On this bonus episode of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, is joined by Georg Schneider, Managing Director @ Digital Asset, Melvin Deng, CEO @ QCP & Chris Zuehlke, Global Co-Head @ Cumberland to discuss onchain finance, liquidity, risk and collateral.
On this bonus episode of Tokenized, Simon Taylor, Head of Content & Strategy @ Sardine, is joined by Georg Schneider, Managing Director @ Digital Asset, Melvin Deng, CEO @ QCP & Chris Zuehlke, Global Co-Head @ Cumberland to discuss onchain finance, liquidity, risk and collateral.
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Music by Henry McLean
Sy Taylor 00:00
Welcome to tokenized. My name is Simon Taylor. I am your host for the tokenized podcast, author at FinTech brain food and head of strategy over at sardine. And joining us today is Georg Schneider, who is from digital asset. How you doing? Georg? Very well. Thank you, Simon. Thank you so much for being with us, and we have Melvin dang who is CEO over, Q, c, p, how you doing? Melvin,
Speaker 1 00:23
I'm very well. Thanks for having me, Simon. I'm
Sy Taylor 00:27
excited to have you both. But before we jump into what you guys are up to, which is pretty, pretty incredible if you're a capital markets nerd, I just have to remind our audience that the views and opinions of contributors are their own and might not reflect the views of the companies they're representing. Nothing we share should be taken as tax legal or financial advice. Please do your own research, folks before you look into things. Alrighty. Melvin QCP has actually been around for a little while. You've been involved in derivative markets across various cycles. So tell me, what is QCP and what role does it play in the evolution of capital markets?
Speaker 1 01:15
Yeah. Well, QCP is Asia's leading digital asset partner, and we've been helping institutional clients and to really integrate digital assets into their portfolios with confidence and some level of precision. And we operate largely on a global scale, but we'll see headquarters both in Singapore and Abu Dhabi. Our expertise has been largely around derivatives and the trading of it, and we've seen the market shift significantly in the last two to three years, since the the FTX incident. We're seeing quite a big paradigm shift with regards to how credit is being managed across the ecosystem. And you're thinking about, you know, products that are demanding for more capital efficiency. We're looking at sophistication with regards to how counterparties look at credit. We're talking about how collateral is being looked upon, dealt with whenever a derivative trade is being executed. I think there are. This is just the beginning of a very, very interesting journey, because the infrastructure gaps remain in the industry, and we are very excited to see opportunities to kind of bridge this gap, and that's where we we reside in terms of our purpose and our aim.
Sy Taylor 02:43
And Gail, how about you capital markets, especially as we record this, becoming very different places in the traditional world. Are you seeing similar shifts in the traditional world of capital markets, as Melvin pointed out there from the digital asset space, post FTX,
Speaker 2 03:03
yeah, we're certainly seeing the demand, you know, for markets to become more efficient, especially when it comes to risk management and dealing with collateral. And it's one of the areas where really, the technology that blockchain has brought us, you know, has a material impact, or can has have a material impact. And we're seeing a lot of the experimentation that has been happening in crypto now being sort of shifted over and moved over more into traffic markets. Because ultimately, we live in a 24/7 world, and markets are becoming more more and more 24/7 and so we see there's a lot of work going on in that space to make, you know, collateral and margin processes more efficient, ultimately, to, you know, reduce the risk that we have, especially in times of stress, as we're seeing, seeing right now. So everybody's looking kind of to, yeah, to really get ready, get ready for that, for that change, and really execute upon it.
Sy Taylor 04:02
Talk me through a use case here, make this really tangible for me, because when you say things like the importance of speed and risk management and reducing settlement risk increasing with Blockchain verifiability, all of those sounds like long words with lots of syllables. But then sometimes, when you work through a use case, and the meaningful difference that means to somebody's positions or their ability to unwind positions, then suddenly the business case makes more sense. So just just walk through one of those for me. Gail, if you would.
Speaker 2 04:38
Yeah, absolutely. So to give you a concrete example, right, the crypto markets have been going 24/7, ever since, since they started, pretty much right. But the way we've been managing risk around these was still sort of using this basic, crude mechanism of calculating daily exposure and then. Are calling for margin and ultimately settling t plus one, sometimes t plus two, right? But really, that doesn't reflect on the 24/7 nature of the risk that's being created within these markets. So one of the projects, for example, that we're working on with QCP is exactly around trying to make this margin more efficient and try to make it more reflect better the actual markets of the underlying assets that have been traded. So that means, if we can follow with exposure calculation and exchange of margin, really, 24/7, if we can do that on a two hour basis, four hour basis, that lets us manage the risk really, according to when the market is open and when things can happen, which is really over the weekend or overnight in crypto. And similarly, if you, if you take that now and look at what happens in traditional markets, then you know, markets are local, but the playoffs are global, right? So somebody that sits in the US and now has to react what to what happened this morning in Asia, right? That risk is currently kind of not covered, really, by the by the tools that we have available. So really, we're trying to bring this efficiency, this this ability to manage margin and collateral 24/7, ultimately, also to the traditional market side, so that really, we can manage the risk better. But not only that, but also by reducing the risk, we also reduce, you know, margin requirements, and ultimately increase the capital efficiency around that. So, so that is the ultimate goal. It's a journey, of course. It's not something that you can change overnight, as you well know, you know, changing operational procedures is always, always a bit of a journey, but we're working hard to bring the simulation into into the chat five world.
Sy Taylor 06:49
So Melvin, I know that QCP is working on this digital collateral with digital asset. Can you explain a little bit behind what's happening there some of the benefits for QCP, and of course, your customers, your clients as well.
Speaker 1 07:05
Yeah, I think the benefit is actually to the wider trading ecosystem. The biggest struggles today with traditional technology stacks is that you are not actually dealing with risk on active and live view, and most systems are running a day behind, or two days behind. So what we're trying to do here is actually bring risk to a live to minute moment, and by being able to do that, it actually increases the transparency of the market, it improves the ability and the confidence of people to interact more frequently and also with greater confidence. So when you think about what we are working together to build, is really creating a system that reduces the overall risk of the trading ecosystem, which can result in capital efficiency, but also increased possibly confidence to do more volumes. If you think about systems today, they are limited because systems have to accommodate 24 hour gap in the way they look at risk, and what we're trying to do here drives that significant efficiency.
Sy Taylor 08:28
When you wake up and markets are down 6% in tradfi, then being 24 hours behind that is not somewhere you want to be. And of course, that's been a reality in digital assets, 24/7, over weekends for a very long time, and it feels like that's the reality everybody in markets now lives in. So bringing risk to real time feels like a huge benefit, but then bringing the transparency of that risk is going to be really, really successful. Is there anything Georg, you want to kind of add to what that means for the wider market and what it will take to bring this to say Trad, Fi,
Speaker 2 09:11
yeah, sure. So I think the potential of bringing these processes and also bringing the exchange of collateral on chain is significant, and really the crypto derivatives segment is a good starting point, because we're dealing with very nimble, very innovative players there. But the ultimate goal is definitely to take that into very traditional businesses, whether that's derivatives or whether that's prime brokerages, even exchanges, everybody, in essence, you know, does the same risk management process. They call for margin, they get some collateral being posted, and they do their regular calculation of exposures and risk, right? So the core of this use case is really transferable onto other types. Types of businesses, and ultimately into into the tradfi work, in terms of what it takes. It's, well, it's definitely an uphill battle, as you know, you know tradfi firms, they move a lot slower. They're much more risk averse when it comes to taking on new technology. But what we have the the opportunity to do here is really to create some proof points in this segment of crypto derivatives that showcase really what can be the impact by bringing on this new technology, what can be impacted, bottom line, impact to capital, to risk, and those proof points we expect to be such that that can't be ignored by traffic counterparties. So once they see that actually, by, you know, doing the risk management on a continuous basis has a positive effect overall on the market, we think that that is simply something that traffic can't ignore anymore. And then, you know, we we do it as we always do. We try to start small, try to carve out the segment where maybe the pain is felt the most, and then try to work with some of our players in ecosystem. I think that's one advantage that we have, is that over the years we've we've managed to actually get a lot of the large Trad five firms, the banks, the FMI, into our network. So I think we're in a good starting position to try and really push that out into the market. Makes
Sy Taylor 11:27
sense? Melvin Gail talked a little bit about changing standard operating procedures. I want to go inside your organization and kind of your standard operating procedures. And how does tokenization and blockchain networks look different to a tradfi world, because I think that's the skill a lot of folks in tradfi are going to have to start to learn if they're going to bring other assets on chain. So maybe just sort of take me under the hood, if you would be so kind, yeah, for sure.
Speaker 1 11:56
And then if you were thinking about life risk and life margin and it's what we're working with, Gail. Here you're actually looking at an instance where, you know, it's 12 O'Clock London time. A Counterparty is significant risk with us. We are now able to call the counterparty, top up your collateral. The collateral comes across in a minute. We're all settled. We are now able to continue trading. We are able to have confidence in the whole settlement process, as opposed to if we were using a very traditional model where you use we have to wait for 24 hours before you see the collateral arrive in your accounts, before you can net off the positions against their risk, before you allow them to trade again. So we can see that in this one simple example, you are increasing the velocity of trades, and you are then facilitating liquidity in a market that doesn't exist today because there are technological gaps that needs to be bridged. That is one very, very simple use case that we're working towards, and the idea is to facilitate greater confidence and greater ability to capture risk and mitigate it.
Sy Taylor 13:13
I love the simplicity of that. Thank you, Melvin, you sort of both alluded to the instant settlement. Georg, I know you mentioned stablecoins and payments, and you've recently announced your partnership with circle. So Is stablecoins coming to Canton, and what use cases could you see and how that fits in the wider network?
Speaker 2 13:34
Yeah, stablecoins is, of course, very important pillar for us. I think what primarily drives the demand for that within the network, or also explains why stable cons are coming into the network is because of the privacy aspects, right? So we're really the one network where you can today transact in private, and that's, of course, important for the for the collateral use case that we've mentioned before. Nobody would want to have their collateral movements, you know, public out there in the open for everyone to see. And it's a similar case for stablecoins, maybe not so much in what we've seen in some of the other you know, public, permissionless networks and stablecoins have had a great success there, but there's a certain limit as to what you can do in a fully transparent environment. So on Canton, we're looking for use cases in in the wholesale, wholesale space, large value payments. You know, if you want to settle the cash lag of a repo transaction, that that just has to be private. So we're really focusing on those use cases where we can, where we have a clear differentiation, where people come to Canton for its properties, for its privacy properties. So one particular use case that's that's really interesting to us is, you know, the ability to 24/7, create, redeem stable coins, right? Yeah, that's exactly kind of fitting in with the collateral topic, in the sense that if, if, if you want to capture an opportunity over a weekend, or if the markets, for some reason, you know, start to tank over the weekend and have to react quickly, you need liquidity right and right now, the only option is really for you to hold large liquidity buffers, which is, of course, costly if we now create this ability to create completely stable coins, 24/7, for example, by entering into a repo on us, treasuries that you're holding that suddenly takes away that need for the liquidity buffer, and you can instantly and spontaneously find yourself to capture any kind of opportunity, even when the local markets that you're operating in are actually closed. So, you know, the other ingredient, of course, needed for that is a tokenized form of some of the traditional collateral. So that's, that's another area where we're very active trying to bring, you know, use treasuries, euro bonds and the likes, really into tokenized form. And then we can actually go into these repo transactions for financing, and it opens up a whole slew of other very interesting use cases, right? Once, once, you can do the, let's say the intraday repo. You can also do 24/7, create, redeem of money market funds, and that opens the door for very interesting Treasury solutions. Imagine your firm is able to park any money that's sitting idle at an instant into a money market fund and capture, let's say, six hours worth of interest until they need the cash again. So these are tangibly
Sy Taylor 16:41
for a corporate treasurer, it could be absolutely massive, right? Like if you are sitting on hundreds of millions in free float, and it was just going to be sitting there idle, or it could be earning three 4% in various bond markets. I mean, that's unbelievable difference, especially if you're able to do that consistently throughout the course of a 12 month period. But that's just not an option today, and that could potentially be be an option, Georg. Sorry to cut across you. I got a little bit excited there, Melvin. I just wanted to ask you, though, before we kind of ask Georg one more is kind of what's next for QCP, what have you guys got coming down the pipe, and what should we be looking forward to from you guys in the near future, especially in your partnership with Canton?
Speaker 1 17:27
Yeah, I think, well, our firms have really been involved in innovating in this space for a while, albeit trading very, very similar products to what we've seen in what we call track fi. We are consistently working towards the convergence of both markets, and continue to expand our product suite in both sectors. And would bring that all together in where we establish our businesses, both in Singapore and Abu Dhabi. But I think when we talk about our partnership and our work with Canton. And I think there is an element that not many have talked about, is that when it comes down to financial transactions, is privacy, something that is a viable of a valuable asset, and we believe that this is something that needs to be considered right as we approach this. So I think when we look at the work we're doing together, collectively, and we look at the business that we have, we believe that there is institutional demand in this direction. We believe that for this institutional demand to scale, there needs to be technology that facilitates this. And as much, as much as we trying to segregate what is tradfi and digital assets, I actually think that it is this journey of us, you know, making the meeting of the two minds is probably the biggest and the most important part, and that's why you know ourselves in Canton. We see ourselves in partnership for this aspect, because there is, there are people who understand what we're trying to do, but they just need to see the use case and be won over by what we're trying to build. I think
Sy Taylor 19:13
that's so true. See the use case, see the future without question. I love that word convergence as well. Gail, that's that's something that Canton has been sort of working towards for a little while. But could you give me the nuts and bolts of how does Canton enable that convergence? Yes, we've talked about privacy, but I'm sort of stuck in a tried I'm a tradfi girl in a tradfi world. I want convergence. How does Canton help me get there?
Speaker 2 19:43
Yeah, certainly, we, we've built Canton. You know, from the get go, really, with, with traditional markets in mind, right? We started out, not so much playing in the in the actual crypto sector, but. Um, so in terms of how the technology has been built, it really has all the properties and ticks all the boxes that any flat file firm would want to see. That's not just privacy. That's also the level of control that we give people around their applications that they're running in the network. You know, the ability to run entirely, you know, Private Sub networks within Canton network. So all of these, you know, content supports very different operating models and and operating models that that, that I think are really viable for some of the more tradfi firms. And I think in terms of what the word Mel has said, in terms of use cases, it's really that, right? The whole industry has been moving and created all these tokenized assets. But I think what's been lacking for many is really, then the so what? Right? Tokenize the asset, but now what? And really, that's the collateral project that we're working on is one example of where we're trying to answer the question, the somewhat question, where really the just tokenizing the asset doesn't necessarily make it immediately better or more valuable than your traditional counterpart. You really have to use it and create utility for it in a way that actually makes it clearly better, so that from an investor, from a trading point of view, I have a strong preference to have the tokenized asset, and that will be the point where the market will demand of issuers to issue their assets in the tokenized form. Right? We're not quite there yet, but I think there will be a point where, really it becomes a broad demand across the market, and people simply won't have a choice then to bring it onto this latest technology, because it then exhibits all this utility, all this mobility that simply a traditional asset won't have anymore. And I think that's the point where then really the sort of the convergence can and will happen, and that's what we're working towards with these applications and use cases in the network. Yeah, and I just wanted to add to what Georg is saying, is this with the use cases, we are now able to then demonstrate to regulators on the impacts and how risk can be re looked and re understood. And I think this is, this is a very important piece to bring about the convergence as well. Because sometimes when we look at this problem, we tend to think there are only two parties involved. Actually, it takes us three to tango. So we need to also not lose sight of that fact. But I think it always starts with putting the use case together and demonstrating it to both sides of the ledger to create this tri party kind of outcome.
Sy Taylor 22:52
Absolutely true. Transparency be trust, but you need privacy. There's a, there's a an interesting kind of almost counterintuitive nature to to that reality, and achieving that complexity is is non trivial. So well done to digital asset and to you guys for for kind of pulling that off. And there's, as you say, there's, there's only so much fun you can have doing a pilot of collateral mobility on with one tokenized asset in one corner. I think we've we've done pilots now we do 2017 was the age of the POC 2021. Was the pilot era. Now it's time to get on chain and get into production, because we have institutional grade networks like Canton that can enable us to do it. So I think that's a great place to leave part one of this show and Georg, where can people find out more about you and more about Canton network?
Speaker 2 23:47
Well, you can find me certainly on LinkedIn and connect if you want to talk to to me about anything related to Canton network, and if you want to come into the ecosystem, simply go to Canton dot network and take your word there.
Sy Taylor 24:02
And Melvin, where can people find out more about you and QCP, yeah.
Speaker 1 24:07
Likewise, you can find me on LinkedIn, and if you wish to join our circle at QCP, you can find us@qcpgroup.com
Sy Taylor 24:15
Perfect. Thank you both so much. We're just gonna take a brief break and we'll be right back. Okay, welcome back to part two of the show. I'm now joined by Chris zulki, who is the global CO head of Cumberland. How are you doing? Chris, yeah, I'm doing good. How are you Simon, I'm really well. Thanks for joining me. Look. Cumberland, at its core, is a trading business in digital assets, but it operates as part of a global traditional finance firm Dr W so let's start with, how does your firm fit into the conversation around stablecoins And what is their utility in global markets?
Speaker 3 24:58
Sure. So to answer that. Question, maybe to speak a little bit more about us, Cumberland is a wide reaching crypto asset operation. We have OTC businesses on exchange businesses. We have some VC strategic partnerships, but we also build a lot in this space. At our core, though, the DNA is capital markets, risk management, market resiliency, optimization of exactly how we operate within the space. And so a lot of those lessons are kind of what drove us to adopt stablecoins over the years. At this point, we think we're one of the largest participants in the space utilizing it, anywhere from OTC, trade settlements, treasury management, we mint and redeem quite a bit in that space, and I think we're pretty large liquidity provider in stablecoins as well. And all because we found that the efficiencies and kind of the determinism that stablecoins offer us as we operate our business, either from a risk management perspective or even on the Treasury side, kind of exceeds the dollar or any other fiat, particularly over the weekends and overnight. I think an interesting example of this, right? We kind of take, take the history of Cumberland and take the history of digital asset markets, go way back, and you think about, you know, the days before stable coins and when you were to trade on exchanges, the arbitrages, the lack of price efficiencies across exchanges were kind of tied to banking rails. Right as banking windows would open back up, the wires would land, and the arts kind of close across exchanges, you march forward a bit, and kind of the same thing happened with Bitcoin, where you would actually see opportunities across exchanges tied to the block times of Bitcoin. You know, you'd almost you'd be sitting there watching the mempool waiting and saying, okay, when is my my transaction going to clear? It's going to land on an exchange. And everyone kind of races to the opportunity once the block prints, and then just it continued to converge into real time, as you saw stable coins and kind of the silver gate and signature settlement networks emerge really just pointing to the fact that the underlying blockchain technologies, regardless of the mechanism, allowed you to take these inefficiencies and value movement across disjoint pools and collapse them down into real time, and that that that kind of like certainty, that that predictability is an incredibly powerful thing to capital markets, and I think that's why We've seen such a quick adoption of them over time.
Sy Taylor 27:24
Certainty and kind of just knowing that something's gonna work is utility. It's huge utility for risk managers. It's huge utility for just everything you're trying to do. And I think fascinating that across the stack, from OTC to Treasury, regardless of what sort of use case you're talking about, knowing that I can settle, knowing that the liquidity is actually there, is hugely valuable. So you've been involved in digital assets, really, for quite a long time, but you're now an active participant in the canton network, with everything going on at the moment. What do you see happening with Canton specifically in the next 18 to 24 months? Because I'm curious as to how you view it and how you contextualize it for people that might
Speaker 3 28:15
not be as familiar with it, sure, maybe we'll start with that second question, how you contextualize it first? Because I think that's kind of feeds into the future. The way I view defi and capital markets kind of contemporaneously with one another, is based on my upbringing in the TRad fi space, and I often remember being told at first, do no harm. We want to continue to evolve the networks or the markets. That markets are Darwinian. They should continue to get better, but first thing, do no harm. And you know, you get it right. Treasury markets are, you know, the backbone of kind of liquidity formation for the government. You got to make sure they work appropriately. But at times, that can add a chilling effect to innovation, and so defi did something interesting. It created a sandbox in which you could innovate, whether or not it's in terms of like the user experience or the underlying infrastructure for capital markets, in a way that lets you learn some really powerful lessons and build some really powerful capabilities before applying it to these Trad five first, do no harm, kind of use cases. And so it kind of lets you cherry pick and learn the lessons and then go and do the right thing after the fact. And I think what we've seen, particularly with the Canton network, is they solve some fundamental problems to capital markets well, and it kind of builds the substrate you need in order to bring these use cases on chain. And so what privacy, composability, some amount of application sovereignty like these things need to exist in order to port capital markets, multi party, highly regulated use chain, use cases on chain. And so. We have this kind of this mantra here, and it's, you know, anytime you're going to do something, first ask yourself the question, if you were to do it over from scratch, how would you do it? You know, build it from zero. And so when we start to think about these important capital markets functions, the movement of value, right, real time, movement to value, uncertainty of the lack of real time and movement to value. If you were going to build it over from scratch, how would you do it? Well, I think the answer is you would build it so you could move value in real time, 24 by seven, privately and in a multi party way, like it just it kind of makes sense, particularly when you compare that to, I can only manage risk during banking hours, so you know something's happened on the weekend. Good luck. Like that just fundamentally doesn't make sense to me. And so when we think about Canton and we think about the problems that it's solved at the fundamental level, that's our starting point. And so now we have this blueprint, this this combination of that, the kind of the defi innovations and the power of the blockchain, side by side with the blueprint that years and years of capital market development and regulation and law has, you know, defined for how these things need to work. And so all you kind of need to do, and I'm oversimplifying it, is, overlay those two concepts. And I think you know, Canton has done is exactly that, and it's allowed us to start to think about, how do you build collateral mobility from scratch, assuming it'll be real time 24, by seven, same question for margin management, how do you build real time margin management and variation, margin movements, etc, all using this technology, same questions for balance sheet and kind of liquidity management. And so it always changes the way you think about the world, because no longer is this a discontinuous function. It allows you to manage this risk and manage this liquidity continuously in real time, 24 by seven, and you don't think need to look too far into the past to find these use cases where that capability would have probably stopped the market from having significant dislocations.
Sy Taylor 32:08
It's phenomenal, isn't it, that you kind of see this pattern repeating, where market structure evolved around firstly office hours and when people were generally available, and then were around the limitations of the technology available at the time, and then, please do no harm by never, ever changing that infrastructure, because it's so massive. If we ever change it, everything would go wrong. And I love this narrative of, well, this sandbox over here now has proven that it's durable. It's prone to some hacks and scams, and it has some issues, but it's durable and it's this is a market that structure that works, and it has this benefit of being 24/7, and instant, and it unlocks these use cases, and they're proven. Now we need to figure out how we bring that into capital markets, and maybe count on is a way to do that. I've heard you say the word privacy several times, so double, double, click on that for me. Like, is that a big concern? And can you make it tangible about why it's a specific concern, and maybe how, how that makes you think about count on? Yeah.
Speaker 3 33:18
So happy to talk about some examples that we think privacy is important ton, and I think it's representative of the broader audience. I mentioned margin management, so during the day, for whatever reason, we need to now post more margin for a position that we have somewhere, if it's an illiquid asset, or even if it's not, and if we are significantly sized in that market, or maybe even if we aren't, a risk emerges anytime that we need to move margin or we need to move collateral, and that is effectively, if you spend enough time, if you think about the problem deeply enough, and you can identify one wallet as Cumberlands or Dr W's, and another wallet, as I'll call it, like the variation margin wallet somewhere, you could, theoretically, based on market movements, start to back out what my position is. You could back out, you know, whether or not there's a resiliency issue at a clearing house or a clearing firm or exchange, for that instance. And so you need to question whether or not there should be transparency on things like margin management associated with positions. And I would argue, and I think historically, capital markets decide no those need to be private. The the information flow there is is not correct for the public site. And so as a result, when we started to think about and we started to talk to financial institutions about this idea of us posting collateral on chain in order to have it real time, in order to avoid, kind of the cold open risk, so to speak, you kind of you dig down deeper and deeper, and eventually. Privacy becomes a concern there, because nobody on either side of the transaction wants that information available to the public in real time. Now that said, you still can't have anonymity, and this is an important distinction privacy, but not anonymity, because you are going to need to be able to audit everything that you've done. You are going to have regulators that you need to report to. And so there's a delicate balance between the privacy side and the anonymity side. The the other example that we see growing, and sometimes it could kind of be seen as a little bit on the settlement of transactions side of things from the OTC space, but more broadly, it's this idea of just payments, some amount of you and I have agreed to something, and now I need to send you value. And it could be from an OTC trading perspective, but it could be just traditional like global commerce. Imagine you're a major multinational organization, and you're accepting payments in, say, stable coins. I think the way most of this payment market structure is growing is that stable coins are cheaper to process payments for than they than Fiat. But if someone could see all the payments that you're receiving from various different locations, whether or not it's from suppliers or the consumers, they can now back out where maybe your success could become their next opportunity. And so that layer of privacy around payments, similar to what we're seeing on the margin side and collateral side, is becoming more and more in demand, and so I imagine that's going to continue as we go forward. Yeah,
Sy Taylor 36:40
people tend to view privacy and anonymity as almost the two points, opposite points, like a binary solution, rather than a spectrum here, where the nuance really matters, but use case auditability can happen on private wallets when that private wallet can be KYC by some other institution or somewhere else, and that's that's a different model, and I think one that's been well established in capital markets. But sort of bringing that to this world is hugely, a huge unlock. So look, this becomes more and more important as more tradfi use cases start to use on chain networks as their default. But do you see the move more broadly in financial markets to 24 by 524, by seven, driving some of that demand. And where's that becoming a reality in your like your old job of tradfi Capital Markets. Where are you seeing that happen first?
Speaker 3 37:46
Yeah, so I'm gonna, if you don't mind humoring me for a moment. Would love one of the one of the pretty common conversation is, I hear everything about 24 by seven. Sounds interesting, but, and the but is, oftentimes it's difficult to work 24 by seven to build that business. And I respect that right. It's you need to intentionally build a 24 by seven business. We've done it for years at this point. And the reality is global markets, you know, maybe not necessarily the banking side of it, but like globally, commerce and transactions happen on a 24 by seven basis, and even if they can't, and this is the part I wanted to Hoover me on, even if they can't, that does not change the fact that markets and risk management and dislocations happen on a 24 by seven basis. You just don't have the tools to manage the risk 24 by seven. Great example of this is the gilt crisis. A few years back, due to increased volatility, raising rates, there was this crisis where people needed to start to post additional margin for positions, and since they had to post cash, they couldn't move these tokenized gilts, or gilts weren't tokenized so they couldn't move them in real time. So they're selling, selling these assets, and in order to raise the cash to post the margin, which only triggers the downward spiral, right? Like you were, you were three seconds ahead of me there. Yeah, imagine a scenario where instead of having to sell those those assets, they were tokenized, and they could have just posted them as collateral in real time. How quickly would that downward spiral have stopped and so, so the argument I make is, yeah, parts of the market might not be 24 by seven, but you better believe that risk managers and CEOs and head heads of businesses are watching things on the weekend, trying to figure out what their first play is on Sunday night or Monday morning, when the markets open back up. So the demand is already there. The tools just don't exist
Sy Taylor 39:50
yet. And I think geopolitical risk has definitely moved into the weekend. If you're in currencies or if you're in anything else, you never know what's coming next at this. Particular juncture. So there's a risk management component for your firm, but for the market there that, I think is a really compelling argument you make. One of the other pushbacks I always heard was, like during the financial crisis, having circuit breakers was actually useful, and the weekend was useful. And I think implied in your comment is, well, we can still have circuit breakers, even if we are 24/7, like that. We just have to build those risk tolerances and those risk thresholds. So I think that's a fascinating point, too. Yeah,
Speaker 3 40:29
you're spot on that, right? I often hear that kind of that argument, well, if we do that, then we're missing that. So I think that the statement is, well, no, you're not. It's, you create a hybrid solution, right? There's no reason why these things are mutually exclusive, as a matter of fact. And I spent a lot of time thinking about like risk management at various different levels. And the way we've always approached it is, there is no such thing as just one line of risk management, right? It's, it's a tapestry, it's layers. And so I think same thing. It's what we're talking about here. You can have circuit breakers while also having 24 by seven movement of assets. And I think that just increases resiliency. The other thing I wanted to point out, and it's a departure from the risk management piece, but it's kind of goes hand in hand, is balance sheet management. 24 by seven will, I think, be a driver for a lot of these adoptions, right? How are you going to have a 24 by seven derivatives market if you can't move tokenized collateral over the weekends to kind of go hand in hand, and I think, will be a forcing function. But as a trading firm, we are constantly managing our balance sheet. How much capital do we want to take from the firm to trade with? How often is that capital going to be deployed to capture a trading opportunity, and how much are we going to have to pay in order to have that, frankly, just balance sheet optionality? So imagine a scenario where you need to whatever, take x millions of dollars from your treasury for the weekend. And what you realized is maybe of that x, you only deploy half of it over the weekend, and so now you're paying carry on that full clip while you're only generating revenues from half that. So if your number is like 500 million, so two 50 million of that capital in your your account at a basis point and a half a day. If you assume that's the weekends, you do all the math, that's somewhere on the order of, like, I want to say, like, $3.75 million of just savings, if you're able to hold those in a yield bearing asset versus cash over the weekend. Wow. And so, yeah, I mean, just adds up for one firm doing that. And so what ends up happening is you look for ways to optimize it well, tokenized yield bearing assets that could be converted into spendable, tokenized cash in real time on the weekend, and then kind of reversing it as well, can dramatically change the efficiency of our balance sheet and also allow us to be, you know, have more optionality in how we like I'll call organize that balance sheet going into the weekend. So there's those macro market resiliency opportunities that 24 by seven offers, but there's also those day to day kind of balance sheet and kind of treasury optimization capabilities that it offers, too, so on both from both directions. I think that's going to create these incentives for the market to adopt these technologies over time.
Sy Taylor 43:23
Incentives matter. And once you've got tokenized both sides of that on the stablecoin and the tokenized treasury, then boom, massive unlock. We know we have that in the purely sort of digital asset world, but moving that into everything you do, and moving it into that kind of scale, that business case starts to look a lot bigger, a lot faster for some major players in the market. So I think you've Chris outlined something there that the ROI calculation is pretty easy to follow along, even I caught that one. So Chris, that kind of pulls us towards the end on time. Is there anything I didn't ask you that I that I should have asked you about your thoughts in this space.
Speaker 3 44:04
You know, Simon, you were pretty thorough there. I'm sure we could keep talking for another four or five hours, if you had the time. But this seems like a seems like good place to wrap it all up. Well,
Sy Taylor 44:13
that sounds like we've got dinner plans in our future, but it's a great I leave it. I will look forward to that next time I'm in New York. But that is all we've got time for folks, Chris, where can people find out more about you and what you're up to at Cumberland?
Speaker 3 44:25
Yeah, you could check us out broadly on our Cumberland website, cumberland.io, it'll talk a little about everything that we do there. And if you ever got any questions, there's some email addresses that you could follow to get in touch with us.
Sy Taylor 44:39
Fantastic. Well, you can find me at sy Taylor on Twitter and Simon Taylor on LinkedIn. You can also find the tokenized podcast everywhere you get your podcasts, and if you haven't already, please leave us a review. It really, really helps others find the show and send it to your friends. Finally, if you like this and want more, did. Know, we have a newsletter. Head to tokenized pod.com and click newsletter to get subscribed. Bye for now.