Olivia Vande Woude on Why Embedded Finance Is The Future Of Tokenization

Transcript

All right, you guys. Welcome back to the digital finance forum here in Bermuda at the Salt conference. You're watching Stable up episode number 32 our premier weekly stable coin and tokenization show powered by our friends at Frax with their FRX USD product. Visit facts frax.finance to learn more. We've got Olivia our in-house tokenization stable coins and real world asset expert. Olivia, welcome to the show again. Thanks for coming on. How's Bermuda treating you? How how's the island? So well. Island is great. How do you how are you finding it? Great.

Could use a little more sun, but we've been inside anyways. Exactly. Gives us more time to do do the deep work. Exactly. Exactly. Had some good conversations here so far. Very well attended. Great lineups. Panels have been fantastic. Yeah. Awesome. Well, we we brought you here for a tokenization stable coin article a masterclass. And I think you guys are thinking about this from the Avalanche perspective with this concept of embedded finance. And so why don't we start there and just understanding what that really means and we'll get into it. Yeah, absolutely.

So I would say the future of embedded finance is tokenized finance, right? And so stepping back, first let's define what embedded finance is, right? The way I think about it is it's what happens when traditional financial products and services, be it banking, be it payments, be it investing products, lending, savings, etc. Get integrated directly into the apps that users already use on a daily basis and really with no detour or, you know, traditional banking integrations required. Which obviously can be very operationally intensive and costly.

So with that, what I'm really excited about is looking at that at that embedded finance stack and looking at the opportunities to embed tokenized assets into those layers that I just mentioned. So think tokenized money market funds. Think tokenized private credit opportunities. think tokenized equities, other tokenized credit instruments, tokenized loyalty points through partners like Up Top of ours, all wrapped in APIs so that a fintech such as a neo bank, a remittance platform, a financial super app, whatever it may be, can very easily ship those products and services even in a matter of days or weeks as opposed to building it in house or taking months if not years to to do that build themselves. And so, the result that I'm

really excited about is how tokenized assets can lead to better UX, new revenue lines, and also just better customer retention mechanisms for fintechs again that may not even have a large product suite or the scale that the new banks or Revoluts of the world may may have at their fingertips. So, that's what I'm very excited about and that's what we're building toward within the Avalanche ecosystem, right? And so, Avalanche is the settlement layer and offers sub-second finality, very inexpensive transaction fees, but we partner more so at the app layer as I call it with a slew of design partners that we're making opinionated bets on.

And these again are not random vendors that, you know, we're we're checking a box on. It's really, you know, a slew of operators that we've built alongside at these various levels of the embedded finance stack to create again new revenue opportunities, customer retention mechanisms, etc. for fintechs that I mentioned earlier. I'm targeting like 1,500 fintechs in Latin America and APAC in particular that are all chomping at the bit for these products and services. And so, it's great to see tokenization, tokenized assets have product market fit. And again with end users that don't know or care that, you know, smart contracts, blockchain, tokenization is on the back end.

>> Let's unpack this, you know, complex of 1,500 fintechs abroad, LatAm, APAC because I think at a high level the reductive argument is, "Hey, you know, there's institutions and, you know, they've got this TradFi thing and it's working for them and then you've got the degenerates and you know, they're just looking for meme coins and high yield things on chain. Where this tokenized finance, embedded finance comes in, okay, we have this giant tokenization supercycle happening all the way from stablecoins to to treasuries to private credit, so on and so forth. But where's the demand?

Where what's the buy side? And it sounds like the 1,500 FinTechs that you're targeting, those are the ones that are demanding these products. Why is it so important to them that they get these products? What is the story that you're hearing from this FinTech complex? >> Yeah, absolutely. And I would say from from an Ava Labs perspective, right? Like our job is is not to go in and you know, prescribe all of the, you know, design partners that I mentioned. It's really to go in and pressure test whatever pain points that a given FinTech is having and then make recommendations accordingly and really serve as a trusted advisor. And so, all that's to say, not all FinTechs are created equal, right?

A remittance platform that already has a large loyal user base and may want to graduate into more of a financial super app has very different needs and constraints than say a smaller Colombian neo bank like Lidio that just wants to add you know, an earn feature in a very conservative manner. So, I would preface the conversation by saying like it really depends on a given partner's needs. But I would say where we're seeing a lot of demand is just especially in Latin America just for basic access to US dollars. And so like a tokenized dollar effectively, right? So things stablecoins like USDC, USDT, Agoras a USD, someone white labeled stablecoins so that they can capture more of the

economics. It really depends on what a given partner wants or needs. But then it's really exciting to see some of these FinTechs graduate to the next level, right? And offer more products and services. So, after they dip their toes in the water with stablecoins, the The question becomes, "Hm, how do I earn yield on those stable coins if it's just idle capital sitting there?" And how do I offer that to users through an API-based mechanism? And so, one of our partners, Open Trade, offers yield as a service, um and they have north of 30 fintech partnerships at this point, accrued over the last 18 months. Um and many of these fintechs just want access to USD for their users, and then also access to conservative yields on the on the that USD. So, money market fund-like yields. I think over time, again, as

those fintechs graduate further and further, they'll be excited to add more to that product suite, perhaps more or like higher yield opportunities in private credit, or perhaps it's, you know, US equities through a partner like Dinari, which we've talked about before. Um they offer more than 250 uh equities on their platform, tokenized equities on their platform, and have seen a good bit of product market fit in Asia in particular. Um others may want cross-border payments mechanisms, right? So, one of our other partners is called Axiom, A X I Y M. Um they process north of a billion dollars in volume on Avalanche, and they work with MSBs, PSPs, um and payment platforms to eliminate the pre-funding requirement with stable coins on the back end. And so, again, that's a

different target audience or segment than, say, a smaller neobank that just wants to offer, you know, access to USD in the first place. Yeah. Yeah. And and are those target segments that are interested in just holding stable coins, are those the same types of people that will want to earn the yield on those stable coins? Or or like how are you thinking about the customer set in these neobanks or fintechs as it pertains to like, "Okay, there's a subset of people that just want to hold stable coins. Some people are aware of the yield of treasuries that these uh stable coins are being put into, so maybe they want to hold a specific stable coin, or they want to have a yield product." Like, what is the customer set for these kind of stable coin yield products look like on Avalanche?

>> Yeah, so it's it does run the gamut, but I would say, again, where we've seen particular traction in Latin America, where also there is just a greater comfort with stablecoin infrastructure to begin with. I mean, the US it's pretty Our banking system works relatively well as it stands, and so retail users aren't clamoring for a stablecoin as much as a, you know, freelance worker, remote worker that's living in Colombia, but maybe employed by an EU-based company, and may need access to both Colombian pesos in stablecoin format, or um you know, euro-denominated stablecoins. So, I would say where we've seen a quite a bit of interest has been in the context of stablecoin payroll applications, like the Rise Payrolls of the world, um the you know, Franklin

Payrolls of the world that are again offering stablecoin payroll opportunities, particularly for freelancers, particularly um in the gig economy worker segment, um and others that have previously not had again access to USD or earn or yield features. But, I think the uptake there is once there an end user has access to stablecoins and is comfortable with that infrastructure, um the uptake is pretty strong for bolting on a yield feature, especially if they're already holding stablecoins, why not why not capitalize on that yield opportunity? Yeah. We we believe in the tokenization thesis, right? There's all sorts of assets that are now becoming tokenized and coming on chain. Um you also mentioned how a lot of this starts at payroll level, because that's what ultimately gets stablecoins

into the hands of real people. Uh from there, I I am of the mind that uh on chain dollar tends to stay on chain, and off chain dollar tends to stay off chain. And so, if you if we're paying people salaries on chain, they're more likely to use DeFi or on chain protocols to ultimately help them facilitate with their financial needs. Um I'm But, but with all that being said, not all tokenization is equal. You know, there's good tokenization and bad tokenization. What do you think most of these tokenization protocols are doing wrong?

Mhm. This is a masterclass. We want you to help educate us and help educate everyone on the right way to do tokenization. >> Yeah, absolutely. And we've we've talked about this in before this before in the context of tokenized securities, but just to zoom out a little further, I think it really comes down to legal structuring, right? And what I mean by that is just take Open Trade for example, they've taken a very compliance-first approach to offering RWA back to yield vaults. And they partner with an FCA-regulated asset manager called Five Sigma Finance. Uh they have a bankruptcy-remote SPC SPC structure in place so that when they're meeting with these neo banks, many of whom are are more on the the conservative side and understandably so,

they can make the case to their chief compliance officer that there are in fact the guardrails and legal structures in place. Mhm. Um and that you know, that ownership is pretty clear in in the event of you know, market stress or a another Mhm. um know, adverse event. And so, I think that's what I'd say whether it be in the context of stablecoins and you know, show proof of reserves or in the context of tokenized securities and whether a you know, given entity is looking at direct on-chain native issuance as Securitize is doing or the Superstate's of the world are doing um or in the context of of Denari who has an SEC-registered is an SEC-registered transfer agent and has a broker-dealer license. Um you know, or many other examples, all of them the

common through line is that they're all taking first approach of having clear legal structures. Um many of them have regulatory opinions or legal opinions um and you know, the what I call uh legal muscle to walk through you know, these these issues with compliance teams. Yep. I'm I'm just curious to sort of sequence this out and and think about how where we are, how early are we? Maybe you could help just articulate what the what the end game in your perspective is for embedded finance? Like where are we going and how far along are we on that vision? Yeah. End game is invisibility. You won't know or care that tokenizations on the back end.

You'll just know that if there's a net new product or capability available to an end user. And so I would expect and and hope to see in 5 to 10 years time that perhaps a freelance worker in Bogota, Colombia can um you know, have access to a money market fund from BlackRock with the same ease and um seamless experience as perhaps a private wealth client in Manhattan may have and has historically had. Um and so I think in the future it'll again be you know, kind of I think about um Jack Bogle a lot and the index fund um which you know, we take for granted now.

Um but that kind of financial innovation where tokenization opened up Wall Street to Main Street and that or sorry, in that case the index fund opened up Wall Street to Main Street. And I think similarly with tokenization we'll see, you know, the opportunities given to Main Street in the US open up to others globally. Um and again, democratization. I know it's an oft-used phrase, but I really do believe democratization of financial products will be the the end game and end state for tokenization. Yeah. You know, one of the things that that I keep talking about is that this idea that we've tokenized a lot of the US products and brought them into other markets, but there hasn't been as much of a focus on tokenizing emerging market products just due to you know, difficulty in regulation, lack of

demand, um education, jurisdictional problems. But I think that there's there's been a kind of shift in the investing framework from like US everything US first to now more into emerging markets. The emerging markets index generally is just performing very well as of late as well. How much work are you guys doing in Asia, in other emerging markets that are you know, bringing bonds on chain, bringing non-USD stablecoins? I know you guys are doing some work in Japan with some bonds. What is the emerging market stablecoin and tokenization front ends or front lines look like right now? And and how do you envision that kind of sizing up against the rest of the world?

Yeah, definitely. So, I would say much of the demand for products understandably ebbs and flows with macro or geopolitical events and there have been many of those this year as we're all aware. So, you know, I would say in in the context of APAC markets, there was very strong demand for the likes of Denari and access to tokenized US equities. And even if you look at other models for tokenization like Ondo or X stocks, you know, those have seen very strong product market fit and traction outside of the US. I would say in the context of of Avalanche and the work we've done outside of the US, our head of Asia Justin Kim and his team have been really leading the charge in, you know, expanding those product

capabilities and and offerings that are more Asia-based. So, for example, Pragma Pragma announced that they'll be moving about 2 billion in securities tokenized securities to to Avalanche. That's again APAC-based. We're working with other tokenization you know, providers and and infrastructure partners like the Accedo Accedos of the world Accedo and many others that are again Asia-based team has really been leading the charge on. So, it's very exciting to see the swath of tokenized products grow especially since, you know, being based in the US, we can kind of get a little bit with the with the blinders on in terms of being laser focused on what's immediately in

front of us, but very excited about the work that we've been doing in APAC, India in particular and and other regions in the world. I'm I'm curious, you know, as I I saw on your notes, so I'm just going to go ahead and ask the question. There's a lot of these protocols. Like who's making money here? Like are we still, you know, on this grand vision or still so early that it's just kind of experiment, no one's really going to monetize, we want to grow first? What are some tan- Are we there, or are there some tangible examples of businesses that weren't really doing much, but now with tokenization they're able to monetize and really grow their business?

>> Yeah, absolutely. So, I would think about it, you know, I like your question, kind of existential question of, you know, who's making money, but I would say each of the aspects or layers of the embedded finance stack that I just mentioned to you either provide a, you know, new revenue line or um the path to a new revenue line. So, just to give one example, um in the context of, you know, Open Trade, you can see the many benefits of offering, you know, new yield and earn capabilities that would invite, um you know, further participation in a given neo bank's platform. Um and so, that's a net new product or service, but you could think about, you know, in terms of a fintech, what they could monetize is really spread, um you know, based on whatever AUM is being held on the platform. Another example, and this is

more of a net new product or capability that's um paving the way for capital efficiency, greater capital efficiency, is with Axiom, like I mentioned, using stablecoins to eliminate pre-funding requirements, um which have plagued plagued, you know, PSPs and MSBs for many years now, in the order of millions and billions of dollars. Um that they've had to, uh you know, suffer from having to keep, you know, capital tied up in the event that they might have to do a, you know, a payout or that they may have to, um keep in a correspondent banking, you know, bank at a given given moment. And so, in that instance, um I mean, the cost savings are really on the capital efficiency side, in that it unlocks idle capital that can be better used other, you know, in other places, uh depending

on the given, you know, given needs of a business. So, I I do think that what we need to see more as an industry are further case studies and proof points, right? We're documenting all this. I think it's very early days. You talked about what the outlook is. I think it's very early days in terms of these proof points. Open trade has been existing about 18 to 24 months now. Probably more like 18 months, I think. And so, it's early days to have proof points. And so, we're only going to see more we need to see more case studies. We've been doing a lot for Non-Co, Axiom, Open Trade. We have a lot of case studies coming out to document this shift. But again, there's there's still so much so many efficiencies, so many customer retention statistics to be seen. And and what do you think is the

number one thing holding us back? Ooh. You know, I would have historically said regulation, but I think obviously, I know the market's happening this week. So, there's there's lots of It's a big week. But Genius obviously paved the way and and, you know, Clarity Act. But you know, I would say the rulemaking and guidance and, um, you know, targeted relief commentary from the SEC has been really instrumental. The collaboration between the SEC and CFTC on, you know, token classification or taxonomy has been really meaningful. Um, so I think that was really the narrative of the last 18 months, 24 months is regulation was impeding progress. Now, I think it's a very, um,

well-articulated and targeted distribution strategy. I think we've been we've solved the issue in the issue inside of the equation. We've solved the supply side of the equation. You can go to a Republic, a Centrifuge, a securitizable world and easily roughly easily bring a tokenized asset, um, to to fruition. The harder part of it is understanding what the distribution channel will be for that tokenized asset. And I think we have a ways to go, uh, for be it, you know, asset managers, banks, fintechs to understand exactly how they can harness tokenization and tokenized products, um, and distribute them accordingly. So, I think that's the next leg is thinking through what happens once we

have Genius, Clarity, and, you know, targeted rulemaking, um, in place. It's really on the distribution side of the equation that we need to find Well, that's why you're here. That's why I'm here. >> Find some distribution. >> [laughter] >> Well, Olivia, thank you for spending some time with us. Um, you know, our first episode was a was extremely kind of deep dive. This one more oriented around kind of like the pragmatic approach to what's happening in the space. Very much appreciate you coming out, being prepared. I I I know you've had a great event. I I just know you, so I know you've been running around. Um, thanks for having me. Thank you so much for having me. Always a pleasure.

Absolutely. We'll see you next time. Thanks, guys. That is episode number 32 of Stable Up, our weekly stablecoin show powered by our friends at Forex. We're signing off. Thanks for being here. We'll see you on the next one. >> That's Bermuda day two.