Beyond the Token – What Do You Actually Own?

Transcript

Hello everybody. I'm David Waxman as mentioned of Waxman and Hawkeye Digital publicly traded merchant bank. And I'm joined today by an esteemed colleague, Frederick of the Cardano Foundation. Frederick, why don't you quickly introduce yourself and then we're going to jump straight into it? >> Yeah, my name is Frederick Gregaard. I'm the CEO of the Cardano Foundation and we are contributor to the world's largest digital nation state called Cardano with 9 million citizens, full on-chain governance, and we're really putting blockchain out to change social systems and financial infrastructure for the better.

>> Well, you have a background even before you came in the blockchain space and working in financial services in heavily regulated spaces. And what I want to talk about today is tokenization, which from the communications industry I can tell you is a buzzword that's gotten a lot of attention. But, it's just a buzzword, Frederick. I mean, we all know that lots of companies talk about tokenization and essentially nothing gets done. But, my understanding is that there are some fundamental flaws with essentially almost all tokenization projects thus far. Is that true? >> Yeah, that's absolutely correct. And you're absolutely also correct that it's a buzzword. Yeah. So, what's basically is happening right now is everybody's talking about tokenization because tokenization is really easy to do. So, back in the '80s we actually tokenized

stocks. So, you know, we actually took the paper trades, right? And you know, you came to the bank and we made it digital, right? But, the digital version of the stock had some enhanced qualities about it. It allowed you to do things better, faster, cheaper. And what we're doing now today is we are we're basically digitizing something which is already digital, but we're now putting handcuffs on it. So, we're actually reducing features. We are making more restrictions by tokenizing. >> Okay, so what do you mean by that? So, like let's say right now there's some sort of security and someone tokenized it. What rights does someone have if you are a an owner, an investor in that security?

>> So, obviously this has been done around the world multiple times, right? From really big companies. So, it's really hard to answer that question, like what rights do you have? But, in general you have worse rights. So, you're worse off than if you buy the actual stock on the >> what What do you mean by that? Give me an example of something that I might not have with tokenization platforms today. >> Yeah, standards. So, let's say you buy a Nvidia stock or an Apple stock on a tokenization platform. >> Sure. >> You actually don't own it, right? So, first and foremost, you might have a participation in a balance sheet, maybe on the Bahamas and the Cayman Islands, where this balance sheet also owns some of those stocks. But, it doesn't mean that you have the legal claim for the

actual stock which you think you own. Which could be a okay if you then can get a discount on the stock. You can buy it at a cheaper price. >> But, probably not. >> Probably not, right? Because you can go on Robinhood and you can trade stocks for free, right? >> Right. >> So, it's really hard to get it cheaper, right? So, you actually have no legal recourse who gives you the claim. And if you wanted to go to a general assembly or participate in any kind of corporate governance, you don't get that. >> Most of the time So, like I may not have voting rights even though I'm an owner of a stock because I bought a tokenized version of it. So, I'm quite literally getting a hobbled version of that equity.

>> Yeah. And you said owner. You're technically not the owner of it. You're the owner of something represented on the blockchain who might or might not follow the value of the stock. And then the tokenization company would be saying, "Yeah, but we guarantee you that it will follow the value of the stock." >> Okay, fine. So, let's let's assume that you're right and let's assume that there are these tokenization standards are aren't up to snuff and that's what we see universally today. What do you propose is different? >> So, we propose a different solution, right? And it has three legs to stand on. And >> So, so CF actually made this proposal recently. Is that not the case?

>> Right now, as we speak, you can go on the Cardano blockchain, and you can see 850,000 shares, which is the tokenization of a Swiss company called Veridian, which is identity company, which is just right now spun out of the Cardano Foundation. >> Right now? >> Right now, as we speak, this is being released, but it's on the blockchain already, so you can find it on the Cardano blockchain. And what you can see is that one token represents one share, but not just that, it's under the Swiss centralized security depositary act equivalent from the legal claim.

That means that, you know, it is no longer a representation of the share. It is the share. >> token is the share, and it's right now happening on the Cardano blockchain, and this is of the Swiss company. >> Of a Swiss company. >> Okay. And >> To do that, right, you needed to get to a situation that you have programmable tokens. And there is other blockchains who have versions of programmable tokens, but you always get into this problematic that the different financial centers, Singapore, Luxembourg, the US, Switzerland, is slightly different, and it was really hard to actually represent it that the like that the financial service authorities tick that box. And we are now in a situation where we can take the off-chain legal identity, which

is accepted in all jurisdictions around the world, is called the LEI, and the quantum secure version is the VLEI. We can embed that into the tokenization, so it's accepted around there. We have enough tooling around this programmability of the token, because Cardano works slightly different, that we can actually manage that on-chain and get that through all these regulatory authorities. And what we announced today, not just announced, what has happened today, right now, is we've done Switzerland. And now the next question is will Singapore and New York be next?

>> And so there could be a actual global standard, a framework for tokenized assets that works in multiple jurisdictions. That seems almost impossible. I mean, to your point, each jurisdiction has their own set of laws, etc. But you found the common threads and built that framework. >> Correct. Yeah. >> And so this framework is available already or at least for review? >> No, this is already done for Switzerland and the super standard is already done and audited. It's on chain, right? And the first company is live. And now we are working with two other jurisdictions to get them live, right? But anybody can now come and say, "Hey, I'm in the Bahamas. I want exactly that, right?"

And what is really good about it is not only can we represent it on chain, right? But we can prove how we can make this better, faster, cheaper. That means we can actually say why this is a better product. >> So talk to us Let's let's use the case of Veridian, for example, the company is being released today. Um what does this enable? What does this tokenization enable that simply wasn't possible before? >> So Veridian is a bit of a special entity, right? Because it's something we are fundraising for right now, right? So we're looking for strategic investors to make this much larger and much broader. And we already have a a basically a nation state who is saying, "You know, we want that because it can actually protect the identity of our >> Mr. digital identity platform, which is required. You need to have an identity

layer for for example, corporates. It's a >> so native wallet infrastructure who respect uh identity in the way we want that to happen, right? So it's not about putting everything in a centralized record because there's only two types of databases today. There's the one who has been hacked and the ones who will be hacked, right? And we saw that earlier today in the discussion about quantum security, right? And what we basically built is a wallet infrastructure who can manage different types of identity including these identity standards which is built on something called carry and ACDC, which is this LEI, which specifically for trad fi works, because this is what everybody is using today off chain. We just made the anchor that

you can use it on Cardano, but you know what? You can actually also use it on Sui. You can actually also use it on Ethereum. You can use it on IBM, right? Because this has to go wider. This is about how do we actually put blockchain in as an enhancement anchor for financial market infrastructure structure and not as a restriction as we see it today with tokenization. So, >> because you're spinning out Veridian, it allows it to be a truly universal uh company and and have a lot more growth. >> That's why we're doing it, right? Because we could have taken all the treasury of Cardano and put it into that, but that doesn't serve enough purpose. This should be a public good allowing investors, allowing companies, allowing family businesses and financial market infrastructure to upscale to a

world where they can actually get the benefits of this. >> Well, I want to go back to talking about kind of this this tokenized Let's call it a tokenized security for example, um using this new framework that right now works today in Switzerland. So, the token is the share. That we know, right? It's It's exactly one to one. It's not a representative of here. It is the share. Yeah. But what makes it better than let's call it a paper share or one of those old school digital shares that we might see at a transfer agent today or the equivalent. So, when we walk down the value chain of of of a share, right? You have different things like transfer agents, custodians, you have corporate actions and stuff.

And what you actually have is you have a set of databases, right? Who all need to be in sync with each other. And then on top of that, you have an identity layer. Most people in crypto is only familiar with the end of the identity layer with the KYC and AML. But actually as you walk down the chain, you have a lot more about metadata and other things who actually play a big role. And by having the share on a common platform which is locked in, so that the rules of the game cannot change. And we have the ability even on Cardano to do selective disclosure, right? So, we can actually do quite a lot of privacy around it. You have a common database. That means that the maintenance of all the other databases becomes way easier to sync.

So, just by the manual labor of moving data from A to B and then reconciling it is that the same as C or not? Already there you have a saving. >> So, that should I mean I would think um putting my my financial services hat on, that would allow for audits to be clearer, uh more accurate. It would allow for the the provenance and transfer of shares to be something that's immutable and and and visible. And it would allow for regulators perhaps in this permissive manner to have total visibility uh to who shareholders are, for example.

>> Exactly. And it's funny you're saying it, right? Because we actually took the Cardano Foundation and its holding companies, and we put all the financial transactions, including our rent and salaries, on the Cardano blockchain. So, we're talking about 70-something thousand transactions right? >> That's a lot of transparency right there. >> And then we asked our auditor to say, "Can you verify that these 70,000 transactions is the same as we have in our internal accounting system?" Then we used the blockchain by using a hash algorithm, which is I think everybody's familiar with here, right? And they actually said, "Yeah, we understand hash algorithms. So, we said we can sign that off." Then they said, "Oh, hold on a second. So, now we have digital access to all of your transactions. We don't need to go on site and actually, you know, ask for

spot check. We can take that when we want." And we said, "Yeah, you can take that when you want." "Shouldn't we then just do a full architecture check, like a full population check of all of your transactions?" We're like, "Yeah, how much does that cost?" >> time out. You're telling me your auditors went and checked 70 all 70,000 transactions. They were able to test all of them automatically. >> Yeah, and they accept that that the source of truth was the blockchain, not the accounting system. >> That's wild. >> And then further to that they said, but how do we then sign that off? Because normally they sign a PDF document. And most of us has been investing in companies, right?

And then you get a PDF document with a balance sheet and you have some signature in the bottom and you think, how do I even know these numbers are correct? Or even worse, if you look at Bank of America Merrill Lynch, like, you know, they're reporting, right? It's impossible to figure out what the risk is. It's so complicated, right? >> Impossible. >> So, they said, can't can't we just sign that on the blockchain? I said, sure you can. What kind of identity do you have? And we're like, we don't really have one, you know, we're Grant Thornton. Very big audit firm. He said, why don't you get one of these LEIs with all the banks and all the big trading companies has? He said, yeah, sure, we'll get one of those, but we need a digital version.

So, they got a VLEI. So, what happened is that after our board meeting where they presented that there was no fraud and everything was well done on the full architecture, they take the hardware security module, they walk out, put it into a computer, sign it off, so you can see on chain the off-chain verification using the Meridian standard, right? We, Grant Thornton Zurich, has done a full architecture check of all of your transactions and we find that it's in order. And then they uploaded that uh to the to the internet, right? So, >> as a consequence of this, it sounds to me like you're able to make much more comprehensive and sophisticated audits faster and perhaps less expensive.

>> Yes. >> You could conceivably then do more audits if you wanted to. >> Yes. So, the idea now is that why don't we do this every 6 months? And when I told my head of accounting that, he was like, no way. This has We we're not doing that, right? by >> way, for for business owners and for public companies, what he's talking about right now is totally game-changing. Audits are incredibly expensive. They're time-consuming, expensive, full of holes. This is What he's talking about is like magic. >> Yeah, so basically my head of accounting said, you know, that we're not doing this. This is just too much. And I said, "How much resources did you save in terms of manpower of this digitization going from spot checks to full or to

full population?" Said, "Well, maybe 50 60% less time." I was like, "Well, then you can do it twice a year, right? Same resources." It's like, "Yeah, we can probably do that." And the reason why we're doing that, right, is because if we can get to a situation that any investors out there can verify whether their investments is at risk due to a social engineering attack, due to an AI bot attack, due to a bot farm, that they can go in and actually verify, "Do these people have the money?" Yes and no. Do these people's business activities, are they actually what they say they are? You know, am I investing in a real estate company or am I investing in a bank or am I investing in a new type of

city, right? You need You want to understand that as the business does these things. And this allows you to use a genetic AI and other tools to verify the truth, not the perception of we're guessing what the truth is. >> So, less speculation. What What I'm hearing here today is it on Cardano now. Tokenization standards are better for issuers and much much much better for investors. Yes. >> Yeah, right now. And we have this audit possibilities since the last 2 years, right? And most people are a little bit scared of this because it's a little bit too much transparency. But what's You can never go from no transparency to some transparency. But where you can go

from is full transparency and then do restrictions on the privacy. Right? And then this is actually the right way of working down. It's the same you cannot go from a, you know, from a private permission blockchain to a full public blockchain, but you can go from a public blockchain and then have a layer two with the business logic. Those things work really well. Well, Frederick, thanks for being here. Congratulations on today's big launch and thanks everyone for watching us talk.