Why Our $300B Asset Manager Is Dead Set on Tokenization - Baillie Gifford Tokenization Lead

Transcript

tokenization lead at Baillie Gifford live from D 5 day at ECC. And so we're going to be chatting about RWAs, why they're not at $1 trillion yet, and how we're going to boost these numbers up. We were coming off of digital assets last week, digital assets summit in New York City, and now we're here in Cannes. We've got Theo Golden right here with us now. Theo, welcome to the show. >> Great to meet you, man. Great to meet >> pleasure. How you feeling? Yeah, great. It's great to be here. It's going like uh you know, people keep on saying D 5 is dead and look at this crowd. I mean, it's absolutely heaving. It's very much alive and kicking and we're having a lot of fun. So, it's great to be here and thanks for having me.

>> Absolutely incredible. I I mean, can't can't can't agree any more. I'm just curious. Maybe for anyone who's unfamiliar, Baillie Gifford has entered the digital asset space, the tokenization space. Why don't we get a primer on Baillie Gifford for anyone who's unfamiliar and then we'll get into what exactly Baillie Gifford is doing in the tokenization space? Yeah, absolutely. So, yeah, Baillie Gifford, we're a we're kind of one of the biggest UK asset managers in in we run about $300 billion of assets under management across like public equity, private equity, fixed income, multi-asset. We're kind of we're based in Scotland, which is beautiful but kind of >> [laughter] >> less familiar.

But we're we're kind of a firm that is very active active house. So, we only run active products where we're adding value through our investments and our kind of investment process. We kind of particularly specialize in in high kind of high growth equity investing. We're a one of the kind of most famous like investors in SpaceX, early in Tesla, and you know, we're in the Throgmorton Revolution etc. But BG as a whole, we kind of you know, we we tend to we have the we tend to think in decades, not quarters, and that's really our edge. We have a very very long-term view. And for us, crypto digital assets, that's firmly within that and we we we stick to invest in the most innovative companies. And you know, really with crypto, we're looking to almost like disrupt ourselves and bring that innovation in-house and be kind of

a really I guess positive influence in how we can help like crypto native teams really scale up in a way where they're kind of building products that you know, institutions are going to not just know and use but also love in time. And and as the tokenization lead at BG Baillie Gifford, what does your day-to-day look like? Are you are you helping more crypto native teams? Are you educating a lot of the traditional financial institutions? Helping bridge the gap, bring them on chain? What is your what is your day look like on a on a normal basis? The day is long >> [laughter] >> but it's very fun. It's a bit of everything. So, I also run a bit of money as well myself. So, I run a bump bump portfolio as well. And but in my tokenization role, I'm very much focused on building kind of tokenized funds. We

can talk about that like fully native tokenized funds, what that looks like, and how we do that in a way which is kind of both D 5 native but kind of regulatory compliant and is in a way which you know, our existing client book not only would be applicable to but also would you know, is better to the extent where they would want to move over from traditional product. And the other side is that working with crypto native teams, helping them think about how they go from just being kind of a a point in time product to being a scalable platform across and you know, basically cannibalizing you know, ingrained intermediated parts of the TradFi market and really taking them into the regulatory clear area and thinking about how yeah, how do they beat the incumbents? And yeah, as you say, you know, talking to our existing

client base, helping them educate like what why use a tokenized product? Why why you know, what do you need to go and buy a tokenized product? Like what's the utility beyond just simply you know, owning a mutual fund or something like that? And taking them on that journey and because BG is a kind of you know, we're a private partnership, we don't have any external shareholders, there's kind of a trust element. We're not really trying to we're not trying to extract anything from them. We're just simply being kind of subject matter experts and taking them on that journey. So, so let's start here with the sophisticated investor, that that end user, that customer.

Why is it better, right? Because we've talked a lot about how tokenization can help make a lot of these markets more efficient, lower settlement times, ultimately provide some value in terms of understanding better risk topology as as far as where the where the money is at any given time, lower settlement times unlock a lot of idle capital. But a lot of that those efficiencies happen at the enterprise level. >> Yeah. They can save a lot of money, increase their bottom line, but ultimately from the end user perspective, it may still look like the same security through a broker-dealer that they're they're used to they're used to purchasing. So, what is the benefit of tokenization for the end user? Yeah, definitely. I mean, maybe taking a bit of a journey here.

So, like when when Baillie Gifford, we think about anything we do in the crypto space has to be what we call the same but better. And we say like so, anything we do in terms of product creation needs to meet the same standards the like the same structuring, same quality, same ownership rights that we do in the in the traditional space, but it needs to have a but better element. And that can come in many you know, many different veins. It can come from you know, better utility, the ability to post it as collateral, get kind of you know, or be it through composability, being able to build like a vertically integrated kind of portfolio across a stack. It can be through speed efficiency, but you know, it can also be cost. And you know, Baillie Gifford slightly different to other people, when we save cost, we pass

on to the end customer. We don't enhance our bottom line. We see that there is a you know, that we're able to do that because we don't have external shareholders. And we say, look, there is a fair market value to investment expertise. That's what we currently charge. We don't extract any any value above that or below that. We we simply we know what we're good at and we do that. And anything that we because ultimately, if we're saving costs for customers, we're also enhancing their outcome in terms of better financial outcomes. You know, two basis point, you know, saving over 10 years will compound over a 60-year life or a savings life, that will compound over time and be truly meaningful. And so, it's in our best interest in our fiduciary duty to pass that on to customers. Some of the I mean, some of

the use cases I get particularly excited about you know, there's obviously the collateral piece for money market funds, you know, being able to post collateral to kind of you know, enhance like FX efficiency, meet you know, cash mismatch matches so I'm not able to sell down parts of my portfolio and then buy them back two days later just to meet a two-day funding cycle. Those things I mean, they're quite obvious but they're very kind of you know, for the end kind of customer, for retail particularly, they feel quite unfamiliar. That's much more for me with my portfolio manager hat on, that feels you know, a nice warm and cuddly thing that I'd like to do. For end retail, it's much more about getting access to to kind of services that you wouldn't have had otherwise had. You know, so you know, Alby says they're talking about

kind of you know, we're thinking about borrow lending, etc. being able to essentially use your capital, collateralize your capital in a way where maybe you know, the top 10% 1% of asset holders are able to do because they have access to private banks or something like that. So, democratizing access to those services. The other thing that I think is super important is you know, I talk about tokenized funds in particular being a little bit like a gateway drug for for TradFi because what it enables us is to build the operating stack that we need to touch tokenized assets. And once you know, you've got your digital asset custodian, you've got your digital transfer agent, you've got all of these things, you can then start to build fully on chain stacks and be a player in underlying tokenized securities. You know, we're a big investor in US stocks. I'd love to run a

fully on chain US stock portfolio, which is just run out of a vault. Well, guess what? You know, my cost of running that fund probably drops about 60 basis points. You know, and I can pass that on to customers. So, that's when you know, those folks really get to feel the full utility. The last thing I was going to say is in terms of some of the stuff that feels a bit unfamiliar to people in retail. I think people forget that a lot of retail flow is then packaged into institutional flow. You know, if you're going through a Vanguard or BlackRock, you know, you're not buying you know, often institutional, it's being packaged into an institutional product and then often goes and you know, is then like goes through the financial system, etc. So, even those things that feel a bit distant and weird and like things like

collateral for FX or you know, composable portfolios or funding cycles, all those things or even just custody and TA, you know, them becoming fully on chain and native, dropping that cost, dropping the human error, dropping the manual the manual processes, that will have tangible value. It just it feels several orders removed. We like to think about it is in if we get this right as as a traditional finance and a decentralized finance community in coming together as finance, we are going to basically improve the risk-adjusted outcomes for everyone in this space because we'll be reducing the human error, the operational risk. It simply just becomes the tech risk of being on chain.

And hopefully, you can also save costs, which will increase the financial outcomes. And if you pull that all together, you should be getting a better kind of sharp ratio for for your assets. >> So, that's the better piece. But you also mentioned like as secure, right? Because you are [clears throat] taking the on chain risk. And maybe you're minimizing a lot of these other risks, you're making things more efficient, ultimately passing on the the lower cost in terms of cost savings to the end user, the end customer. But you know, I really like your framing this the same but better. And so, you know, talk to us about how on chain risk might compare to some of the human error and some of these risks that you're mentioning that are currently embedded into the system in the off chain system. How how does the on chain

risk compare to what is currently in place? For sure. Yeah, so there's I mean, there's a couple of things. What do we mean by the same in the first instance? Well, you know, when we we tokenized the first fully native tokenized fund in the UK, which was actually the strategic bond fund. And we did that and what we mean by fully native, we mean on chain books and records. So, we're utilizing the the blockchain as the legal source of truth of ownership 24/7. Come back to that in a bit cuz that leads into your question. And then the second piece is also it's fully native. So, there's no kind of SPV, there's no beneficial ownership structure, there's no you know, extra layer of cost risk and particularly counterparty risk.

>> And this is the direct tokenization model. Recently, we've heard quite a bit about the wrapped token model. Any anything to say just as a quick tangent on the wrapped tokens for us, tokenized equities, tokenized funds? Yeah, I think so. Look, look, to me different product has different meaning to different people, right? And you know, it's really about building products that that really fulfills the risk profile that different customers want to hit. So, for example, the wrapped token makes a lot of sense for particularly retail. They just want they want access to the asset. They want it in the form that they they want it in. Um they don't care as much, you know, potentially as about like corporate actions, pay disputes. Um you know, they don't mind that it's an SPV out of the British Virgin Islands. They just want access, you know, they just want to

deploy. Um that's fine and and you know and that works for a lot of people and they're doing really well and I think that's going to have really strong, you know, the Ondo models of the world is going to really like have traction long term because, you know, they will have, you know, potentially greater utility because of the aspects of being, you know, I guess more fully on chain. They're not they're not limited by the structure that's off chain. With the direct issuance model, what you what you're getting and this is what's going to be appropriate for the institutions. So, like the next, you know, 650, 600, almost 700 trillion of of assets that come on chain is like for our mandates, we can't take that extra layer of counterparty risk. And we don't really want to because we don't have And so, if you're trying to say to

people, "This is better. This is you know, there's cost involved in that CAPEX to come on chain and you can only do that you you won't do that if you think you're going to get a worse product." And so, the direct issuance model where you have direct recourse to the underlying, you have regulatory clarity, you have the ability to know, you know, in specie your assets out of the structure, you have the ability to pay, you know, you know, vote on next Elon Musk pay dispute or whatever it is, you know, we have a fiduciary duty to do those things. Our mandates compel us to own those structures. We are heavily regulated institutions and so, direct issuance is basically going to be the model that we have we're forced to buy as of that. Got it. Um So, that's So, this is part of the the on-chain risk,

but the risk on chain is somewhat dependent upon the tokenization model. Exactly. And And And And the wrapped model adds layers of risk, but it adds layers of, you know, potential more utility. So, so it's a different sharp ratio, right? It's a different they're different trades. If you if you if think about it and that's that's how we tend to kind of think about it because, you know, there will be things that, you know, we might do that the wrapped model might be more appropriate for. There'll be, you know, you know, particularly if we're trying to onboard our existing book into crypto, they're only going to want to buy the direct model. So, you know, we have to play flexible. We have to be making sure that we're getting the right product to the right people and being that kind of institution of trust, um but also kind of the institution of

trust with DeFi ideals. Right. So, with the ideals of self-custody, with the ideals of 24/7 and not, you know, a you know, exaggerated counterparty risk. >> To your to your point about like what are the the kind of the savings for people about being on chain? Like what's actually better in in terms I mean, the big one for me is like transfer agency. Like this is the most potentially the most boring part of TradFi, which is like >> Sometimes the most effective. Yeah, who owns what at what point, right? And in in a mutual fund or a UCITS fund, you know, we basically go daily, we go, "This person This is the shareholder list, right?" We go once a day, "These people own this fund. This is who our clients are. These are the beneficial owners." Right? If you start to use the blockchain as the legal source of truth,

you get two extra things. Firstly, it drops the human error risk. You drops the kind of the reconciliations that you have to do. You just have one legal source of truth, which is automated. We say We like to say that tokenization is just unitization on steroids because it's just programmatic unitization. The second component is also, you know, once you start to do that, you're able to do it, you know, outside of that one business day and hour one hour every business day. And you know, that's really important because, you know, we want assets to be traded. We want people to use and not be limited by our cash flow requirements. And if you are 24/7, then that's great. It's important to say that that's only really available right now in in, you know, particularly for tokenized

funds where they have an on-chain books and records. And most tokenized funds in the market don't. Right. Um they have what's called a mirror book or hybrid book where they basically have, you know, a proxy for shareholder register on chain, but it's syncing once a day to the legal source of truth. >> Right. This is the represented share of tokenized assets right now. Um which if, you know, you can go on rwa.xyz and you can see the split and the predominant share of RWAs are currently this representative form where they're sort of just using the blockchain as an accounting layer. They're not tracking the pure true ownership of these assets using the blockchain. And they're not legally, but they're not they don't they don't have legal recourse.

>> Right. So, for example, like the the the source of truth is the thing that has that once once a day kind of point in time sync. So, trading between you know, you're taking counterparty risk in that in that moment. >> Yeah. How long has this method been available to us? I know in the US it's only, you know, been recently that we've gotten some regulatory clarity in terms of, "Hey, these things are digital securities. There's no disputing that." What do you think was the trigger moment that ultimately opened the floodgates and now we're seeing firms like Baillie Gifford, we're seeing more firms like Morgan Stanley and and others get back to Morgan Stanley in a second, but we're seeing more and more of these institutions finally, you know, open their doors to tokenized funds and start to issue assets on chain. Yeah, I think

so so in terms of like the ability to do on-chain books and records, it's been pretty new. So, they you know, Benji and Franklin's tokenized fund, they can use on-chain books and records in their Lux UCITS. And we can use it for the the FCA vehicle that we had. And the the, you know, but we had to get like special permissions for that. We had to really It wasn't just like a uniform like blanket approach. That's increasingly we think, you know, changing. I think especially as the regulators are doing an amazing job and they're thinking kind of, you know, "How do we How do we get best in class as a jurisdiction?" And that's that's been that's been brilliant. Um so, it's it's but it's it's also worth weighing up that, you know, doing an on-chain books and records takes longer through compliance, it takes it through legal, through

regulation, but it also it imply it does have a it's harder to do, right? It's it's but once you've done it, the kind of incremental cost saving over time, the ROI of that process is very high. Who's in the in the position to be disrupted the most as a result of the direct tokenization model? My understanding right now is that we do have some broker-dealers where the broker owns all of the shares and then it deals the shares to its end customers in terms of the retail users that are using the broker-dealer platform. Are those firms about to be disrupted as we have this this moment that unleashes peer-to-peer finance? These shareholders are able to own tokenized shares directly without

needing a broker-dealer of sorts? I think look, a broker-dealer is a certain type of license. It's still incredibly important and broker-dealers will have particular role in secondary market liquidity, those sort of things and the kind of the distribution like it will start to just look more like a a TradFi-esque distribution relationship, but there will be kind of less kind of intermediaries between them. So, you might go So, like there's a really good study by Dr. King, which kind of said in the UK, um there are 19 intermediaries from pound to product. Pound is being our kind of our currency to product, right? And I think what you'll basically is seeing, you know, that 19 might go down to three. You know, it might be issuer, broker-dealer, wallet, that sort of model. And that that reduction and you might be like, you know, you'll be reducing the the the custody might be on

chain, the TA might be on chain, the fund admin might be on chain if if these assets underlying are on chain as well. And so, you know, I haven't seen this this this unpacking, this unbundling of the 19 these 19 intermediaries. If you could just call out maybe one or two, who do you think are most at risk in that stack? I think so I think look, a lot of them change and they they become so like they become so TA becomes less of a record-keeping role and it becomes more of a KYC role and it becomes more of like a uniform product probably with custody. See, like the big banks moving that, you know, most big banks don't really make a huge amount of money on their custody business. Custody is a cross-selling thing. They bring you in as custody and then they try and

cross-sell you TA, etc. And I think that's going to be the same thing here. They're going to, you know, TA that actually become like a KYC/AML program. And so, I think they'll change. I think the biggest ones who get disrupted are kind of like um particularly the kind of I I guess you don't kind of the AJ Bells of the world where you're you're kind of your distributors in that and you're you're just simply getting it and potentially in wallet as we know a lot of wallet producers want to do that. You know, those sort of players, their kind of, you know, value add is already questionable, but you know, at you know, charging 30 basis points for a platform fee, you know, you really start to question are they required? And I guess the key point here is that the D2C model, the direct consumer

model, is much easier to do in a tokenized world because you're not having to have, you know, APIs for every fund, every product. You just have oracles that sit on chain. So, the hurdle rate to the hurdle rate to access is lower, the hurdle rate to being a financial participant is lower, and the ability for us to have direct relationships with them is higher. Yeah. Um so, I think those are going to be the big disruptions and I I I I think, you know, I actually think the banks could be relatively big winners of this. I always say to people with particular when I'm talking to startups, there's there's two ways of disrupting. The technology is disruptive or your company is disruptive. And you know, for a lot of spaces places now, this the technology is disruptive and it's very hard to disrupt incumbents if

the incumbent itself is disrupting itself, right? And I think that's particularly true in this space. So, I think there's, you know, there is a massive opportunity if the banks particularly don't get let bureaucracy get in the way and they able to really empower the people. We have fantastic people now in those seats at the banks. I think we've seen that particularly in the last couple of weeks. Um to kind of get out of their way and enable them to innovate in a really really creative manner. Um I think they have the ability to be, you know, phenomenal winners in this space. And And same goes for the asset managers as well. You guys are doing incredible, you're extremely forward-thinking and fast-paced.

BlackRock as well is doing incredible things as part of supporting tokenization as a whole, almost disrupting themselves before they can be disrupted, uh Uh much an adapt or die mentality and they're choosing to adapt. Um only a couple questions left for you. You mentioned working with startups, working with some crypto-native teams. Same question, you know, maybe just from the other side, who do you think are the crypto-native teams that are most poised to do the disrupting? >> Mhm. It's It's like it's very It's very interesting. I wouldn't mention any names.

>> [laughter] >> But I think that the players who really like the best way to, you know, I think the the best example >> what? The best example I think is is those who are, you know, being you thinking about being institutional first and um but with the kind of principles of DeFi. And so I think the players who are can, you know, trying to base I always say don't don't overcomplicate it at the start. Because as soon as you add complexity at the beginning, you've lost. And so you don't want to necessarily reinvent the wheel because finance is actually pretty efficient. What you're trying to do is take things that already work today and just make them, you know, quicker, faster better automated lower counterparty risk, all of those things.

And we've seen a lot of players come to the space who are thinking, okay, this thing already exists off-chain. For on-chain assets to have a real flywheel effect, this thing is also So I always think about you know, secondary market trading. Like market makers are actually a really big winner, I think, in this space. And their ability to, you know, as you take air gaps out of, you know, the cash settlement cycle, well, if you take air gaps out, you need to put liquidity in. So liquidity providers, I think, are going to have, you know, you know, particularly in the meantime having an ability to almost like name their price. I think that's going to be really important. The secondary market liquidity piece as well is really interesting. You know, we need to be in a world where tokenized funds can be traded, make a market in them,

and we're not taking like 2% haircuts because, you know, ultimately if you take a 2% haircut on an underlying portfolio, like what was the point of doing it in the first place? Unless you're you're a forced buy forced seller. So I think those things are going to be really important. And then I think this, you know, stablecoins are the thing that have real like impact in the real world today. Um and so anything which is kind of stablecoin adjacent infrastructure which actually makes them usable across the stack rather than just simply, you know, payments, you know, just-in-time payments. Because actually most players corporates, banks, etc. don't want to be just-in-time. Like actually there is a there's a premium you're willing to pay.

There's a cost of carry that you're willing to pay for peace of mind as an issue, as a CFO. And so people who are able to take stablecoins beyond just simply the kind of the cross-border just-in-time payments piece and expand it out um beyond just yield as well, just expand it out across the stack through the banking system, they're going to be going to be the real big winners. And that might not be issuers, that might be infrastructure, that might be, you know, you know, might be market makers. Um so I think I guess the big thesis I would leave you with you on this question is like currently in finance you have vertical leaders, you have asset managers, you have banks, you have exchanges, etc. You have these vertical leaders who define a category. Um in the next 10 years, I think there's

going to be basically a complete breakdown in those barriers and you're just going to have expanding times to tangible addressable market, but they will be collapsing into each other. So wallet providers will be competing with exchanges, banks will be competing with asset managers, asset managers will be competing, you know, with the, you know, direct lenders and like the competition is going to people will be cross verticals and they'll be able to because the technology reduces the edge that you have in a particular vertical. It allows you to both compete but also have to defend. And so I think the big thing is like you're going to have this time grow as a collective, as finance, but we're going to be able to essentially move between those verticals and not just be defined by the thing we already do today.

Yeah, incredible. I I feel like we could go for another another hour, but I I I think that was such a great point to leave off on because it really does open up our minds as to how these colliding worlds might start to intersect with one another and and what could potentially shake out as a result. And so I'm going to I'm going to let that one I'm going to let that one settle, marinate. [laughter] And would would love to do it again sometime soon. >> Thank you for having me. Really appreciate it. Thank you for having me. Absolutely. Yeah, cheers.