to be far more expert at it than I am. I have maybe two thoughts when we have kind of the same problem with RBAs today, a lot of real world assets that get tokenized, get tokenized into a smart contract and never move because there is an allow list, or they're not able to go do anything. Yet, the walled garden hasn't expanded beyond wherever they literally, the contract they get tokenized into on chain. And so the follow on to that is like, well, what's the point? Why are you doing this? There is some cost to integrating a blockchain into your product, versus an EC two instance or some, you know, hosted database somewhere else. Why do that? If there's no intention to ever take advantage of what blockchains are and the sort of more global on Chain Finance, on chain Liquidity Markets that you referred to earlier Kai, that exists there and are growing there. And so I suspect there is intentionality in that, but in terms of what they're allowed to do, how that might happen in the short term, what they might be thinking more specifically, I defer to Leslie, who I think has far more insight than I do.
Speaker 2 36:21
Yeah. I mean, well, I think there's even nuances depending on you, who you ask between a deposit token and a tokenized deposit. That
Cuy Sheffield 36:29
one I struggle with like, I still can't I like, isn't it just the difference of the word? It's the same thing. Whichever word comes first,
Speaker 2 36:37
I know. And then you deal with all of these when you think about permissible reserve assets under genius, getting at your question, right? You allow those assets to be tokenized, which is a great step forward. So, could you have a stable coin that's backed by tokenized deposits entirely? Could you have a universe where it's, you know, a stable coin backed by other approved stable coins? I think we're still getting to a point where we're, you know, barely into the rulemaking process on genius. So I think a lot of this is going to be fleshed out by Treasury, by OCC. But yeah, I think we're potentially moving more towards an on chain world, including the reserve assets. It is
Cuy Sheffield 37:16
kind of cool to think about the reserve assets being tokenized and having just more transparent reporting on underlying reserves. If you say you have X amount of deposits, like instead of waiting for whatever the monthly attestation is, if you have jpmd And you can point to the address of where it's held, that you can control people. Can monitor how many deposits that you have in real time. And then I think we're also seeing Bittle. We're seeing super state starting to be used as collateral backing stable coins, so that may end up being like one of the more interesting use cases of RWAs and deposits, just as the reserve assets behind stable coins. The other story was that HSBC makes big bets on blockchain with tokenization expansion. So global bank is due to launch expansion of its tokenized deposits to service corporate clients in the US UAE early next year. So it definitely seems like the race is on. Of jpmd has been the early leader. Here. You've had Citi token services. Now you have HSBC. I think there have been reports around BNY and standard charter and so for the large, major global banks, having a tokenized deposit seems to be the area that they are focused on. I'm really interested, what does it mean for the end customer experience? Of how will it be different interacting with a tokenized deposit from your bank than just interacting with a deposit today, and Sam, like, my starting point in that has been, does this mean you could bring your own wallet and you're not dependent upon the bank's interface? Because it is kind of interesting. If you unbundle like today, most of the time, like, it's the same thing. Of like, you have a deposit from the bank, but the only way you could access the deposit from the bank is going to the bank's mobile app or their web app. That's it. Or you go walk into the bank branch, are we now going to see many different types of interfaces? If I could bring my fireblocks wallet or my Metamask wallet or my Coinbase wallet, and I could then hold tokenized deposits that might be from multiple banks, next to my stable coins, next to my bitcoin, next to my other assets, all within the same interface in the same wallet. And then does that mean the bank doesn't have to invest as much in building and maintaining the latest, modern interface? They just make sure that their deposit money is compatible within it. How do you see it changing the interface game?
Speaker 1 39:37
Yeah, we think about this from a couple of different perspectives. One is, how do we get more users and more assets on blockchain, just in general? And I don't think the answer there is like more people use Metamask or other wallets and hold all of their assets across many different chains. We live those experiences every day and in general, they kind of suck. They're just not good UX relative to what we're used to from like any other. Other app we consume on our phones. So when I think about all the people that are not currently on chain, that don't have any of their assets on chain or interact there, most of them are probably going to come through a very specific and bespoke and like walled garden surface, via some other app or product or company they already interact with. So when I use coin basis, crypto back loan product, or when I use the new earned product, they launch on base or even Dex trading there. Now I'm inside the Coinbase app. I don't have a wallet there, and I'm getting the really quality UX that Coinbase has built. I suspect Robinhood is going to do something very, very similar as they expand their on chain presence. Most fintechs that really value neobanks too, that really value UX as a way that they sort of serve their customers. I think we'll do deploy similar strategies, because they want to control that whole service. They want to control the whole customer experience for their end users. So really do expect that most new users to blockchains are going to come through some sort of define mode, but there's, like, a very specific interface in the app they're using. The flip side of this is like, what do we actually want? Do we want, you know, everyone, to just control how folks consume on chain finance? And I think the answer is no. So what I hope exists is that there are eject buttons from these various apps that would allow the power user, the sophisticated user, or someone who is fed up or not getting served the right way from their financial partner to eject out easily of that, maybe into their own wallet, maybe just into an own surface, somewhere else, and be able to move their assets around, have low switching costs, et cetera. Just that opportunity to eject, I think, is like a lot of nice pressure back on our existing financial services companies to provide better and more transparent products to everyone. So that feels really important and aligned with sort of like the ethos of crypto. But I strongly suspect the future is defi mullets, where I don't even really know there's a blockchain in the back end. I'm just getting a better yield. I'm getting more assets to trade. I can borrow different stuff against my existing assets. Blockchain back ends are going to power all of those. Most folks won't even know there's a blockchain in the back end.
Cuy Sheffield 42:03
I like the framing of the opportunity to eject. The other thing that I think that tokenized deposit trend brings up is privacy. We're not used to. You can't just see all the deposits sitting in jpm in real time now, like, I've got an ether scan linked to the jpmd smart contract, and they make a transaction like, ooh, someone sent $1,000 jpmd To like, somebody else and like, then you have these chain sleuths trying to figure out what addresses are tied to which entities and attribute them. And so it seems like if this is going to scale, there's going to need to be some type of privacy, particularly for large enterprises. Leslie, what's the state of blockchain privacy from a at least like, a regulatory standpoint of, is there any barrier of on the regulatory side? Is it just, is it a technical problem, like, why don't we have stable coins running with any privacy today, at any
Speaker 2 42:55
scale? From the regulatory perspective, I think one advantage that is pretty clearly acknowledged in the policy space with all of this blockchain innovation is the transparency, right? I used to work at the Treasury Department, and I worked on illicit finance issues. You can't track cold, hard, physical cash, right? It goes across the border. You never see it again. It's completely different when you're in the blockchain space, where you do have this transparency, that's great for law enforcement, right? But I think as an industry, this next stage is thinking about how you create privacy solutions, and there are many that are already in use, under development, that allow some basic privacy protections. Because if you think about it, the average person probably doesn't want the world to be able to figure out how many times they've ordered from DoorDash, right? Like they don't want that out there. That's not what they have with their current financial products and services. So there's going to be some expectation of basic privacy, but at the same time, you're going to want to allow for control, so that law enforcement, if they have appropriate court orders, whatever it is, can access that information if there is evidence of misuse. So I think it's striking that balance that's going to be challenging. And I think going back to the earlier discussion around sort of the ideology and those in the industry who are really kind of attached to the early mission. A lot of it is around this, right? They want to keep all of this private. They want to keep their information as private as possible. How do you do that in a way that still allows for law enforcement if needed? So I think it's still a work in progress, but I think especially as there's greater adoption of the technology, there'll be a natural customer demand for it. So we'll come with that. Yeah, it's
Cuy Sheffield 44:43
been interesting to just even see the speculative interest in resurgence in Z cash lately, and, like some of the the original kind of privacy approaches. But Sam on the OP lab side, how are you all thinking about privacy? How far are we away from, like, a technical standpoint, are there via. Able approaches, just they haven't been deployed or scaled yet. When will we get some form of real, credible privacy for stable
Speaker 1 45:09
coins? I think we're basically there. The Op stack supports a myriad of different ways to implement privacy. Today, everything is sort of fully shielded and opaque, which and then, to Leslie's point, is like, Okay, well, like, what's the point of a blockchain here to selectively shielding various pieces of a transaction, all the way to like more bespoke privacy pools that are sort of integrated into the protocol itself, that give them various benefits. Our conversations is that most financial companies that are moving some of their products or their business on chain, they do care a lot about privacy. No one knows exactly like what it is, or how they want to see that implemented yet, and so we have a bunch of different ways that we offer, sort of like a privacy toolkit, so to speak, for them, to experiment with things. And there's a bunch of experiments running on the OP stack right now that we expect will hopefully materialize into full blown on chain privacy solutions in the near future. The one that I'm most excited about is selectively transaction data that is sort of like selectively shielded and revealable to certain folks, whether that's a sequencer, validators, other trusted entities that you want to allow to come in and see and hopefully the vast majority of information on the blockchain is still public. That's kind of the point. But those really key pieces of transactions, or transactor information, as we learn about like, what those specifically are. How can we shield those and make them private?
Cuy Sheffield 46:25
Yeah, we're gonna have to spend a lot more time on privacy. On the show. It's such an important thing. It's coming up in every conversation that we're having, and for stable coins to reach that next stage. Yeah, I think there have to be solutions, but that's all the time that we have for today. Thanks so much for listening. Leslie, where can people find more about you? You can find me on LinkedIn. All right. What about you? Sam?
Speaker 1 46:46
I'm Sam mcengo on x, and learn more about optimism@optimism.io
Cuy Sheffield 46:52
awesome, and I'm at Kai Sheffield on x and visa comm slash crypto. If you haven't already, please subscribe to tokenize on Apple, Spotify, wherever you get your podcasts, if you enjoyed this and you want more, leave us a review. Really helps other people find the show. Thank you, everyone for listening. Thanks to our guests for great discussion today. Bye for now.