CVA Tokenizer Series, Pt. 2: Tokenized Assets & Decentralized Finance

Transcript

hello everyone and welcome to the second episode of the tokenizer by crypto valley station today we have the honor of having with us kyo who is the founder of security token market which is a startup that is focused on blockchain and on the bfi wall so kaio nice to meet you and having today with us thank you so much for for having me on the show i'm excited to to dig into the blockchain industry a little bit more i think you gave me a great intro i'm kyle sondlin and we launched security token market three or four years ago in tracking the security token space which is taking

real world assets and applying blockchain technology to improve that process and a lot of my expertise does kind of merge with a lot of the fun terms like efi and and crypto and a lot of these different things that you may have heard so we'll definitely have to get into a little bit of everything on the show cool so kyle just to start off with uh with an interview i would like to ask you what's dfi for those of you in the audience that they don't know anything about this new innovation and this new way of doing finance that we are reading in the news every day yeah so defy is this idea of taking a lot of the traditional

financial processes that usually would be relied upon by banks and financial service providers they would need to use very manual processes to identify who exactly is investing in different projects who exactly is transferring their assets from place to place and so instead of relying on those banks and those third-party middlemen the idea is that we can use code to automate that process much more effectively so by automating it you can now reduce the costs and you can increase the efficiencies of transfer of things whether you're buying or selling or you need a loan and lending is a really big example of that

and so you can do a lot of these things permissionlessly where you don't need to work with a bank that will take their fees and you know hand hold you through it you can instead use an application that's been built out that that leverages blockchain and smart contracts to do so okay so we could define it as the bank 3.0 no like the new digital bank that has emerged with all the blockchain technology and and now is giving access to more people and more freedom to to investors and buyers and sellers know in in in a way i think that's a good way to look at it it's kind of like unbundling banks right where they would traditionally do all of these different services because they had all the licenses that they were

needed and now we just have the different applications right if you need to to get a collateralized loan you can do that very effectively through using compound or av or one of these different protocols as well as as you know if you're trying to do some other kind of technology you know through issuance of an actual asset you could use an issuance platform to do that and actually launch your own you know stocks and investment products just like you would with the traditional market except you're now able to do that in a much cheaper and much more effective global opportunity um as well so it's really it's encompassing all of the financial sector and how that grows and develops yeah it's amazing it's a really transformation of

the whole industry so yeah i think for for the future it's gonna be it's gonna be massive the the transformation there and and it's gonna be also fun to see people interacting in this new system because we've been used to interact with banks for for everything loans trading so now having this uh freedom to go to a market and lift our own products is uh something that is completely new and in that way i want to ask you kyo from your experience uh what are the the risks you see here because there's no one regulating or controlling who

live or what people list in this market i do think it's a very nuanced answer because it does depend on the different application right so this might make sense different different services that you need might have different levels of requirements so one example of one way to mitigate risk especially on the asset side so i work primarily in security tokens which as i mentioned is this idea of taking private company ownership equities it's taking real estate it's taking debt products and it's putting that information and putting that asset on chain so that we can trade around the world simultaneously seamlessly from anybody that needs access or wants to invest in these different products or in these companies or whatever

and this is an industry that's very regulated for good reason we need to make sure that we know who the investors are that there's no you know money laundering or there's no financial crimes that are occurring also if you're talking about legal ownership in an asset we need to know exactly what the company is we need to know exactly who the investor is so that we can manage these things and so with the security token space it is highly regulated and we'd have to treat these things the same way that we would treat a traditional financial asset which means that you need to do the identification process especially you also might need to be an accredited investor which is a certain level of income to be able to be allowed to invest here in the us as opposed to internationally it's more of it it's a little bit varied

in terms of the the qualifications that you might need but with that information we can track that through the blockchain and as long as you are who you say you are and you are by the definition set by your country allowed to invest in this opportunity you can do that seamlessly so you might not need that same level of third-party support but you still need to take those steps to ensure that you're doing it properly and legally which is super super important and a great way that you know the reason why this is beginning to see more mainstream adoption is because we've taken along with you know me and my firm as well as a lot of the other companies in the space have taken a lot of emphasis on making sure that you follow all the existing regulations and so as long as we follow the existing

regulations and then build applications on top of it that can open what we've already set up as the rules to make an even bigger opportunity that's kind of where we try to play in that sandbox and so because of that you do drastically mitigate some of the risk associated that being said with some of these other defy applications especially ones that tend to use cryptocurrencies as their main form of investment so if you're talking about collateralized lending for example where you could stake your you know one bitcoin that you own and get cash back now you could then spend and then you know pay back the loan over time or something like that those do have risks associated because there is not that same level of standard

that has been applied which is either a risk or a reward because some people like the permissionless aspect of it some people like the idea that it is a little bit more anonymous but the reality is that that doesn't work in in some different you know sectors right when we're talking about real world assets investment products that just doesn't work so it kind of depends on the level of risk and reward that that you as a user or an investor are looking for and looking to get out of and and you know definitely making sure that you're you're staying legal staying compliant and none of this is legal advice for sure um but but making sure that you're doing it compliantly is important yeah absolutely i think being with the right company or with the right advisor in

in this space is crucial in this moment that we are living because we are in the beginning of the transition or the or leaving the creation of this new system so it's crucial to to have these uh advisor or companies like yours that can follow you or or guide you through the journey of this organization or the dfi and another question i receive many times is okay i understand that you need to comply with all the regulation and everything to create the token but then i'm free to leave the token in this dfi protocol so nobody does a due diligence on the company or

on the real asset or whatever it is so uh how can you mitigate risk there because you can list the share of a company that might go in bankruptcy because the business model is not good so how do you see that and how what can investors do in order to mitigate these risks so with real world assets it definitely gets complicated because oftentimes a lot of these issuers will work with an issuance platform which is a company that does have some level of financial licenses to allow them to to do a lot of the diligence that's required for these offerings and and they will also have to file their you know a lot of internal

incorporation documents and many other things that do hold that level of that standard of what you're providing to some degree obviously startup businesses that you invest in there's a lot of risk there even in the traditional markets you know 90 plus percent of tech companies don't don't end up working out so there is a high level of risk in terms of early stage businesses which is why a lot of the target has been focused around assets that are less risky for example real estate is a great example real estate is an asset class that has been super successful over the centuries and it also can pay out a dividend from renting the property so you could sell fractionalized shares of a property and then the investor would not only receive the

appreciation in the property value over time but they also might get a dividend or something along those lines from actual the rental payments that the individual tenant is paying and so an asset like that is going to be something that does have less risk from the bankruptcy perspective but it may also have a little bit of less of an upside on you know if that you know if you if you ended up investing in facebook you might have you know made your a ton of money but for every one facebook there's you know a thousand that don't necessarily work out so there's there's certainly i think risk there as an investor and you need to keep those things in mind and uh and then again mitigating the risk from a fraud perspective is much easier because of the fact that we do require and a lot of

all these issuance platforms require a level of compliance there that you're not just listing something that's a shell company doing nothing um you are onboarding your investors properly they do know the proper risks that are associated um and then you know it kind of does go from there so there's certainly plenty of risk you need to do your own research when investing in these things but um you know hopefully by by following a lot of the regulations and ensuring that the companies are following those regulations from their local jurisdictions um that's a strong way to help uphold that that level of standard yeah yeah i mean i think it's really important to to make everyone aware that the products implies risk but as you said if you go with the right

person then you mitigate this kind of rest and another another question i have you mentioned before that you can land against bitcoin for instance right now so good do you see in the future lending against for instance a token representing the ownership of a real estate asset or not i think that would be fantastic i i mean where think about it today right if you own whether it's real estate that that's a property that you own separately maybe it's the your primary residence or even if it's amazon's stock that you own like if somebody owns something like that they're thinking long term they own this property or this this asset for the next 20 or 30 years and

they're using that for their retirement or for their long-term savings how cool is it that they could actually stake that in a protocol and get cash that they can spend now and then that's appreciating in value and they just need to pay back whatever they they took out in a loan that doesn't increase in value so they don't need to sell the amazon stock or they don't need to sell the real estate property but they can get some liquidity now to be able to spend on the things that they want while still keeping that investment locked and then because they would just have to pay back that that loan over time um i think it's a really interesting opportunity to get leverage as an investor it's also an opportunity for people to to get liquidity when they need it especially you know whether it's from a loan

perspective or from a collat a fractionalization perspective being able to sell a fraction of a property that you own versus needing to sell the entire thing is something that's also very fascinating i totally see it happening the one problem especially on the lending front is that it does require licenses when you're talking about real world assets and so in defy and the decentralized finance they've been able to get away with it with crypto because crypto is still a you know they haven't fully figured out exactly what asset class crypto is and so because of that these protocols have been able to take advantage of that to to offer these lending protocols and so once you start talking about real legal financial assets that just so happen to be traded on the blockchain

um again don't forget these things are blockchain assets for sure but they are they're really just financial instruments they follow all of the exact laws set by the sec or the you know wherever jurisdiction the the assets based out of whether it's europe or asia or south america you have to follow those those laws so it's it's definitely a it's it's an interesting perspective and it's one that i would love to continue to see grow but we just haven't quite exactly seen that launch yet um for now it's strictly crypto but the application as you're going to is is tremendous and it's just so large it's exciting yeah uh for me then the lending part for real estate

is necessary because uh if you hold uh participation in a building or in a company that owns real estate assets and now you don't have liquidity but through dfi you can get this extra liquidity you mentioned that's that's amazing because then you can use it to buy another property or to invest in another thing and i think an important key aspect here is that uh the difference between the real world the traditional world and dfi in this sense is that the collateral of the guarantee is already on the hands of the lender so if the borrower defaults you can always have this smart contract that triggers and then the

lender has the ownership through the token that is already mistaken so i think that is also a revolution though absolutely absolutely i think that the closest example that we've seen is this company called reyno r-e-i-n-n-o and they're offering a collateralized loan on a property that you make on an investment but specifically for the lock-up period so with with these assets when you're investing in real estate or investing in any kind of security you have to have a 12-month lock-up period as a us investor before you're actually able to be given that asset and then be able to trade that thing and that 12 months kind of stinks

because you've invested but you're illiquid for that period and what the the innovative model that reno's come up with is they actually will immediately offer you a significant portion of your initial investment in a collateralized loan backed by the investment that you just made in their property so you can essentially invest and then during that 12-month period of lock-up you essentially get 75 of your cash back or something like that to be able to then use how you'd like and then you just would repay that at the end of that period to get your asset and then be able to do what you want with it and so there's some really interesting mechanisms like that that are building and being developed by by platforms all around the world and it's only going to grow and as you said being able to take your investment and

then being able to scale that up and be be able to do something else with the cash essentially taking leverage on your position for real world assets is something that we've really never seen before and could could exponentially grow the markets as as savvy uh asset managers are able to to kind of reposition their funds yeah definitely and you mentioned at the beginning of the of the show that there is a reduction in cost and also you make the market more efficient by doing this through dfi so could you give us a little bit more concrete example of the reduction in cost what are the fees we are we are managing here yeah so with a with a d5 application

the value here is that these builders have created essentially code that takes the place of what an individual would have to do in the traditional system so in in the traditional system you would have an investment banker that would actually look over the the loan that they're providing justify make sure that the you know the investor is somebody who they say they are do all the compliance things that we said also from the other side making sure that the assets are changed and change hands right they may come from one bank to another bank there's a lot of different systems there so you have to pay not only that individual to do that for every single transaction but you also would have to pay all those bank to bank fees

you have to pay all the different financial service providers that are involved in that process and there would be that that time where they would actually have to review each application give credit scores all those different pieces in d5 the cool thing is that they've really pioneered over collateralized loans and so what an open yeah cash flow so i need to put up let's say 125 of the amount of the asset that i am taking from a loan or i'm getting in cash you know for the the crypto or or asset that i'm staking and so because of that if i choose to default if i choose not to pay back my loan the the application actually makes a

profit on that because they i gave up more than what i was getting so there's no risk to the the platform to give me this opportunity because i'm staking more than what i'm getting and so that's that's kind of how they help to mitigate that risk and it reduces the cost because it's just it's just a it's it's code that we developed that it says as long as you put in this you're able to get this make it happen that's kind of all that it is and then obviously you may need to build other pieces on top of that when we start to talk about real world assets as we mentioned because there's an additional layer of compliance that needs to happen but if you think about it instead of needing to have somebody that manually checks for all these

different pieces you could just have a program that says okay are they a citizen of these approved countries are they qualified to make this investment do they have the specific asset that they say do we have the reserve pool the asset that they want and if all of those things are checked off it should just happen like we don't need to have somebody that like manually checks those things off if we can just approve it and so that's kind of where the future of this stuff is going and again as you can see just in that example the you can have a significantly higher amount of loans actually be being given out because you don't need a manual approval every time and as long as we're keeping it as an over collateralization model you are there's much less risk of

default because this person has already put up assets that are more valuable and provided that those assets are liquid enough which is its own maybe conversation but but provided that those assets are liquid enough to be able to to convert that back into the the collateralized cash or whatever the the asset that you gave out were there's not much risk to the system and and therefore you know they give very favorable rates they don't need to charge really higher rates to the lenders or to the lendees you know into a traditional bank they would have to charge you know an arm and a leg in order to to give you this loan because it's risky for them but if you've already put up all this collateral it's much less risky and therefore you don't have to get charged as much for your loan which is

another way that you bring those expenses down yeah absolutely absolutely and maybe the last or second last question is regarding the the liquidity in these protocols who is pumping money in here and who is on the other side of the of the equation so who is giving these loans to these people that have the the collateral the tokens and wanna struggle liquidity so there there's this idea of it's it's a it's a term called total value locked and this is a term that often is used to evaluate the health of a d5

application the idea with tvl or total value locked is that we're looking at how many people have decided to stake their assets into the protocol and so with you know there's a lot of people that are placing their assets in the protocol in exchange for getting an interest rate on that so um they may not themselves pull out collateral they may just be putting in the asset that they have which is then used as as a collateral for others and so they can get some of that return that we're talking about in that lending model as the d5 protocol lends out cash to somebody else the rate that it's making on that is then given to the people that stake their assets into the underlying liquidity pool so

the protocol itself isn't actually taking any of that profit it's actually being distributed on the other side to the people that are actually pumping it full of liquidity um which is a very interesting model that would be called staking and staking rewards if somebody was interested in looking more into that but essentially you've got two sides you've got somebody that wants to get a loan and then you've got people that are putting up the underlying backing collateral this person also needs to put in capital in order to get capital but the underlying people provide that base so they can continue to give out all that liquid cash and then in exchange those people get paid back the interest on on the the loan that the person pays back over time yeah it's amazing how uh we how how we are

evolving here and that everything is run through a smart contract and and goes now because if you have told someone 10 years ago or five years ago that it was possible maybe he would thought that you are crazy so so yeah i mean i'm amazed by by these stains and how things are evolving and they are evolving i think in the right way and as you said before like regulation is also being more friendly and and looking at this with good eyes which is good for for the ecosystem so so yeah and maybe last question something that is also in the mouth of a lot of people right now is

okay defy you mentioned this ave compound unisa they're different protocols but then do you think that in the future we are going to see a b5 protocol for real estate as a d5 protocol for u.s equities or us token servers and another one for european token service do you see this fragmentation on or is going to be everything in the same protocol i've actually been preaching interoperability interoperability is this idea that we can all work together i don't think that fragmentation is the right strategy but when we think about it just from a logical perspective the tokenization piece is taking all of these real world physical assets and creating a

standardized blockchain based token and that's what the smart contracts operate on the smart contracts don't care whether it's a real estate property or an equity we've created a blockchain based token and so those things can move in the exact same way we obviously need to establish the compliance layer which is going to be very important but provided that those compliance pieces and regulatory complexities are encoded into your individual wallet and into the individual asset the the smart contracts themselves don't care what kind of asset it is which is great for investors because you can buy all these things from the same platform you can that you know you can get exposure from a lending perspective using all these different assets there should be no reason why it's european focused versus u.s focused

versus real estate versus private equities versus public equities all these things can all work together certainly i think at first you're going to see it more likely starts fragmented because of the compliance piece right if you're an expert in real estate you might just want to focus on real estate to prove the concept but i think in the future and where we're headed is that all these things can work together and be optimized in that same process there's no reason why this same technology that we're working on and what we've seen from the crypto space can't apply to any of those different assets real estate equities x y and z and the power is in the liquidity of the system so making sure that they all work together only makes it more effective more cheap you know

better rates all those different things are compounded the more assets we have you know all pulled together so i i really do see a future where all this stuff works together which is really the promise of security tokens is creating a global financial system here having investors be able to buy and sell u.s real estate from anywhere around the world or for us investors to be able to invest in country emerging tech companies in africa or whatever anyone being able to buy and invest in in companies and assets around the world and then be able to trade them with each other you know in in you know those kinds of places i think is something that that is absolutely going to happen in the future and something a future that i believe in and and happy to be building it yeah absolutely i completely agree with you

i've seen the most assets of the more tokens we have in a platform or in a protocol the better because you are focusing all the attention all the liquidity in one space so rather than having different platforms then you have everything together so you get more liquidity and more opportunities to to the best to investors and people listing the the talking there so so yeah and in the interest of time uh i'm gonna take the bonus question so sorry for that but i think this is a spicy question so i wanna i wanna see your reaction and your answer on this where do you see traditional vines in all of this

that's a fantastic question they're not going away they definitely they definitely can't go away um at least anytime soon certainly a lot of their services are going to need to evolve but the the network effects that the traditional banks have and the the influence that they have on the traditional financial markets is something that that we certainly have to you know accept and and work with because of the fact that we're working with compliant assets here we're talking about real world assets and we need their ability to underwrite deals for example they've got huge stacks of cash and when we're talking about underwriting right they they subscribe a deal so that an issuer knows that they've got their cash committed underwriting is something that's super important and that we don't see from traditional brokers today and so i think that from

an investment bank perspective a lot of their broker services and underwriting services are still going to be so incredibly valuable in the the future of all this stuff they're also you know have a lot of expertise on this the regulatory complexities of making complex financial and synthetic vehicles which will be very valuable in building smart contract logic that works with all the different financial service providers and all those different pieces the the value of these investment banks is that they have such a broad range of services that they can really create a strong ecosystem throughout each of those different pieces that isn't quite as fluid when you have a lot of different small startups that are building their own tech right it can be a little bit clunky sometimes as opposed to

you know the goldman sachs method which might be you know very fluid because it's all through their services so um i definitely don't think that they're going away um but they will need to adjust because their current business model of just employing a ton of people and just hounding people at it is not a scalable solution and and i don't think it takes full advantage of the opportunity of blockchain okay so it was a good answer so yeah thank you very much for your time kaio and for those of you that want to learn more about tokenization please pay a visit to his channel is the security token show right he has already done many episodes and he explained basically everything there

i already saw some videos and they are amazing so for those of you more interested in the topic please visit the youtube channel and thank you very much everyone that is watching this video and see you in the next episode for the tokenizer by cryptowallet station thank you so appreciate it man thank you