Fireside Chat: Tokenized Securities with Carlos Domingo and Camila Russo

Transcript

[applause] >> Hi. Um, welcome everyone and thanks EthCon for having us. I'm I'm really excited to interview uh Carlos from Securitize. So, I I I believe it was Friday the SEC approved your S-4, which means now you the doors are open for Securitize to go public through a SPAC vehicle. Uh so, yeah, can you kind of explain what that means and the significance of it? >> Sure. Well, thanks everybody for having us here.

So, last year, you know, our company became 8 years old. The market was finally growing after many years of, you know, tokenization not being a thing and we took a leading position because we landed a partnership with BlackRock and, you know, Apollo, Voya and many other companies. And you know, we were thinking about what to do with the company and then, you know, I think Circle did the IPO, which was extremely successful and then I kind of realized there is a lot of, you know, investor demand for tokenized dollars, which is stable coins. So, tokenize everything else, which is what we do, should also, you know, be something that has a, you know, demand from investors. And for us, working with very large institutions, you know, going public and having transparency towards our financials and being able to, you

know, raise a larger amount of money, tap public markets, etc. We thought it was a very good opportunity and then we look at the different options of going public and decided to to go public through a a merge with a an existing public literary company and a SPAC from Cantor Fitzgerald called Cantor Equity Partners 2. And then we filed with the SEC and then this is like a a very lengthy process where you, you know, you do the business combination agreement with the SPAC, which means you agree to merge at a particular valuation. And then after that, you have to file something called an S-4, which is similar to what a company does when they IPO. In in an IPO it's called an S1 and SPAC is called an S4, but it's essentially the same process. You have to file a very lengthy document. It's like 850

pages uh with all the disclosures from your company, all your financials, description of your business model, like all the uh you know uh warnings to investors about the risks uh etc. And then finally on Friday, the S4 got approved, which means this is kind of like the last uh step towards going public given that we're doing a SPAC. Now we have a a 20 day period to do a shareholder voting for the shareholders of the SPAC to approve the the merge with uh Securitize. That's going to happen on uh June 29th. And then two or three days after we'll go public on the New York Stock Exchange and we'll change the ticker from the SPAC, which is C P T to the ticker of Securitize, which is going to be S E C which you can read sexy.

>> [laughter] >> Nice. Um awesome. Okay, so uh July 2nd, the uh Securitize uh SPAC will start uh trading on NYSE. Um what will this enable for Securitize? >> As I mentioned, it it give us two things. One is it firstly puts our company out there. Like more people will get to know Securitize and tokenization because being a publicly traded company gives you more exposure. It also [clears throat] allows us to basically have a a larger pool of capital between the the SPAC trust and the the PIPE we raised. We'll have around half a billion dollars in cash that we can use for not funding the operations cuz we don't consume a lot of cash, but you know, basically expand businesses, do acquisitions uh etc.

But more importantly, it will give us the the credibility with the large, you know, financial services companies that we work with that uh Securitize is here to stay, that we are you know, what our financials are, how much are we growing, how much money we have, etc. and give us kind of like the credibility we need to operate in this you know, very traditional space and try to bring traditional companies into the crypto. >> Um So uh you have uh around uh 4 billion in AUM. You're facilitating um the tokenization services for some of the biggest institutions, and a lot of that is happening on Ethereum. Why do you think Ethereum has emerged as, you know, one of the leading or or the leading blockchain for tokenization?

>> Well, we started on Ethereum. When I started the company, it was 2017, and and Ethereum was pretty much the only uh credible blockchain at the time. So, we've been kind of an EVM shop deploying on Ethereum since the very, very beginning. That's the DNA of our company. Um of course, over the years, there's always blockchains that have come, and then we also expanded support uh because obviously there's different ecosystems and and market demand, but Ethereum consistently continues being the largest, uh you know, platform for us, the largest blockchain. I think we have like around 30% of our assets that are there. And it's the largest one. Um And then many of the Ethereum L2s as well, which kind of like adjacent to Ethereum, if you want, that we support as well.

Like, uh you know, ZkSync or or um you know, Arbitrum, Polygon, uh etc. So, and I think it, you know, from from the perception of a financial services company, when they approach blockchain, they just want to make sure that you know, their assets are going to be secure, that there's going to be an ecosystem, that there's going to be enough liquidity, etc. So, Ethereum kind of stands out in all the It checks all the boxes from from that perspective. Um so, for us, the issue of um you know, gas fees and things like that that has been problematic for other use cases is really not a problem for uh for what we do. So, that has never been an an impediment. And I think the the fact that it's the most decentralized and the most secure, and the one that has the largest ecosystem and liquidity is what I think attracts

the institutions. And BlackRock, for instance, when we launched with them, the first blockchain they wanted to be was Ethereum. So, >> Um the fact that it's it's a a public chain doesn't have a lot of the the privacy guarantees yet. Um the uh kind of like a permission facilities to do KYC to, um, kind of know your counterparty, like all those things that institutions usually look for are I guess like harder to to do on Ethereum. Has that been an issue? >> No, so so we use a permissionless infrastructure like Ethereum, but our assets are permission, right? Because our assets represent securities. So what we do is basically we leverage the the power of the smart contracts on Ethereum

to be able to, you know, white list on chain certain wallets that have been KYC. So, you know, on chain we know this wallet is safe because it belongs to like a real investor. And then we use the smart contracts to in a decentralized manner control how transfer happens and how the assets move across, uh, Ethereum. So, the fact that the the underlying layer is permissionless does not prevent us to create you know, permission assets that move in a decentralized manner. That's the the important thing. There is no when when an asset that we issue on Ethereum moves from one investor wallet to another investor wallet, moves without any, you know, intermediary. This is basically is a peer-to-peer transaction that the smart contracts, um, approve or reject. Now, privacy is a different story. Privacy has really not

been a thing until very recently that some companies are trying to kind of position themselves about uh, privacy, but I want to distinguish about two types of privacy. There is privacy by you know, like some other blockchains do, which is say, "Oh, we're private." But they're private because they just basically restrict the access to the asset. To me, that's saying that, you know, your like an Oracle database is private because only those three institutions access the Oracle database and nobody else can actually see what's inside. That to me, that's not interesting. I think what's interesting is some of the privacy approaches that you can actually build on top of Ethereum where you can actually create you know, a a layer on top of the transactions to to introduce privacy in the transactions while you still see it on a public infrastructure. So,

and that's kind of the approach that we've been looking at. Uh it you know, it I think eventually that will require to be there. I think today it's fine. Like most of the RWAs are are sitting there and and this pseudo anonymity of the wallets, etc. is not creating a problem. But yeah, I see a future where, you know, introducing privacy and transactions on Ethereum will become more and more important for RWAs. >> Especially for creating kind of more composability and and use within DeFi, which right now is is a bit limited for tokenized assets and and RWAs, right? >> Not not true. So, we've we've developed something like a vault technology where any kind of like permissionless DeFi protocol especially for lending can actually take, uh you know, permission assets as

collateral. And then we kind of control also the liquidation process because you know, the assets represent securities, right? So, if if you borrow money against an RWA on let's say Aave, and then your your loan gets liquidated, you need to know who is actually taking the underlying asset, right? Like on on a on a digital asset, not a traditional digital asset, it doesn't matter because they are you know, permissionless assets. But on on permission assets, you need to control that. But introducing few of these kind of like modifications into existing DeFi protocols, it actually works. We've We're integrated with Aave. Aave has a separate marketplace called Horizon, which is dedicated for RWAs. We're integrated with Euler. We're integrated with, you know, many of the leading, you know, DeFi lending protocols. Now,

trading is a different story. So, we have done an integration on Ethereum with Uniswap X, which is an RFQ mechanism to be able to provide liquidity for on-chain assets. And and the the the RFQ from Uniswap X is is still decentralized, but then we kind of control on the on the two ends that the asset is permissioned and that also the market makers that are, you know, responding to the RFQ request are also permissioned. So, so the the infrastructure the trading infrastructure is still decentralized, but the end points are are not. And then automated market makers is kind of like the next evolution, which I think it will come, but it's a bit more tricky from a regulatory perspective.

>> Got it. Um that's that's that's exciting and interesting that all the pieces are there for um for RWAs and tokenized assets to to integrate more fully with with DeFi and and to see more trading volume and more lending volume um or or RWAs used as collateral in more lending markets. Um so Citi said uh um said that they expect a growth of RWAs to go to 5.5 trillion by 2030. Um it's we're still a far far away from there.

>> [laughter] >> So what will it take to see that growth? >> I think we're I think we're very far away. So so we are at like around I don't know depending what you consider as tokenized assets because there is a lot of like misleading metrics out there, but let's say we have around 30 billion or so that I think most people will agree that are real tokenized assets on a permissionless infrastructure. Um so to go to 5 trillion that's a huge leap, right? So first it depends on what you count, what asset classes you count, you can you know grow faster or not, but I think the one of the ones that we're very excited about is is tokenized equities and ETFs.

Um because if you think about the size of the market, the entire tokenized equities and ETFs worldwide is probably like 150 trillion dollars or something like that. So only if a small percentage of that like 2 or 3% moves on chain it then gets you very very close to that 5 trillion dollars and it actually basically doubles the size of the entire crypto market. Uh so so tokenized equities and ETFs done the right way because you know there's many ways of doing it. I think that's the the asset class that probably moves the needle and it's very exciting to see that the kind of the leading companies in the TradFi space that are kind of like you know working with those assets on traditional markets are coming on chain.

So we've announced a partnership with Nicey to be able to trade uh tokenized equities and ETFs 24/7 with instant settlement. We've announced a partnership with Computershare, which is the largest transfer agent that controls the publicly traded company shares that they want to use Securitize to move them on chain, etc. So, I think that is what's going to move the needle to get us closer to this $5 trillion projection that Citi put out recently. >> All right. So, tokenized equities is where you see the the most uh area of growth. >> ETFs. ETFs, sorry. >> Um but you said there's a right way to do it. Uh and uh of course there are many competitors in in the tokenized equities space. Um Can Can you Can you expand more on what you mean by that?

Like How How is Securitize uh doing tokenized equities? How is it different from uh all the competition? And um related to that, if you can also uh touch on just like the the potential uh fragmentation that uh you know, that that that can come from all these different venues doing tokenized equities, uh issuing tokenized equities in in a different way. >> So, so first I was going to say like a lot of people that today say that they tokenize equities, they're not tokenizing the equity. They're tokenizing something else. They give you a token that does not represent the actual underlying equity. They give you a derivative. They give you a wrapper, uh a price swap, uh obviously most of them block the US,

which is the largest market in the world because the way they do it is probably not compliant here. Otherwise, why would you exclude the largest market in the world if you're compliant? Um and that on top of that, that creates fragmentation as you mentioned because every single company creating these different derivative under a different construct is essentially creating a different asset, right? Like you don't have the same asset. And look, tokenization was meant to be technology to solve problems and eliminate intermediaries. And what those people are doing, in my opinion, is they are adding more intermediaries, more counterparty risk, and creating more problems because they are fragmenting the market. They are bypassing regulations. They are creating issues with insider trading.

They are creating issues allowing you know, people in countries like China to access US stocks, which is not legal, etc. So, the way we we feel that is the right way to do it, and by the way, we're not the only one in the industry. There's some of our, you know, competitors like Superstate, Centrifuge, Bullish, etc. They kind of push towards the same direction is where the token does actually represent the same share of the company. You're not buying something different. You're not taking any counterparty risk towards any entity. You're not buying another entity, but if you're buying the same asset, it just happens to be on chain instead of being sitting on a centralized database on an exchange. So, and that gives you the same rights. It gives you the same,

you know, voting rights, access to dividends, etc. And I think that that does not introduce any fragmentation because it's the same asset that already exists. It just creates more liquidity because it allows you to trade on chain in a more efficient way. So, we do believe that this is the right way to do it, and of course, it's as everything done right, it's harder than if you decide to take shortcuts. And unfortunately, that's the situation where we are today, but I believe long term that will be the prevailing mechanism. >> Um right now, what what still needs to be solved? Like, what would you need to see? What will investors need to see, and issuers need to see to bring more assets on chain?

>> I think you need to see utility for the assets, right? Like, if you put something on chain, but then you can't do anything new with it, then it's less interesting, right? It's maybe more efficient, maybe it's managed in a in a better way, etc., but usually on innovation, innovations that create efficiency versus innovation that create new markets, you know, efficiency is less interesting. New markets is what is interesting. So, I think that as we see that tokenized assets have a specific characteristics that makes it better than the non-tokenized asset, that is going to drive investor demand.

And then going to give you one very simple example. So, as you know, we we work with BlackRock. BlackRock is a very large asset manager, the largest in the world. They manage like $12 trillion in assets. And within the many verticals that BlackRock operates, there's one that they call cash products, right? Which these are products that are act like cash, like dollars, but they usually contain treasuries. Um so, BUIDL, which is the product we tokenized with BlackRock, falls into that category. And because treasuries give you a yield, we pay dividends. And then if you buy any of those products from BlackRock, they will give you a dividend based on the on the Fed rate on the on the interest from the US government.

Now, the tokenized version of BUIDL is the only one of all the products that BlackRock has that pays daily dividends. Why? Because on chain is very easy to pay daily dividends because for us it's basically one blockchain transaction to basically issue more tokens into the wallets and we know in real time the balances even if the tokens have moved, uh etc. So, why is this important? Because if you get paid dividends on a daily basis, means the same the the same second day you've been paid more because you've accrued more interest into the fund. So, our fund is the best performing because precisely of these daily dividends. It also you can move it peer-to-peer 24/7 across investors.

You can also have on chain liquidity uh 24/7, etc. So, it has characteristics that makes it better than the non-tokenized asset. So, I think as as you we start creating these tokenized versions of assets that also, for instance, as you mentioned, can be you know, used as collateral on DeFi to borrow or can be trading on chain with instant settlement 24/7, etc. As those things happen, then the investor demand will move from the traditional assets into the tokenized assets. So, that's kind of the journey where we are into providing utility to tokenized assets to make them more attractive than the non-tokenized versions. And I think that's what ultimately will drive investor adoption.

>> And and speaking of that, where are you seeing the the most demand right now from tokenized assets? >> Today is pretty much the the crypto crowd right? >> [clears throat] >> It's the large, you know, uh protocols out there that are kind of migrating to to RWAs, let's say like Sky Athena and others. It's also a lot of the the crypto, you know, hedge funds that are using RWAs for, you know, posting collateral on derivatives tradings, some of the foundations for treasury management, some protocols that create derivative versions that need to generate yield, etc. So, that's that's where the the demand comes today.

I think that the step change in terms of demand for RWAs and to get to these $5 trillion that Citi is saying is when you, as I mentioned, the take the the TradFi, you know, people that want to consume the tokenized asset. And that's still, you know, requires them to be familiar with wallets, to use a stable coins, etc. So, there's still a little bit of friction that crypto people don't have because crypto people are familiar with wallets, they already consume stable coins, etc. But I do I do believe that's the direction of travel and where where we will see the the step change in demand changing.

>> Are there any regulatory steps that institutional investors are still waiting for to hold tokenized assets? >> Not not really. So, today tokenized assets are legal in the US if you do it the right way, of course. Lots of people doing it the wrong way, they they claim that, you know, they can't do it in the US, but that's actually not true. You can do it in the US, we do it in the US, we have licenses in the US. We work with the largest, you know, asset managers that are US-based, the largest exchanges like nice etc. So, so there is definitely regulatory clarity, especially since, you know, the change of the on the SEC recently, like a year ago. So, so there is a path to do it here.

Are there certain things that will eliminate some friction? Yes, of course. I think clarity will help because it will, you know, bring you know, more clarity towards the the crypto ecosystem overall. I think genius act for stable coins is great because now it makes a stable coins legal. I think there is certain things for tokenized equities, some some of the rules that apply to centralized exchanges that maybe when you trade them on decentralized exchanges on DeFi then you you shouldn't need to follow etc. So, there is kind of marginal improvements that will make the the RWA space better, but for the most part today if you want to operate compliant with regulations, there's zero problem.

So. >> Okay, so it's more about kind of getting over that initial hurdle of getting used to just a different kind of asset and wallets just like that maybe like UX friction of dealing with crypto. >> Yes, this is like I mean I think the crowd here is very young, but um if you 30 years ago or 20 or 40 years ago, you wanted to to connect to the internet there was a lot of friction. You had to download TCP/IP software on your computer because it didn't have there. You have to have a hardware modem and you have to connect it to your phone and get your mom to allow you to not receive phone calls for like 2 hours while you're connected to the internet and you know, go dial up and wait for 5 minutes to connect and there was

friction, right? But people saw the value and started connecting to the internet because the internet opened up like a lot of you know, new applications and new opportunities. So, I see crypto kind of like the same way that we are at at the very early stages of the adoption curve where the really kind of people that are ahead of the curve in terms of adopting new technology, they go through this friction of using wallets, consuming stablecoins and stuff like that. But I see also kind of following the same path as the internet where today you open your phone or you open your laptop and you're connected to the internet. You don't even think that you're connected to the internet. So, I think that there's a future in the coming years where you're opening your phone and you're connected to a blockchain and the financial assets that you

consume sit on your phone and are sitting on a blockchain without you actually having to know that there is a blockchain behind or having to remember a passkey or having to download a separate app etc. And I think that's what ultimately when the endpoints get integrated with blockchains and blockchains become transparent, that's when really the mass adoption happens. >> So, looking at at that future, but maybe not so far ahead like like CD says, um but just you know, in the next uh 5 years, how how does uh the financial markets uh look like? Um and what role uh does Securitize have there?

>> I think what we're going to see is kind of like the the new the traditional markets are going to stay there. Let's just be realistic about it. Like this this the thing saying, "Oh, everything is going to be tokenized and then, you know, nice is going to disappear." That's not going to happen in my opinion. I think traditional markets have a ton of market participants, a lot of liquidity, a lot of infrastructure that has been developed over the years, etc. So, that's going to stay there. What we're going to see is we're going to see a new market that is going to emerge in parallel that will be incremental, that will run on blockchain rails, and that will be much more efficient, and that slowly is going to migrate from traditional markets into, you know, blockchain-based uh capital markets. And those are going to coexist

for a period of time, and then over time then one thing will migrate to to the to the other one. But they're going to coexist for for a period of time, and I see Securitize as being the company, you know, powering this new blockchain on-chain capital markets, if you want, um where where you need to bring assets, you need to bring also uh you know, trading uh capabilities, you need to bring, you know, DeFi lending markets, etc. Obviously, interacting with the with the rest of the ecosystem. But I see us as kind of like the conduit between bringing the TradFi people into crypto. And sitting in between, right? Because we we are fully integrated with like the Ethereum and all the protocols and all the wallets and all the infrastructure there, but at the same time we're fully regulated, so we actually can interface with that traditional financial services

firm to bring them on chain, so. >> And in in that world, um where does Ethereum sit? Is it still leading? >> I think Ethereum I I I have a hard time thinking that Ethereum is going to disappear, right? Like, you know, he's been around for such a long time and and he continues improving and he's still the leading you know, blockchain from from many different respects. Um so I still think that first I do think that there's going to be kind of like a collapse in the amount of blockchains out there. Like today we have way too many and some of them don't really have any meaningful activity and I think those kind of are going to disappear over time and I think the market will kind of like consolidate with few blockchains that where Ethereum probably is the one that's going to be the more like like

the the multi-purpose blockchain where it will serve multiple use cases and then alongside maybe you had specific blockchains that are geared towards I don't know, stable coins or like specific use cases. Um and that's kind of where I see the the market evolving and hopefully at some point you know, this will consolidate further and as as developers we don't have to deal with multiple chains and we can just sit in one particular chain. >> Awesome. All right, thank you so much Carlos. Congrats again on the S4. >> I'm looking forward to uh July 2nd and see how that trades. Um and thanks everyone for joining us.

>> Thank you. >> [applause]