Tokenizing Tradition: How Franklin Templeton Brings Money Market Funds to the Blockchain

Transcript

Thank you Nikki. Hi everybody. Uh welcome to uh this uh new second part. Uh we'll go a bit more uh into institutional crypto adoption. Um so I'm Jeron Bay. I'm the vice president of the crypto association. So of course I'm very happy to uh see so many people the this year. Um I'm also working for Adnov. We are uh Swissbased D um software engineering and cyber security working with banks fintech and crypto. And yeah, today I have the pleasure to um interview Katrina Kelas from Franklin Tumbleton.

Katrina, you are uh international legal lead on digital project. So um first of all yeah I want to um before we deep dive I want to remember everybody if you missed the news yesterday on our social media every we posted the big news. So yeah Franklin is now um a corporate member of the crypto association we are very very happy to uh welcome this uh institution within within us because that's really um one of our goal is to connect um our web3 and crypto industry with the traditional players. So thank you again uh Franklin and so thank you Katria. Thank you very much. It's a pleasure to be here. So um okay let's uh let's first start with you Katrina. Um

can you tell us a bit more about you about your your journey within uh within FT and um and especially with digital assets. Of course. Yeah. Thank you so much Jerome. It's a pleasure to be here. I feel like uh my suit alone marks me out as a lawyer. So, uh, hopefully I won't, uh, won't turn everyone off with with lots of legal discussion today. Um, so I think my journey, uh, with crypto really started back in about 2016. Um, and I was working in Hong Kong and it really felt at that time that crypto was booming. So, a lot of my clients were starting to look at, you know, ask me about these new digital assets, ask me about how to custody them, how to raise capital using ICOs. And at the same time this was happening, I was having a

coffee with a friend um that I worked with and she was telling me that her son was investing his allowance at age 14 in Bitcoin and using um crypto ATMs and she was quite concerned about this. But I thought, well, there's sure if if the young kids are doing it, maybe there's there's something really exciting going on that's really sort of cutting through. And I think that really sparked my interest in the technology behind it as well. So, not just the assets, but but what people could do with it and how it was really cutting through to to different segments of of investors, although perhaps 14 is a little bit too young. Um, and then I came back to London, really refocused and pivoted back into my role um at my law firm,

which was very much retail product focused. So, I'm originally a product lawyer. Um and then when the chance came to join Franklin Templeton and get involved in um this newly created role to support them rolling out some of their innovations that had really been very US focused at first um when that chance came up I uh I jumped at it to be honest. All right. So I I had the pleasure to meet your your CEO Jenny Johnson this week. She she traveled to Switzerland to meet uh some Cryptoval Association member. So I add directly from her this brief. I had to admit I of course know you as a as a as a giant asset manager. Uh you manage 1.6

trillion I think that's that's correct. Um but um maybe can you explain us and tell us uh your the journey of Franklin within within digital asset because uh I I I heard during this meeting that you started back in 2019. So I was very surprised and and and and yeah that's a that's an amazing journey. Can you maybe sum up the journey of FDA? Yeah, 100%. And and you're right, we're we're so lucky to have a CEO who genuinely believes in the technology and the power of that technology and she's got amazing experience as well. And she talks very eloquently, much more eloquently than I would do about how she came her personal journey to that from running the operations of Franklin Templeton to that role in CEO and and really pioneering

for us that digital assets journey. Um and for us really I think it was around the same time 2018 2019 Bitcoin is you know again a buzz word on everybody's lips but over in California I guess the Franklin Temple team with Templeton team were thinking about it a little bit differently and really focusing on um how or whether in fact whether and how we could deploy that technology within our existing business. So you mentioned 1.6 trillion um dollars under management. Um we actually quite uniquely used to do a lot of our transfer agency. So our record keeping ourselves. We didn't used to um send that out to third parties. And as you can imagine that results in a lot of records to be kept, a lot of data to be

managed, lots of different systems, not necessarily interoperable. And that was really the problem we were trying to solve for us to be a bit more efficient. And then also, you know, getting interested in in whether those efficiencies could be passed on to clients. And that was really the genesis of it. But I think we very quickly thought, you know, in order to really innovate within this and and build something that we could use, we would need to be genuinely invested into the digital asset ecosystem and and genuinely into the infrastructure of the technology. And that's really what's led to some of the other sort of pillars of our digital asset strategy where you'll see us um running node validators. I think we've got across 12 different chains at the moment. Um uh and and

that's really been important for us to kind of understand really clearly how these chains operate, what the protocols do, how does validation work, how do tokens operate, and that's really been foundational in in our future success with the Benji products. Um but we've also then uh diversified. We offer uh crypto ETFs um and private funds which offer access to multicoin strategies. We've got model portfolios. Um, lots of exciting things going on. But of course, I think what what most people probably know us for is is our tokenized money market funds. And that's really the fruit of that labor that went into creating that tokenized recordkeeping system is our is our suite of tokenized money market funds. All right, perfect.

So, let's now double click especially on on that point. Uh but before to take everybody up to speed because uh uh can you briefly explain us uh what a money market fund not tokenized but just uh money market funds is and how it works um and why is it uh so important in traditional finance. Yeah. So I think it's probably quite surprising to everyone that suddenly money market funds are this buzzword because of the tokenization because they've been out around for quite a while and they're probably not what you would think of as the most exciting um of asset classes but effectively what we're talking about is um typically a regulated structure.

So in the US a 40 act uh in Europe obviously we'd know them as us um and uh really the key thing to think about is that highly regulated structure. So the aim is to maintain a stable net asset value. Uh in our case that's $1 per share. Um and we can pay out yield. That's quite an important point. Um but really the composition of the assets that's in the fund is very highly regulated. Uh usually short-term treasuries, government guilts, uh money, uh cash and cashlike instruments, that kind of thing. And obviously we're also highly regulated in terms of how those are custodied, how those are audited and all of those kind of things. So really um before I think tokenization came

along, you would really see it as um as an asset that perhaps people used for cash sweeps, for cash management and so on. Uh, and what's really exciting, I think, is that adding the tokenization layer, and hopefully we're going to get to that later on, is is how you start to see this very traditional asset become really exciting in terms of solving some of the problems that that we're experiencing in the Tradfi ecosystem. So it was like 2021 I think you started uh creating this product uh on chain and called and yeah tell us why and how you can tokenize a money market fund and how does it work. Yeah. Absolutely. So, it's kind of going back to um when I say that

we've created this tokenized uh recordkeeping system, that's really what's what's key when it comes to tokenizing because in a lot of the conversations that I have with regulators, with counterparties and clients, they hear tokenization and they think it's a crypto fund suddenly. No, all we've done is is put is put the legal record of ownership of those shares natively onto the blockchain. And and actually, when you say it like that, it becomes a lot more simple. So the assets of the fund remain the same. The way we operate the fund remains the same, but we have um yeah, we've we've put those uh legal records of ownership, those share ownerships uh directly onto the blockchain. So I think um we're operating I'm probably going to get the

numbers wrong because we're adding all the time. We're operating across 10 public blockchains and one private in the US. Um you mentioned uh that we're operating internationally. We've we've just launched our Luxembourg version of the fund. We've just received approval in Singapore as well to launch a VCC structure there and we've got a private fund as well and all of those funds are at slightly different stages of evolution. Obviously the our most mature product is the US fund and that's where you get the most functionality at the moment. Um so for example uh how we accommodate yield um we we pay out daily yield on that fund and we aird drop it directly into um clients wallets um either in obviously whole tokens or fractions of tokens depending on on the

yield numbers itself and that's really sort of how we're how we're operating it. Yeah. You just talk about this public blockchain. So I have a question about public versus private blockchain. That's a that's a discussion we hear very often in the in the space especially with traditional um finance company but you choose public uh and you choose several blockchain tell us a bit more about that definitely so so we definitely think um and I think back at the time when we were first having these discussions with the SEC um there was very much a thought process at regulators um and counterparties that private blockchains were the only fun you you know, the only chains that were

able to demonstrate these security and privacy characteristics that that were so crucial. And so, you know, we actually took a very different view. We thought the public blockchains were very much the way to go. And so we had to really um engage with regulators and engage with the market to kind of counter and flip that thinking on its head and really kind of demonstrate how those public blockchains that we have selected can still demonstrate that good control environment can demonstrate that resilience actually. um that's super important as well as obviously um being preferable from our perspective in terms of interoperability and and being able to um to really kind of access the benefits of blockchain and and scale and so on and so forth. Um and and we have I

mean I don't know how much you want me to get into it but we uh we have developed a a very um uh intense uh due diligence uh process that we put our blockchains through before we select one. So a client could come to us and say you know we we operate on XY Z uh blockchain polygon arbitrum whichever it is we're already live on those um stellar obviously um and we want to use Benji on it and then we'll put it through our due diligence process and um obviously it has to meet certain factors and certain um factors like uptime transaction cost uh a third party code audit things like that that we're looking at to make sure that we can really stand behind it when we're presenting it to clients. Um so some of those conversations particularly in the

early years were quite challenging because there was this really ingrained um attitude particularly at regulators that um you know public blockchains were were not suitable for this use case but hopefully I think we've seen that that page has now been turned and and regulators in particular are getting a lot more flexible about about what they'll accept. uh you talking about regulator can you say anything about uh different different jurisdiction you okay you're you're based in London but you the headquarter is in the US we've seen a dramatic 180 degree shift in the US when it comes to digital asset regulation uh any comment on on on that yeah I mean it's it's quite fascinating for me because um I've suddenly been

thrust into this very international uh world where I'm dealing with lots of different regulators and seeing trying to pick up the themes that they're all thinking about, but also noticing the differences between them. Um, and I think over the last couple of years, we've really seen a shift in regulators kind of start to understand the technology. If you start, you know, it sounds really ridiculous, but sometimes I just look at jobs boards and see, you know, how many crypto jobs are being, you know, um, are being advertised at regulators. We saw it very much in the UK with the FCA really kind of doubling down on investment um in specialists to understand the technology. But there are definitely regional differences. I mean, you know, we have uh some super constructive discussions, very flexible discussions uh in the Middle East. Um I

think it's quite impressive that I think uh VAR in Dubai is the only um cryptospecific regulator so far that we've seen. most are trying to do it out of their existing uh regulatory bodies. Um and ADGM is also very flexible. Um but then the Asian regulators are obviously putting a lot of effort in. We've seen uh really great strides with Project Guardian in Singapore and it's been a very constructive dialogue wherever we've chosen to go. Um even if there are sort of local challenges and local concerns which which may differ slightly, I think we definitely the mood music that we're seeing is is positive.

And for Europe, you choose uh Luxmbourg recently like it was announced two two or three months ago. Yeah. Yeah. We launched a few months ago. So can you tell us uh why this choice what who are your client in Europe or and what use case do you see for institutional um investor in Europe with Benji? Yeah. So at the moment we're we're very institutional focused um outside the US. In the US, we've got retail and uh institutional. Um but definitely in Europe at the moment, we're focusing on is institutional use cases. And I think when it's looking at those use cases, it's actually interesting to think about, well, you know, it's one thing to just put your money market fund, put

your records on chain, but we didn't really feel that just stopping there was really engaging with benefits of the technology. So what we've done is we've added two additional functionalities um which have then driven the use case and driven those institutional conversations. So the one way I think about it is is okay so how can we push forward the efficiency um and the way we've done that is by introducing instant uh peer-to-peer transfers of our tokens 247 365 outside of market hours as long as you're on boarded with us. if you're a Benji client, you can transfer to another Benji client instantaneously.

And then linked to that, we thought, oh, well, is there a problem with with how yield is currently calculated and paid out? So, we we leverage the precision of the blockchain technology and we've just launched an intraday yield um functionality, which is patent pending in the US. Um but effectively it means that if you've got several different transfers of a token between parties perhaps in a collateral use case um you know where you might have an intraday margin call or where several different parties might need to um hold the token at any any particular day each one of those will get their prata portion of the um of the yield for that particular day. So it doesn't just acrue to whoever was lucky enough to hold it at the end or at the beginning of the day. And so

when you put those functionalities in place, suddenly you see these use cases really popping up. So I've mentioned the collateral use case and that's probably the the the biggest focus at the moment. But we're also seeing interest from treasury functions particularly for global treasuries who need to move money around very quickly and easily to different jurisdictions. And then looking forward I think you know we can see Benji is potentially being useful as a um in stable coin reserves for example but also as a money-like instrument. So, is there a world in which we could actually use our money market fund shares to to make payments or to engage in sort of high-tech barter economies? I think I think we're only just beginning to think about those use cases. Yeah, you just talked about stable coin to I

think to be my last question. That's also the hot topic these days in the in the space. So, what difference do you see uh between tokenized money market fund and and stable coin uh pro and cons? No, I'm I'm glad that you didn't ask me is Benji better or not because I think for me it's a zero sum game. You know, there are definitely space for both um both types of assets. I mean I think one of the things that that sometimes maybe puts people off particularly in a crypton native world is you know when I say oh well Benji is highly regulated and people will sort of shudder but for us of course coming from that tradfi world and with 75 years of engagement with regulators and and engagement with those standards that's not a problem and we think actually um

from a pros and cons perspective that could actually be a superpower because if you think about one of the challenges that some stable coins have with opacity um with concerns about the reserves. You know, our reserves are audited, are visible, are highly regulated in terms of what they can hold and they're held with regulated custodians. So, you know, in a way, um that's a real positive, I think, for the regulatory piece. Of course, the the pro for a stable coin is that it's much easier for the stable coin to move through the digital asset ecosystem, and we don't have that flexibility yet because obviously we've got to comply with securities laws, which is why I popped in that thing about saying, you know, you can peer-to-peer transfers as long as you're on boarded with us and you've passed our

AML KYC. And so, you know, I think there's definitely a world where different clients and different use cases are going to prefer each different asset for different reasons, but they're they're both of them, I think, have have great opportunities and great opportunities to collaborate. I mean, I said that, you know, Benji could be a great reserve asset for a stable coin, possibly solving some of that opacity and that those challenges about reserves. So, you know, I definitely think that it's it's um an opportunity for both assets to to move forward and and get engaged in really exciting business. Yes, collaboration. I think it will be the the last word. Uh I think uh we already experienced that with with our new uh partnership of Frontland

joining us as a corporate member. Um u I was impressed on how you wanted to build bridges with our our Swiss industry already from from day one during uh during this meeting with with Jenny. So yes, thanks again for supporting our ecosystem and thanks for the in insightful discussion. Thank you very much for having me. Thanks.