Coinbase, Tokenized T-Bills, and The Future Of On-Chain Finance

Transcript

Welcome to episode number 31 of Stable up our premier weekly stable coin and tokenization show powered by our friends at Frax with their FRX USD product. Check out frax.finance to learn more. Today we have Centrifuge CEO Baji Illumanati. Baji, welcome to Miami. Welcome to the show. Great to have you. >> to be here. >> Big news today. Congratulations. Thank you. Thank you. >> feeling? Very excellent. It's been a long time in the making. We actually announced today that Centrifuge was selected as a preferred tokenization infrastructure for Coinbase. That's cool.

>> been working closely with We actually launched our first products on base 3 years ago. Had Jesse Pollak at our RWA summit when they had just launched base. So we've been a very early supporter of the base ecosystem and it's incredible to see it really come full circle where now we're collaborating with them on what does tokenization look like to not just bring assets on chain but to integrate them into DeFi and to make them usable and to really grow them and bring them the to the same level as other crypto assets that folks are used to interacting with on chain.

>> Yeah. So yeah, go ahead. >> I just remember they did that um Coinbase change everything thing like last October. I think they had this big event and and they spoke about they were launching a tokenization platform and that it was going to be a big focus, you know, for them going forward. So congratulations there. Yeah, the system update where Brian Armstrong ended it by talking about Coinbase tokenize. It left a lot to the imagination. So we're very excited that this is the first big announcement they did around their push into tokenization. Well, the tokenized treasury market is specifically growing a lot. Um you guys have a product there that is in the billions in in TVL.

There's quite a handful of leaders. It's kind of yet to be decided who's going to be the fastest horse but it it's a race. It's it's a full on race. I'm just curious your view. Let's start with with with the Treasuries market. How do you kind of view the tokenized Treasuries market right now? Obviously, we've been in a world where stablecoins have been a massively revenue generating business from a just a standpoint of earning the interest from yields in Treasuries and money markets and keeping that and and basically just growing a massive business. Tokenized Treasuries are passing that yield back to their users. These users are are more sophisticated investors coming on chain to purchase these products. What is your

kind of lay of the land of tokenized of the tokenized Treasury market now? Yeah, I'll say the market now is all about deeply liquid and fast duration T0 or T1 products. So, that has been T-bills. Another product that we have alongside our T-bill product is AAA CLOs, which is about 200 basis points above the risk-free rate. And we're seeing a similar buyer, which is primarily stablecoins and on-chain allocators who want that enhanced cash product coming into both T-bills and that AAA CLO product. So, we've started really packaging them together where you have the liquidity profile that's needed for on-chain markets, and you have a slightly higher yield. So, it it hedges

some of the risk of when the T-bill rate start to go down. On-chain markets are they're still a huge demand and a huge growth driver both for products like stablecoins that want to manage their reserve with the safest most stable assets, but then also vaults and DeFi protocols that want to construct better products. So, that might mean having T-bills as the liquidity buffer, having JAAA as the yield floor, so that there's always an allocation into T-bills that can come in and out instantly. And then with JAAA as the yield floor, when crypto rates are volatile and they come down, they never go below JAAA. So, they would just swap into J

and you would have at least always a 5% yield. Um so that is that's some of the work that we're doing on chain in terms of integrating these products throughout the broader ecosystem. And there's a couple iterative steps that make them even better. So for instance, we are changing our T-bill fund from T+1, so we update the NAV daily, but it can take a day to redeem, to INAV, so instantaneous NAV any second throughout the day. That makes it a lot easier for these atomic protocols that need to be able to swap in and out to get that real-time NAV. We're also adding a liquidity facility that will be announced in the next couple weeks that's a very large scale largest that the industry has seen. And what that

allows is that we're able to work with Janus Henderson, our partner for the T-bill fund, and they're now selling this money market fund to their traditional clients. So having a money market fund that is instant liquidity at such a deep level becomes a better option than what they currently have. So it's the same product except better. And definitely is. For those allocators that Janus Henderson is now going to, you know, champion the the tokenized T-bill fund, is it any change to their user experience, you know, when they allocate into these funds if they're typically accustomed to a, you know, money market?

Are they seeing anything different now that it's tokenized? Yeah, there's still some basic infrastructure around being able to hold tokenized assets and create a wallet. So we're working together to simplify and streamline that process, but it becomes significantly easier as the space matures and there's just more institutional players that are putting their brand and putting their reputation and building these products, then folks are willing to take that step and add the additional complexity to get started because they have confidence that this isn't just a phase, it's the future of finance and they want to be early. Yeah.

>> Yeah. No, I'll tell you I mean I mean when you invest into money markets and brokerages, they have there's a T+1 settlement. When you trade securities, you can trade in and out in the same day now, uh but with money markets specifically, you have to wait at least a day and that is that that is a bit annoying. It can be solved right now. That's the really exciting thing is it's not too far away. Is there like is there a component of using stablecoins to contribute to this solution or what is the Do you have a reserve management of liquidity that you're able to kind of pull from? How do you manage redemptions and people wanting to move in and out when let's say it's a weekend or if it's after-market hours or just during market hours, if there is that T+1, what is

that kind of redemp- redemption and liquidity management look like? Yeah, we're starting with T-bills because it's the it's the deepest, most liquid market and there's the least fluctuation on price. So, we're working with a provider. We're starting for free, so we don't want to charge for subscriptions and redemptions. We want to just grow this product. Ultimately, they'll be able to price the risk based on the duration. So, it'll stay relatively low for T-bills, but if someone redeems on a weekend for instance, that could fluctuate. I think the question is like very, very relevant for stocks and a lot of these more actively traded products, which is why you're not seeing the

liquidity depth in the ecosystem around those products yet cuz there's just so much more risk, but for a money market fund, it's a lot more seamless to be able to put institutional capital in these large institutions behind these products from launch. Yeah, definitely. And then like, you know, it'll be pretty seamless, so you can just do that instant redemption via Centrifuge. Yeah, very cool. And I think an instant redemption is one of those things where it's just better, you know, than than the current alternative. Quick another another question here on the Coinbase partnership.

Um I'm looking at the Centrifuge RWA league table. You know, you've got this billion-dollar Janus Henderson and Amoy Treasury fund. Most of that is on Ethereum mainnet, and then you've got Avalanche, Plume, Stellar, then Base. Base comes in 8.2 million dollars in Centrifuge RWAs. Well, this is This is where what what we're getting to. Ethereum's got, you know, 1.3 billion and, you know, Avalanche and Plume are doing well as well. How much of that changes now with this Coinbase partnership? Are we going to see a shift of Centrifuge RWAs over to Base? Yeah, it's a great question, and it's something that we talked to the Base team a lot about. That 8 million is from the product that we just launched last week, so or last month. So, we got it

out to really prove this partnership, and it's actually a RDRWA token, which is the DeFi version of our permissioned assets. And what that allows is for these assets to be used within DeFi. So, it's S&P 500 is the first product that we did, and it's integrated in Morfo, curated by a on a vault by Steakhouse, integrated in Euler, curated by Clear Star, integrated in Multiplier as part of their RWA USD stablecoin, and traded on DEXs. So, we started small because we really wanted to prove RWA DeFi, and have this really intentional use case. And the TVL opportunity is both How are we taking

our existing products? So, that's our T-bill fund, our CLO fund, making that available for users on Base. And then how are we building new products and new use cases with Base? So, we're actually not announcing in the next few weeks, but we have a really interesting client referred from the Base team that is that wants to build on Base. So, they come to Centrifuge. We help them tokenize. So, Base has an and Coinbase have incredible brands and vast networks. And the those that want to build on Base now have this path with Centrifuge, where we can help them get to market. So, I think there's some movement of the existing TVL, but more importantly, it's new TVL and new

products and new interesting use cases that are available on Base. >> Well, I think the DeFi RWA product is one of the most compelling ones that we've seen and heard about because RWAs naturally are great. You know, you get instant settlement. That's a massive value proposition. But then, the next step is, you know, comp- liquid composable tokens that are that are able to be used in a lot of the DeFi ecosystem that we've been proving out. That's able to to take something that previously yielded 3%, now yields 5%, and at scale, this is a meaningful difference. And so, tell us a bit more, you know, about this DeFi wrapped product because I'd imagine that most RWAs are going to follow suit once we start to prove out this use case. Is it permissioned, KYC? Can anyone deposit

into some of these vaults? How composable is it? Where you know, what How do you see RWAs becoming incorporated into the same DeFi protocols that have been primarily for the native crypto tokens? Yeah, so it's freely transferable, which means [clears throat] that there's KYC on subscription and redemption, and then it's it's freely tradable on secondary markets. So, we are we've always been focused on securities, deep security securities lawyers on our teams. We're very comfortable with securities law. So, this is a debt security. It's a different type of instrument, but it's very well understood in traditional finance and the folks that we're talking to on chain, and it gives it still provides that legal protection and the investor rights, and it gives us the comfort of building this construct that

is usable within DeFi, but still maintains that underlying right. So, we expect that it we we did a lot of research. We feel like it was the best solution and we've started seeing really positive response from the folks we've been integrating with and from some of the early use cases that we've built. >> And and you know, from your experience looking at D5, looking at looping and staking and all these different things, how do you think bringing the you know, billion that you know, people are projecting this industry at two trillions, right? As we kind of tokenize more of the market, what happens to D5 when we bring trillions of dollars of assets on chain into D5 protocols? Yeah, it's really interesting. I think there's two

components. One is that it's invisible infrastructure like a Canton and it's just tokenized and it just makes it better in the back end. To the second is that you're actually creating new novel ways to build the products. So you're not just wrapping off chain products, you're actually building them on chain from day one. And then what to do with the products? So we work with 3F that Sonya and their team just launched recently. I was just on a panel with her. And they're building automated leverage looping and the first asset they selected was our DJ so the triple A CLOs. And that's a new novel way. Of course, you can do that off chain, but it's months of legal paperwork and signing documents and back and forth and

it's just not scalable in the way that it can be on on chain. >> And I'd imagine difficult to rebalance. If there's some sort of thing you need to add more collateral, you need to rebalance your leverage, you know, looping is something that takes a little bit more active management and when you can embed all of that into a smart contract, makes those things a lot lot easier. Yeah. So it truly can become better, faster, cheaper and we're iteratively building some of those. So we've done some different case studies. We we did an Apollo product where we were able to provide intra-quarter liquidity through liquidity partnerships that we have. So in that case, the on chain version had better liquidity than the off chain version. And then we were able to provide that automated looping via a deployment on Morpho so that

someone can deposit a credit X, they can borrow against it and they can drive that loop. So both of those then make the on-chain version of the product better than the off-chain version of the product and that's what compels Christine and the Apollo team to go and sell it to their internal teams and to advocate this and to show those side-by-side differences. Yeah. So you guys are sitting at that about one one and a half billion dollars mark on these products. What takes this to 10 billion? How do you Is it solely a institutional sales partnerships B2B enterprise type of operation? Is it opening up to more of the on-chain user base? What is the kind of five to 10X here for for this kind of tokenized T-bills and CLO product? Yeah.

So specifically for the tokenized T-bill T-bills and CLO product, we view it as programmatic distribution. So right now a lot of it is one-to-one sales. We know the Sky team and we know all the major allocators and we know all the lending markets and we're having these conversations. What we're doing is we're automating a lot of that. So we're building APIs and we're making it much more programmatic and we're making it more of this marketplace ecosystem where not just our existing current products but any product that comes on chain via Centrifuge has the quality that has is known from our brand, has the audit the 24 audits we've done so it has the

security security and operational um requirements and then it has the standards that the on-chain community has vetted. So there's much a much lower diligence curve if you tokenize via Centrifuge because we've checked off operations, we've checked off token standards and integrations, we've checked off that on-chain operational security rigor. And now the last thing to underwrite is the individual asset. As it relates to assets, we have two on-ramps, you could say.

One is an in-house asset manager, where we're actually the trusted advisor and strategic partner for these large institutions that are building their tokenization strategy, and they need us to advise them on what is how to think about on-chain finance, and how to think about accepting stable coins, and really building the infrastructure and the team required for building on-chain. This is a um we usually work with the largest institutional asset managers in the world. It's a handheld approach, where we really are going deep within their team and shaping that strategy. That being said, we recognize the time is now for tokenization. So, we have a white-label version of our product,

where anyone can build on Centrifuge using that same underlying technology that's been audited, that's secure, that we are constantly upgrading and improving. So, that's where we're working with vertically integrated asset managers and originators who deeply understand their niche, and who want to build these products natively on-chain from day one. And this is an incredible scale vector, because it's what allows every asset to be tokenized and done in a safe and secure and scalable way. >> Yeah. Yeah, so so the CLOs that you guys have some of those power the collateral backing for Sky's USDs, right? Yeah.

Yeah. Okay. Yeah. Sky's a very early adopter in real-world assets, and has been a incredible pioneer. We actually minted the first stablecoin. We minted it Dai with RWA backing back in 2021. Nice. Very cool. And so, they were kind of in a weird spot after this whole Celsius Voyager thing, where they're trying to lower risk, and they actually mentioned kind of changing their collateral base to kind of like they were going to lower their rates down a bit and adjust some of the CLO backing. How do you navigate the hey, you know, we don't want to operate with CLOs because we're a little bit worried it's getting a little bit a little bit kind of all over the place

and disjointed with what our collateral backing is. We just want something very, very safe. How do you kind of How do you kind of deal with that pushback on the CLO product? Yes, we've seen a increased inflow over the last few weeks into our T-Bill product above the CLO product. We're doing a lot of education on the CLO product. So, Nick Cherny from Janus is a great advocate. Of course, they're the market leaders in CLOs off-chain and on-chain as well of the risk mitigation, how to think about underwriting, and how to think about CLOs for real risk off allocators, T-Bills are truly the safest. So, we that's why we offered the T-Bill product and bring those to market side by side. Um and I think ultimately in times of DeFi volatility, RWAs are

safe haven. Correct. >> They're stable, they're predictable, there's very low volatility. And in times of increased security risk, what sometimes can be perceived as a negative thing for RWAs can be perceived as positive because we're managing the share registry off-chain. Somebody deposits USDC, we convert to USD, we hold the assets in custody. So, there's >> low risk of losing those funds. So, when people are really hunkering down in terms of who they're partnering with, they want a long track record, they want operational security, smart contract security, but then a high degree of confidence that there's as low of a risk vector as possible for any potential

hacks and Yeah. Yeah. >> And is part of the business model then powering the collateral of other stablecoin issuers then with the CLO product and with the T-Bill product? Like Like if I'm a stablecoin issuer, why would I go to Centrifuge to get access to a T-Bill product if I could get that on my own. I I imagine it's a lot of the infrastructure that you just said. Now, I think the CLO product part becomes more compelling because that probably requires quite a bit more diligence and set up and legal structures, etc. Why Why as a stablecoin issuer would I want to use Centrifuge's products to power my yield? And is that a a part of your business model? Yeah, absolutely a part of our business model and still the the primary buyer of RWA is on chain right

now. There's two two reasons right now. One is those that don't have the off-chain infrastructure to buy the T-Bills direct. Um where they just want to operate fully on chain. They want to operate fully within stablecoins. And then the second, um for those that do have the off-chain infrastructure, often they want a fully on-chain reserves so that they have that instant liquidity. So, in that in both cases, we absolutely support them. There are some like Circle's reserve, which is fully off-chain and it will always be that way, but we want to build for the on-chain economy and provide that optionality where we can manage the off-chain infrastructure and regulatory complexity for you. Yeah, so it's very

much like a trusted partner expertise. We just want to work on our our stablecoin scaling this thing and knowing that you guys can take care of the kind of underlying collateral backing part. Exactly. Yeah. Yeah. Awesome. I'm just curious how how the asset universe expands from here. You know, obviously CLOs, treasuries are kind of the You know, it feels like we're just going to go down the risk curve in terms of how we're tokenizing this, but ultimately everything will be tokenized and brought on chain. Um you know, whether it's equities or it's other types of yield-bearing products.

Is there a particular sector of, you know, the off-chain finance market that you're looking at bringing on chain next? Yeah, so we're actually in the next couple weeks announcing a high yield bond fund. Cool. So, it's 7% liquidity, 7% yield, daily liquid. So, there's this um opportunity in the existing curve, which is still relatively liquid products, where we go from T-bills to CLOs to high yield bond to private credit, and we can have a really good offering across the spectrum. Um and we'll probably stay in that sweet spot on our asset management side. In terms of the uh white label side, that's where we bring some more of these hard to access, more esoteric in some way assets on chain, where traditional allocators,

they can't access them easily in traditional channels. So, the best access point is on chain. Um and then they often have different yield and different durations. So, ultimately, we do want to be this home where every asset, every yield, every jurisdiction, every asset class can be accessed through Centrifuge, and those portfolios can be constructed on Centrifuge. Yep. Yep. All right. Bhaji, I hope you have a great rest of your week. Congrats on the news today. This This is awesome for you guys. Coinbase is huge, obviously, and they did make that announcement. So, I know this has been a long time coming for you. Yeah. Um thanks for joining us.

>> Big announcement today. And I feel like you mentioned a couple other things. You said, you know, >> months. In the coming weeks, in the coming months, we're going to be announcing this. >> ready for consensus, but we we got to sequence it out. So, yeah, we have a Keith and I at Centrifuge. A lot of exciting updates Well, the market is reacting well to the announcement so far. So, thanks for joining us today. >> Thanks for having us on, guys. >> Up episode number 31, guys.