Does every company need a stablecoin strategy? On Ep. 11 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Eric Saraniecki, Co-Founder and Head of Network @ Digital Asset to discuss USDG stablecoin, Polymarket & betting markets and how policies post-election will affect the space.
Does every company need a stablecoin strategy?
On Ep. 11 of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, and Cuy Sheffield, Head of Crypto @ Visa, are joined by Eric Saraniecki, Co-Founder and Head of Network @ Digital Asset to discuss USDG stablecoin, Polymarket & betting markets and how policies post-election will affect the space.
Timestamps:
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Unknown Speaker 00:00
Simon,
Sy Taylor 00:10
welcome to tokenized My name is Simon Taylor, and I am your host for the tokenized podcast, author at FinTech brain food and head of strategy at soddeen. Joining me is my co host, my friend Kai Sheffield, head of crypto at visa. How's your week been? Kai,
Cuy Sheffield 00:27
it's been crazy. There's a lot going on in the world right now. I feel like it's been months since we got together again, but a lot to discuss.
Sy Taylor 00:37
It really does feel that way every time I have the inclination to log on to Twitter, I'd see 10 new news stories. But to make sense of it, we are joined by Eric, who's the co founder and head of network at digital asset. Eric, how are you doing, sir,
Eric Saraniecki 00:54
I'm doing great. Similarly, feel like I've entered into a new world here. So fun to dig through some of these stories in that context?
Sy Taylor 01:01
Well, we're going to dig through these stories, but we're also going to remind our listeners that views and opinions are their own and don't always reflect those of their companies. None of this is financial or legal advice. Do your own research, folks. But with that, let's get straight into the news. First story we picked up from CoinDesk. This is about USD G, a new stablecoin backed by Robin Hood, Kraken and Paxos. It also includes anchorage digital, bullish Galaxy digital and new V, the payments company. It's issued out of Singapore, and participants will earn yield, and that's designed to help foster adoption. Paxos says it is substantively compliant with the monetary authority of Singapore's upcoming stable coin framework. And the CEO of Paxos said anybody can join the global dollar network and accrue rewards for activity. They're distributing something like 97% of the economics here, which is a big difference from how other stable coins have been set up and created to date. So Kylie, Mr. Stable coins himself, I wanted to get your immediate reactions to this. I think this
Cuy Sheffield 02:19
is a pretty big announcement. This is a fairly ambitious attempt at creating a real competitor to USDC, which seems to be the focus, having the participation of large exchanges like Kraken, having custodians like anchorage involved. And then really interesting to see that there are fintechs and payment companies with Robin Hood as well as nuvey. And so I think we're in this really interesting point in the stable coin ecosystem, where, as we've talked about it, it's clear that stable coins are a thing. They're not going away. There's consensus that there's value in using a stable coin. But now you're seeing more and more competition and questions around, how did the economics behind stable coins get distributed. And so today, the large stable coins that are driving most of the volume and activity in USDC and usdt, the model is you give them dollars, and they earn interest income that goes back to the issuers or a handful of companies are benefiting from the growth of stable coins. And so it seems that usdg is really an approach to create this consortium like model and distribute the interest income much more broadly to many different participants who are involved in driving the distribution of it. And so I think that's a trend we're only going to see more and more, and there are a number of other stablecoin projects looking to distribute interest income back to the companies driving it. And so the question will be, can it cut into the network effect that USDC and usdt have, and will that interest income incentive be enough to get companies across the ecosystem to use usdg instead of USDC? How do they interact with each other? They're gonna be a bunch of interesting questions, but just excited to see more competition, more products, more companies, getting in the space. And I think this is a pretty big deal.
Sy Taylor 04:04
Yeah, issuing it out of Singapore, where there's a framework where you can have interest income on a stable coin without it being classified as a security is interesting. And number two, it struck me as an alternative to interchange people complain about the fee structure of payments, but Well, what about a fee structure where you get paid, but from the interest income, it's really different. Eric, what are your thoughts and reflections on developments like this?
Eric Saraniecki 04:34
I've been telling people for a long time that I think the the area of experimentation and prior art in the crypto networks that is really under appreciated is around tokenomics, the concept of deploying incentives to encourage outcomes and behaviors, but especially in a network sort of scenario. And so I see, I see a lot of inspiration in this configurable interest sharing system that. Just looks a lot like what a tokenomics distribution regime might look like to encourage certain types of outcomes, just done with something that doesn't have the convexity of a crypto asset, and maybe not all this sort of, you know, negative connotation that a coin would and I think that we'll see much more experimentation around how to use the revenues of these assets, or the benefits of these assets, and distribute it to those that actually go and make a network out of it. I applaud all of the experimentation that we see in this space, because there's just a lot for all of us to learn from. What does catch on, what does work? What Doesn't this concept of building companies, they're not really effectively consortium, but more network aligned is definitely a new area for a lot of us. One
Cuy Sheffield 05:45
important clarification from my understanding of the setup here is that the interest income goes to the partners, the companies driving the adoption of the stable coin, whether it's an exchange or wallet, rather than the end customers. Now it'll be interesting to see maybe some of those companies then decide to pass that through. If you're holding the stable coin on their platform, which we've seen Coinbase today, offers rewards if you hold USCC on their platform, passing some of the interest income through. And so it's almost like there's this progression where, traditionally, no interest income is distributed beyond anyone other than the single issuer of the stable coin itself. Now this is kind of one step further of the interest income is distributed to any companies involved in the distribution of the stable coin offering, wallets and exchanges and payment platforms. And then there's another step to say, Okay, does the interest income programmatically go all the way back downstream to the end holder of the stable coin, which we've seen attempts like usdl and USDM, and a number of different approaches to do that. That's the one. I think they're the most questions around, does that make it a security? Is that a money market fund? If it's going all the way through here, it's kind of this middle ground of it's going to the company that's distributing it, and then the question is, do they pass it through in some other mechanism.
Eric Saraniecki 07:00
My understanding is that that's not really new. So I think about this more as the systemization of that and kind of employing it around incentives. I'm pretty confident that if you go to any of these companies that will help you launch your own stable coin, you you can build whatever sort of interest sharing regime you can negotiate between the two. I see that big Delta being more about that being productized for end goal, and also the ability for a bunch of companies to come under a single main asset as well. Something that's been bothering me in a lot of the crypto networks is just how everything is branded at the user level, as opposed to like the way we use money. Today, I spend dollars no matter what venue I'm spending dollars in I might have commercial bank risk if it's spending my Chase dollars. I might have impermanent loss risk if I'm spending dollars in my pocket. I might have credit risk if I'm using a credit card, but I'm still spending dollars at all times. And we've kind of lost that abstraction when we have USDC, usdt, and I'd like to see more of a push in this direction of it's $1 and then there are these secondary concerns that are more in the wholesale market. Yeah,
Sy Taylor 08:05
that's a conversation I was having with some senior regulators recently who were sort of getting themselves tied up in the knots of what's backing it. And I said, Well, what's backing Sterling? What's backing the dollar? The answer is, it depends. Where did you get it from and who issued it, and so commercial paper, we know and understand, commercial bank money we know and understand money market funds we know and understand. So these are different credit risks that a consumer isn't walking around thinking about. I like the approach that the sling money guys and many of the newer wallets in that category have taken, where it just looks like $1 it just looks like local currency. And they're sort of making decisions on behalf of the user to abstract that complexity. Again, rather than treating everybody as a crypto native, you're treating people as, Hey, I just want to move money around the world. Tai, I want to come back to you, though on the PSP side, because I'm interested that nuvey is in here. And again, the PSPS are in an interesting spot where Zack at bridge, who said all of the PSPS are now seriously looking at this space. Since that company got acquired, has that gotten more serious in your world view, or what are you seeing?
Cuy Sheffield 09:15
It's clear at this point that every payments company needs a stable COIN strategy. Most payments companies have been following, experimenting with stable coins in some way, but I think over the past few weeks, it's really become something that's not a five to 10 years away, just kind of in the innovation side. It's really a how do you integrate stable coins into the core payments business? How do you integrate to existing products? What are new products that you can build on top of it, particularly around cross border? I think one of the interesting things for payments companies is a lot of the economics behind stablecoins coming from interest income. It's very much predicated upon people holding stablecoins and most. Payment companies aren't really in the business of many. Payment companies just want to move stable coins. They don't necessarily want to hold large amounts of stable coins for long periods of time. So I think there's an open question around, how do payment companies monetize usage of stable coins? And so it'll be interesting to see. Are there experiments around not just distributing interest income based upon who's holding funds, but distributing interest income based upon who's initiating transactions using those funds. Because it's very clear, if you have more payment companies using a stable coin, that grows the liquidity, it grows the network effect, it grows the distribution so it adds value to the overall ecosystem. It's just not directly one to one, like you've got a billion dollars sitting there that is earning interest income that then you can pass back. So I think that's one of the interesting questions here. And then the other is, just as Eric mentioned, kind of what happens with stable coin brands? And I think that there's one view of the world where every company, every bank, every payment company, has their own stable coin and it's branded as their company, and then you have to figure out how to have interoperability between them. But I think that there's an increasing understanding of maybe it's really hard to bootstrap adoption, to get exchange listings, to get wallets, to get to have a new brand, it's easy to issue a stablecoin. It's hard to get distribution of it. And so it's interesting to see this attempt where, here you have a single brand in usdg, that you now have many companies kind of aggregating around to see if they can kind of Bootstrap, get the network effect going. And so will we see more consortium based stable coins? Will we see more individual bank or FinTech branded stable coins? I think we're gonna see both. And then the question is, what happens in which model ends up becoming more successful, Eric, I
Sy Taylor 11:43
know you've done a lot of work on interoperability. Is that a pipe dream or a possibility?
Eric Saraniecki 11:47
Well, interoperability where, like across chains. I mean, we're just talking about the same thing we've done for the past five or six decades, messaging, reconciliation, counterparty risk of some sort, whether it be tech or custodial or some combination of both. But within an ecosystem, interoperability is absolutely achievable. That's what's so compelling about defi. Within the eth one, you have incredible interesting defi cases. Within Solana on the l1 you have really interesting defi use cases. So it's within an ecosystem, yes, and then across ecosystems, we have our more traditional paths to go across them that opens up a whole can of worms about what does it mean to even bridge something from one place to another. In tradfi, we have terms for this, like, if you hold an equity at the DTC, it's different than holding it on the balance sheet of another company. It's a CFD or an ADR, it's a derivative. Or if I hold money at the Central Bank, I hold hard money. I own money at a commercial bank I hold a liability. So like these bridges are also transformational in some sort. So I think what's interesting about the crypto experience, generally speaking, is that it's a very, very low level experience. Still, it happens to have a lot of retail people playing in it, but it's really a wholesale experience. The information you get by knowing it's usdt or USDC is telling you about depository risk and holding risk and credit risk, and generally speaking, We've abstracted that out to the users at the higher level. So there's a lot of room to improve these experiences. I think it's telling you that even though we have really great product market fit on the stable coin space, there's a lot to be done still and a lot to be learned if we want to get to billions and billions of users in regular, high volume use case, I mean, we're still searching for what are these right wholesale market constructs, and how do we abstract them to end user? Hey,
Sy Taylor 13:33
speaking of mass market use cases, we did see one in the recent election for prediction markets. So poly market has dominated the headlines for some good reasons, some bad ones. So with nearly $3.7 billion worth of contracts tied to the outcome of the presidential election, as polls began closing, they had the odds of a Trump victory at about 58% which was much higher than any of the polls that were calling it as closer to 5050, and of course, as the night went on, those odds shot up to 95% by 11:43pm nearly six hours before the Associated Press called the election. We also saw a French crypto whale made $45 million from the election, and now the French and government are investigating poly market, and we're seeing all kinds of consequences, but we've also seen Interactive Brokers and Robin Hood now launching their own election betting markets in the past month. Eric, you are a veteran of markets, and you've seen things that look like derivatives before. How do you frame what's happened here?
Eric Saraniecki 14:41
People love to gamble, don't they? I mean, they like to be active in these marketplace. I mean, we've seen a big transformation in the United States over the past decade. Do you guys remember trade sports? I feel like that was kind of the OG in this space, or in trade. In trade is also another one. This model has come and gone, many, many times, often gone thanks to regulatory reasons. Not to lack of demand. I just, I think, especially around these really big, consequential, discrete events, there's an opportunity to trade the volatility, and that's what people enjoy. And you know, there's, it's just an opportunity to participate in a market. And there was a great report about that French trader commissioning his own polls. I don't know if you guys read that report, but he adopted a whole other methodology and invested. I mean, these prediction markets are very, very similar to what we do in futures markets, derivatives markets, capital markets. Why we would be precluded from participating in sports or popular culture seems like a seems like a missed opportunity to improve the quality of information to individuals. One of
Cuy Sheffield 15:44
the most interesting parts of the story, to me is that, when it emerged that they identified that the French whale who was making these big bets, I think the initial reaction was like, Oh, here's someone who's just like gambling. It's like, for whatever reason, is like, just wants to gamble on the election. But then it turns out, in interviews with him that he was doing his own polls and that he was using a different methodology, and so he was using what's called the neighbor method. And he's like, I think everyone's lying about who they're going to vote for, and so we're gonna ask them who their neighbor is gonna vote for, not who you're gonna vote for. And so I think that it's a good example of how it created this mechanism that brought more high quality information and signal into the market that other people can react to, rather than I'm sure there were plenty of people on there just purely gambling and speculating, but there were also kind of professionals that were putting time into the poll, and poly market asks a different question, like polls. Ask, who are you going to vote for? Poly market asks Who do you think is going to win? And you get somewhat different results when you ask that. I think they also did a really good job, from a product perspective, where poly market had a standalone app, just as like a news app, that, you know, I was kind of refreshing and like watching throughout the night that was separate from the actual exchange, where I believe the exchange is outside us only right now, there's a complicated process in terms of, I think it's on Polygon, you got to have a crypto wallet like there's some real work around I would imagine that there were a lot more people who got value out of viewing the results and updating the market in the signal than there were the number of people who participated in it. And so it's kind of interesting to see that I think they did a really good job not requiring you to have to have a crypto wallet to be able to get the signal, being able to just have a normal app that I think was ranked very highly in the news section, at least for the past few weeks, and then all this volume was on USDC. That's the other really interesting component of this is a stablecoin use case. Of this is a effectively a global exchange that had people trading on it from all over the world. And so one way that they facilitated that and made it as easy as possible was the ability to deposit USDC into poly market and use that USDC balance to be able to trade. So I think that was another big win of a stablecoin use case that is now having some impact.
Eric Saraniecki 18:03
I think we benefit a lot from just the information that we get out of markets. Even think about something as germane as sneaker values, and think about what transformational value stock X provided to that ecosystem, or Ebay. I just think we're really missing out on a lot of information from being able to put capital at risk to represent a point of view and then tighten up the true signal and understanding of information in an ecosystem. I
Sy Taylor 18:30
was gonna say it's fascinating that there are parts of life where we find that acceptable, like futures for commodities, and there are parts of life where we find it morally reprehensible, whereas, actually, in this case, you see that there were only a select few who crawled through glass to get to this, given the difficulty, but everybody could view it. And it became mainstream media covered. But when the mainstream media covered poly market, they would always couch it with, well, you know, that's kind of a crypto thing, and therefore it must be a little bit biased. And in reality, capital at risk was always the counter argument to that, and it appears to have been proven right now, one example is not the example of long term success. It could always be wrong, but it does make it kind of transparent how often this new approach of doing things could be useful, and maybe it's opened a few minds along the way.
Eric Saraniecki 19:24
I'll challenge your comment about where this is acceptable. In some markets, derivatives markets are not accessible to everybody. Even in the United States, on futures markets, we have all sorts of accreditation rules. I don't know if you've ever tried to sign up for like an Interactive Brokers account. You have to demonstrate that you know what options are and how FX markets work. There's a real nanny state when it comes to access to our capital markets, and so just like being able to participate is also for some of those participants, it might have been the first time they were actually in a market. I think that's also a big part of the what made Robin Hood so appealing to the masses. It just. Being able to make these things much more accessible.
Sy Taylor 20:02
Yeah, and then maybe I made a bad case for myself. I was almost describing the difficulty of getting into derivatives markets is all the examinations and how hard it is to get there, whereas the difficulty was more on the user experience side. With poly market, you had to, as Tai explained, use polygon. And this is a complex process, but everybody could view it, but because one is deemed regulated and official, and the other one is just difficult to do, we view them through a different lens. It's almost like if somebody rubber stamped it and said, Oh, you have to crawl through all of this glass in order to trade on Poly market. Then everybody go, oh, well, okay, now, now this is an official thing. I just find that psychology interesting. Eric, I'm kind of interested though. Now we are post the election, we are now in a very different world for crypto. How do you think that the potential vibe shift in policy might impact things like poly market and perspectives like the one we've just talked about,
Eric Saraniecki 21:02
I think we have to be a little bit careful about it. I mean, if there was one hallmark to the previous Trump administration, I think it was just there was so much variance and volatility in it, I think there was a ton of unexpected behavior. And so I'm optimistic, but I am cautious, because we need to really see who ends up landing in these different positions. And I think the cat was out of the bag no matter what, when the donor base started leaving the Democratic Party during the race, and it became clear that this was not a topic that the public was behind, restricting access to or shutting down seeing like Andreessen Horowitz can, in a very public way and support Trump during the election cycle, we saw the peak antagonistic position change even before the election that was over. But still, I'd say whether or not it's going to be an enthusiastic embrace or still bureaucratic remains to be seen. So let's say embrace a little caution here.
Sy Taylor 22:03
Yeah, it's a powerful counter narrative to what the market, or certainly the sentiment, appears to be out there as ice feeds people, because as I look at financial services policy generally, the first Trump administration was surprisingly normal, optically, and vibes wise and sentiment wise. It appeared very different. But you know, if you actually go look at the policies that were written, they're not a million miles away from what you would expect out of out of the Democrats. And then, as you say, towards the end of the the last administration, we saw ETFs granted for Ethereum, which at one point was supposedly a security so we are, I think, seeing a shift within that policy world. And you
Eric Saraniecki 22:43
also have to keep in mind that the SEC is a big focal point for a lot of people, rightly so. But when you're talking about what it means for global banks to embrace the ecosystem, now you have to think about the Fed. You have to think about the OCC. When you're thinking about regional banks, you have to think about even federal facilities like the FDIC. So there's a lot more than just a single appointment to change here, to change the stance of the whole ecosystem. Again, I'm optimistic, but the work to create a more good faith environment and a more engaging environment is not done with a single
Sy Taylor 23:16
election. Yeah, well, I'm gonna thank our sponsors, and we'll come back and talk a little bit more about what's happening in the world of Wall Street. 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. V tap allows financial institutions to issue Fiat back 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 podcast is also supported by our friends at Digital Asset the creators of the Canton network, Canton is unlocking the utility and liquidity of institutional grade real world assets with over $3.6 trillion of assets issued or processed on the network today. Think of it like defi transactions, but with the privacy and control, institutions need digital asset solutions make it easy to tokenize, use or invest in digital assets on the network, create connected applications or simply get started with a validator node. Visit Canton, dot network, forward, slash, connect to get started. All right, thank you to our sponsors, and we have two of them right here with us. So thank you guys for for making this podcast a reality. The next story comes from coin desk, and it is about Lazard our planning to create tokenized funds with BitFinex. Securities. So the tokenized funds will be set up and issued under the Kazakhstan Financial Services law and regulatory oversight of the stana Financial Services Authority, where both skybridge and BitFinex are licensed to operate. BitFinex securities, a subsidiary is responsible for the tokenization process, while skybridge will act as a broker and manager of this tokenized Fund, and the products will be available to retail users, but with certain geographic limitations. And you can also purchase these tokenized funds with stablecoins. So my understanding is this is tokenizing a fund of funds where Lazard helps buy global equities, so they will go and buy bits of PE funds and VC funds, and that's typically very difficult for retail consumers to get access to Eric. This sort of links to some of the points you were talking about in the first segment of the show about retail is not allowed in. Is tokenization the best route to that? I've seen lots of FinTech companies try and bring funds down market, even Robin Hood, for instance. But why tokenization?
Eric Saraniecki 26:11
Honestly, I'm a little skeptical about this part of the market for tokenization, and what I mean by that is, where you're talking to the crypto markets, you have a primed audience that is expecting much more than 8% yields. They're looking for 10x yields. And so I'm not so sure that these products are appealing to the existing customer base. So if you take a step back, and similar to the product market fit that stable coins are finding, I think, in more of the wholesale markets, if you say, Well, what's, what's, what's appealing to tokenization to us, when we look at it in Canton, it's really around the mobility of assets is the big game changer. Again, just looking at what is so successful about a stable coin is how quickly money can move around the world and how seamlessly that happens. What are the asset classes that benefit from that above money? And we think a lot about collateral, and we see a lot of that in the canton network, things like treasuries, money market funds, zero bonds, gilts, any high quality bank note or commercial paper. These are the things that today suffer from a lack of mobility and then introduce a ton of latency and risk into our market. I think a lot of the tokenization projects that you see here around yield assets, or access to assets, I think are falling slightly victim to there's hundreds of millions of wallets here, and thus access is what's important to them. Think that will come, but I don't think we've figured out the last mile distribution to the end user on these types of products yet. Whereas we have some of the largest market participants, institutional investors, really large new exchanges, traditional exchanges, in form of like CME, that are coming into the crypto markets, and they all need greater and greater mobility. So I tend to focus on these things as being really interesting experiments to get the pipes working. But the things that have earlier fit are more about velocity than access.
Cuy Sheffield 28:01
It's an interesting argument. Eric Simon, I have talked about this on a few shows. Seems like one of the markets in target markets and opportunities for tokenized assets today are crypto investors with the idea that crypto investors are already on chain, and so if they're already on chain. Can you bring a traditional product to meet them where they are, and then kind of use blockchains and wallets as distribution to be able to get them? I think your point is, most of the products that, particularly retail consumers, are trading on chain are a very different type of product that they're not necessarily interested in, 8% yield, which some of these examples are trying to do. On the other hand, isn't there something to be said for institutions coming on chain to trade crypto when you have larger hedge funds, family offices, etc, they're starting to get crypto infrastructure in place. They're likely having more moderate exposure to crypto. And so they're not they don't have their entire portfolio in crypto, but they might now have 1% or 5% or kind of some amount, as they get accustomed with crypto infrastructure, then the ability to meet those kind of forward thinking institutions in a place that they already are with products that are attractive to them. Like, does that argument make more sense on the institutional side, where, again, it's it's demand for crypto that installs the infrastructure. Once the infrastructure is in place, with institutions, then the other products come. Or, how do you think about that, that case, that, that some people hate? I think it's a great question,
Eric Saraniecki 29:38
but I think it makes my point exactly, which is that institution already has access. What they don't have is velocity. And so you have to say, what is the incremental benefit to adopting this infrastructure to the asset class being added there? And I think access is a trap right now, and especially for the institutional participants. I don't. Know the retail market all that well. So I'm always speaking really from an institutional lens. You take someone like a Cumberland or a QCP or a jump, and they get accustomed to 24/7 money moving with a click of a button, and then on the other side of the house, they go back to their normal Monday to Friday, nine to five derivatives activity on im and VM into the large exchanges. And it's just, I think that you're just seeing like a disappointment internally in these organizations, about I can get mobility and velocity in this ecosystem, and I want it where I have much larger notional, where that impact to velocity is going to make a bigger change to my margin, my ability to trade 24/7, my liquidity, my interest in these ecosystems, how I fund myself. All this benefits the moment that we start to talk about mobility around collateral, and that's where we see overwhelming interest from our adopters of the Canton network is around the velocity and mobility side of things, because access is just there isn't a thing on earth that Don Wilson doesn't have access to just to name check a little bit, and it's pretty consistent for a lot of these institutions. Also true for high net worth individuals, not just institutions. You know, if you have a Interactive Brokers account, or you've got a Robin Hood account, I used to in my PA trade like Turkish, 30 year long, dated debt. You know, through my Interactive Brokers account, it's all there that's very rarely an access problem, and it's more about what's the next round of utility we're going to be able to bring into these assets that are decades old?
Sy Taylor 31:29
It's interesting. I think there's a third thing, which is the crypto native institution that lives in crypto assets and now wants to de risk and come down the risk spectrum, but they want to do it with crypto native tools and crypto Native Assets. And that's where Rob leschner at Super state is starting to play in that sort of now you can have the basis trade as a single token that you just hold like you would hold anything else. And sort of that defi approach to sort of managing your operation as a crypto native institution is a fascinating one, and would those crypto native institutions want this type of asset as well? Yes, probably. How big is that market today? Nowhere near as big as the rest of capital markets. But then, I think there's also something to be said for market share is cheap when markets are small, but markets aren't small forever, and sometimes the new market is the one that grows fastest. It's rare, typically, people take market share of an existing market, but then, every now and then, somebody goes and events invents a new one. So I just want to throw that as like another thing. You're
Eric Saraniecki 32:35
absolutely right, but I still think the ones that are performing the best are the ones that are focused on not just the asset class as a lift and shift, but again, what's the incremental utility we can add to it? So one of our big partners in Kansas, I mean, I really like the super state guys. I'm very supportive of what they're doing, but hash note is the first into our ecosystem for tokenized money market fund, and one of the main reasons that we wanted to partner with them is just the simple little design decisions that they made about optimizing a money market fund to be useful for collateral, and then their dogmatic strategy to go and get accepted into all of the places where that's useful, getting into the derivatives exchanges they announced there a bit, maybe three weeks ago at this point, being able to post im in a money market fund instead of a stable coin. These things matter a lot. When you're a large institution, you're moving around hundreds of millions of dollars in these ecosystems, which many of them are at this point. So I agree there is that third type. But if you really want to get them over the fence and enthusiastically embrace it, you want to give them some incremental value to being in these products, not just on chain, because they have a preference for on chain, or now they have some new on chain infrastructure, but it is a truly differentiated product from what they would otherwise have.
Cuy Sheffield 33:46
It's an important point just to highlight and re emphasize what we said, Eric, it's like participating in crypto and in crypto markets, whether a retail investor institution, it changes your product expectations after you have that experience of moving money, 24/7, you go back to sending a wire transfer, you go back to some of these other experiences. You say, Wait a minute. Once you've seen like how it can work, then it kind of puts pressure on which I think is a really good thing as a forcing function to drive innovation in traditional finance. If you've never had another experience. If you've never been able to move value 24/7, if you've never been able to lock up collateral and borrow against it Sunday at three in the morning, then you don't even think about that. You just kind of keep using the tools the way they are. Once you have that expansion of what's possible through one ecosystem, even if it's a limited set of assets that are more volatile, then it feels like we're gonna have a whole new set of market participants whose expectations just raised. And so I think every traditional financial institution should be thinking about that, particularly as the market cycle grows, the more and more people that participate in crypto, and frankly, participate both on chain as well as some of the infrastructure. The exchanges have that is quite modern, they're going to compare their traditional experiences to that. And I think that that's a forcing function to improve. And kind of, whether it's tokenization or not, getting to faster, easier value transfer experiences is going to be more and more important. Something
Eric Saraniecki 35:17
we look a lot at Da is just where is their existing product market fit, and what's going to shift? Is it going to grow? It going to grow, or is it going to shift into something else? And I think that the stable coin ecosystem is going to continue to grow, but as a percentage of assets that are held in stable coins versus yield bearing assets, I think that's going to shift in a different direction. So if you take the category of stable coins that are not passing yield on to their end holders, and you look at other asset classes that are emerging, whether they be like you guys mentioned a whole bunch of them at the start of the podcast, but if you look at the yield bearing to the holder asset classes, I think that's going to shift in a demonstrable way, provided that those ladder assets have utility, I can use them in the network in interesting Ways, and that the liquidity between them and the widely accepted payment vehicle, the usdcs and the usdts of the world, is a 24 by seven instantaneous, frictionless experience. If I can go between those worlds, then I've created all the building blocks of a highly efficient bank. I can be in yield when I'm not using my money. I can be spending money when I need to spend it. And just being able to switch in and out of that and optimize for that is where the interoperability of these assets is going to become really, really interesting.
Cuy Sheffield 36:30
And so Simon, I guess, question for you, it seems like there are two different ways that that could play out, like if you follow Eric's thesis, there's one way that you have traditional stable coins like USDC, usdt, that are not interest bearing, that are used for money movement. But then once you receive them, you auto convert them into tokenized securities, whether it's Biddle or super state, or many others that are money market funds, that are actual securities. And then there's just frictionless movement between when it's at rest, it's a security. When you're ready to move it you're sending it out. That's kind of one view of the world. The other view of the world is the stable coin itself becomes interest bearing. And you don't move back and forth between a security that is a money market fund. You have these structures like usdl or USDM, and even as you're transferring the value, it's still interest bearing the entire time, and you're not transitioning back and forth between a money market fund and a stable coin. It's just they kind of blend together, and you get these interest bearing stable coins that are then used for payments. Like, how do you think about those two different worlds and how that might play out? I
Sy Taylor 37:36
think you got to separate the technology from the business model. Tokens are just a really fascinating, powerful, programmable way of like any any attribute you want an asset to have, you can record that asset and it can have ownership for anyone in the network. And if you want it to be yield bearing, it can be yield bearing. If you want it to be switched for something else the moment it lands, it can do that too. So it makes it really difficult to figure out what the model is going to be, because the answer is, it could do anything. I think the more concrete lens I would look at it as is the business model of the market participants. So a financial institution is used to monetizing the net interest margin of the difference between the value of a deposit and a liability. And I set in a liability and holding on to that and trying to hold on to it for as long as possible, whereas a payments company is trying to monetize the message sending and hold it for as short as time as possible, because they want volume and throughput. And the leopards often don't change their spots, even if a new technology comes along. So it's like, oh, well, you can have like, night vision and be like, this invisible leopard. That'd be cool. But like, Yeah, I'm still a leopard underneath it, and you default to your business model. The Kodak moment was not really one where they couldn't build digital cameras. It's where they couldn't figure out the business model where they sold memory cards cheap enough because they were used to selling film, that's where they made their money, and therefore that's why I always hold this candle for the incumbents will probably be able to lean into this where it suits their business model, but the new market participants can do new experimental things with business models that will be fascinating to watch, and it will probably come from the Global South, first or newer companies. It's not exactly like Chase didn't benefit from the internet. They just didn't grow quite as fast as PayPal did as a direct result of it. And so there will be new mountains to be created from what tokens can do. And I don't know the direct answer to your question, which model of stable coin is going to play out, but the fact that we get to witness it means I think somebody is going to do one or both of those and do something new with it. So I didn't answer your question. I answered something else. I
Eric Saraniecki 39:54
have a little bit of a point of view on this, which is, it's your slogan, right? That's accepted everywhere you. Wanna be. Is that an old slogan, or is that still active? I can't remember. But when I think about money, this medium of exchange, you want the thing that is the most far reaching, credit worthy thing that you can find. And so I think that there is a real argument to be made for the simplest, most vanilla, most clearly down the center of the lane, regulatory approved everywhere in the world. Thing that you can find, like, that's going to be the medium of exchange, and then where we see a lot of experimentation, it's going to, you know, be a little bit of a gray zone. Is this a security? Not a security? How is this transferable, and to whom? And I think that you just have to accept, no matter how big the delta between those two things, there will be a difference in accessibility between those two. And so the thing that is the most accessible is going to be the way that you pay someone or that you exchange with someone in a random place. And then everything other than that exact discrete transaction is then an optimization of what you can do based on what you have access to and what you're allowed to participate in. So I think that we would benefit, well, we're benefiting a lot from all these different types of money being created because we're going to learn more. But I do think that there's something to be said for the USDC, usdt model to be just a universally accepted thing and everything else to be more of an optimization when not in a multi party transaction.
Sy Taylor 41:23
Its simplicity is beautiful, but it's also programmable. So the lowest order bit, the most primitive thing, is surely the stable coin that doesn't bear yield, but is programmable, because then everything else you can add over the top of it. I think that's a really interesting perspective. We had one last story that I want to bring us to, and this came from block works, and it's about Swift UBS and chain link announcing a successful tokenized asset pilot. The pilot is part of the monetary authority of Singapore's Project Guardian, which keeps on rolling, aimed at promoting asset tokenization to improve financial market functions, institutions can use the SWIFT network for the settlement of tokenized fund subscriptions and redemptions. And of course, those traditional fund processes in the $63 trillion mutual fund industry are inefficient, manual and a bit of a nightmare, which all lead to increased costs and reduced liquidity. Eric, could you just talk to what this looks like today, and how something like this would help it? Yeah,
Eric Saraniecki 42:29
so, I mean, if you think about any, any really capital markets use case, we're talking about updating multiple systems at the same time, right? Like even a simple asset payment or settlement is a an asset moves in the asset system, and a payment moves in the payment system. And when you think about funds, just the number of systems that have to get coordinated for a single action or transaction or payment or capital call, it's a significantly higher number than another scenario. So you think about every time you add another system to coordinate, that just means that you're increasing the latency and complexity and reconciliation that comes from it. So the benefit of using the chain in this scenario is pretty straightforward. I think it ensures that all of the parties to this transaction, all of the systems involved in this transaction, could all be guaranteed to update at the same time. But there's a real shortcoming in the approach of connecting to these systems via messaging, which is that you're just reintroducing that opportunity to be out of sync with the underlying system. And so I understand why this is happening, and I applaud it from the perspective of making it easier to come and participate in these systems. So I understand the draw, but at the same time, this approach is in many ways in validating the underlying systems correctness, because messaging is what's really driving this reconciliation problem. The last thing I'll say in this, because I'm sure you guys have a few follow ups, is that a lot of times the reason that someone's connecting to the system externally via an API or a message is because the underlying system itself has no privacy within it, and you really can't give access to a lot of these participants. So again, the shortcoming of the underlying system is causing you to recreate the same problems that we're trying to eradicate. I'm a little surprised at the lack of privacy and the systems that are going through the capital markets use cases for Canton, it's been a focus for us for the past 10 years is to really develop that as the number one most important feature in the system. It's hard to get right, but I think it's a threshold issue. Otherwise, you find yourself in a scenario where you're in a private silo and people are connecting to you through messaging or interoperability protocols, and you have the same latency and reconciliation problems that you had between an old system underneath the message, you don't know what's there. Could be a Java system, could be a blockchain, could be a cobalt system under a message, you have no visibility into that, so intermediating your access to that system through a message is really curtailing the benefit that you can get from it. Now, again, I support it as like a phase zero sort. Thing, but your destination has to be to come into that ecosystem.
Cuy Sheffield 45:03
So if I understand your point on this is what you're saying, that part of the potential benefit of tokenization and blockchains in general is combining messaging and settlement and not having these like two distinct legs where normally most payment systems, most financial systems, there is real time messaging through one of a number of different systems, and then there's delayed, deferred settlement that happens some other time. Blockchains, in general, are one of the first systems that can do it's a message and settlement in real time at the same time, although sacrificing privacy to some respect. Are you saying that for institutional tokenization use cases in the long term, as long as you keep this separation between messaging and settlement that creates reconciliation challenges, and so those should be one thing, but it has to be one thing on a network that preserves privacy, because you have to have messaging in a private way. Is that the way to interpret what you're saying? Yeah, I think it's
Eric Saraniecki 46:03
pretty fair. I would just say that I always like to kind of oversimplify the story. If I text my wife and I say, Hey, could you please bring home a carton of milk on the way home today, and she texts back, yeah, no problem. That's a message. I don't know that she did it. She could even be at the store and say, I picked up a gallon of milk. I still actually don't know that you did that until the moment that we come home and we do state comparison is there a gallon of milk in front of me, and when you're using a message, there is no guarantee about what's on the other side of that system. They might even tell you once, but again, you don't know. So what's so powerful about a blockchain in terms of like synchronization, is the real time stateful guarantees that it provides the participants to it. And then what's so powerful about being in defi is the guarantee of two totally disconnected systems, a stable coin and a security being able to be guaranteed to settle at the same time. So it's not so much about the message and the settlement being the same action. You could easily send an instruction, hey, settle this in 10 hours. It's more about the stateful guarantee that these things are happening and that they happened the way you expected them to all along the way. So if we want to solve the friction in capital markets, we have to move away from messaging, which, by almost a rule of physics, introduces latency and reconciliation, and we have to move to stateful communication and synchronization. That's what blockchains do. I think
Sy Taylor 47:26
part of the reason why Swift is involved is because Swift is plumbed into most of the back end of most of the banks, so they would, in principle, be a big on ramp. But the difficulty there is, of course, it's just a message. And the way swift messaging works today is, hey, I'd like to move this money, please. Okay, yep, I've got your message. Go ahead and move the money. All right, yep, I've moved the money. Okay, great, so have I. I mean it's literally, there's, there is no guarantee there. You're just taking the other institution's word for it, and the fact that they've signed those messages as then That's
Eric Saraniecki 47:59
right. And there's a huge role for swift, an opportunity for them to play in the future. If they think about their role as being synchronization and not messaging, if they're not too in love with the tool and they fall in love with their role, then think about if instead they were facilitating nodes and access for those institutions into that network.
Sy Taylor 48:17
Swift nodes are a whole thing, so it's not a million miles away at all. Kai, I want to close out on this point, which is, you've been in Singapore a little bit recently. You're seeing a lot of activity over there. What is it about Singapore that has created all of this momentum? I think break point was there this year. And then we've also seen the monetary of thing. Ot of Singapore, zodia markets is out there. What is it that's going on there? Yeah,
Cuy Sheffield 48:41
I mean, it was just my first time that I've been in Singapore in the past few months, and there's just a lot of energy and excitement and focus on the positive elements and the potential of this space. That was one of the observations that I had, is when you're having conversations and the focus is, what can this technology do? What things can it improve? What can it solve? And even if it's early, there's just this sense of optimism towards it, a recognition that there are risks. But there's a lot more discussion and focus on the opportunity versus I think in other places, it's challenging. Sometimes when if you're having a discussion about a new technology, if the entire discussion is about the risks, it's just like a good way to tell what direction you're coming from, and every new technology is going to have risks. There's no question. And so it's not that you don't talk about the risks, it's is the entire discussion the risks, or is there a good discussion around what are all the things that technology could do, and then how do we mitigate the risks within that. And I think mas has been incredibly forward thinking as a regulator for a long time across a lot of different areas. So it's no surprise that crypto is one area they've been proactive on. And also it seems like there's some like healthy competition between MAs and Hong Kong and other markets where they see this as the next generation of. Finance and technology coming together, and they are really focused on they want to be a leader in it. And I think it's a huge win for the MAS, if you think about the structure of usdg and how it's being issued by Paxos, out of the entity in Singapore, if this becomes a successful global stable coin, having the MAS regulating one of the largest dollar denominated global stable coins like that would be something that I think they would consider a big win. And so that'll be really interesting to see how it plays out, how other jurisdictions fall. It's
Sy Taylor 50:31
going to be fascinating for sure. Well, that sort of wraps us up for time. So I want to thank you guys for joining me, and I want to thank everybody for listening. This was fascinating, Eric, especially. Thank you so much for being our guest today. Where can people find out more about you and what you're up to? At digital asset? Yeah,
Eric Saraniecki 50:48
you can find more about the company at Digital asset.com and you can find more about Canton network at Canton dot network.
Sy Taylor 50:54
And what about yourself Kai
Cuy Sheffield 50:56
on Twitter at Kai Sheffield and visa.com/crypto
Sy Taylor 51:00
and you'll find me at sy Taylor on Twitter or Simon Taylor on LinkedIn and fintechbarnfood.com if you haven't already, please go ahead and subscribe to tokenize on Apple, Spotify or wherever where you get your podcasts, and remember to hit that five stars on the review. It really, really does help others find the show. Thank you so much, and we'll be back with you next time.