What do composable capital markets look like? On Ep. 6 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Noelle Acheson, author of Crypto is Macro Now to discuss Paypal's PYUSD hitting $1bn market cap, Certifuge's lending market, Sony launching a L2 blockchain backed by Samsung, and Hong Kong launching 'Project Ensemble'.
On Ep. 6 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Noelle Acheson, author of Crypto is Macro Now to discuss Paypal's PYUSD hitting $1bn market cap, Certifuge's lending market, Sony launching a L2 blockchain backed by Samsung, and Hong Kong launching 'Project Ensemble'.
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This episode is brought to you by Visa
A world leader in digital payments, Visa is bridging the gap between traditional financial institutions and innovative blockchain networks, helping players in the payments ecosystem navigate the ever-evolving world of tokenized fiat currencies with confidence and ease. Learn more at visa.com/crypto.
This podcast is also supported by Digital Asset.
Digital Asset is excited to launch the Canton Network, a proven, trusted, and scaleable service that provides interoperability between institutional-grade tokenization platforms. The Global Synchronizer is now live, managed by Linux and institutions are actively using Canton Coin to manage the governance. No, the banks haven’t launched a token in the classic sense, this is much more interesting. They’ve done it to make all token networks interoperable. Find out more at canton.network
Noelle Acheson 00:00
Sebace as the initial example, or initial foundation. I want to look at it of the composable capital markets. I mean, Coinbase is a key part of crypto capital markets. It has a blockchain. There are many apps being built on that blockchain, and it is a name that institutions and retail tend to trust. So we want to know what the future composable capital markets could look like. Watch what happens on base.
Sy Taylor 00:34
Welcome to tokenized My name is Simon Taylor. I am your host of the tokenized podcast, author at FinTech brain food, and head of strategy at a little company called sodine. Joining me is my co host, my friend Kai Sheffield, head of crypto over at visa. Kai Sheffield, head of crypto at visa. How are you, sir?
Cuy Sheffield 00:53
I'm fantastic. It's September. I can't believe it. It's September already. There's a ton going on in the space. It's conference season already again. It's gonna be a fun month.
Sy Taylor 01:04
It's one September hits. You know you're in the downhill. It's gonna be cute four before you know it. And we're we've got the pumpkin spice last days, but we're gonna have non stop news. And I could not think of a better guest to try and make sense of some of this news than the one and only. Noel edgeson, author of crypto, is macro. Noel, been too long. How are you really
Noelle Acheson 01:27
well, Simon, so good to be with you here. So good to see you again. It's so good to be on with Kai as well. And the expertise on this panel is just amazing.
Sy Taylor 01:35
We'd also like to remind you that the views and opinions of our contributors today are their own and do not necessarily reflect those of the companies they're representing. Nothing we say should be taken as tax financial or legal advice. Please do your own research, folks. All right, so the first story we picked up from coin telegraph is about paypal's pyusd stablecoin hitting a $1 billion market cap, they have, of course, been taking many steps to expand pyusd accessibility, including working with anchorage digital to launch a rewards program for clients who custody PayPal USD stablecoins With that custodian, and they also launched pyusd on Solana back in May, partnering with crypto.com they've got a long way to go. Tether and USDC command market capitalizations of over 100,000,000,030 5 billion respectively. These are pretty large, but Noel, are you surprised that it's taken PayPal this long to catch up?
Noelle Acheson 02:44
No, I'm probably going to say something heretical here, and that is, why would it? It's not got the same use cases that USDC, usdt have not even closed. What really is the use case for PayPal, stablecoin right now? Sure, you can hook into merchants and pay for your and pay for cross border purchases with stable coins. That certainly makes it cheaper. But the demand for that, we haven't really seen the proof that there is actually retail level demand for that, and a lot of the increase has come just over the past few months, since it went on to Solana, that's been massive success. But it's becoming it's coming from yield is because there are some incentives now to buy the stable coin, deposit it in some of the apps on Solana, let's face it, people want yield. You can get really good yield using the PayPal stable coin on some of these apps, much better than you can get in tradfi. That's driving the growth. What happens when that yield is no longer there? I do see that said, I do see a really cool potential use case for PayPal stablecoin That is not as accessible to the usdcs and usdts of the world, and that is acting as a sort of crypto on ramp four, mainstream and into web three, not so much into crypto trading, because, let's face it, USDC usdt, they're on all of the exchanges. They got the liquidity, they got the brand recognition for that. But web three, more broadly, what is necessary for that is UX experience, and PayPal is good at that. PayPal is very good at the US experience. PayPal does have the trust of the mainstream users, most of them anyway, and it does also have the connections to the merchants that themselves may be developing web three experiences as the ecosystem evolves. But will it catch up to USDC? Usdt, no, that's why it has taken so long to get there. There isn't that same kind of trading and cross border transaction use case that the big names have. But that doesn't mean it's not a significant development. It just does mean it's going to be a very different user base. And that's good. That increases the diversity of the ecosystem
Cuy Sheffield 04:47
really, well said. And in first, it seems like a win for Solana, in the sense of before, when pyusc was just on Ethereum, it was growing kind of relatively. Slowly, but there wasn't. It didn't seem like there was a ton of momentum. Once they added it to Solana, you started to see much faster growth, and now it looks like about 60 some percent of the overall supply is on Solana. So pyusd on. Solana has flipped pyusd on Ethereum, and so that makes sense intuitively, that being on a faster, cheaper chain could give them potentially better capabilities for some payment use cases. But I think that the surprise has been what you mentioned, of how it's being used in defi, and that's not something I would have expected. If you asked me a year ago and you say, okay, PayPal is launching a stablecoin Like, what's the top use case? It looks like close to $400 million of the pyusd is in a vault on the Camino protocol on Solana and so it's not clear, like, you know, was this like a specific go to market where they've said, you know, defi, it's a unique use case. There's demand for people to earn yield on these stable coins. Are people borrowing pyusd, you know, from this protocol, that's kind of a different use case, and How sustainable is it? How do they expand from, you know, that early growth in defi into some of the payment use cases that I think PayPal thinks and talks about more, it surprises me kind of how much adoption it's gotten in that segment. But perhaps that bootstraps and drives more demand and momentum that then leads to payment use cases. And I'm really interested to see, will there be opportunities where defi and payments come together? Because right now, it seems like people are using it just purely defi, let me earn yield on my pyusd, but there's not a connection to a payment use case, you know, outside of it, and perhaps in the future, you know, you start to see those, those two come together. But Simon, what do you what do
Sy Taylor 06:47
you think about this? Yeah, as Noel was talking, and as you were talking, Kai, I immediately sort of jumped to paypal's position in the mainstream. You know, this is the OG FinTech wallet. It's the two 30 million users around the world. It is from the 90s. It was x.com and it's kind of gone on to become the FinTech company, and they have a lot of trust. It's the thing that your parents have probably used. It's been around for a long time, and actually in the last few years, on that side of things, they almost risked getting a little bit old and left behind. And so there's a new CEO in there now, looking to help them innovate and looking to help them do exciting new things. They launched the Fastlane products. They've been really pushing the boundaries of what they can do on the consumer experience side, and they'd always been doing interesting things in crypto behind the scenes, but it was kind of disconnected. So now you get this, well, there's USDC, and there's tether, then known as the trading coins. How do we win? What's our right to win in this space? Maybe our right to win is something in payments, which is what we're good at. But isn't it counterintuitive that then along comes this defi protocol to bootstrap it, because it almost looks like a great marketing ploy, knowing some of the actors involved. Again, I have no knowledge of this, just to be absolutely abundantly clear, but sort of knowing some of the actors involved, knowing some of the ways people think and and the organizations, I would be very surprised if that was an intentional marketing budget and marketing strategy. It's somebody smart in defi has figured this out. But wouldn't it be wonderful if that actually bootstrapped today and reverse engineered a whole bunch of payments use cases, because there are two 30 million PayPal wallets that could be used for peer to peer. So of course, it would be on salon and not ethereums l1 anyway, because it's just better, faster, cheaper when it comes to payments, use case, Noel, your thoughts, two things
Noelle Acheson 08:50
to pull on there, and you've hit on some really interesting ports. And also going to wrap this into what Kai was saying about payments, and that is, this is just very information rich about what users today in the crypto ecosystem want. What they want is the faster, better, cheaper, and what they want is the Give me some yield. That's right. Now what we've seen to be bootstrapping the growth in liquidity for PayPal. We must remember that liquidity is the holy grail. Nothing really works without liquidity. This is what so many, pretty much, every project building in crypto wants liquidity. And how do you get that? Well, PayPal can pick up the phone and it can talk to some defi founders, and it can say, Hey, how about you use our token in your app? And you know, we'll just see where this goes. And they're like, Sure, why not? I don't know what went on in the back, but I do know that liquidity is key what PayPal has, and this is the question really to ask you when it comes to the competitive landscape, what PayPal has that circle and tether don't have is regulatory clout. Do you remember back in November when they got issued a subpoena looking for information about their stablecoin? Have you heard anything about that since then? In No, you haven't. PayPal has regulatory clout, much like Blackrock has regulatory clout, and this is something worth keeping an eye on. What if, just what if PayPal is able to help push through the stablecoin regulation we know the United States needs? Oh,
Cuy Sheffield 10:18
super interesting. There's another angle that, since you're on Noel and you are the crypto macro person, I also have to ask you, like, what happens when rates come down? I think there's this, like, this big question in the background of stablecoins have this very profitable business model where a consumer, they give dollars to a stablecoin issuer, they invest those dollars, you know, they earn four to 5% and then most cases, in most of the leading stable coins, the consumers aren't getting that yield. And in many cases, even the wallets or the platforms aren't getting that yield. And so when yield comes down, like, how do you see that affecting, you know, the overall competitive dynamics between these different stablecoin players,
Noelle Acheson 11:01
exactly. Kai, and that's the bridge to what you were talking about with payments, and what Simon was talking about with liquidity. The yield will come down. We know this, the yields that the yields are being offered right now in the defi apps, it's not really sustainable. And yes, the demand for that obviously, will come down, which is sort of why I was asking the beginning, what happens when this incentive is no longer there. But if they have the liquidity and they have the regulatory clout, in other words, there is a stable coin law in place that we support in place in the United States, then the payments use case kicks in, because payments are heavily regulated in the United States, insanely heavily regulated in the United States and in many other jurisdictions as well. Defi is not, not yet anyway, is not so they are relying, in my opinion. Obviously, I'm not insider there, but what if they're relying on the one to get the liquidity they need to be able to offer a good service when the other has some official support?
Sy Taylor 11:55
Ooh. I mean, I wouldn't put it past smart government relation teams to be thinking two or three steps ahead. Government Relations teams are always trying to think about, well, if this is an inevitable circumstance, how do we position ourselves to move towards it in a way that moves the ecosystem forward? And of course, we have seen a lot of, as you say, subpoenas and issues with lots of organizations that are getting headlines. There is one organization that's not getting headlines that's been around for a long time and knows how to be involved in that space. We are, of course, in an election year, we may start to see that there's a new administration, whatever color that is. I am making a prediction here that we will very quickly see some level of bypasses and support for stablecoin regulation. I think it's now finally time for that to happen, whether it's on the Democrat side that there's only so far they can push crypto away without it, without it happening. And we've sort of seen quietly, whilst nobody was paying attention, we got an Ethereum ETF. Oh, how about that? And now there's talk of even a Solana one, and lots of these things are just starting to go away that weren't an issue whilst the rest of the world has already got their stable coin regulation in place. The US, then could probably come along and just clean it up and take care of that, and it would be the non contentious thing to do, and you'd have giant culprits like PayPal that you could kind of point out that would be extremely convenient. So do you think that's the play here? And do you think that we'll see the other stable coins, the other wallets, move into this space and try and make the yield the thing that attracts that closer to the wallet? Or is the yield going to go away as an issue? And we're going to really be talking about other things in time, we're going to be talking about verification. We're going to be talking about the KYC side of it in the near future. Unfortunately, the KYC
Noelle Acheson 13:49
side of it is going to become increasingly dominant in conversations, just for regulatory reasons, and again, especially if indeed the official the regulatory support, starts to gather some steam in the United States. But let's face it, yield is very popular. Even when rates were low, there were a yield, very successful yield, varying apps and stable core and tokens, I should say, in the crypto ecosystem. And we all know that the creativity and ingenuity of the builders in this space does not know any limits. So yield is not going away. In fact, the creativity in the crypto ecosystem is going to be a plus when tradfi yields come down. Part of the headwinds that we've been battling with is the very safe and very attractive alternatives in traditional markets, when it's safe but not so attractive, yield does tend to win, and crypto investors are not exactly conservative,
Sy Taylor 14:43
okay, well, we can talk about stable coins for a long time, but I'm gonna talk about the next story. This is from CoinDesk, tokenization pioneer, of course, centrifuge have unveiled lending markets. With Morpho and Coinbase, the institutional real world asset lending market combines Coinbase as layer two network base, Morpho vaults and uses three varieties of tokenized treasury bills the market will allow for the collateralization and borrowing against centrifuges, a moi fund tokenized T bills from Midas and hash notes us yield coin. It's the first time a permissioned lending market will use the Ethereum powered Coinbase verifications. There's a lot of firsts going here. The aim is to provide instant liquidity without having to redeem the underlying T bill. So Noel talk us through this one. What's the use case? Who's it for? And how are they getting benefit from this? I'm going
Noelle Acheson 15:55
to confess I haven't gone into the weeds of how this works, but I am going to say why I was I'll explain why I was paying attention to it, even though, without going to the details. And this is what I've called generally, probably incorrectly, but it's what I call Lego finance. It's the modularity. What we have here is a sort of defi type application using other defi applications. I mean, it's using the Morpher vaults, it's using tokenized treasuries. It's using all sorts of components to make a new kind of service. And this is one of the hugely overlooked, in my opinion, advantages of the development going on in defi. This was briefly a thing. Years ago stopped being a thing when yields became every well anyone talked about and hopefully with this, we can see it's coming back, the modularity of defi And sure, with all sorts of components building new types of services, there is risk, because if one component fails, then you know, maybe the app or the service can fail. But that's the design issue that that can be sorted out. What I'm fascinated by is how blockchain technology is enabling not just products and assets that we haven't seen before, but new types of services that are relying on the work of others in efficient and relatively easy to construct ways we haven't seen before. Those
Cuy Sheffield 17:18
are all great points that they're a bunch of really interesting things here that relate to conversations we've had on this show over the past five episodes. And so I think back to when we talked to Robert leshner about this trend in the growth and the rise of tokenized treasuries and tokenized money market funds, one of the questions that we ask is, okay, what? What can you do with them? What are the novel capabilities that it unlocks once you can represent a money market fund, you know, on chain, and when is that coming? And Robert's like, it's it's coming, but it's like, it's not really here yet. And one of those things is, can you use them, you know, as collateral. We talked about this at the very first episode with digital asset this kind of collateral mobility. Now you've got the ability to use tokenized treasuries as collateral to be able to borrow against in one of these, these protocols. So I think that's first, you know, really early, but a signal kind of moving in that direction of, you know, those assets being useful to be able to borrow against, so you can still, you know, earn the yield that you have on that collateral while you borrow cash, or the equivalent of cash in the form of a stablecoin against it, then I think you have this notion of, if you want to use tokenized treasuries, if you want to use these assets inside defi, how do you manage identity? And so you got this, like, big open question around this concept of Coinbase verifications trying to solve, how do you know who the consumer is that is actually depositing into a defi protocol or getting a loan from it? And I saw when Coinbase verifications launched, I think it was over, like a year ago. I went in, I connected my self custodial wallet to my Coinbase account. I minted this attestation using the Ethereum Attestation service, and it was really cool to just see how you can prove and represent that this wallet is connected to a Coinbase customer in the United States. And then the question is, okay, what can you do with that? And now that that exists, and this is one of the most interesting applications that I've seen using Coinbase verifications to provide some identity layer for that fault. And then I think the third piece is just this is on base, and we've talked a lot about the need for faster, cheaper blockchains to make many of these use cases work, and l twos being the primary path that Ethereum is taking. And so to have these very real, institutional, tokenized Treasury use cases coming onto base, I think that's a big deal. So those three things together, interacting, it still seems early, but it's promising that you could see how those could develop over time.
Sy Taylor 19:56
And it's the Lego point, right? Like identity. Goes plus T bills, Legos, creates overnight repo service, and it looks like overnight repo in tradfi, where you would do exactly the same thing. You didn't want to sell the underlying, but you did want that little bit of liquidity for that little bit of time. So you just park it over here, and then you have to prove who you are with, whoever the custodian is and whoever the CSD is that you parked it with. So then you can do the overnight repo and have that liquidity. Because in the traditional world, of course overnight matters, because you don't trade 24/7 markets close and overnight, you might want to do other things in other parts of the world so that liquidity being stuck was a problem. This is a different use case. You might want to not sell it, and you might want to do something else with it, but until you have a verification service, until you have these pieces, until you have the proliferation of real world assets on chain. You can't put these Legos together, and we want real world assets on chain a because, as Noel was saying earlier, they're potentially seen as very low risk, but at the moment, they're also quite high yielding. So we also end up wanting to solve a lot of the problems that come with it. So who's the first best customer for this? Noel, what are your thoughts? Is it the like existing crypto institutional folks? Is this going to be stay niche, as Kai suggests, it's like, super early, or do you think we'll see it build out from here? Because centrifuge has, you know, been a bit of a pioneer. It
Noelle Acheson 21:38
has. But then again, in, you know, crypto years. It's been around forever, but it's only what, 2017 I think, if not earlier, it's that's not that long. In terms of finance, I think Kai hit it on the head when he was talking about collateral. That's the big deal right now, he's right. It's very niche. It's going to be crypto treasurers. It's going to be crypto fund managers. But I have had so many tradfi people ask me about the tokenization of real world, especially Travis. What's the point, especially when you can't transfer it freely, when there are KYC rules, etc? Well, this is the point. This is the point. This is leading to the potential modularity. And there are some fascinating projects, I mean little what PVO one, are working on, tokenizing securities that can then be transferred into compatible defi apps to enhance the liquidity, as you mentioned, Simon, enhance the return. That's a treasurer's dream. That's a fund manager's dream, and that's the composability of the capital markets of tomorrow. Hopefully, yes, there is more risk, but that's a design issue,
Sy Taylor 22:40
composable capital markets, that's a great sentence. I
Cuy Sheffield 22:44
think it's also interesting to just think about what does the defi infrastructure need to look like at the protocol layer to support some of these use cases. And so we've seen products like Ave, I think they've launched Ave arc and tried to create permissioned versions of ave to be able to have institutions access. Morpho seems like this new lending protocol that's more customizable, and so being able to create specific pools that might be gated by certain conditions that you have or that only support certain assets. So I think we're just seeing the continued maturation of defi infrastructure that can have more flexibility. And so it's not just a one size fits all the same pool that you're using to borrow against, if is the same pool you're using to borrow against tokenized treasury. But how do you take the protocols themselves and be able to customize them towards these use cases, which it seems like Morpho is really doing some interesting things around.
Sy Taylor 23:45
Yeah, that's actually a really great point, because historically, you saw the protocols themselves. We're also trying to build the pools themselves, and we're trying to launch the identity service themselves. And actually, that's not what defi is. It's by default, modular. So you can take these pieces, and you can end up building this type of lending pool that requires a KYC, but you can use another service for how you do that, and maybe that pool doesn't like one service. It can use another service that has higher, more stringent requirements. So it's almost this really poetic moment inside of defy that you the modularity is what will eventually unlock it and be its ultimate strength. Kai, I want to pick up on one last point that you made, which is, it's all sitting on base you. We sort of haven't given that much much attention yet on this show, but it's the platform that there's a lot of momentum around there's a lot of stories about there's certainly a lot of energy there. Why do you think that is other than it's by Coinbase, and they've they've got a lot of market share.
Cuy Sheffield 24:53
I think the way that we're seeing l twos play out today is, you know, distribution really matters. And I. Think having Coinbase, which I think it would have been one thing if Coinbase looked at base as like an experiment and like an early stage kind of proof of concept that was like on the side, it feels like Coinbase has really positioned the company around base. Every product that they're building is touching base in some ways, the combination of just their commitment, and I'd say, Jesse Pollock and his ability to just be building in public, creating a developer ecosystem, it's really fascinating to see the traction that they've had. I think the interesting thing to watch is Coinbase has such a large institutional business right now, whether it's what they're doing, providing custody for ETFs, large asset managers that are working with Coinbase prime and their institutional services, we haven't really seen institutional products come onto base yet. I think this is one of the first early examples. And so are they going to be able to take the distribution, not only just on the consumer side that they have, which seems clear that they've been able to do, but also take their distribution on the institutional side and to be able to create an ecosystem of tokenized securities, other tokenized assets, that they could then have base become a leading chain for that. And that would be really powerful. And so that's something to watch for going forward,
Noelle Acheson 26:21
especially the compatibility with the Ethereum ecosystem at large and through bridging others as well. I see base to continue to pull further on that trend. I see base as the initial example, or initial foundation. I want to look at it of the composable capital markets. I mean, Coinbase is a key part of crypto capital markets. It has a blockchain. There are many apps being built on that blockchain, and it is a name that institutions and retail tend to trust. So we want to know what the future composable capital markets could look like. Watch what happens on base.
Sy Taylor 26:59
This episode is brought to you by Visa, the world leader in digital payments. Visa is bridging the gap between traditional financial institutions and the innovative blockchain networks, helping players in the payments ecosystem get closer to the world of tokenized fiat currencies with confidence and ease. Learn more@visa.com forward, slash crypto. This podcast is also supported by our friends at digital asset. They're excited to share the Canton network with the world a proven, trusted and scalable service that provides interoperability between institutional grade tokenization platform, the global synchronizer, is now live. It's managed by the Linux Foundation and institutions are actively using Canton coin to manage its governance. Finally, enterprise grade interoperability. No, the banks haven't launched a token. This is much more interesting. They've made all networks interoperable, and you can find out more at Canton dot network. The next story comes from ledger insights, and it's about Sony readying their own public blockchain. They've confirmed the new Blockchain cineum Will. I don't know how to say it, but it's something like that, S o, n, e, i, u, M, listeners, you figure out how to say it too. It's been built by Sony block solution labs, a business Sony owns 90% of. It's an l2 Ethereum chain using optimism, much like, of course, Coinbase as base chain that we were just talking about, and Samsung's capital arm, Samsung next, are also investing in it. The Director of Sony's block solution labs said, We believe this is a watershed moment for the entire web three industry, and it will be whether we as companies involved in web three. Can we truly provide solutions that billions of people use as a matter of a course in their daily lives, and make web three mainstream in the next few years? So of course, Sony have trialed a stablecoin on Polygon. They've dabbled in this before. Why do you think that they're going so public on this. Why now? Why Sony? Why this? What are your thoughts? Noel,
Noelle Acheson 29:26
this is, I see it as an extension of the strategy they kicked off the beginning of the century. I think it goes that far back. And I'm sure many of your listeners are probably way too young to know Sony walks Sony Walkmans, but, you know, I had a Sony Walkman I actually found it the other day, and I was cleaning out covers. But anyways, going back, Sony are known for creating industry defining consumer products. They created the first transistor radio, the first cassette player you could put in your pocket, the C the CD player can. Were DVD players. Then they made so much money doing that that they started moving into culture. They were creating and buying businesses in movies, Gaming Music, and then they went into finance. Sony owns a bank, and their strategy all along has been the convergence of the three key threads of society, which are technology, finance and culture. And sometimes they made some mistakes, and it didn't all go very well, but I see their web three strategy as an extension of that web three strategy for Sony, from the beginning, they started dabbling in it in publicly anyway, in 2018 as far as if I remember correctly, I could get my dates wrong, and it was something to do with music rights, which makes sense given their music business. Then they went they'd done NFT platforms, they've invested, they've launched nfts that go with some of their movies. They have filed a patent recently, I think it was this year, for how to have rights, actually, in the metaverse and digital assets in the metaverse, I think this is their strategy, is to use their web three extension as the continuation of the convergence of consumer products and the finance as well as culture. And whether they'll be successful on that depends on one, the user base, which is really pretty considerable. Two, the actual technology, because we know that some web three, especially Metaverse technologies, are not quite ready yet for mainstream adoption, and three, the finance imagine if all three threads can converge. Sony are probably in a very good place to make this happen, because they are among the very few culture and technology companies that have a bank which, according to Japanese law, can now issue stable coins.
Cuy Sheffield 31:42
That's really well said. This is a super interesting story in that I think the fact that it's an l2 is notable. They could have created their own layer one. And so I wonder if is part of this from what we just talked about, people are very aware of the success of base, and how Coinbase has been able to take their distribution and be able to bring that into their own. Layer two, will Sony be able to do the same thing? And I think that's the big question. They have many different properties, as you mentioned, which ones are they going to focus on? What are going to be the early use cases? Is it going to be around gaming? Are they going to take a run to nfts in game assets. Will it be more on the financial side? It doesn't seem like we know at this stage, particularly when you look at the revenue that Coinbase is able to earn on the sequencer, fees on base. I think it's very tempting for large companies to say, why don't we try and create our own layer two, and can they execute? Can they pull it off? Will be the big question. And then, if you have many different companies creating their own l twos, do those l twos interoperate? Are they going to be able to interact with each other, and do they need to? And so I think the fact that they're using optimism, and this vision that optimism has of trying to create this super chain, and the ability that two different l twos interacting on optimism can then be able to transact with each other, like, will there be use cases where they want to take customers that are on base today, tap into the growth that base has, and be able to bridge over easily from base to a Sony game, it seems like optimism has a potential to become a standard, but you still have other competing standards. You've got l twos and the arbitrum ecosystem and the polygon ecosystem, and so there's going to be, I think, really significant competition between what is that standard that l twos are built on how much can they interact with each other, and that's going to be one of the interesting things to watch in the next few years, as more companies try and go down this path of creating their own LTS,
Sy Taylor 33:51
Sony is no stranger to format wars. VHS, Betamax, HD, DVD versus blu ray. Even CDs were not always a sure thing. And there was a brief period where they tried to make laser discs a thing, and there was a format wall there that nobody remembers, but all of that aside, and my definite aging process being shown aside the fact that they have, as Noel said, the IP and I think the long term commitment, and I think the mandate is really interesting. Layer on top of that, that they have not just taken funds from an ecosystem project here and done that like, Okay, your marketing has been paid for by the ecosystem fund. And this is doing a thing to experiment, because it costs you nothing in the research and development. This is the opposite. This is we are funding this thing and we are building this thing. Could it find its space as the l2 that has the most distributed IP already baked in it? There? Four, much like base, has a distribution advantage. This scenario ends up with a distribution advantage because they can instantiate it, much like the PS two did for DVD and then later the PS three did for blu ray. Could they make that a thing by winning on distribution with something that they have is popular. I think there's a there's a real possibility there any thoughts anybody wants to jump in on so many
Noelle Acheson 35:28
thoughts on this, because it is such a fascinating project. I love what Kai brought up about the competition between the different ecosystems. Let's face it, the characters are very similar. If you were a developer, would you rather build on Sony's blockchain? Knowing that Sony decides whether you stay or whether you go, they can kick you off if they want to. It's not necessarily going to be distributed or decentralized in any way, shape or form. Coinbase perhaps, is a more trusted crypto name, perhaps more bought into the decentralization ethos. Then again, Sony has the properties, the brand recognition, the I don't know if they do the Marios, but maybe that kind of thing. So developers will be choosing on those criteria. Do they go with the safety of future development and the security that in the knowledge that they're not going to be kicked off, or do they just go where the mass consumer is going to be? And does the timing matter? Because right now, the mass consumer is not really in web three are they thinking three years ahead? Five years ahead, that is also very relevant, and the regulatory framework will also end up being relevant, because there's no point in building for digital assets in a Metaverse when you don't have regulatory clarity around that. And it's worth mentioning. I don't know if you remember recently the news that Sony had bought and was revamping and relaunching a crypto assets exchange which could be material for this whole strategy. Convergence sounds really cool. It is a very powerful strategy. But in the end, developers want some security that their work is going to be able to be monetized and will make an impact in the sector going forward, Sony versus the Coinbase ecosystem. It's not an easy choice. In the end, the users just want to have fun games and cool music. The
Sy Taylor 37:10
gaming world has been through progressive changes in business model over the past couple of decades, and mainstream gaming, as you would understand it in the West, is the business model of paying $60 for a big game has really collapsed to two or three big launches per annum, and then the rest of the industry is just in a dire, dire straight. You can just look at GameStop and everything that happened with that and why it was a bubble, to sort of see that that model of distribution has gone and what we're moving is to sort of this Netflix model of all you can eat and everything shows up everywhere, or the live service game in which you buy a Battle Pass and it's always on, and there's just like a lot of fatigue in these gamers that have been really felt exploited. And they, weirdly enough, saw nfts as just the next big exploitation. So you can't say NFT in this space, but Sony needs to figure out a way that it competes with Valve and the PC ecosystem, because Valve and the PC ecosystem is slowly pulling everything in, and it's more likely that Game Pass and Sony will start to live inside of a PC ecosystem the way things are going. So what's the lateral move here? What's the format that you can own? Well, you try and own where the new business model is going. I think that's a really, really interesting set of dynamics for the gaming industry to think about, because when owned assets in game really do show up, it won't look or feel like an NFT. It'll look and feel like V bucks, it just sort of happens to be available in my other games, in other ecosystems. And that is when consumer adoption covers because they don't care about how Netflix works. They care that it works. And so we don't care how nfts work. We just care that I can have that thing that I bought in this other thing somewhere else. And that's what started with cross playing. Could end with cross chain. Who knows? I'm going to move us to the last story. This is from ledger insight. So it's about Hong Kong launching project ensemble, a sandbox for w cbdc, tokenization. This aims to support institutional experimentation with tokenization, both with traditional securities and real world assets. The initiative also involves experimental wholesale cbdc to enable the interbank settlement between the tokenized deposits of banks. We got a lot going on here. Kai, do you want to help us unpack this? Tokenized deposits, real world assets, traditional securities? What are your thoughts? Yes,
Cuy Sheffield 39:49
I think first, Hong Kong has been one of the more forward thinking central banks in this space for a number of years now, and they've been really active around creating sand. Boxes and pilots and experiments and really engaging with the industry, looking to understand how these technologies operate. In general, if we take a step back, I think we've seen a lot of the interest in cbdc kind of started on the retail side, you could argue, to some extent, a reaction to some of the larger stablecoin proposals. And I think over time, we've seen the momentum for retail cbdc really slow down, and there's just been a lot of big questions and challenges around what would a retail cbdc look like? What role would the central bank play, and what does it mean for banks? But I think we've seen, more recently, a resurgence of interest in wholesale cbdc and saying, how do we use these technologies at the wholesale level to improve central bank payment systems that banks can interact with? And particularly combining wholesale cbdc With tokenized deposits and really having wholesale cbdc as a way that you could settle transactions in tokenized deposits. And so if you have two banks that each tokenize their deposits and they want to transact with each other, can you settle that instantly, using central bank money in a wholesale cbdc? And then I think a lot of the use cases that have really been driving the interest in the experiments, they've been more around, how do you just upgrade broader financial market infrastructure? It hasn't really just been a payment thing. It's been a monetary system, financial assets, securities, bonds, commodities like, what are all the different ways that you can upgrade the ledgers that these assets sit on inside our economy, and then have a form of central bank money that could enable flexible, 24/7, easy settlement of those assets. So I think Hong Kong has really been on the forefront, along with Singapore, Brazil, a number of those other markets that have taken a very ambitious long term view to say that we think that tokenization can help upgrade the rails that a lot of the financial system in our economy can run on, and they're kind of going step by step, running these trials and experiments to try and answer a lot of the open questions to get there. Noelle
Unknown Speaker 42:17
thoughts,
Noelle Acheson 42:18
plenty, because I hit on many of the key points of trials like this are, is the reimagining financial ledgers and having money, be it in the form of tokenized deposits or wholesale CBDCs or a hybrid and securities, aren't the same rails. I mean, today, banks spend billions of dollars a day in reconciling the money and the securities rails. Imagine the efficiency that they were actually on the same rail. And then there's the cross border aspect. While this is a Hong Kong experiment trying different types of assets on the same rail, tokenized deposits, cbdc and the tokenized securities, Hong Kong is involved in many others. It's involved in Enbridge, which is trialing the cross border use of wholesale CBDCs. It's, I don't know if it's a Malden Project Guardian, someone should probably check that. But again, there's a lot going on there based in Singapore and Hong Kong. Is if I'm not wrong and correct me, somebody let me know if I am. It's the only foreign, non European Central Bank involved in the ECB wholesale DLT trials. It is working with the Bank of France right now on the DL 3s i think it's called, using the French bank simulation of a hotel CBC on cross border settlements. And it's the only one that is going in that direction. This is Hong Kong working with Europe on these kind of trials, so it's definitely taking it seriously. I enjoy stepping back and wondering, why is it because it cares about the finance or the future? Is it because it wants to recover the financial status it once had and just might be losing because of some the increasing Association and censorship and change in the regulations, given its proximity to China. Well,
Sy Taylor 44:08
Singapore and Hong Kong have had a not so subtle tit for tat exchange of who's the most innovative former British colony, best known for global trade, and it's it's very much the case that both of them lean heavily into regulatory innovation in order to maintain their status as global shipping hubs and operate on the international stage. I think it's no coincidence that supply chain finance is one massive area to be explored in the sandbox with electronic bills of lading and the global shipping business network infrastructure. There's also liquidity management with Ant International, of course, the non Chinese part of ant that makes Alipay appear as a payment method everywhere else in the world. And of course, Alipay as a payment method is now becoming one. The most widely accepted payment methods in the world, right up there with the visas of the world, so that as a payment network is really starting to grow, and you could see why HSBC and Standard Chartered would be interested. But all of this ultimately has to flow back to the banks, which is where money has to sit, and then that has to flow back to the central banks, because who else would make sure that all the money moves? So it's almost like these layers in a stack are starting to emerge, where at the very bottom, of course, you've got the central bank above that, you've got the commercial banks above that, you've got all of these different sort of tokens and token use cases in all of these different geographies, and then the question is, how do they get recombined and underwatch legal framework? So having a sandbox and being the most active participant when you view global trade as shifting, when you are naturally reliant on global trade as a sort of a port hub and as a organization a part of the world that's very reliant on that money movement, on that trade movement, it would make sense that you would lean into a lot of this stuff. Switzerland, of course, has been collaborating with everybody. The Bank of England has been collaborating with everybody. If you're not paying attention to the Bank of International Settlements projects list. It is extremely long, and it's almost always tokenization of some sort of asset. They are the world of big finances paying attention to this. And inevitably, these things do start to converge. Any final thoughts? Kaio Noel, before we close out today,
Noelle Acheson 46:37
one further thing to point out about the various experimentation we're seeing from the BIS and others about tokenization. Not a lot of it involves tokenization of the dollar that sort of seems to be solved. And right now they're focusing on tokenizing local currencies, be they central bank or be they commercial bank. But what if these do become a more efficient payment token than the dollar currently is. Right now, the dollar is the world's reserve currency because of its convenience, because everyone wants dollars, because it's just easier to transact in dollars because of the liquidity. But what if these new types of Rails start to change that equation a bit? It's not going to happen overnight, but in finance, even just 10 years is a short time frame for that kind of change Well,
Sy Taylor 47:21
indeed. And of course, India is trying to export UPI. Brazil is now thinking about how it exports pix. We are seeing the connectivity of local payment methods. There's a lot of different plays. Tokenization is not not exclusive to that. We will see so much more of this, I'm sure. And I would love to dive into like, 10 more stories with both of you, because the energy and the enjoyment of this show has been off the charts. But I also want to thank our audience for listening. I want to thank Noelle for just being here and being such a star. Where can people find out more about you and what you do?
Noelle Acheson 47:55
Thanks for asking. Simon. I write the crypto is macro now substack newsletter, if any of your listeners are interested in getting a daily comment on what I see to be examples of the conversions of the crypto and macro landscapes as well as the occasional market commentary, do please sign up and on Twitter, you can find me at Noel in Madrid, where I tweet about what I'm keeping an eye on, as well as a daily photo of the beautiful city I live in.
Sy Taylor 48:21
I love that. Kai. How
Cuy Sheffield 48:23
about you on Twitter at Kai Sheffield and visa.com/crypto
Sy Taylor 48:27
and you can find me at sy Taylor on Twitter or on LinkedIn. And please listeners, if you like this show, remember to hit that subscribe button and tell everyone you know to subscribe too, and then leave a review. It genuinely helps us. And of course, remember that none of what we've said during this show is financial or business advice, and this content is for information purposes only. And oh my god, it was jam packed full of information until next time. Bye for now, everybody.