The Institutional Tokenization Frenzy Is In Full Swing

Transcript

institutions aren't that excited about investing in meme coins. They're excited about investing in real businesses early in their life cycle in a new secular growth industry. >> My name is Robbie and you're watching the Rollup and today I'm asking you to please subscribe, comment, like, and support our channel. We interview some of the best and brightest minds in digital assets, digital finance, and tokenization. We are doing this for you. So, please sit back, [music] relax, enjoy the show, and thank you so much for all your support. And we're back October 7th, D Asia, and we're live with the Franklin Crypto team. Excited to chat with Anthony and Seth today. Uh, we're going to talk key themes, uh, what

you guys are seeing in the market, maybe some war stories of, uh, Franklin Crypto's experience in the industry. I think the t main takeaway if you just look around the room I mean the institutions are here and you guys have led the way uh since uh I mean since you guys have gotten started you've pioneered a lot of the work that institutions have now looked to uh as they've entered the space and so welcome to the show it's a pleasure to have you guys um maybe we can just start with what you guys are focused on what is the most exciting aspect of what you see in digital assets today and where you're spending the most time Seth and maybe we'll or or or get a tie.

>> Yeah. I mean, look, I think the the most exciting thing for us right now is the the fact that we're seeing broader and broader sets of institutional allocators show interest in the space. We're we're seeing, you know, on the liquid market side. We're seeing really good revenue growth. We're seeing value capture in tokens, reasonable multiples, >> and that resonates. That looks like equities, which is really exciting, right? People want fundamental opportunities. Institutions aren't that excited about investing in memecoins. They're excited about investing in real businesses early in their life cycle in a new secular growth industry. And that's really coming together as an investable theme right now. So, we're

we're seeing that resonate, which is really exciting. >> Yeah. And we we like to say we're in the midst of this tokenization super cycle, which is fueling a lot of that growth. Tony, what are you most excited about these days? Well, we're we're sort of going back to basics. Uh so Franklin famous is famous for Benji. So the tokenized money market fund. >> Yep. >> Very simple concept. Uh we made our name. It it's it's really fun for Franklin Templeton 80 nearly 80-year-old company to have street cred in crypto. Uh and it was through uh what started off as an experiment in tokenizing a money market fund. that fund has been live and working flawlessly since 2021.

Uh people are institutions are now starting to see that as good collateral for all sorts of interesting things. Uh and all of this is going to be settled and traded on the blockchain. Uh lots of different protocols. But it's that sort of behavior which is driving usage which is driving KPIs which then turn into revenue which then turn into investable assets back into the liquid uh the liquid token space. >> Yeah. And and that is ultimately where I think we're headed right this tokenization super cycle. I was at Cyos last week and there was some talk from you know some of these digital asset

teams within these bigger institutions around oh we're on a tokenization path to nowhere. And now I think they're starting to realize that this is ultimately making the entire financial world more capital efficient, more productive, more programmable, and it's unlocking tons of idle capital. >> And so this this tokenization super cycle, it starts with getting these things tokenized, but it doesn't stop there. Then they flow into a lot of the protocols, a lot of the onchain applications and rerate those TVLs, rerate those those AUMs and that entire addressable market so much higher. And that's what I think we've seen in the market as of recently is that hey, a lot of the same lending facilities, these these exchanges, these things are not just for cryptonative assets. They are

for assets. They're they're for financial assets in general. And this is so much larger of an addressable market and and and it's growing the pie in general. The question that that always comes back to is who are going to be the biggest beneficiaries? There's going to be winners and losers who are on sides and offsides. Who do you guys think are going to be the biggest winners of the tokenization super cycle? >> Well, I'll just say the the watch word always is who's going to capture the value? Yeah. So, there's clearly value being created by this technology. Who's going to capture it?

>> Seth, who's going to capture it? >> Well, so, so it's interesting. There's a lot of excitement about tokenizing private investment instruments, right? So, we we've had this wave of excitement about preIPO tokenized equities. >> I'll actually take the other side of that. When you think about the addressable market, I think assets that already benefit from liquidity >> are going to see the biggest benefit from 24/7 liquidity. >> And then when you think about so so what is that? That's equities, right? That that's treasury. So I I think and that that turns kind of the conventional wisdom on its head a little bit. But >> so so that's number one. I think equities will be a huge beneficiary. Now the push [clears throat] back that I

often get is well but there's no liquidity over the weekend for like even in crypto assets liquidity goes away on the weekend. It's like well yes except when there's a really important event that happens over the weekend and then liquidity comes right in. So if you look at like what happened with oil around the Iran war like when you have something happen over the weekend that's meaningful liquidity find it finds its way into the market and people are able to to adjust their position. So that's number one. I think equities will be a huge beneficiary. But then when you think about what you can do with tokenization, the composability, creating new instruments, there are a lot of things that were just really hard to do [clears throat] with traditional market infrastructure.

>> But now when you're dealing with a thin infrastructure stack where it's just the the token trading on blockchain rails, you can start doing really creative things, right? and Pendle has shown us some really creative things that you can do with yield in the tokenized world. I think you're going to start seeing a lot of interesting things come into equities that tie into slicing and dicing profit streams and and yield and all types of dynamics and and recombining them. >> Yeah, that is really exciting because we are seeing this grow the pie moment.

feels like there's going to be a whole new ass there's going to be so many new asset classes that are tokenized brought on chain increase the the the addressable market for these applications but then there's you're absolutely right all these exciting nonsuorphic things that we can't really see until they play out and so Benji was innovative extremely innovative for its time and now we're unlocking what a new paradigm could look like and so when you're thinking you know inside of Franklin Templeton as an institution, but then more broadly about institutions in general. Are they are they starting to think about some of these financial products that they can create? How are they being innovative? I I take it, you

know, the liquid markets are one thing, but how are they thinking about building new products with tokenized >> features? We're still >> we're still on the journey. >> Uh as finance is being upgraded uh with tokenization and the protocol rails. >> Uh we're still in the midst of building, sometimes we use the word the liquidity layer. >> Yeah. uh and that is going to help support the 24/7 trading uh and the collateralization behind all these trades uh allowing for things to be levered and unwound over the weekend in an orderly way.

>> Uh all of this again goes into the liquidity layer. Once you have that then you can start to build applications on top of that that start to become more consumerf facing. Uh there there'll always be instit you know structured finance has been around for a very long time. >> Uh you might say spreadsheets you know were the greatest revolution in finance for a long time. Well this is another revolution. >> Uh but we are just at the beginning of the journey. So the the products that will come >> we'll find out.

>> And and Tony give us a sense of the war stories like you know you've had Benji around for a long time. What was the feeling in the room? What were the conversations like when you first rolled this out? >> Was there some like odd looks? Like what is that for? Why are we doing this odd looks >> and and and how have those changed? >> Plenty of odd looks. Uh we started the So again, Franklin's been around for 75 plus years and you you don't stick you don't live that long without reinventing yourself a couple of times. >> Yeah. Yeah, Franklin is a closely controlled public company but uh you know essentially family you know familyowned with long vision with a long vision. So we can do these experiments.

>> Yeah. uh and with you know with the support interest and curiosity of of leadership and all the way down Jenny Johnson uh we started this just as an experiment of what could be uh I mean look digital ass the digital digital ledger technology can disrupt asset management >> so that is not lost on us uh and it's our job to stay in front of that and make sure we can use this technology to to help our clients so fine we did now we did this in in in consultation and with you know working with the SEC.

>> Uh Ben Benji is uh our money funds. Money funds are regulated of course. >> So we are very regulated. We had to work with the regulators. Uh I think we all had to help help in our conversations with regulators. Uh but we did it and we came up with a rockolid project uh and product where the ownership of of the funds are on chain just purely on chain. There's no secondary book of records. Uh >> so it all worked in the end but it was uh there was some risk in doing it.

>> And is it still an experiment? >> I don't think so. >> No, it's proven itself. There's well the the uh the many many of our uh competitors want to have similar projects or starting similar projects. Tokenized [clears throat] money market funds are becoming table stakes for a lot of asset managers at this point. >> Yeah. And and so as we think about the evolution, it feels like you guys kicked off maybe this institutional FOMO is something that we're calling it because now it seems as if everyone is now racing to get in and claim some dominion over a part of this market. And so Seth, I I I think you've got some key themes as far as, you know, some liquid token narratives and things that we want to

pay attention to, but also I'm curious from the institutional perspective, what are the key themes? How will institutions enter the market if they haven't already and what is some of that that green space that is still up for grabs? >> Yeah. So, it's interesting. Let's start with you. You brought up skuorphic and nonsuorphic. So, skuorphic obviously matches what we have today. Non-s skumorphic is kind of the new things that come out of the these primitives. So, starting with what we have today, um we we already talked about the fact that topline growth. So, fundamentals look fantastic. By the way, these businesses are incredibly profitable, incredibly capital efficient. So, drops to the bottom line goes into buybacks. We're we're seeing a lot of interest in these

fundamental stories. So, that that's like squarely skumorphic. When I think about some of the things that are going to start to evolve out of this, so I come from the equities world. I I was an equities investor for 18 years before launching a liquid crypto fund in 2020. Um I I think the um the the structure that we have in the equities world where you have analysts that cover particular sectors I think we're not too far away maybe it's one year maybe it's 2 years from having a healthcare analyst who has to know healthcare maybe it's biotech maybe it's uh uh healthcare services but has to know [clears throat] that business inside and out and then also has to have the the crypto understanding inside and out as well

>> and that comes combination will be a key differentiator. We'll have someone who focuses on healthcare, someone who focuses on consumer discretionary, someone who focuses on AI, but that vertical specialization, right? It so far liquid funds have taken it for granted that knowing what's happening in crypto is by far the most important element for your investment. I think as we're talking about revenue development, it's going to be about what's happening in the end market, what's happening in the competitive dynamics between the businesses that are using crypto rails to accelerate their business versus the ones that aren't.

>> But you're going to have to have a picture of what's happening in that end market that goes beyond just the crypto part of it. >> And that I think is happening in real time right now. And that's going to be really important. Now if we step out another level from from that I think you're going to start seeing equity disagregation. So trading different profit pools within a particular company. And that's interesting from two sides. It's interesting from the investor side because you can say I want to bet on H100s and I want to short uh Vera Rubins or Blackwells or or you might do the opposite trade there.

Great. But then from a management perspective, management is going to start seeing, hey, you know what, the market is putting a higher multiple on this business that we own versus this other business. Maybe we should invest capex into the business that gets the higher multiple, expand that business more quickly. >> And by the way, what you're doing is you're laying the groundwork for starting to drive autonomous management of the these businesses, right? where the market is sending signals that drive capital allocation. So, some really interesting steps that you can kind of start seeing.

>> Let's not forget the debt side of the uh structure. Everything Seth just said can also apply to the debt structure of of companies where you can have bonds that are now in theory bonds that are collateralized by the cash of very specific projects. So, you can have very uh tailored financing uh as a large company wants to make very specific bets. M >> uh they can finance it through tailored tailored uh debt and tailored equity. >> Fascinating stuff here. I mean one of the things that piqu my interest obviously there's this unpacking and unbundling of some of these companies especially when it comes to sort of the the uh structures of some of these profit pools and where companies are

choosing to invest resources. You also mentioned autonomous management which is something that I I think and and Tony you piqu Tony's interest and he's starting to smile even as you think about this and so I think this is something where you guys are ahead of the curve and as an asset manager thinking about the future whereas others are still trying to catch up. Talk to me about autonomous management of capital how you think that is going to look and what is the opportunity at stake here. So, so in that particular example, I was talking about the management teams of companies starting to to have some of their roles taken over, but it could certainly also be on the the the fund

management side. Um, but but I think that's a a little further out. Okay. >> Um, particularly when you think about the institutional business, a lot of it is the human relationships, the trust, the the knowledge transfer over time. But but I think there's a really important dynamic at play which is using AI making sure that look our advantage is the analog data. It's the human data that that we're able to own in a proprietary sense from going to conferences speaking to people talking to the leads of projects to their competitors putting it all together synthesizing it into a world view.

That's what's incredibly valuable. But using AI as a tool to synthesize that >> insanely powerful having the productivity gains from that so that an analyst or an investor that's looking at a particular name can now do that in 20% of the time 10% of the time and be able to to 10x their their productivity and and what the re like all of that is happening right now. >> It's the the tools are amazing. >> Franklin is a fiduciary >> the portfolio manager the buck stops with the portfolio manager. Yeah.

>> So my eye, you know, eyebrow was raising uh just in the sense that if the if the if the agent goes astray, well, it's still on the portfolio manager to be responsible for that. >> Absolutely. Yeah. And and so to wrap up here, take us inside of Franklin, right? Because a lot of what you're describing is is ubiquitous across corporate structures when it comes to healthcare and it come it comes to manufacturing, it comes to these companies, but it also applies to asset management. And so take us inside of Franklin for a moment. What are some of the fastest growing products and verticals inside of Franklin? And how are you thinking about innovating and iterating on those products so that you can continue to stay ahead?

>> Uh I'll take a crack at that. We have many ideas that are uh are they three years out? Are they seven years out? Uh but things we're thinking about thinking about the idea of a asset management world where it's not accountbased. So we don't, you and I, we don't have our accounts in various places. We have all of our assets in a wallet. >> What does that imply? What assets can go into that wallet? Well, they're tokenized for sure. Uh and then how can agent AI agent or AI help with the management of that? How can we still offer advice? Back to the portfolio manager still is, you know, the buck stops there. Uh but how all these pieces come together I think are going to drive

what the world looks like in seven years. >> Yeah. >> Yeah. >> Well, I think everything that we've been talking about requires connectivity. It requires wallets. It requires um everything that we've been building in crypto to to kind of become table stakes to become infrastructure. Um and and we're seeing that happen right now very quickly. And whether it's agents, whether it's humans, that that reduced friction of having everything connected onchain, having wallets everywhere, like we think AI and and crypto are complimentary technologies.

And this is where the the rubber meets the road on that complimentary technology dynamic. It's wallets, it's interconnectedness, it's crosschain connectivity, something that that's probably going to end up being in the weeds that doesn't get talked about that much anymore, but but it it was a key building block to to get where we are today. That's going to be the key enabler of just inlecting um all of the innovation very quickly. >> I I I think the term here is the financial singularity. Yeah, >> this truly is the convergence between Tradfi and the onchain economy that we've been talking about for so long.

You guys and and the entire Franklin team has helped pioneer this and is now a steward of the rest of the institutions that are looking to come on board. Seth, Tony, guys, thank you so much for joining. It was an absolute pleasure. Pleasure. >> Yeah. And would love to have you guys on again. Awesome money.