Sandy Kaul on AI, blockchain and tokenization in money management

Transcript

Let's talk about how how how our money will be managed in the future. If we look at like three simple buckets, so you have cash, you have savings, things that you put into low yield products and then you have your your investment portfolio. If we look at those three buckets, let's start with with first with investments. How do you see the future of portfolio management when you think about AI and blockchain and the role that they will play? First off, I think there's a lot of investment products that I own today that I get a lot of great return from, but I don't get much utility from them. Right? If I'm a big institutional player, right, I can get money for lending out my securities and I can get other people to

lend those securities on my behalf and I get extra money and extra return in my portfolio for lending out those securities. If I'm a big institution, I can create liquidity uh and be willing to stand in between buyers and sellers and let the size of my holdings allow me to get extra fees, take a little fee on that spread between the buyers and the sellers. But if I'm an individual, I don't get those opportunities today. So I think one of the most important reasons that we are going to see investment portfolios move into tokenized form and into wallets is because it opens up all this new utility and all these new ways of making money

through DeFi models. I can pledge my investments into a liquidity pool and get fees. I can stake my assets and get fees. I can lend my assets and get fees. I'm going to take my investment portfolio that today is earning me certain returns and I'm going to be able to add to those returns with all sorts of additional uh kinds of income that can come in around that. So number one, I think that's going to be the most important reason we see this migration is that it allows everyday people to do what institutions have been doing for decades in the in investing market. So that's why I think you're going to see

investments move in that direction. >> I I truly hope that retail takes advantage of that opportunity. I agree with everything you're saying from the perspective of it's going to happen. It's going to be available. The thing I just never know is, you know, the the financial knowledge of the majority of the world is is pretty low. And in order to understand even basic things like staking or various yield generating products is is a step that a lot of people don't take and I you know I don't I don't expect you to speculate on what we need to do to educate the world on financial

education like that's an important thing that everybody needs to do. I just hope that they take advantage of that because I just don't know that they will, especially when so many people have cash sitting in, you know, their their savings account and they could click one button right now and put it into a treasury. And a lot of people don't even do that. And that's not even using blockchain or crypto, right? But this is where I do think that AI is going to be super helpful because just like what we were talking about with MetaMask allowing you to now use your uh Google or Apple wallet signin and not have to remember your seed phrase right I am not going to have to make these personal decisions right today if I want to take

advantage of all of these different yieldbearing opportunities around my investment portfolio I have to actively manage the use of my tokens in that manner in the future When I buy an investment portfolio, my onboarding document may have a little clause in it that says, "Would you like us to optimize the use of your assets?" And if I just click yes, this may all happen automatically without me having to take an action. Right? That is the beauty of smart contracts and the ability to automatically execute based on pre-programmed contract terms. A lot of this may just happen automatically on my behalf. And the same is true for cash, right? We talked about cash and what's

going to happen with my cash and my savings, right? Today, every institution in the world, every hedge fund in the world, every corporate treasurer in the world, every single day, they sweep all of their undeployed cash into yieldbearing market money market funds. And that that money sits in those money market funds until the next time they need that cash at which point they can sweep it out of the money market fund, put it back into cash and spend it. Right? This is too going to become an automated function that every person is going to have in their portfolio. Why would I sit with a stable coin in my account where I am not earning yield on that stable coin? I would sweep that

stable coin into a tokenized money market fund. And if I need that cash back, I can sweep it out of that tokenized money market fund and have that cash available within seconds. We already offer this at Franklin Templeton. This isn't some future nirvana that we're talking about. This is something that our uh funds do every single day. We already have these capabilities and have built them, right? So, this is going to become a common offering as well. Again, it's a benefit that institutions have used for decades, but now it's becoming available to you and to me and to everyday investors.

>> It is truly hard to grasp the power of having two technologies combined the way AI and blockchain are going to combined in the future. It was it's funny because in crypto uh we have all these narratives that come out that everybody gets excited about and AI had a really big narrative at the end of last year which was a little bit uh it can be dangerous when these narratives take take uh take the stage because from a speculative standpoint everybody gets so excited and you have so many tokens that become super overvalued very quickly and there wasn't a lot of meat behind a lot

of these projects. Uh, a lot of them were pretty basic AI. You could even call them chat bots to be honest. Um, so I think that a lot of people in crypto kind of were fel felt a little bit like is AI really going to have a place within blockchain. But when you for fast forward to the future of what you're saying is AI managing our assets. And the thing you have to realize is the only way AI can manage our assets is if they are in a digitally native way where AI can interact with them. Well, you know what? That's what blockchain does, right? If it wasn't for blockchain, then AI couldn't really get involved with our money in the same way that it can because of blockchain and because of a

wallet-based system. It feels like I I when you when when you when you paint that picture, I don't even know what the world the finance world looks like 5 10 years from now. >> Well, and this is where and to your point about needing to be careful is just because a technology can do something doesn't mean that the people trying to launch a project in it understand what the technology should do. Right? This is why instead of going to a cryptonnative firm, I did choose to go to Franklin Templeton because it is a wellestablished firm with a deep sets of expertise in portfolio construction, in active management, in being able to build effective goals

outcomes for investments, right? They need that pool of expertise. I need that pool of expertise to create the AI and the blockchain based tools that are going to do what a investor needs. Right? So when we build a portfolio construction algorithm using AI which our solutions team has already done at Franklin Templeton, right? that AI has been trained by the best minds in the industry who do nothing but manage portfolios as they're living to achieve those results for individuals, right?

And so I think this is why you need to see Tradfi and crypto come together. The innovation coming from the crypto side and the innovation coming from the AI world is critical to creating new capabilities, but the expertise to deploy those capabilities and to really achieve the outcomes that you and I and their listeners need as you know things that are going to enhance my daytoday life. That's where you need the experts that have done this for their entire careers and really have that depth of understanding.

>> If we if we look at where institutions are and we look through look at it through two lenses. One is their participation in the crypto economy. So buying selling the assets and then the other and and then offering those products to their customers and then the other is their actual adoption of the technology in the ways that you've talked about Franklin Templeton building out their own blockchain crypto stack to be able to offer all the various uh parts of the stack that you need for the tech. Where where are we through those two lenses in terms of institutional adoption?

Yeah. So, institutions are always going to be slower to move than individuals, right? Um, institutions have this fiduciary duty, right? They are acting on behalf of their members uh or their employees or their constituents and therefore they are always going to move slower because they have to be very cautious because they could get sued, right? they have to rise to a very high standard before they can take too innovative a move. Uh throughout financial history we see that it is individuals and and wealthy individuals in particular who are willing to take risk sooner to get the higher reward.

Right? by the time a big institution is there uh oftent times that that stage where you can get the really massive returns has passed right and I think you're seeing this play out in the marketplace today in that Bitcoin which has become much more institutionally acceptable is having a much more muted trading pattern than any other cycle of Bitcoin that we've seen in the past. It's still rising. It's still strong, but it's not having the explosive upside that we've seen in the past in Bitcoin.

And in a sense, that's because there are more and more institutions who are participating, and institutions have a very different pattern in how they enter and exit markets that tend to dampen that extreme volatility. Um, but I do think that you are seeing more and more interest now moving into altcoins. you're seeing more and more interest moving into new projects. Uh, and this is coming from the more retail and the more risk-taking side of the house. And I think they will open up these models and create that institutional acceptance. And to go back to the point we were talking about earlier about all this incoming interest coming from traditional wealth managers and

financial firms, they're starting to see it, right? There was an announcement a few weeks ago from Charles Schwab that they are going to introduce wallets and allow people to hold Bitcoin and Ethereum in the crypto wallets on Charles Schwab and trade uh those uh assets for themselves, right? This is a sign that it's now, you know, becoming commonplace. As soon as millions of retail participants have wallets on a platform like Charles Schwab, it's going to become much easier for institutional pensions to then say, "Oh, well, I'm going to put uh I'm going to hold my own wallet and I'm not going to own Bitcoin via an ETF. I'm going to own my Bitcoin directly and manage my Bitcoin

directly." Right? So in a sense the retail participation and the retail willingness to take risk opens the door and creates the conditions for the institutions to follow. >> Thanks for watching. Make sure you subscribe to the Milkro Daily YouTube channel. And if you enjoyed this clip, you can watch the full episode here. [Music]