Who Actually Wins The Tokenization Supercycle

Transcript

I think it was actually really wise what um Congress and the administration did with Genius, which is take off a chunk of the overall crypto landscape regulatory structure and pass it as an individual bill. 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, relax, enjoy the show, and thank you so much for all your support. And today, we've got Nathan McCauley talking about why banks are going onchain. Nathan co-founded Anchorage Digital, and they

are also leading the charge when it comes to helping banks go on chain. They're one of the first federally chartered digital asset banks in the United States. They issue USAT, that's Tether's US regulated dollar stable coin. Uh, and we actually just covered something around USAT and A at Avalanche Summit last week. So, big big partnerships that are happening and Nathan is here to talk about it. Uh, Nathan, man, welcome to the show. It's a pleasure to have you. >> Thanks. I'm really happy to be here. >> Absolutely. I really enjoyed our last time that we uh we had you on as well. So, it's good to have you back and uh it just feels like everything I mean, we're hitting on all cylinders since the last time we had you. Excuse the uh runchy language there on my hat. I'll take it

off for this one, but it is truly how I feel. And so, um, man, I think you can tell that we are, uh, excited about where we stand, not only in the markets, but also in the industry broadly about all of the institutional adoption. We're calling it institutional FOMO. It's happening at every level. Stable coins feel like they're a national economic priority. The way that they're twisting duration out of the bond market, it feels like everything is hitting on all cylinders. Is that how it feels inside at Anchorage Digital headquarters as well? Yeah, I think that's exactly right. We're seeing um you know a a few mega trends happen. Certainly the adoption of digital assets across the institutional landscape, uh banks, broker dealers, fintexs, u across

stables, across tokenized assets. Everybody talking about like hey is this the question now is not do assets come on chain but how do they come on chain uh via native issuance or DTCC or some other mechanism by which they come on chain. Uh so the kinds of debates that we're having, the kinds of questions we're having are very tactical, very real, solving uh road mapaps from teams with uh P&L responsibility. Uh so yeah, we're seeing it across the board. >> I uh I had a conversation with someone earlier today. It's not been released yet, but it was uh with a rep from Tempo, and he was talking about how important the Genius Act was, which you know was this landmark piece of regulation in the stable coin space.

Obviously more recently we've had the clarity act fail to reach closure and so given that Anchorage and yourself you guys are interfacing with banks I'd assume on essentially a daily basis is the clarity act a significant obstacle that has not been overcome and therefore will hinder the bank's entrance into this space or was it relatively inconsequential and banks are coming in anyway despite clarity act >> agree with over whoever it was earlier on today from the from the other team that uh the Genius Act was an incredible milestone for digital assets. I mean there's a lot of things that that come in there. So first of all, you look at it and say it itself legally blesses a

path for stable coins. Uh and so there's a a first order answer there on there's a such a thing as a stable coin. It's a legal entity. It's a legal uh concept uh that now can be regulated. Uh but the implication there is that a bunch of the stuff that stable coins depend on are also good. Chains are good, blockchains are good, uh decentralized networks are good. Uh and so it comes with a lot of built-in implications that I think are in many ways the unlock for many banks to start to come in. So I would say that genius was already an unlock. uh most banks their primary business is in movement, settlement and holding of the dollar and the fact that the dollar is getting upgraded uh to a like 10 times better product with stable coins uh

means that all of them now can't ignore what's going on. >> Uh so with respect to clarity uh is clarity a big loss or is it going to slow us down? I think the the way that I would think about it is that clarity was going to be an accelerant. So things were going to go even faster. there was going to be even more FOMO. And I still think that that will uh take place. I think it was actually really wise what um Congress and the administration did with Genius, which is take off a chunk of the overall crypto landscape regulatory structure and pass it as an individual bill. Um for those who aren't maybe historians of regulatory history like probably most people aren't but unfortunately within crypto we have to

be uh you'd know that uh securities legislation actually rolled out over the course of a decade across three different bills um 30 act um 33 act and the 40 act each of which established a different thing. So you know there was a there was a bill to describe what a security is there was a bill to decide describe what an investment adviser is. there was a bill to describe what an exchange act tried to bite off all of that across the definitions of assets and across different asset classes as well. And so it was inherently a very ambitious bill. Uh but what I imagine will happen over the next um few years is that we'll still see the acceleration, we'll still see the

adoption, but maybe we'll see pieces of this broken off into chunks uh and then solved individually either through rulem at the legislative agencies or mean even more importantly as legislation that passes uh but in a more uh focused and and structured way rather than as one big omnibus. I I really like the framing of the potential accelerant but not the deceleration that people might be speculating that it it entails. Um we would have moved a lot faster but we're still moving at a break next pace. So very very uh relevant to a lot of the people that are watching this and looking at how this will evolve over the coming weeks and months. And again, your company at Anchorage interfaces with

several of the banking and stable coin institutional players that are looking at entering the space, looking at how to navigate, right, some of the some of the stable coin and also the tokenization, you know, wave more broadly. And I guess what what I'm getting to is that a lot of these financial institutions, banks being part of that that cohort were positioned against crypto in some way, shape, or form. And for a long time, that was the rhetoric. It was, hey, be your own bank. We don't need the banks, right? We're going to go crypto. We're going to self-custody. We're going to do all these things. Is that still the dichconomy? Is it still banks versus, you know, the individual taking finance

into their own hands? How relevant is that oppositional framing now versus look, I mean, we have more news that banks are looking at launching stable coin programs. Maybe they're doing so in a KYC, AML compliant way, but that's not necessarily antithetical to self-custody and some of the, you know, underlying principles that digital assets stand for. >> Yeah. So, I mean, lots to dig into there. I think that, um, there's a number of apertures to look at the banks across the country. You've got the the very large G sibs um which I I joke with my team that the very large GIS don't even really exist. There's no such thing as a large bank. There's a bunch of divisions uh within that large bank each

that have their own uh agenda and own kind of thing that they are they're working on. So you have wealth departments that absolutely want their clients to be able to buy and hold Bitcoin. Uh you've got uh payments divisions that want uh stable coins to be integrated but also want tokenized deposits to be integrated. Um you've got the lending and prime desks that want to accept crypto as collateral or accept tokenized assets as collateral so they can move them more freely. Um and so the the idea that there is one view that banks have and one orientation the banks have towards the uh digital asset industry, the crypto industry, blockchain industry, uh is just a it's a a foolish thing to even think about.

It's like kind of a category error. Uh the right way to think about it is individual groups that have a mandate and want to want to get something done and want to improve their um business lines. Now there is unfortunately a bank lobby and the bank lobby actually weirdly doesn't always act in the very interests of the banks themselves. Uh and so I think that's one of the weird things where uh what you see is that the bank lobby was advocating for things that sometimes when you actually go talk to the individual banks they didn't even want they didn't even care about that much. Uh and so it's u a little bit of an interesting dynamic that comes there.

But make no mistake banks are going to be adopting uh blockchain. Banks are be adopting tokenization. uh banks are going to be holding Bitcoin and I think it's uh to your point uh not just not going to come in uh contention with the decentralized narrative but actually going to help the decentralization narrative very meaningfully. >> Yeah, and I I think that's absolutely right and the more that we've thought about this is it pays not to be a maximalist or tribalistic in this sense. It pays to be open-minded to the ways in which large institutions could come on chain ultimately. Sure, some of these institutions are coming on with permissioned environments. They're doing so with again KYC and AML. Maybe it's a walled garden inside of this permission environment, but that's still a step in

the right direction that ultimately gets us into one composable economic zone of interoperability, right? Maybe there's a there's a a zone that adheres to some of these institutional principles and then you've got other zones that ultimately have more of the you know cipher punk ethos. But it is better than them being this closed system offchain. once we bring it onchain, we can do a lot more composable things with it. Uh, and I think that gives us a much more capital efficient structure as well. Um, and and so to that end, Nathan, I'd love just to kind of just to illustrate Anchorage's product stack because I think maybe we did go through this, you know, several months ago back in the day, but just to

really paint a very vivid picture as to how Anchorage is supporting some of the institutions out there and helping bring more people into this economy on chain and and supporting the tokenization efforts. Can you just kind of unpack the way in which you help customers? Who are your primary customers and what is the product stack with Anchorage that ultimately helps these customers? >> Sure. So I think there's there's broadly speaking three verticals. One of them is uh prime, one of them is financial infrastructure and then one of them is uh what I'd call commercial and enterprise type use cases. Uh and so prime is where we are helping a client directly. Uh they directly come to us that we are their bank, we are their trading partner, we are their staking

provider or their settlement provider. We help them collateralize their assets to borrow against them. Anything you and everything you'd want to do at a traditional prime or traditional custodian, traditional bank, uh we can do that for you across both crypto assets and traditional assets. We hold um we hold treasuries for people un um unoffchain treasuries. You know, we can do that. We hold uh cash for people as well. Uh and so we are a a full service bank that also has the full gamut of uh crypto capabilities. That's kind of the the prime stack and very popular. um you used by most of the crypto investors in the world right now today. Second vertical is what we call financial infrastructure. This is where you take the incredible technology we've built

for our bank and how have it enable your bank. Uh so this could be uh custody features, this could be uh outsourced trading features, this could be uh settlement uh infrastructure, uh tokenization infrastructure, uh tokenized deposits, um stable coins, kind of anything where you're looking to build your business in crypto on top of the infrastructure that we've provided. Uh and the third area that's kind of more developing is like commercial and enterprise. And our our vision there is the the next set of adopters after the banks is going to be the Fortune 500. Is going to be people that aren't even necessarily in a financial services business at all, but wants to use the technology that we've

built, wants to use the infrastructure that we've built to optimize their processes. Um, and that may not look like them holding Bitcoin on their balance sheet. That might look like, hey, we've got a bunch of international suppliers. We'd like to pay them and stable coins are just better than the dollar. Uh and so we want to be able to do those kinds of use cases. Um and so all of our all of our solutions kind of fall in those three buckets. You serve you directly. Uh we build infrastructure so you can build your business or then kind of the frontier which is um uh commercial and enterprise use cases. >> Yeah. And which of these segments is fastest growing? Which one is largest?

Maybe you could just unpack like what portion of the business is falling into each of these categories. >> Sure. So uh uh prime is where we're we're well built up and that's that business is kind of growing automatically right now as more and more clients come on. Uh financial infrastructure is the one that's really been um boosted by say this this year's macro thesis around banks adopting uh digital assets. So um stable coins is uh growing very nicely there. tokenized deposits. We'll be rolling out some um some announcements coming soon about banks adopting us as their tokenized deposit infrastructure and and then moving on from there. Uh tokenization as well. And so all of those uh kinds of use cases using our infrastructure to

build up your bank infrastructure. Uh that's that's really big for us. how I I've had people come on the tokenized deposit seems to be this thing that's very nebulous right now and we've got some mixed opinions from people that have come on the show and support it and then others who come on the show and say look this is this is totally inconsequential like it's really not much happening here it is I think someone called it like the least interesting thing happening in crypto but again it feels like a stepping stone getting to a more tokenized and a more onchain economy given that you help banks set up their tokenized deposit infrastructure. How important are tokenized deposits versus just going directly to a stable coin. What does a

tokenized deposit allow a bank to do that they can't currently do without a tokenized deposit? >> So, it is um it is hard to understand unless you have um steeped yourself in um banking core integrations. uh the fact that many banks don't actually know how much money is in their accounts until the end of the day because all their systems are batch processed. There's so many things that are just kind of basic stuff that is kind of busted about the way that banks operate right now and they're just they've just come to accept it. Uh and so when you tell them, hey, you can have a 247 rail that allows you to move assets even within your bank, move assets between your subsidiaries, um they are uh blown

away. uh and even if the technology is a um closed network uh that is kind of just even internal to their bank, it still brings them forward. Uh but I what I would tell to anyone that is skeptical about that use case is listen to what happens when you bring tokenized deposits into a bank. They get wallet infrastructure, they get contact with uh blockchain systems, they get contact with uh ledgering systems. Uh and so they it actually ends up being a great way to get started with crypto. Uh that guess what after they have the wallet infrastructure, it's a very small leap to say, "Hey, now we're going to start accepting stable coins or now we're going to allow Bitcoin to come in

through this wallet infrastructure that we've built." Um and so it's really kind of like a first step on a on a long journey uh that I think many of these banks are going to be over for the next couple of decades. >> Would you call tokenized deposits a Trojan horse? Well, um the Trojan howers didn't um didn't end up well for those that accepted it. Uh and so I think it's a it's Trojan horse and in that it's a gift. Uh but it's a gift that doesn't turn on you. It doesn't betray you. It actually, you know, helps you in many different ways. So I don't I don't know if Trojan horse would be exactly the right analogy. Um maybe a uh a garden uh that grows and bears much fruit over much time. There's probably some better analogy there. It it it seems as if the

institutional custody infrastructure is systemically important. I mean it is to basically grow all of the other components of the onchain ecosystem as they are onboarded. How difficult is it for an institutional partner be it a bank to integrate some of their existing systems into let's say the custody system that Anchorage has as part of its product stack and your you know general financial infrastructure stack to accept tokenized deposits to accept you know tokenized assets in general. what is the onboarding process like for a bank or an institution to how much do they have to unwind or rip out and then implement the anchorage system?

>> So it's a uh it's an evolution that everybody has to go through. There's no one that is starting this by saying hey let's rip out an existing system and replace it with uh blockchain based rails. So it's always an additive >> um an additive thesis where you're getting more features and more capabilities uh and then going through an evolutionary process. Uh I imagine that these will be side cars uh for quite some time maybe a decade on where additional use cases are moving toward that. Uh but you must still support the legacy. You've got hundreds th hundreds of thousands maybe millions of clients using the existing system and there's no way you can just cut over to it directly. Um, and so I really think it's going to be about seductive adoption.

Um, some use cases that are very useful to a set of clients and those kind of compound. Then you start to see uh a bunch more assets get delivered on top of those rails, whether it's tokenized deposits leading to stable coins leading to tokenized uh money market funds, general purpose securities, and then onto um maybe even tokenized metals, who knows? Uh there's a there's a bunch of things that kind of get add added on over time. Uh but certainly no one is doing a rip and replace on this. This is all this is all purely additive. >> I I realize we're we're coming up on time, but I just got a couple more questions. One of which is just to drill into the technical implementation that you're describing.

Does it look like a carbon copy of the existing infrastructure on blockchain rails pretty much running in parallel side by side to make sure that there's uptime and make sure that there's, you know, seamless and and uh no no, you know, potential bottlenecks or trap doors or anything for a little while until making the switch over. These these two systems run in parallel. Make sure that they they net out and tie out at, you know, different periods throughout the day. And then eventually you anticipate sunsetting the legacy infrastructure and moving completely onto blockchain rails.

>> Uh I think that to the degree you're going to sunset anything, the suns setting will be much farther out than that. Um no one's doing this and saying, "Hey, we're just going to move all of our deposits to tokenized deposits." They're saying, "Hey, these use cases on this subset of clients are going to be on tokenized deposits." And so the existing system is running asis and a net new system is sitting beside it that enables some of the use cases that weren't possible with the existing ledgers. Um and so it's it's all purely additive and um so no one has to feel like there's this hard cut off date uh where you shift and everything uh is is on those new rails. when it does eventually get to that point where the technology use cases are comprehensive enough they can cover all the use cases

then yes you might look at something like a progressive cut over like you described uh but nobody's looking at that right now everyone's looking at say hey um add a tokenized deposit use case for a subset of clients allow some clients to borrow against Bitcoin inside the existing collateralization system uh move some of the um tokenized repo use cases um away from existing repo onto tokenized repo so we have more collateral mobility. Uh so it's all uh you know kind of starts with experiments and then rolls out a little bit more. Um no one's no one's trying to do a hard cut off.

>> Yeah. Okay. Makes sense there. And this is gradual and evolutionary because these are you know these are large ships and they you know they they turn slowly. Uh but over time right these make s significant differences in the way that these things are structured. Uh last question here, Nathan, is just kind of thinking broadly. You know, we've got what feels like multiple contributing factors that are now at a convergence or confluence where it does and like we open the show feel like we're hitting on all cylinders. We've got what we're calling the tokenization super cycle. A lot of that is born out of regulation for tokenized securities. CFTC perpetuals regulation moving forward. We

got the Genius Act that's helping stable coins. We're also seeing like you mentioned the repo market, idle capital, right, is becoming productive. A lot of this is happening. We're now seeing uh some of the largest exchanges in the world, be it nice, uh the London Stock Exchange, NASDAQ are moving to 235. That certainly feels like a stepping stone to 247. A lot of that feels like it's really only possible on blockchain rails. And so given that we've got this confluence of factors, we anticipate a a surplus just an absolute wave of tokenized assets now entering the ecosystem into a lot of the same DeFi and onchain primitives that you know have been around for a long time and

you're helping to facilitate that migration and that tokenization wave. I'm curious as now the it it feels as if the total addressable market of this this industry has grown in order of magnitude. Who do you think are the biggest winners? Who do you think is positioned to benefit the most from the tokenization super cycle? >> Great question. So, uh I would I would start out saying that the biggest winner is the industry at large. Um as uh as assets move on chain, uh we're going to have systematic reduction reduction of risk in the system, systematic uh uh acceleration of settlement times.

Uh, and so the the good news here is it's it's truly a a win-win for the entire industry at large. Um, and so I think that's the the most important thing to keep to mind is this is this is positive sum. Uh, everybody can be winners without their necessarily being losers in any meaningful sense. Um, and so I think the the whole industry is going to win as a as a result of this. Um, some some players are positioned particularly nicely. Uh, infrastructure providers to the financial institutions certainly going to do well. uh chains uh where the assets end up settling are going to do extremely well. Um and so who who is going to win the the settlement leg for stable coins? Which chain is that going to be on? That's going to be a big one to be to be one.

And then as you mentioned, DeFi protocols. Uh the whole point to move things on chain is not just for faster settle settlement time uh but also applications being uh utilized uh so that more interesting stuff can be done with the assets themselves. And so um the the DeFi protocols that are mature and have been built well also kind of naturally benefit from this movement. Very cool. Nathan, thank you so much for spending some time with us today and uh for being stewards of the tokenization super cycle as well. You guys have been a I mean a a a great voice in helping to educate banks, financial institutions at large and uh yeah, would love to have you on again soon and uh do some more with you guys in the very near future.

Awesome. >> Uh because uh it's it's always a good time. We'll see you again soon. Thanks. >> Have a good one.