On Ep. 46 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Andrew Huang, Founder @ Conduit and Bhaji Illuminati, CEO @ Centrifuge to discuss tokenized deposits vs stablecoins in banking, regulatory considerations for tokenized deposits and more!
On Ep. 46 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Andrew Huang, Founder @ Conduit and Bhaji Illuminati, CEO @ Centrifuge to discuss tokenized deposits vs stablecoins in banking, regulatory considerations for tokenized deposits and more!
Timestamps:
Tokenized is sponsored 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.
Tokenized is presented by Bridge, a Stripe company.
Just like the internet made information global, stablecoins are making money global. And Bridge, a Stripe company, is the infrastructure powering that shift. Built for speed, scale, and simplicity, Bridge helps businesses send, store, convert, and spend stablecoins instantly, all without borders or having to navigate the complexities of crypto. Learn more at bridge.xyz
Tokenized is also presented by Centrifuge
With over $1 billion in total value locked, Centrifuge works with major institutional partners to tokenize and distribute their funds — and with capital allocators onchain to invest and manage yield. Through every crypto cycle, Centrifuge has been building — and today, it’s the market leader in tokenizing real-world assets. Learn more at centrifuge.io
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Music by Henry McLean
Bhaji Illuminati 00:00
Simon Tai,
Sy Taylor 00:10
welcome to tokenized. The show focused on stable coins and the institutional adoption of tokenized real world assets. My name is Simon Taylor. I am your host for today, author at FinTech, brain food and advisor at sardine. And I'm joined, as always, by the fantastic, the incredible, the unbelievable, the effervescent. Kai Sheffield, how are you doing,
Cuy Sheffield 00:32
sir, I'm fantastic. We've got great guests. We got a lot to cover. Let's get into it. All
Sy Taylor 00:37
right, yeah. Let's start with our first guest today, Andrew Huang, founder of conduit, tell us about you, Andrew. Tell us about conduit.
Andrew Huang 00:44
Yeah. Well, thanks for having me. Simon and Kai, I'm the founder of conduit. We do chain infrastructure. So we help teams like Athena secure Kai and polygon build their own custom chains, and ultimately, kind of the Last Mile End customization, performance, scalability, security solutions there. What we're really excited about over this next year is kind of the institutional and fintech adoption. So I think circle and Stripe launching their own chains here is incredibly interesting for us. We spend a lot of time in kind of the core crypto native categories, and it's very exciting to start to see some of that institutional and kind of finance kind of from off chain start to come on chain.
Sy Taylor 01:21
Yeah, I'll love to get your thoughts on that as we come to our first segment of the show. But we're also joined really, really excited to be joined by boggy Illuminati, who's the CEO of centrifuge. Thank you so much for joining us. Tell us a little bit about you and tell us about centrifuge.
Bhaji Illuminati 01:38
Hi, thank you so much for having me. I've been a major fan of this show from the very beginning, and happy that me sliding into your DMS many, many months ago resulted in this conversation today. So centrifuge, we've been around since 2017 we are one of the original founders of the idea of real world assets. So we've been really focused on tokenizing assets, creating this bridge between off chain, institutional financial products and on chain, capital allocators and treasury management. We are a billion in TVL, so of course, small in the grand scheme of things, but top three as it relates to RWA platforms within the sector right now, over the many years, have survived multiple cycles, learned a lot, iterated a lot, focused on different types of asset classes, different types of go to market motions, and have really gotten to this point today where we do act as this liaison, where we strive to be The best on ramp for institutional asset managers to come on chain, to tokenize, manage and distribute those funds. So really excited to be here and jump into the conversation today,
Sy Taylor 02:49
and I should mention as well, we're excited to welcome you as a sponsor. So thank you for supporting the show and thank you for making this possible. We enjoy it, and we seems like we're getting good feedback, and other people seem to enjoy it too. So we appreciate you supporting us. Tokenized is brought to you by our friends at centrifuge. Through every crypto cycle, centrifuge has been building, and today they are the market leader in tokenized real world assets. Back in 2017 they were one of the first to mint a stable coin backed by real world assets with maker, they're now launched an RWA lending capability with AAVE, which is over a billion in total value, locked and centrifuge works with major institutional partners to tokenize and distribute their funds from treasuries to credit strategies. Centrifuge connects traditional finance to decentralized markets, creating new ways to access and put capital to work. Centrifuge is more than simply part of a tokenization wave. They've been kind of driving it in many, many ways, whether you're an asset manager or a FinTech exploring tokenization, or a stable coin allocator seeking high quality institutional yield no further than centrifuge. Two quick bits before we get into the content. Reminder, we're doing our first ever tokenized live in London on the 11th of September. Tickets are completely free. Thank you to our sponsors. To register, click on the link in the description wherever you're watching or listening. And of course, I need to remind you that views and opinions of our contributors today are their own and might not reflect those of the companies they represent. Please don't take anything we say is tax legal or financial advice or fashion advice or sports advice, it's not advice. Do your own research, folks. All right, Kai, you wanted to start with something today, I believe,
Cuy Sheffield 04:43
yeah, before we get into the news, Simon, we got to start with your latest FinTech brain food piece. Every bank should tokenize deposits. This is something we've been debating for a long time. I've gotten a bunch of people pinging me about this blog post. Give us a quick rundown on your thesis here at. Then, would love to hear Andrew Baji and others your take on tokenized deposits. Sure,
Sy Taylor 05:05
the world seems to think it's stablecoins versus banking and tradfi, and I just don't think that's true. The world seems to think that stablecoins means we're entering a world of narrow banking, and that this is de facto competitive with banking, and there will be some competition, don't get me wrong, but I can't imagine a world in which some of the world's largest balance sheets don't play a useful role. I really, really love what centrifuge is doing, and I really love this alternative way of providing stable coins and deposits and different types of lending. The market needs credit. The market needs innovation, but the market needs people that have learned from centuries of market cycles like booms and busts and recessions to be able to absorb shocks. The market needs people that can serve fortune 500 companies, and those fortune 500 companies will probably want to get access to stable coins that want to get access to defi markets, and they'll want to do that through their bank partners. So I think it's less of a stable coins on one end of the spectrum and tokenized deposits on the other. And these things are fighting each other. I actually think they will coexist in the same universe, insofar as really a token is a token, but what it's backed by may vary. A token can be backed by treasuries and a stable coin issuer. A token could be backed by something else and may not be a permitted payment stable coin in the United States under genius or it could be backed under the genius act by deposits held at a bank, and those banks can lend against it. They can do whatever they want. And there was a lot of people speaking to me saying, Simon, how would you tokenize a deposit? And I was like, Well, surely it's very simple, isn't it? And they were like, no. Nobody's ever drawn the diagram for me. So one of the things I did was just build a really simple sequence diagram that says, Okay, well, all you have to do is move the deposit into a minting account, so the deposit just stays inside the bank from a balance standpoint, and then you mint a token on chain that represents that deposit. And so long as that deposit can still be found later on, from a bank's perspective, you can do whatever you want with it. You can lend against it. You can do all of your treasury management. There's just this other version of it existing on chain that you now need to track and chase, and then once it's minted, you can then send it to beneficiary wallet and out into a blockchain network. Now, which blockchain network with which compliance requirements, that's the thing that everybody seems to get to second. And I think that's the debate, and that was a lot of the thrust of my argument is there's still a bunch of questions about privacy and KYC and all of the engineering trade offs. So that was the centerpiece of it. But Andrew, you sort of mentioned you're interested in larger organizations coming on chain. What are your thoughts on tokenized deposits? Bad Thing, good thing. I think
Andrew Huang 08:07
it's a good thing. I think it's somewhat similar to stable coins. I think it's ultimately a different kind of asset, right? I think stable coins typically backed by short term treasuries or overnight repo markets. You can have a lot more confidence in that bank deposits are pretty, generally pretty high quality asset. It's a bit harder to get on chain, kind of, as you alluded to, in a way that preserves privacy and a lot of the compliance and regulations that banks have to deal with. And so I think for us, ultimately, that's maybe what the interesting problem is, is if you can bring these on chain deposits, or kind of these deposits on chain give access to liquidity and defi native services. Certainly, that's something like defi would be interested in. Right? Is New liquidity streams coming into the ecosystem? But is there a way to do that while satisfying really kind of the permission and private nature that these kind of exist in off chain today? So ultimately for us, how we think about it, is one. It's a huge source of what we would call sustainable supply and demand for blockchains. I think if you look at a lot of the organic activity today, it's a lot of speculative finance, and it tends to move around into kind of various places, and a lot of these chains are kind of competing over the same sources of speculation. But why things like the stripe chain and like circle chain, and maybe we'll talk about the Google one kind of down the line is like these, have the opportunity to bring these more sustainable sources of demand on chain in a way that leads to durable revenues, and all the things that I think us and Baiji here at centrifuge are kind of excited about,
Sy Taylor 09:41
yeah, I think you raised a couple of great points. And to the point about what Google's announced, from the looks of it, they did a pilot, I believe, on their closed permissioned chain back in March with CLS bank, who are one of the major FX banks in the world. And so that would resemble sort of the Google version. Of a Connexus or a Citi token services. I think these things are very, very interesting, because certainly in the case of Connexus or Citi or HSBC, they're already moving trillions as tokens. And people wonder like, why are banks moving millions as tokens? Couldn't they just update their mainframes? And actually, unless you've worked inside a banking it seems like a really easy thing to do. It's possibly the hardest thing they will ever do in existence. It might actually be a lot better to abstract their mainframes away into one consistent global ledger and use that as their source of truth over time. And what that does is, inside their closed loop, is it gives them 24/7, instant settlement across borders. What I'm suggesting is tokenized deposits help them gradually go open loop. And so I'm very excited by zksync providiums idea, and what that might look like on some of the new well ones, and how you could give banks sort of the ability to take their deposits on chain, but in a semi closed loop, but in a way that could be atomically swapped for a stable coin and or some other asset that then flows on chain, just as everything else does, because they have a lot of fortune, five hundreds, that want to give access to stable coins. And this is a really neat firewalled way to almost think about how you might do that, but you, I know you've been doing a lot bringing real world assets on chain for a while. What are your thoughts on the deposit side, if any?
Bhaji Illuminati 11:27
Yeah, I think it's really an interesting conversation. And there's, of course, a lot of opportunity for banks, and it makes a lot of sense that banks are interested in this to touch on Andrew's point a bit, and where it gets most relevant to centrifuge is, what can you then do with that token once it's on chain? So are there opportunities to make it more programmable and more deeply integrated within defi? Can you lend against it, and can you start to use it as this collateral asset, which I think is very interesting in many ways, from the bank's perspective, it makes those deposits more sticky. From the user's perspective, it creates opportunities for broader utility and growth and leverage within the system. There are, you know, some questions around, what does that do for potential systemic risks if there's effectively the ability for the bank to still lend against the deposit and then a second life created for that same dollar on chain, so it amplifies leverage across the system, and could potentially be a flag in terms of like how regulators are thinking about the potential utility So one area to definitely continue to look at and double click on, I think ultimately, like we are making very good progress, but there is still a big question around if the Fed and FDIC will agree to this. From their perspective, there's quite a lot of focus, of course, in the genius act clarifying how banks can engage in crypto activities. What are some of the foundational and structural rules that need to be agreed upon? And this is another area that will require a lot of nuance, a lot of work to be done in terms of how it can be sound and work really well within the existing structuring system, non trivial. Non trivial. Yeah. I mean just thinking about the rules right now around internationally agreed risk waiting for different types of assets and how much has been built and baked into this system that needs to be thought through and built in a way that protects the most valuable asset we have as a country, which is our banking system, the
Sy Taylor 13:44
other type of RWA, the risk weighted assets. Yes, the true bankers know that one for sure. I
Bhaji Illuminati 13:51
didn't use the acronym to spare the audience.
Cuy Sheffield 13:55
I feel like we go back and forth on it. Sometimes we say RWA, sometimes we don't. And I fully understand the argument to not use, to not use that term. I think on on this topic, there are a bunch of big, open questions. I think my starting point is just, where are we today, and what have we seen to date? And I think that has been large banks like jpm using tokenized deposit type of systems for 24/7 intra bank transfers. And it seems like that is working. And they've announced significant volume that they've moved through Connexus and the jpm coin system and then Citi with Citi token services. I don't know if they've announced volume, but sounds like a similar use case of if you're a global bank, and you have many different core ledgers, and people want to move from jpm New York to Singapore to London, like being able to have this abstraction of a new, modern 24/7 ledger that happens to be a permission blockchain where you can move funds 24/7 so I fully expect that that is a use case. That has value and will continue to grow. I think the question in your piece, Simon is, do we end up going beyond that from both a regulatory perspective and a bank risk tolerance perspective, are you going to be able to have deposit tokens that actually are able to go to consumers outside of the bank? And it's interesting to see this next step of Connexus is kind of a closed permission system just operated by jpm. They now have jpmd issued on base, and so now you're using a public blockchain where theoretically someone could use any third party interface to be able to hold jpmd. But it's still, as I understand it, permission to only jpm customers. So jpmd Can't just trade on an exchange. It can't circulate freely. It can't be held by someone who's not a customer. And so I think there's a question of, will tokenized deposits be able to function more like stable coins, where they can flow freely, or, if not, then, if you always have this dependency around you have to onboard a customer into the bank. Is it more about serving existing customers and just doing 24/7 faster internally inside of a bank? Or are there systems where you might have on Chain Finance protocols that are KY bead or KY seed and banks actually acquire new customers. They get the right KYC information, and they serve their deposits into these different ecosystems, and it's just not clear what that's going to look like yet. But I think right now, it has not left the walls of a bank, and it's not obvious whether or not it's ever going to leave the walls of a bank where stable coins are very clearly, this open loop ecosystem that is moving between many different entities, not just inside the stable coin issuers. Yeah, I think
Sy Taylor 16:49
there are two ends of a spectrum today, and what I can see is you don't bring 2 trillion on chain without thinking it through first like you're gonna definitely really be thoughtful about every potential risk, but I was thinking more about their corporate customers, not their consumers. I large global corporate has supply chains than 190 countries for that large global corporate that is already fully KY bead that you have a very secure relationship with that customer is somebody that is very interested in stable coins and asking you about it. And so that customer, how would you give them an easier on ramp into the stable coin ecosystem, whilst retaining as much of that relationship as possible as a financial institution? The way you might do that is in some sort of VPN, like version of taking your deposits on chain. Your deposits exist on chain, but only for your KY bead to KYC customers, but because they're now on chain, you can atomically swap those for stable coins as a KY bead customer with somebody else that corporate can cash manage however they see fit with multiple institutions, you as a financial institution, have made their lives easier. That was my primary sort of baby step that I was suggesting, really as an evolution of where they are today, because I expect them to be incredibly cautious, incredibly baby steps, especially the G sibs, focusing really on their institutional clients. I do think for some of the smaller banks, for the embedded finance players, for the FinTech ecosystem, like how Robinhood, Revolut, Nubank, I think you will see a lot more innovation there on how do deposits change for stablecoins? And I think that, like consumer acquisition funnel, becomes a very interesting question for those non banks, and a very interesting question for remittance companies like I really think Kai, with that segment, you've definitely got something. And in that world, remember, all of the non banks are customers of the big banks, so maybe those non banks who've gone more into the on chain world would like a tokenized deposit to swap against when they're balancing things. So I think there are ways to serve this ecosystem that are not we tend to default to thinking consumer, but actually there's a much broader opportunity for financial institutions that's much lower risk. So Baby steps, baby steps.
Cuy Sheffield 19:15
Andrew, would love your take on do you think banks are going to if they do a tokenized deposit, be willing to do it on an existing chain. Or are they going to look to say, let's create our own chain, and then if they're going to create their own chain, is it an l2 is it an l1 like, what have you seen in condo as you've evolved from serving crypto natives to institutions of Do you think part of the requirement of creating the tokenized deposit is going to be their own chain along along with it.
Andrew Huang 19:43
Yeah, I, you know, in our explorations there, I think every institution is a little bit different, and it's still very early. That being said in terms of what we're seeing as hard requirements, I do think a major question that comes up is, is this mostly an internal kind of facing ledger, or is this something. That connects with other banks and institutions. And if it does is that some sort of consortium chain, and if it is a consortium chain, how does our privacy and kind of permissioning kind of plug into that? And so it's a pretty complicated problem. I would say that maybe there's like multiple layers to the solution. And as an example, if you look at a stripe l1 which is not a role of tape, I think there's an aspect to that which many different players can be a part of that chain, and it's not owned by any single entity. From an uptime perspective, having multiple operators is kind of helpful. And then for things like privacy and permissioning, which are very hard to do at an l1 level, because of the nature of them, is that many people have the ability to validate and kind of be a part of that network. That's really where we think roll ups are gonna play the biggest role. Is on a per kind of issuer or like bank or kind of institution basis, be really the hub and kind of core ledger for serving those kind of use cases. And the ultimate connectivity layer is probably going to be, you know, these more neutral l ones, whether that is something like Stripe, ball one, circles, arc, or even something like Ethereum,
Sy Taylor 21:14
I think that's such a good point. Like the l2 is the mirror to your internal core ledger. And we don't know what the l1 is going to be, but that l1 being somewhat neutral, incredibly neutral, is a really important point, because if it is credibly neutral, then you avoid platform lock in. And I think a lot of financial institutions in particular have avoided going fully cloud native, because of some of the drawbacks of platform lock in, even if you're multi cloud, even if you're something else, there are good reasons why platform lock in is a concern, and there are lots of sort of uptime reasons. Sure, there are lots of security reasons, there are lots of other good reasons why platform lock in is to be avoided. So the more credible neutrality you can build, whilst also imbuing it with distribution. I think it's an interesting trade off that we're going to see these networks start to emerge, because the connexuses and city token services have a lot of distribution, but they're locked into their own ecosystem. There's only so much fun you can have on your own blockchain. The opposite end of the spectrum. One might argue that Bitcoin is a bit too slow for regular payments use cases. And it's sort of layers above it, lightning are not the VPN model of l2 that you've just described, where you know the l1 is, is for everybody, this sort of settlement infrastructure for the internet. And then above that you get this VPN which mirrors almost your internal system. Great point. We can talk about this all day. So thank you for indulging this and Kai, thanks for bringing it up. I do want to bring us to this other story from Ave, so they've launched their RWA market horizon, and that enables tokenized real world assets to serve directly as collateral, within defi meaning, institutions can unlock stablecoin liquidity against tokenized assets without needing to sell or redeem them. So this is like secured lending, really. And for lenders, Harrison provides access to those new yield opportunities. So they've got a bunch of options from Super state and centrifuge and circle and many, many others. So Baji, do you want to explain this one to us? Because I figure you're pretty close to it, and might know what's what's happening
Bhaji Illuminati 23:34
here, very close to it. Yeah, and really glad the timing worked out where it was announced yesterday, so we can talk about it today. So this is really cool from Ave we view it as it's more than just another RWA market, where there is some RWA lending and utility use cases that are being developed on Morpho and across a couple different vehicles on chain. The reason that this matters is because this brings the traditional capital markets infrastructure on chain, so you can now start to use treasuries, use Clos, use these financial products as collateral, to borrow, to hedge, to leverage against not just buying and holding them. So as we make steps as an industry, as we bring treasuries on chain, it's a move towards greater maturity of the space, but until we really have that infrastructure around it that is expected in off chain environments, we're not going to see the same level of sophisticated and traditional investors that are participating in these types of assets on chain. So Ave has always been an early adopter and innovator as it relates to real world assets. We actually built a real world asset market with them back in 2021 it was called RWA market. Yeah, very early, first of its kind, in retrospect, too early. At that point in 2021 there weren't the right assets on chain. So there was a duration and yield mismatch, where very long duration a couple of years, very low liquidity and pretty low yield. So we weren't able to really see that type of interest and activity that we believe we're ready for. Now we got to about 18 million, but as we look at horizon there, when I checked a couple hours ago, at 48 million in just 24 hours. So Ave putting their brand behind it, putting their trust behind it is exactly what we need to see for these types of primitives to gain adoption. I think Stani posted a tweet a couple weeks ago saying that Ave is now like the 37th largest bank, except it isn't a bank, but a network for any financial institution to plug into to unlock non fed, correlated yield. So pretty bold, but also very indicative of the fact that Ave has established themselves as this very trusted brand that's very secure, that creates deep liquidity, and because of that positioning and influence and role that they play in the market, enabling these types of opportunities around RW A is, is exactly what's needed to see that next phase of utility and growth for RW A's. So for centrifuge, we have our T bill Fund, which is j, T, R, S, Y, and we have our triple A rated clo Fund, which is J triple A available. Super state has their T bill fund, and then they have their carry trade Fund, which is available. So some really great RW A's from launch, paired with a number of great stable coins. So we're at a position now where we expect this market to perform really well. We have the right Rw is in place a diversified mix of different options across the yield and risk and liquidity curve. We have the right stable coins in place with a very similar structure, and then Ave is facilitating this exchange and opportunity between the two parties.
Cuy Sheffield 27:20
Yeah, this seems like a really big deal, and part of a theme that we've been talking about on the show for a while, it's pretty clear that defi has been able to get product market fit within crypto natives, where you can go to Ave, and Ave has been tremendously successful, enabling anyone to lock up ether, other Types of crypto assets as collateral, and be able to borrow stable coins against them. And there have been billions of dollars of loans that have been dispersed in stable coins. But the question has been okay, is, is it only going to be crypto assets as collateral, and then, because they're crypto assets, then they're volatile, and so then what's the loan to value ratio around how you're borrowing against your eth. Can you take all of that technology and infrastructure and make it useful for asset backed lending with traditional assets? It feels like that's been like the idea for a long time, but we haven't really seen it implemented at scale yet. And so I'm really interested in Andrew. I don't know if you have a perspective on like, going from pure defi permissionless, anyone can deposit, anyone can withdraw to Now, if you're bringing in these real world assets, these tokenized treasuries, you have to start to design for, okay, well, there's a allow list on some of these products around who can actually hold or redeem them. And so it can't just be 100% permissionless across the board. How are you seeing this balance of using this open source infrastructure to create lending markets while still accounting for compliance and the requirements that the institutions are working with centrifuge have around where their assets are held or how they're they're being used?
Andrew Huang 28:59
Yeah, definitely. I think the maybe the best example is something like what Athena and securitize are building and converge chain, which is, in their mind, is kind of the convergence of like institutional capital with like more defi native and stuff. And so for those that don't know, like Athena is probably the, I think, the number three stable coin at this point, and they basically execute like a basis trade and use that yield to fund yield for holders part of their chain design. And kind of one of the problems generally amongst crypto native protocols is that there's only a certain amount of crypto native liquidity out there. And once you get to five, 10 billion or so, you might, in some ways, kind of be tapped out. And the question is, where is this additional capital gonna come from? And if you look at the snapshot of like crypto native capital versus capital in like the rest of the market, it's pretty clear that there's still a ways to go in terms of bringing on, whether it's RW, A's or institutional capital or kind of all this stuff in. Into kind of more interesting defi native schemes. I think what it will probably require. So defi native stuff tends to be, as you mentioned, like Wild West, anybody can kind of do anything, and because of that, there's a lot of risk. I think what we're seeing is for more of these, like regulated RW A's, you typically need some kind of KY bead middleman that is running a specific set of strategies that are kind of like given the blessing of kind of these institutions. So Athena obviously using USD TV, which is like BlackRock, kind of treasury bill fund, and kind of the securitized Athena relationship, being able to know who they're interacting with, knowing who they're dealing with, but then being able to use a lot of the Athena strategies to generate yield, I think is a very interesting kind of format for how these two will end up converging.
Sy Taylor 30:53
I think it's fascinating to see this kind of move of liquidity into the markets through real world assets, and the sort of tension on both sides, where the on chain markets need it, but they have to get KYB to get there, and the institutions want to come in, but they need KYB to get there. It's really creating this, this interesting pinch point on, how do you balance this tension of universal infrastructure that anybody can access, but building these, these pockets of K, way, B and Ky. So we'll come to a story a little bit like this just after the ad. So I do need to pause here to thank our sponsors, and we'll be right back. 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 also brought to you by bridge, a stripe company businesses need easier global money movement. Bridge is the stablecoin orchestration platform that makes it simple to receive store issue and spend using stablecoins. Companies like X, Shopify and airtm already use bridge to lower their costs, simplify their global Treasury operations and expand their global reach. Learn how you can grow your business with instant global money movement using stablecoins at bridge. Dot XYZ, all right, thank you to our sponsors. The next story was actually about circle Paxos and a couple of others testing a new way to verify crypto payments. So blueprint, which is founded by friend of the show Chris Brummer, estimates that today, phony and counterfeit stablecoins are costing crypto users at least 1.6 billion in losses on an annualized basis, and they have a new solution called Know Your issuer that aims to reduce that amount dramatically by linking A stablecoin issuer's credentials to the asset on chain, so creating a strong guarantee between the KYB, essentially they've done on circle or Paxos and the actual stable coin itself. And so Chris says in a quote, if you can provide provenance up front, you can reduce the complexity of KYB for everybody in capital markets and institutions they're no longer worried about. Is this a counterfeit coin? But I could imagine several other use cases for this. If KYB, or know your issuer, can actually travel with the token itself, and you can have strong cryptographic guarantees of this. So Andrew, this was largely to your point. I don't know if you saw this story or if you had chance to look at it just yet, but thought it was an interesting segue from what you were just talking about before the ad.
Andrew Huang 34:09
Definitely. I, you know, I haven't had a chance to take a look at this. I do think as more institutional and like kind of regulated finance comes on chain, auditability and kind of verifiability becomes even more important. There are a lot of security solutions out there that have built businesses purely on filtering out fake tokens. That kind of goes to show you how large of a problem it is. And I think even if you look at Sony, Sony has a layer two called sodium, which is like, kind of like a permissioned chain. And like, you know, they're very sensitive to who is owning what. And like, you know, they're issuing some IP on their chain. Very big issue for them was, you know, the creation of, essentially, like fake IP or meme coins, which they viewed as a big kind of, like brand and reputational risk. So certainly being able to filter out those assets. Having a way to determine who is issuing what seems to be key, particularly as we bring more of these real kind of assets on chain,
Bhaji Illuminati 35:08
I think there's a lot of very interesting ways to slice KYC in Kyd, and a lot of it comes down to the point around we need to create the Trust for institutions to come on chain, we need to work with regulators to ensure there's continued embrace of this industry overall. So now there's a lot of different in roads for how to think about ensuring that compliance. This is the indebted KYC on stable coins that follows the token. I think is very interesting to touch back on the point around how Harrison for Ave is structuring it, their approach is that the KYC is on the issuer level, and then it's fully permissioned on the stable coin level. So in that way, you still can't get access to the RWA unless you do full KYC. KYB for our W A's, there's like, full fund onboarding, KYC, KYB, where there's no secondary or there's a type of security where you can do it on subscription redemption, and then there's secondary trading. So a lot of different ways to come about this challenge that we all know that we need to solve to really, truly grow the
Cuy Sheffield 36:18
pie. Yeah, it's amazing to see just the product in technology innovation addressing real concerns that regulators have, and not necessarily waiting for things to happen that then require regulators to respond and create new rules. I think Chris has been an amazing innovator saying, how do we just create very practical solutions to these problems, and I think counterfeit and scam tokens, you're only gonna see more of over time. There's nothing stopping anyone from being able to deploy a smart contract and make the ticker something that is either identical or looks like a real stable coin or a real brand, and then if you have consumers that are coming across that token, whether it's in a social feed, in a self custodial wallet, how do they know when they see there are 20 different tokens that all have the same ticker, which one is actually the entity that has the license, the brand that is who they say they are? So I think that this is going to become more of an issue, and we need new solutions like this. And it's been really interesting to see crypto and regulatory kind of tech companies creating know your transaction solutions on the on chain analytics side, trying to address some of the AML challenges, and now you have know your issuer. So there are all these different approaches towards how do you use cryptography? How do you use some of these new solutions to solve problems. I also wanted to go back Baji on Harrison, like, how do you think about who the end customer is? And, like, one of the topics that we've talked about on the show is it seems like most of the customers of tokenized Treasuries are crypto native institutions that there aren't like traditional institutions buying tokenized treasuries because they could buy regular treasuries, and so it's foundations, it's crypto native funds. Do you see that today with horizon, or is there a world where you would see traditional institutions coming on chain, buying a tokenized treasury and then using that as collateral to borrow a stable coin? Like, what? What does it take? Of like, where we are today with the existing customer base into Who do you think the customers will be in the coming years?
Bhaji Illuminati 38:24
Yeah, right now, where we are today is still mostly all going after the pool of on chain capital. But a big reason that's the case is because there hasn't been the same infrastructure around these financial products on chain as there is off chain. So I do think this is an important step to getting us there when we start to allow the same types of utility mechanisms on chain as off chain, and doing it with Ave and under the brand of Ave that has done such a great job to establish themselves as trusted within the ecosystem. On chain and off chain is an important step. So I think there needs to be broader drivers across defi more generally. So from a institutional perspective, now we say, okay, you can buy the tokenized version of the Treasury on chain. You can borrow against it, and then once you borrow against it, now you are open to this big, wide, beautiful world of defi and you can do all this cool shit. So there's like an incremental step where they get the baseline expectation of what they need to achieve from the current process off chain, and then they get this added, an incremental value that they can't get off chain, and the pair of those creates an opportunity for them to say, we're willing to take this added level of risk and added complexity, because we have so much upside in these certain areas.
Sy Taylor 39:55
Yeah, I think so long as we can continue to deliver on that promise and the upside the business. Base will make itself for institutions. And that's the critical thing here, is it has to make business sense. You're either taking out existing business workflow complexity and or you're creating new revenue in that second one, defi has been extremely good at consistently, and I think you have to learn a new way of operating. That's why I think innovations like Kyi are absolutely needed, because we've, as you said, we've seen this approach where you can exist inside the KY bead pool on chain that's just for people that are allowed to buy those assets. But the promise of defi was always its decentralization and its ability to therefore be more interoperable with the wider world of assets, and sort of thinking about your firewalls or your demilitarized zones or your VPN approaches to like, how do you start somewhere, but then also, how do you have some level of assurance that can live out as the token flows between different networks over time? I think there's so much experimentation that it's really exciting. I do want to link us to the last story as well. Couple of funding rounds got announced, just as we were going to record today. So first up, rain raised a $58 million Series B, led by Sapphire, with dragonfly galaxy and several others. So rain, of course, do stable coin linked cards, and they're, I think, a visa principal member, and that allows them to do some very clever stuff around how there are for if you're issuing a credit card, you can actually have that paid off as soon as a consumer pays it. The settlement is, more or less, instance, some very cool stuff those guys are doing as Visa principal members. So shout out to those guys, Kai. I wanted to get your thoughts on this first, because I know stable coin linked cards are a thing we've come to several times on this show. Any thoughts on recent developments that you've seen in that space that you think our audience should know
Cuy Sheffield 41:56
about? I think it's a major category, and so huge congrats to the rain team, and they've been at this for several years now. And so as we talked about before, it's just we think that the best way to spend a stable coin is to do it connected to a Visa card, because it works everywhere on day one. But the challenge is, you need a lot of infrastructure that's specialized to be able to create those cards and enable them to operate. And so we're trying to update how visa operates, being able to use stable coins to settle those transactions. But we need this new class of program managers, principal members, issuer processors. You kind of need the whole ecosystem to become compatible with this new type of asset that is going to be tied to the card. And so it's been really exciting to see the growth of companies like rain as they've kind of built out purpose built solutions for stable coin like cards. And we don't really see a ton of demand in the US, like you have plenty of great options to hold and spend dollars. We see the demand in Latin America. We see it in Africa. We see it in Asia Pacific, and so we plan to continue to just do everything we can to grow stablecoin Like cards as the way to pay with with a stablecoin.
Sy Taylor 43:07
No, it's a really interesting category. I know dollar cards have been around for a while, but this is really, really exploding. I'm gonna link to the other story and then come through the rest of our guests. Of course, m zero, friends of the show, raised a $40 million round led by the crypto venture capital firm polychain, as well as Ribbit and Pantera and Bain crypto m zero as well bog, I guess you're reasonably familiar with these guys, stable coin issuer that buys RWA is genius compliant, but they're sort of a stable coin issuer, but also helps people quickly create their own stable coins, more of a white label ecosystem within there. So interesting. One your thoughts on sort of the growth of these different types of stable coin issuers? Do they solve a different problem for different people and your thoughts more broadly?
Bhaji Illuminati 43:58
Yeah. So very, very, excellent. Congrats to Luca and team. We love m zero. This infrastructure layer for stable coins is a critical enabler for what you all are so famous of saying, Of every bank, every FinTech, everyone needs their own stable coin. So a lot of these folks who are now looking at how can we get to market quickly with a stable coin. Have a trade off of, do we build the tech in house, or do we use someone who already has the systems and the network and the infrastructure in place that can help us scale and grow that so we see m zero playing a very strong role here, we see agora playing a very strong role here. It's a very great segment of the market that enables this rapid adoption and utilization of stable coins so that people can come to market faster. It's also pretty close tie to like the tokenized R to b a space as well, because folks like m zero work with folks like centrifuge to manage. Reserves to manage the collateral that's backing and enabling those yields
Sy Taylor 45:03
as an ecosystem. Andrew, your thoughts on either of these stories?
Andrew Huang 45:07
Yeah, we're big fans of m zero and agora. Everybody's looking to stable coins, especially in a high yield environment, as a revenue source, and if you have the distribution, it just makes a lot of sense. I think the key question for a lot of these, and we see this a lot on kind of the chain infrastructure side, is these chains kind of want their own stable coin for revenue reasons, but in terms of, like interoperability and like bridging, how do you convert these stable coins, right? If you're gonna have 1000 stable coins, you know that kind of, like pair wise trading might be a tough kind of infra thing, and I think that's where these issuers, like an agora, like an m zero, really come into play, where it's kind of the same infrastructure under the hood, even if these are white labeled as like, different stable coins. So it really, I think they'll end up building network effects over time and become like, pretty powerful. And so both are companies that we'd like to work with. And, you know, we currently have a pilot with agora on kind of the stable coin side,
Sy Taylor 46:01
that's really cool. I think there's an interesting question is like, Where does interoperability live? So circle have done God's work integrating USDC with countless chains, so you can kind of bridge between chains via circle extremely easily. Or maybe you want stable coins themselves to be interoperable, and should that stablecoin interoperability exist at the stablecoin issuer level? Should it exist at the network level? Should it exist as an opportunity for on chain market makers, or clearing above that level, like a ubix, for instance? And we don't know? I suspect some level of all of that will be the answer, because the world is annoyingly complex, and there's never one simple answer to these things. But it's the excitement of being in this space. It's the business opportunity is real, and I think we're sort of in land grab mode for a lot of folks, that will create some level of fragmentation, but then also the market opportunity will tend to do its power law thing. Kay, any closing thoughts on these stories?
Cuy Sheffield 47:02
Yeah, I think it's be fascinating to see how the white label stable coin ecosystem plays out. You've got a purchase. Paxos has been doing this for a while, serving as the licensed issuer, doing these co branded stable coins. M zero is more of this network and ecosystem where you have many licensed issuers who are sharing a common scheme and smart contracts, and so I think we'll see experimentation at many different parts of the spectrum, and it's gonna be fascinating. Nobody knows who's gonna win, but I think we're gonna have better products at the end of this with all the competition coming into the
Sy Taylor 47:34
space, yeah. Game home.
Bhaji Illuminati 47:36
One thing that's really cool, if I can just add so we all talk a lot about, of course, growing the PI, when we talk about, like all banks having their own l twos, or all fin Dex having stable coins, this is an opportunity to grow the PI through their network, and then, if we can enable, once they're on chain, atomic swapping and interoperability between chains, And this being a entry point for broader utility and programmability across chains that can become a great funnel where the PI has grown through, you know, these 1000s of L twos that then are connected into one centralized system, where there's so much more opportunity on chain.
Sy Taylor 48:16
Yeah, it is grow the pie time. It certainly seems, from everything I hear that we're starting to cross the chasm a little bit the classic book of Crossing the Chasm. So the innovators stayed in defi. They never went away. That 2% who's there through bear markets and bull markets and bodgy Andrew, it sounds like you've survived a few of those. Then there's the early adopters, maybe myself and Kai. You know we were there. We'll have a play, but we don't live in this world. There's some tradfi stuff we gotta do occasionally, and kind of get involved in that. And I think we'll always be around as well. But then there's the chasm, that gap between this becoming an everyday thing. And my thinking is, we all, if we can just keep this momentum a little bit longer, we are perilously close to overcoming that. And I see a couple of weak signals, not just that fintechs are launching stable coins, but it's a major feature in the new bank app. It's a major feature of Robin Hood, that they using it for settlement, that they're using it for infrastructure, that they're using it for cross border, that there is an entirely new growth opportunity of serving the global south consumer base through stable coins as a rail to access them, initially through payments and dollars, but then through other financial products, and then also at the other end of the spectrum that the institutions, and certainly some on the buy side and the shadow banks, are really aggressively leaning into this as a new wrapper, a new way to think about market structure and the larger traditional sell side institutions are now starting to think, Okay, we have to build our our own answers here. So it's going to be fascinating to watch even BBVA and Santander now let their customers buy, sell, hold crypto PNC does. Let's see if that's still true. In a year's time, we'll have you guys back and see if we have crossed that chasm. And speaking of having you guys back before that happens, bhaji, where can people find out more about you and centrifuge,
Bhaji Illuminati 50:06
I am on socials at it's Baji, and centrifuge is everywhere as well. Just centrifuge, and then centrifuge.io.
Sy Taylor 50:15
Perfect.
Andrew Huang 50:16
Andrew, yeah, I'm on socials. K Andrew Huang, on Twitter is probably the main one. And then we're conduit dot XYZ,
Cuy Sheffield 50:24
fantastic. Kai on x at Kai Sheffield and visa.com/crypto
Sy Taylor 50:28
you'll find me at sy Taylor on your favorite social platform, I guess. And you'll find me at FinTech brain food.com usually ranting about something to do with tokenized deposits and or AI and finance and payments and all of that kind of stuff. And if you haven't already, please go ahead and subscribe. Hit the subscribe button and tell everybody you know, spam them. Spam them till you can't spam them anymore about this show, and make them listen. Hold it to their ear and make them listen. And if you really want to help us, do leave us a review. It helps others find the show. It's all for now. Catch it.