Fund Tokenization - DeFi Today Devconnect ARG

Transcript

All right, I hope you guys enjoyed that stable twins panel. Um, so today we've been talking about institutions, institutions, and institutions. But we haven't actually heard of any institutions. And usually at DevTools there aren't that many. So here we have Matthew from the Ethereum Foundation Enterprise Acceleration team who is sitting down with Theo Golden who is an investment manager at Batty Gifford, one of the largest investment managers in the UK and asking what institutions actually demand from Ethereum. Please give a big round of applause. >> Thanks. Thanks Julian. So as Julian said, I think this is a really exciting opportunity to have this conversation.

If you were here at 10, when Danny spoke, Danny was talking about institutional adoption and why Ethereum can be, you know, new financial market infrastructure for institutions and we talk about it all the time. But to hear from one of the institutions is, I think, going to be particularly interesting. So, Theo, why don't we start with like a personal introduction, how he got into crypto, and then we'll move on to Bailey Gford and others. >> Awesome. Yeah. Hello everyone and great to be here. Thank you for having us. Um yeah, so by by way of introduction, I'm Theo Golden. Uh I'm a portfolio manager at Bailey Gifford. Um and I I'm also the tokenization lead. Um in a personal capacity, I've been in crypto since about 2016. Um probably have lost as much money as I've made, but um that's

that's how it goes. Hey. Um but it's been uh kind of one of my focuses in my personal capacity for a very long time, and it's kind of what I've started to live and breathe. Um, I first got into crypto for kind of maybe more idealistic reasons. Uh, similar to maybe others in the space. Uh, I come from, uh, my on my mother's side is refugees from Libya. And I got very much interested in Bitcoin and the idea of having censorship resisted money and whether we would have had a different life if we hadn't been expelled from our from our home country. And then I fell into the rabbit hole of Ethereum in in 2016 and was working and then became a financial journalist. And I remember sitting at my Bloomberg terminal thinking is this really is this really what we built the

uh financial system around this sort of architecture when we've got Ethereum coming coming through the pipeline. So it's been an awesome journey to now be working directly with as an institution on on Ethereum and um as you you know some of you may be aware of Bailey Gford has said we're one of the UK's biggest uh asset managers. We have about $300 billion of assets under management across public equity, private equity, fixed income. Um, and we are a slightly unique organization in that rather than being a externally listed with a listed asset manager with external shareholders, we are run by a partnership, an unlimited liability

partnership with 59 partners who own the firm. So that allows us to take a very long-term view around what the future of the financial system should look like and how we can build in that. So for us being in crypto is not just an opportunistic distribution opportunity or something to just play around with. This is something that we are building a whole firm around. So we're in the place where we are taking um basically an operational um call option into being onchain by the end of the decade into the next decade. So we are incredibly excited to be building here and and working with great people. Maybe just the last thing to say is you know what do we know about tokenization? What are

we what are we doing in the space? We launched the first fully native tokenized fund in December 24 uh in direct uh um kind of a collaboration with the FCA, the UK regulator. What do I mean by that? It was a a truly onchain books and records, not a mirror books and records like you see in some of the the tokenized funds um in the market today. And it was a direct issuance onto Ethereum mainet. What I mean by that is that the fund was the token and the token was the fund. There was no SPV structure in the middle which basically adds counterparty and um operational risk. So it was a truly native, a true tokenization where we were truly employing the uh security of the L1.

>> Fantastic. I think Bailey Gifford's been around for over 100 years. So what does that journey look like from maybe the 2016 onwards where you're thinking, "Oh, this is interesting. There's some potential through to okay, we really need a strategy here." And then what does that strategy look like for the next 5 to 10 years? I think you mentioned being on chain by the end of the decade. >> Yeah, I think for us we're thinking about the the key driver for anything in in our businesses around creating a better economic outcome for clients. Um and truly the financial system works but it's not very efficient and often there is a lot of re rent seeking in the process between us as manager and

investor to clients who are owning the assets and you know putting their capital in uh to work in our products and I think what we see is there's an opportunity to remove a lot of those rent seeking players and put you know incremental 20 30 50 100 basis points of value back into uh our clients portfolios perom simply by extracting um players who are extracting themselves. Right? So I think that's the key opportunity and that's the drive here is really to put power and and and performance at at the client's disposal.

I think the the other thing is really that we believe we we do great investment products um and we believe we can do the same thing on chain. So it's about delivering the same great investment products but um and and delivering them on the same kind of fee terms etc but creating better utility. So a phrase that we use a lot internally when we talk about tokenization is same but better. And I think that's something that we want to work with a lot of people in this space and also work with a lot of the kind of high growth uh fintexs that we have in our portfolios to really kind of bring um these these uh these products that people know and love uh and own offchain um but give them greater utility onchain. And the

the last thing to talk about as I said is bringing the firm on chain. What what does that actually mean? There are a lot of very inefficient processes in asset management because we're a very regulated entity. We have a lot of um kind of processes which can either be doubled up or rely on multiple um data sources or rely on a lot of manual checks. The more we can put on chain, be that in terms of cash settlement, transfer agency, fund administration, the more we can make an efficient process um from um the time that the the the fund is minted and from the time that it is redeemed. So what does that mean to clients? Well, that also means

that we can again lower fees and put that directly into the wallets of of our clients. I think this is really nice kind of series of of presentations because Danny Ryan started out with some of these points this morning about the potential of native issuance and bringing more and more of these intermediary steps on chain to essentially make it more efficient. What does that look like at the moment? I think you're obviously going a few steps beyond some of the current implementations in terms of what's coming on chain, how native it is, how much you rely on the chain as infrastructure, but what limitations uh are there at the moment in terms of uh what is possible and uh what do you think is could be possible in the

future? >> Yeah, it's it's a great question. I think to summarize it very high level, it would be to say that there is currently in the in the marketplace no plugandplay solution for um real world asset issuers to come on chain. The solutions in the market today are either quasi unregulated or they are using um I guess very very cheap services available in tradi and then tsing those fee multiples by five, right? And then and we're really uncomfortable with that prospect because we see that as quite exploitative um or not necessarily exploitive but kind of a max extract mentality on customers who are actually

the true innovators. Right? We we're doing the same product. We're just packaging it into something which is much more efficient and giving you greater utility. But people working and saving and doing things on chain you guys are the guys creating true value in this ecosystem. So there's an element of having respect and coming and working with you uh and not extracting. And so I think that's been a a key issue is that there isn't that plug-and-play model and we've been working really hard with some of the biggest entities in the world to build solutions which then can be used as a plug-and-play for other asset managers and issuers as they come on chain. Um I think the the other thing is that you know real world assets and and tokenization has been in the kind of Ethereum mind share for for a long time.

Um, you know, I remember kind of five, seven years ago people talking about it, but really it hasn't become, it's only really become a reality in the last year, kind of 18 months and really with the advent of regulated uh and and uh usable stable coins, right? And they've created a liquidity uh rails which we can then build on. Um so with that a lot of parties have had to find kind of quasy solutions which are kind of imperfect, expensive or kind of add operational complexity to kind of circumvent or or play nice with the kind of spirit of regulation. We've taken a slightly different approach which is that we think regulators are ultimately

probably our first client, right? They're they're our key stakeholder that we need to work bilaterally with and really communicate with and build together. So we've had an amazing experience uh dealing with the the financial conduct authority in the UK. I'd really encourage you to work with them. They are they are really really keen to build in this space and talking bilaterally with them, talking with them and understanding what they're concerned with us and then ideulating with them on what a solution could look like. And that meant we didn't have to find these kind of middle ground um quasy solutions. we could just go for the thing we actually wanted and we structured it in a way where they were comfortable. Um, so I think that's the last element is really just and that's how we're proving in the US as well and

with Ethma in the in the in the European Union and and Mass in Singapore. These bilateral conversations and sharing of expertise with regulators are going to mean that we don't have to we don't have to go for second best. We can jump straight to the solution we all want. >> Okay. And DeFi is particularly interesting. I think lots of people here very excited about it and we're probably seeing somewhat of a merge of traditional finance and DeFi and some of that maybe just become uh become one. What does the the current state of institutional DeFi look like or what elements of DeFi today do you think are institutionally ready if any? Yeah, I I mean to your first point like Matthew, I

think Joseph Shalom puts it really well. Like we have Tradfi and DeFi, but that's just going to become finance in the next kind of 12 18 months, you know. Um hopefully we don't have to say we'll just say we're we're we're just institutions. We're not trady institutions, right? Um but um yeah, I think there's a lot of really exciting stuff for us in in in DeFi. I'll break it up into three again. So the first one is just really about that utility um side of things. One of the things that gets me most excited about um about I guess tokenization and DeFi is if you're a saver in the UK right now, you might save on our version of an AJ Bell or um a Hogre Land or whatever it looks like.

And what you basically have is a piece of paper or an app that says that you have beneficial ownership of something that they actually are running for you, but you can't actually use those assets. They're stuck in a basically a walled garden. And what I'm really excited about is the fact that people can use their assets, use their use their hard their hard savings, go into DeFi, maybe get an overcolateralized loan, and then go build a business. Goodness, in the UK, we'd really like some productivity. So, credit growth would be a really helpful thing. But allowing people to actually use their savings and put them to use is a really like that's just a very simple use case for for, you know, quite primitive in the world of DeFi. So that will have really big outcomes for for folks in in in Tradfi. I talked to a

lot of you know I help a little bit on on some of the earlier um and some of the private companies that we look at and you know talking to founders where they've had to basically sell down all of their savings in the S&P to simply get the working capital to start building. We shouldn't be in that environment where we've got solutions from DeFi where people can be using that as collateral to go get kind of lower cost of financing loans to go and build the um the companies of the future. So there's really simple stuff like that. The second thing is really around um your kind of what's institutional grade ready etc. I think we we think kind of the concept of v curation in general is super exciting because it starts to reconceive of what funds can look like or fund um savings

infrastructure can could look like. Can they be much more efficient? Can they might be much more liquid? Can they be much more hyperpersonalized? The idea of uh kind of solutions-based um products is quite common in Tradfi. We have a solutions team which will sculpt products to to um kind of an end client's uh use. So that might they might say volatility, they might have sustainability criteria, whatever it might look like. And what's quite exciting for us is that you can start to put that in the vault paradigm and make it very efficient, but also you can start to you can start to cater those products. And so you could come to me and say, "Theo, I would like mining exposure with this ESG criteria and this volatility limit, and I'd like to use it with something else that you've got here, and I could put it in a vault, and

I'm going to have um much more hyperpersonalized products." And that's really really intriguing for us. And in the vault curation space, there's also the angle with, you know, maybe that's something that we can be portfolio managers for and using using those those DeFi rails to redefine what our business model looks like. And the last angle is just really around it's really around just kind of uh redefining what money flow looks like. So there are a lot of entities around the world in the trady banking system that acrew a lot of um a lot of topline revenue from basically managing crossber flow and then sort of doing some treasury management to get kind of a

quasi interesting roe for their u their clients. Well, I think some of the stuff that's happening particularly in treasury management and how that interacts with DeFi and tokenized funds and um kind of crosscurrency stable coins is really interesting. This is much more of a 24 month or three year story, but really about how that can start to allow companies with and trading firms um to really access DeFi rails and start to integrate and get much more efficient uh treasury functions um utilizing composible assets rather than simply being stuck in um both jurisdictional and asset class um uh kind of walled gardens.

Okay. It's it's quite clear that you've got a very firm grasp on all of these topics, but how do you explain to your internal let's say your board, your peers in the industry and others who are a few steps behind the benefits of onchain finance and leveraging these new rails and paradigms. >> Yeah. With with um I won't I will embarrass them actually. I've actually the chairwoman of our board, Katherine Hamilton, is here today. She's gone all the way to Argentina to to spend time with people at DevConnect and understand the space quicker. And the reason I say that is because if you have a forward-looking financial entity which wants to actually improve outcomes for people, they will commit to finding

those outcomes and put leather to the sidewalk and time with you to build them. You've also got people like Amsa here from Aban Amro who is doing great work and they're building a lot of you know they're giving thought processes and they're building internal like internal conviction and there's people at State Street doing the same and it really relies on a lot of kind of individuals being at these companies and I think there is a responsibility to an extent and this is why Matthew and the foundation are being fantastic to empower them. It's quite a scary prospect sometimes to go up to your employer and say I want to redefine your business plan. That's that you're taking on a hell of a lot of careerist to do that. And so being able to empower people to do that and I think we as a

community within crypto and the Ethereum particularly with our culture can make that possible. That's one side of it. Um and that's kind of helping individuals. The second side of it is making making crypto sound and feel exactly what real world products already sound and feel like without adopting all of the bureaucracy and pain points that exist in those products. So what do I mean by that? when you're starting to think about identity solutions or you're starting to think about um KYC and compliance or explaining what a zero knowledge is, you have to take it back to first principles and then try and link it to something that already exists in their mind share, right? So, you

can't just push someone into the this paradigm. It's completely overwhelming. But taking them via a tradey bridge is very helpful. Um the last thing to really say is um with traditional finance entities boards particularly those who are um have external shareholders. They have external drivers for what value creation could look like. You have to make the use cases real, right? And that is something that floats around in crypto the whole time. But it's really about not scoping for the edge cases first, right? It's about talking with them about what is a painoint for you now that I can solve. So there's some great

work around KYC and identity happening around that and how we can interact with like some of the privacy work as well. But you have to you have to start with a solution, right? So the way I think about that is is rather than saying, you know, we're going to put every single driving license on chain, that's quite a big chunk of work. That's heavy lift. Maybe the starting point is to say, hey, when people buy tokenized funds, can we help them make a composible identity which allows for them to move between products easier? Okay, let's start there and then we'll talk to the regulator and and and work with boards. Boards generally like to oversee. They don't really like to innovate. So give them the solution and work with them.

>> Okay. Um when I when I talk at conferences, I talk to institutions often um I'm talking about the the kind of shift in the past few years from a private chain consortium chain to public chains um and particularly to Ethereum and to Ethereum layer 2s. So often it's me saying why I think it's great. Why do you think that Ethereum and the ecosystem is appropriate for this institutional grade uh tokenization and rails as opposed to a private chain or other alternatives?

>> Yeah, I think the first very obvious thing to answer there is private chains are no better than what we already do. So there is no greater utility from a private chain. It's probably not that that much cheaper including the build cost. it's probably not that much faster and there's probably not enough eco uh ecosystem participants to make it worthwhile and deliver a better outcome to clients. So, private chains don't really add any value is basically it's basically the cliff notes, right?

there is a place for some more compliant private chains um or compliant kind of public based infrastructure um because ultimately for a lot of institutions their journey into crypto is going to be somewhere along a decentralization arc right so you can't just take people all the way to to DGEN decentralization you need to take them on the journey right and as you build them more comfortably and also you build tech be that particularly around the KYC and compliance angle you'll be able to bring them along and so the way I I was speaking to a found uh founder the other day we were speaking it's like you know this is really the beginning and you

need to be be able to assist folks putting their hand into the cookie jar you can't just ram it down so I think that's that's the one angle I think the the other thing is really like why why public networks why why Ethereum in particular is well we need something which has security at its core. When things when things do go wrong, it's not if things have been tried, things go wrong, we can be even more confident that either it is more compliant or that a fix is easier to find. So when something goes wrong, there is a true and immutable source of truth which we can refer to to identify where ownership really lies. And so that's why, you know, public chains make

the most sense. So I think to kind of summarize that is is basically like we're going to end up on on public chains and and the greater utility of the security, the liquidity, the composibility and the ability to interact with other great products is I mean that that cool pre uh that call option value is absolutely immense. But there's also a very big time value of money component in that which is that it's going to take time for people to do that and get comfortable. And if I may make a plea to the community is we need to be patient and not uh berate people for trying to get there slowly with a slightly imperfect solution because I can promise you there will be people in those entities who are

working towards what we would deem the kind of the nana the perfect oasis. They're just trying to build the way there with their internal stakeholders. >> Yeah. And I think um at the end of the day Dev Connect is a developer conference. I think Bailey Gford's particularly interesting. I think being an early investor in SpaceX, Alibaba, all of the VC work you do. And I know you spend a lot of time, I don't know how you have enough time talking to founders uh in many capacities. For founders looking to build products for institutions or for their existing product to be fit for institutional use, what what sort of things should they be thinking about? Uh and what pitfalls should they avoid?

>> Yeah, definitely. Um I may get two high level points which is firstly if you want to build for institutions you have to go talk to them right a bit like if I wanted to come build a solution for DeFi in terms of maybe a financial instrument I'd be a fool to just flip it into the market I would come and talk to vault creators I would come and talk to participants and try and work out what their actual needs are and what good looks like to them so you need to communicate with them you can't just like go and build right product market fit is immensely powerful. Um but it relies on communication with with incumbents to an extent. Um the second thing is just really second high level

point it is really solve clear pain points that exist in the existing structure. So not necessarily pain points that you can see in three steps time once you've built your main solution. Just solve the main the issue that people are having now. So an example of that is compliance, right? doing KYC AML checks on folks is painful. We have a lot of people working on it in our in our function and it's very manual and um and and it's it's timeconuming for everyone involved.

Building something which is addresses is addresses that and both fixes a trady and a D5 problem is going to be a very compelling product market fit. Um and will enable you to capture um I guess you know um a uh a client base to start off with and build and future proof your client base in time. So you're using crypto rails to solve tradi problems and they have utility in the kind of DeFi outcome. Um the the other real thing to say is um kind of and I say the same thing to stratify people when they're saying kind of how can I get into tokenization is really like your network is an echo chamber. Go talk to people that you

don't that like go find an incredibly challenging go find a compliance officer at a bank, the person who probably laughed at crypto five years ago and talk to them. Find out um how and find their challenges and be be a like be a friend to them in an extent. And that's something we found super powerful in the other side which was not going and talking to our peers, not going and talking to venture capitalists or or people in Silicon Valley about what tokenization should look like. We went and spoke to founders who were running a bootstrap team of three people and we asked them kind of what should DeFi look like? What do I need to know? What have

I got wrong? That would be the the place to start and reach out. You know, I'm here to help. That's why I'm here. >> Awesome. Okay. Okay, clearly we need to be pragmatic. Um, it's going to take time, but let's end on what it could look like. You've talked about like hyperpersonalization, curation, way more customer, uh, a better customer experience with lower fees. What could it look like in 10 years time where you've, you know, as an industry started building the primitives? Um, yeah. What could it be?

>> Yeah. I I with a massive caveat of if anyone tells you what's going to happen in crypto beyond 3 months, they're lying to you. Um but let's you know our investment time horizon on average is 10 years. So let's let's go for it. Um in 10 years time I think you will have a large amount of institutional back office function sitting on chain um but still utilizing uh tradi asset bases. So you'll start to see digital transfer agents. You'll see fund admins with the data sitting onchain but servicing offchain assets. You'll still have an immense book of of corporate credit of government bonds of equity sitting

offchain but ultimately the the way that we will um interact and understand with them will sit onchain. you'll then see a a bit of a kind of um I think in 10 years time we'll still be in a bit of a a kind of a merge period. Um I still remember when mobile banking and and online banking came to the UK, people still were using checks and now people are still using checks and just taking pictures of the checks. Um but it will take time, right? You'll have you'll have some people who simply like your institutional pension fund who still just wants to own shares and do nothing with it. But you'll have Gen Z. I think there was a recent survey like 40% of Gen Z just hold crypto and cash, right?

So there's going to be that client base who are ultimately already going to be kind of captivated on onchain rails. Um so I think on the distribution side you'll have that and then in terms of the actual product side I think this kind of idea of kind of vaults as hyperpersonalization. uh the idea that we essentially kind of transform kind of these saving products uh into essentially earn features. Um I think that's going to have really compounded over time and become a kind of a new normal. Um, the last thing I would say is, and this might be an unpopular opinion to say at a crypto conference, but I think there's going to be a big shakeout of kind of dead projects, right? There's going to

be a concentration of value into things which are um truly adding value to um to to kind of end clients. institutions are bureaucratic and annoying and painful sometimes. But one thing they are quite good at is sending flow to something which is fixing a pain point for them. So I think there is going to be a bit of a concentration uh and a bit of a kind of a realization of value into um into some like key protocols and some new protocols that will come. But I I think we'll start to see again a bit of a paradigm a second paradigm shift um from things that have solely been there for speculation and things that are there to

build uh the rails of the future. >> Fantastic. Thank you. Well, thank you for your insights today. Thank you for joining us at Dev Connect. Thank you for supporting uh a lot of the people and founders I know you've been talking to this week and I look forward to seeing your road mapap on u you know play out in the next few years. So thank you very much. >> Thank you for having me. Cheers folks.