Speaker 1: Since you're a subscriber to this Bloomberg podcast, we thought
Speaker 1: you'd be interested in a sponsored podcast called Evolving Money,
Speaker 1: produced by Coinbase and Bloomberg Media Studios. It explains how
Speaker 1: institutional investors are adopting the world's newest asset class, crypto.
Speaker 1: Here's a recent episode.
Speaker 2: There's been a lot of frustration in the crypto community
Speaker 2: over the past fifteen years because the Wall Street and
Speaker 2: financial services industries have ignored crypto or outright been opposed
Speaker 2: to it.
Speaker 3: That's Rick Edelman, a longtime financial advisor and podcaster in
Speaker 3: the financial world, and the perfect guest to kick off
Speaker 3: this episode of Evolving Money.
Speaker 2: The reason that there has been such antipathy about crypto
Speaker 2: in its early years is because it didn't get invented
Speaker 2: by Wall Street, and Wall Street doesn't like what it
Speaker 2: doesn't control and own, so better to quash it if
Speaker 2: you can, ignore it if you can't, and they did
Speaker 2: that pretty successfully or ten years. But eventually they began
Speaker 2: to realize it's here to stay, and oh, by the way,
Speaker 2: the technology is in fact pretty cool.
Speaker 3: Welcome to Evolving Money.
Speaker 4: I'm your host.
Speaker 3: Angie low I spent decades as a journalist covering the
Speaker 3: financial industry and weal this is the biggest story yet.
Speaker 3: This show is co produced by Coinbase, one of the
Speaker 3: largest cryptocurrency platforms in the world, and Bloomberg Media Studios.
Speaker 3: In this series, we are exploring how crypto is being
Speaker 3: adopted by traditional financial institutions as the next logical evolution
Speaker 3: of the monetary system. This episode is about tokenization. That's
Speaker 3: the process of representing a real world asset or financial
Speaker 3: instrument on blockchain. Now, in less than three years, the
Speaker 3: amount of tokenized assets has grown eightfold to more than
Speaker 3: thirty billion US dollars across equities, fixed income, private assets,
Speaker 3: real estate, and a whole lot more. And the tokenization
Speaker 3: revolution is still in its early stages. Now, recently we've
Speaker 3: seen some of the largest traditional asset management companies embrace
Speaker 3: it in a big way. This is what I'm talking about.
Speaker 3: Blackrock they've launched what they call the Biddle Fund on Ethereum.
Speaker 3: It's a tokenized money market fund they've made available to
Speaker 3: qualified investors. The total value of those tokens all around
Speaker 3: two point eight billion dollars. And then we've got Fidelity.
Speaker 3: They've rolled out their own tokenized money market fund, currently
Speaker 3: valued at over two hundred million dollars. JP Morgan and
Speaker 3: Goldman Sachs. They've also made their tokenized assets available to
Speaker 3: their investors in various ways. But why are they doing
Speaker 3: it Well, there are three main drivers. We've got liquidity,
Speaker 3: broader access, and operational efficiency. We're going to touch on
Speaker 3: all three of those topics with our next two guests.
Speaker 3: Rick Edelman, who you've already heard from. He launched the
Speaker 3: Digital Assets Council of Financial Professionals, the first educational platform
Speaker 3: helping financial advisors responsibly navigate crypto, blockchain and tokenized assets.
Speaker 3: He's uber bullish on the opportunities tokenization is bringing to
Speaker 3: the market. And Scott lucas Head of Markets Digital Assets
Speaker 3: with JP Morgan. He's actively integrating tokenization and blockchain technology
Speaker 3: into JP Morgan's operations, but he isn't in as much
Speaker 3: of a hurry as Rick is, and I think it's
Speaker 3: important to give them both a place to explain their
Speaker 3: approaches for you. We'll start with Rick.
Speaker 2: Now.
Speaker 3: Just a few months ago, Rick, you said that by
Speaker 3: the end of the decade, tokenization will be the dominant
Speaker 3: investment platform in the industry, far eclipsing ETFs, ETFs as
Speaker 3: we know them, today really won't exist in five years.
Speaker 3: That is quite the prediction. Rick, Why do you see that?
Speaker 2: Yeah, it does sound momentous, but it really isn't. It's iterative.
Speaker 2: It's just the next logical step in technological generation of
Speaker 2: money management. Remember that ets have come on the marketplace
Speaker 2: of the last twenty twenty five years, replacing mutual funds,
Speaker 2: which were themselves the dominant investment vehicle for Americans for
Speaker 2: decades and decades.
Speaker 3: Okay, but mutual funds still hold I think about twenty
Speaker 3: trillion dollars here. That's a huge piece of the investment world.
Speaker 3: So why do you see ETFs and eventually tokenized products
Speaker 3: actually eating into that.
Speaker 2: They're simply technologically superior. ETFs trade throughout the day. Mutual
Speaker 2: funds are only priced once when the market closes. ETFs
Speaker 2: have better disclosure. ETFs are lower in taxation, they're lower
Speaker 2: in cost, they're higher in liquidity, So naturally people love
Speaker 2: ETFs over mutual funds. The same thing's going to happen
Speaker 2: with token is We're going to take those ETF shares
Speaker 2: and turn them into tokens, which will trade on blockchains.
Speaker 2: This will further reduce the costs further increase the liquidity,
Speaker 2: further increase the broad array of assets available for you
Speaker 2: to invest in, improving your diversification. So what's not to love.
Speaker 2: So just as everybody graduated from mutual funds to ETFs,
Speaker 2: next we're going to go from ETFs to tokens.
Speaker 3: Do customers want it? Do they understand it? Because at
Speaker 3: the end of the day, if the customer doesn't want it,
Speaker 3: the bank is not going to create the product.
Speaker 2: Well, we all remember Steve Jobs who famously said he
Speaker 2: never engaged in focus group testing because nobody understood the
Speaker 2: products he was inventing, so how could they have a
Speaker 2: valid opinion. And it's the same thing with blockchain technology.
Speaker 2: People don't understand it and so how can they like it?
Speaker 2: In other words, all we're going to do is develop
Speaker 2: the technology, introduce the products on that platform, and consumers
Speaker 2: will quickly discover it's faster, cheaper, safer, with greater transparency
Speaker 2: and inclusion. So they will move and adopt to this
Speaker 2: because it's simply going to offer them tremendous benefits that
Speaker 2: they currently lack. Right now, we can only trade stocks
Speaker 2: Monday through Friday, excluding holidays and weekends, from nine point
Speaker 2: thirty to four in the afternoon. That's silly. Why aren't
Speaker 2: we able to do this twenty four to seven, three
Speaker 2: sixty five? Why aren't we able to do it instantaneously?
Speaker 2: Like when you go to a supermarket to buyolo for bread,
Speaker 2: you walk out with the bread as soon as you
Speaker 2: pay for it. Why can't we do that with chairs
Speaker 2: of IBM.
Speaker 3: You remember back in twenty nineteen, we were both in
Speaker 3: the space then, but one of the world's first real
Speaker 3: estate tokenization ideas came to light and it was an aspen.
Speaker 3: It was Saint Regis. They were fractionalizing the sale of
Speaker 3: their big resort and I think a fifth of it
Speaker 3: went for I think was it eighteen million rick, do
Speaker 3: you remember?
Speaker 5: Yeah?
Speaker 2: And there were ten there were ten bucks apiece, Yeah,
Speaker 2: each of the tokens. And that was actually the second transaction.
Speaker 2: The first one was a year earlier, a condo building
Speaker 2: in Manhattan tokenized. And just think about the wonder of this. See.
Speaker 2: The big problem with real estate, as we all know,
Speaker 2: is that it's very expensive to buy and it's highly liquid.
Speaker 2: I mean, we all know how hard it is to
Speaker 2: buy and sell a house compared to buying and selling
Speaker 2: shares of Nvidia So along comes the tokenization process, where
Speaker 2: they could take this multimillion dollar asset and split it
Speaker 2: into tokens of ten dollars apiece. All of a sudden,
Speaker 2: people who never were able to buy commercial or investable
Speaker 2: real estate now can because the price of the token
Speaker 2: is cheap and it trades with great liquidity. This opens
Speaker 2: up the commercial real estate sector to retail investors in
Speaker 2: a scale never before seen. This is a big deal
Speaker 2: because the real estate market globally is three times bigger
Speaker 2: than the globe stock market.
Speaker 3: So rick I get it that tokenization makes transactions more straightforward,
Speaker 3: it makes them quicker, it reduces overhead all of that,
Speaker 3: but realistically, I mean, actually, how much money will using
Speaker 3: crypto rails save the banks and overhead?
Speaker 2: So you look at Kinesis, which is a blockchain created
Speaker 2: by JP Morgan that does two billion dollars a day
Speaker 2: in cross border transmittals. They've moved over four trillion dollars
Speaker 2: worldwide since it was conceived four years ago because they
Speaker 2: recognize they can move money for their institutional clients faster, cheaper,
Speaker 2: and easier than they can using the federal systems that
Speaker 2: we use in money management, such as the Swift system.
Speaker 2: So everybody's beginning to recognize that this is better technology
Speaker 2: than the technology we've been using to date. It offers
Speaker 2: big business benefits, saving lots of money. JP Morgan says
Speaker 2: that blockchainels Bank's one hundred and twenty billion dollars a year.
Speaker 2: So you're now at the stage where nine out of
Speaker 2: ten banks are developing blockchain technology, two out of three
Speaker 2: Fortune five hundred companies are developing the technology, and over
Speaker 2: the next twelve to twenty four months, you're going to
Speaker 2: see all of them begin to deploy, and it's going
Speaker 2: to be an exponential growth curve that traditional hockey stick,
Speaker 2: and people are going to be shocked at the speed
Speaker 2: of adoption and implementation in the marketplace. It's going to
Speaker 2: appear to have come out of nowhere, but it's going
Speaker 2: to be like the Beatles where they spent six years
Speaker 2: becoming an overnight success.
Speaker 3: Rick, what's next. We have the institutionals coming in, We
Speaker 3: have the Black Rock, the Franklin, Templeton, JPM, all of
Speaker 3: these folks are coming into this space. How will this
Speaker 3: look in five years?
Speaker 2: Well, everything's going to be tokenized, not just financial assets
Speaker 2: such as stocks, bonds, real estate, and and other but
Speaker 2: everything is going to be tokenized. For example, your driver's
Speaker 2: license and passport. Why are we carrying a piece of
Speaker 2: plastic in our wallet or purse. That's ridiculous. Your employment records,
Speaker 2: your academic records, your health records will all be tokens,
Speaker 2: making it easier for you to deal with the medical industry.
Speaker 2: Or when you're applying for a job or trying to
Speaker 2: rent an apartment. You're going to be able to tokenize
Speaker 2: your home. We all know that homes are the number
Speaker 2: one asset for most Americans, but they don't want to
Speaker 2: sell their house when they're retired to generate income. They
Speaker 2: want to keep living there. So by tokenizing your house,
Speaker 2: you can take that million dollar home, create one million
Speaker 2: tokens of a dollar each, and now you can sell
Speaker 2: them off one at a time as you wish to
Speaker 2: generate income for yourself. Investors will want to buy it
Speaker 2: because they're going to want to own a piece of
Speaker 2: your home because you live in a great community without
Speaker 2: an appreciating asset. So we're also going to tokenize salaries.
Speaker 2: For example, you can already buy into a token that
Speaker 2: is a contract of a professional athlete, your favorite quarterback
Speaker 2: or your favorite Hollywood celebrity or your favorite recording artist,
Speaker 2: you can buy a token of their music catalog. So
Speaker 2: instead of being a fan of Taylor Swift, you'll be
Speaker 2: able to be an owner of her music along with her,
Speaker 2: so that you're earning money by enjoying your favorite radio
Speaker 2: show or Hollywood movie or Broadway play. This is going
Speaker 2: to be the tokenization of everything. We're gonna be able
Speaker 2: to take all these real world assets and create digital
Speaker 2: representations of them that you'll be able to own and
Speaker 2: trade and enjoy.
Speaker 5: As a hobby.
Speaker 3: That's Rick Edelman, and what he sees makes him highly
Speaker 3: enthusiastic about the potential of tokenization. My next guest, however,
Speaker 3: has a more measured perspective. Scott Lucas is the head
Speaker 3: of Markets digital Assets for JP Morgan, the world's largest
Speaker 3: bank and a leader in blockchain usage amongst trade five firms.
Speaker 3: Scott is an expert and a leader in this space,
Speaker 3: and he recently oversaw a very large transaction that.
Speaker 4: Caught my attention.
Speaker 3: In late twenty twenty five, JP Morgan served as an
Speaker 3: arranger for fifty million US dollar commercial paper issuance on
Speaker 3: Solana's public blockchain, Galaxy Digital, which is a global cryptofocused
Speaker 3: financial services and infrastructure firm issued the tokenized commercial papers.
Speaker 3: Those tokens were purchased by coinbase and Franklin Templeton, with
Speaker 3: settlement occurring in stable coin. Now, this was a short
Speaker 3: term corporate debt deal done in a traditional finance structure,
Speaker 3: but issued, traded, and settled directly on a public blockchain
Speaker 3: instead of through legacy banking rails. No doubt it was
Speaker 3: a landmark deal, But my question is why did JP
Speaker 3: Morgan do it?
Speaker 4: I guess the key thing Roust is really trying to
Speaker 4: understand what the MAKO option years. There's a lot of
Speaker 4: talk about doing things on Popper blockchain. There's a lot
Speaker 4: of talk about the potential, there's a lot of talk
Speaker 4: about the appetite, and I feel actually the only way
Speaker 4: that we can really pressure test that and prove it
Speaker 4: and adjust the thesis to kind of where the market
Speaker 4: needs to go.
Speaker 5: Is to do something.
Speaker 3: But Scott, now that you are using both blockchain and
Speaker 3: legacy rails for transactions, have you chosen a winner a
Speaker 3: preferred way forward.
Speaker 4: Quite often in the blockchain space, it gets really emotional,
Speaker 4: really quickly about what technology you use. It's either this
Speaker 4: or it's that you can do it this way or
Speaker 4: you can do it that way. And really a market's
Speaker 4: an efficient market does end. So there'll be a whole
Speaker 4: bunch of products that stay as they work today in
Speaker 4: a very deep in liquid capital markets footprint in the
Speaker 4: United States, and there'll be some stuff that we add
Speaker 4: to that market, whether it be similar products or new
Speaker 4: products that work on blockchain, and at some point the
Speaker 4: market will just side whether blockchain is a better answer
Speaker 4: or not, you know, and whether it becomes an all
Speaker 4: blockchain or a no blockchain or a regular technology and
Speaker 4: blockchain upcome. And to be honest, like that's not our
Speaker 4: decision as jup and Morgan, I think that's the market's decision.
Speaker 5: I mean, that's the journey we're on.
Speaker 4: And I think it's reasonable to say that there's a
Speaker 4: good thesis to suggest that blockchain is a better technology
Speaker 4: for a bunch of different instruments in the market. There's
Speaker 4: no evidence yet, So let's build that body of evidence
Speaker 4: and make sure that our thesis is correct and if
Speaker 4: it if it's not quite correct in one way, can
Speaker 4: it go another way and perhaps answer the question separately.
Speaker 4: So that's really the point of this exercise.
Speaker 3: If we were to take a ten thousand foot view,
Speaker 3: and I'm going to ask you to take that pilot's view,
Speaker 3: if you will, Scott, the amount of money being moved
Speaker 3: in traditional market channels really dwarfs what's moving on chain.
Speaker 3: If that ratio changes, could those massive amounts of capital
Speaker 3: be tokenized and handled unblockchain?
Speaker 4: I think we need to figure out for what purpose
Speaker 4: those changes would happen. United States already has the most
Speaker 4: deep and liquid couple of markets on the planet. To
Speaker 4: make those more efficient, you need to kind of say, well,
Speaker 4: first of all, where are the inefficiencies that we think
Speaker 4: could be addressed, and second of all, how do those
Speaker 4: inefficiencies positively impact the market in a way that's worth
Speaker 4: making the investment to get there. There has been a
Speaker 4: lot of supply and experimentation with tokenized securities over a
Speaker 4: range of years. There hasn't been a lot of success
Speaker 4: in bringing sort of broader market products into production because
Speaker 4: there hasn't been a broad set of usable cash sources.
Speaker 5: And when it is as much.
Speaker 4: As stable coins are growing, the opportunity exists for stable
Speaker 4: points to continue to grow, there still aren't an enormous
Speaker 4: set of scalable cash sources, and so tomorrow maybe there's cash,
Speaker 4: maybe there's stable coins, maybe there's tourkenized deposits, maybe there's
Speaker 4: central bank digital currencies in some jurisdictions, maybe there's other
Speaker 4: means of settling that transaction. And so I think that
Speaker 4: the question really is, like how can you match those
Speaker 4: up if you've got a sophisticated methodology of choosing the
Speaker 4: security on a particular platform and they've got multiple choices
Speaker 4: of the settlement mechanism for that, Like how does that
Speaker 4: then get built and how does that work? And again
Speaker 4: that's very much a client driven conversation, you know, it's
Speaker 4: what do the clients want to do where they want
Speaker 4: to operate?
Speaker 5: Do we think we can help them with that?
Speaker 4: And if we can help them with that, like what's
Speaker 4: our risk footprint work are there to take in that
Speaker 4: sort of in that area? And that's the same as
Speaker 4: every other product, the facts on blockchain and not almost
Speaker 4: doesn't matter, Like we asked ourselves the same questions every time,
Speaker 4: how do you support clients? How do we think about
Speaker 4: our risk footprint? Are we prepared to operate in that space?
Speaker 4: What are the resources we're going to put against that?
Speaker 4: I think there is a fair bit to learn there,
Speaker 4: and I think the potential exists, but you know, we
Speaker 4: still need to prove the thesis in the market and
Speaker 4: then you see whether we are takes us and I
Speaker 4: think that horizon's pretty open.
Speaker 3: Scott, the commercial paper transaction we talked about off at
Speaker 3: the top, that was a really great proof of concept
Speaker 3: in that specific domain. What other opportunities do you see
Speaker 3: tokenization bringing to other asset classes besides money markets.
Speaker 5: If you put something on a distributed ledger with a
Speaker 5: single record that entitled users can see, it's impossible to disagree,
Speaker 5: and it's if impossible to disagree that yours mind becomes
Speaker 5: ours and there's our record of that instrument. Then the
Speaker 5: way that.
Speaker 4: You think about and we often talk about this from
Speaker 4: a sort of a fixed income standpoint, maybe you think
Speaker 4: about coupon, is there's one record. Well, if there's only
Speaker 4: one record today, we pay coupon on a six monthly
Speaker 4: or annual basis, because there's a lot of overhead around
Speaker 4: managing that process and checking that process at scale. Well,
Speaker 4: is there any one recordd why wouldn't you calculate coupon
Speaker 4: to the millisecond? And then when you trade that instrument
Speaker 4: that clean and dirty price associated with the trade at
Speaker 4: that particular moment is very very clear, even if you
Speaker 4: settle it later, like that's the rule set and there's
Speaker 4: no debate around what that looks like. You can change
Speaker 4: the frequency of the coupon payment. You could pay daily, weekly, monthly.
Speaker 4: You could provide optionality around whether you wanted to keep
Speaker 4: all of the coupon at the same frequency or you
Speaker 4: wanted a different frequency, and that could be at the
Speaker 4: best of the investor. If they want a different credit
Speaker 4: risks profile, you could be the best of the issue.
Speaker 4: If they want a different liquidity profile. You could embed
Speaker 4: a smart contract in to manage the interust rate swap,
Speaker 4: so the issuer steps out of the equation and now
Speaker 4: you've got like the bank managing the cash flows directly
Speaker 4: to the investor or who was managing that that swap.
Speaker 4: And then you don't need a very sophisticated finance department
Speaker 4: who can manage the swap on your behalf because you
Speaker 4: don't have all the accounting rules and processing etc.
Speaker 5: Around those cases.
Speaker 4: Like if that's the case, then companies that are as
Speaker 4: mature Arna's Big, et cetera. Might be able to access
Speaker 4: get capital markets in the way they can't access today.
Speaker 4: And so when you really think about what tokenization can do,
Speaker 4: it's not just about faster mobilization and bring more clateral
Speaker 4: to the table. It's also about like changing the potential
Speaker 4: for the instruments themselves in a way that enables more
Speaker 4: utility and enables capital markets to do what capital markets
Speaker 4: should do, which is get themselves wider and deeper a
Speaker 4: service the wider economy and economic growth.
Speaker 5: Like that's the point.
Speaker 3: We had a conversation with Rick Edelman. He said the
Speaker 3: tokenization will revolutionize the entire industry. He said that within
Speaker 3: ten years everything will be tokenized and traded on chain.
Speaker 5: Do you agree? Possible?
Speaker 4: But improbable, And that doesn't mean it shouldn't. It's not
Speaker 4: a view on whether it's the right choice or not.
Speaker 4: But I don't think this changes as easy as everyone thinks.
Speaker 4: There's a big difference between technological readiness, legal readiness, regulatory understanding,
Speaker 4: then taking risk, then upgrading internal systems. So that just
Speaker 4: takes a while. And I don't care if it takes
Speaker 4: three years, five years, ten years, fifteen years. I don't
Speaker 4: mind if the whole market changes or some of the
Speaker 4: market changes. But what we do believe in is there
Speaker 4: is absolute value in deploying this technology into specific areas
Speaker 4: of the market. We do believe that there will be
Speaker 4: scalable market change over time, but to be deterministic around
Speaker 4: how long that takes or how long that should take,
Speaker 4: I don't think that's our job. I think that's the
Speaker 4: market to figure that out, and.
Speaker 5: Will hopefully help figure that out with the market.
Speaker 3: Both our guests today agree that tokenized assets are emerging
Speaker 3: as a powerful tool for investors and investment companies, but
Speaker 3: where they differ is in the timeline. Rick talks about
Speaker 3: tokenization taking over within five to ten years, while Scott
Speaker 3: is monitoring client demand and letting that dictate the pace
Speaker 3: of adoption. So I want to wrap this episode by
Speaker 3: going back to Rick Edelman to get his opinion of
Speaker 3: what it will take to accelerate the rate of institutional
Speaker 3: adoption and make his bullish prediction come true.
Speaker 2: A big impediment to adoption has been the lack of
Speaker 2: clarity by Congress. We don't know what the rules are,
Speaker 2: we don't know how to engage, we don't have rules
Speaker 2: for custody. We don't know what taxation is going to
Speaker 2: be yet, so we're waiting for Congress to create the laws.
Speaker 2: Once we have the rules of the road and the
Speaker 2: brokerage industry, the banking industry, the insurance industry all know
Speaker 2: how they're allowed to engage, you'll begin to see the
Speaker 2: massive levels of adoption.
Speaker 3: I'm Aji Lao and this is Evolving Money, a co
Speaker 3: production between Pinbase and Bloomberg Media Studios. Thanks for listening.
Speaker 3: Be sure to follow the show on your app voice
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