What TradFi’s Crypto Integration Actually Looks Like | Sid Powell & Theo Golden

Transcript

The biggest thing that most people are talking about in Tradfire when it comes to tokenization, tokenization is just unitization on steroids. It's it's what we've all been trying to do in Tradfire for a good long while and this is just a way of doing it with operational simplicity um and and without kind of just adding layers and layers of uh counterparty and operational risk. >> This episode is sponsored by Canton, the only public permissionless blockchain built for institutional finance. We'll hear more from Canton later in the episode. Blockwork's digital asset summit is back in New York March 24th through 26th. We'll have top speakers from leading asset managers, financial institutions, DeFi protocols, crypto companies, and policy makers all under one roof. Think Black Rockck, Coinbase, Robin Hood, and more. Follow the link in

today's show notes to buy tickets and make sure to use code Bell200 for $200 off at checkout. See you there. Hey everyone, quick disclaimer before we get into today's episode. Nothing said on bell curve is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guests and I may hold positions in the companies, funds or projects discussed. All right, everyone. Welcome back to another episode of Bel Curve. Today I'm joined by Theo Golden of Bailey Gford and Sid Powell Maple Finance. Guys, welcome.

>> Thanks for having us. >> Yeah, guys, this will be uh this will be a lot of fun. I think we're chatting about 3 weeks ahead of uh DS. Um so I'll see you guys both there in New York and maybe we can uh follow up this virtual conversation with one in person and live. But excited to see you guys in person soon. >> Yeah, likewise. Should be good. I think this will be my fourth or fourth or fifth dash in a row. >> We'll have to print a special badge for you said. Um yeah. Um well guys, I thought it would be really interesting to chat to the two of you three weeks ahead of this event because um you both represent really interesting sides of kind of this burging world of traditional finance and DeFi and you know Sid you've been building you know

one of the largest I don't know how you like lending protocols or onchain asset managers um in the space for a long time now and Theo you work at uh Bailey Gford which is very well known um over in the UK but maybe for our American audience who might not be as familiar with Baya Gford can you just give us a quick intro for the firm that you work at. >> Yeah, sure. So, uh, great to be with you guys. Uh, Bailey Gford, we're a, uh, one of the bigger independent asset management, uh, firms based out of the UK. Um, we're about 120 years old, uh, privately owned, partnerowned business. Everyone who owns the business works under business and we run about just around 300 billion dollars of assets under management. Um, we've been in tokenization for a while. um kind of but bit more behind the scenes but coming

out of the coming out of the uh the curtain a bit more. Um but you're probably most most familiar for our kind of growth equity investing being long-term investors in things like SpaceX, Alibaba Bar, but across asset classes, fixed income, multiasset, uh the work. So, we're probably the old the old British version of what SID is uh growing on chain and hopefully we kind of together together we we merge and become the future of of what uh good good money management looks like on on on on chain in the in the next couple of decades. Yeah, I think um maybe we can just start off very high level here and you know I've been hosting conversations like this for about eight years now and uh you know I very much remember when

Mike Novagrat said the herd is coming and the institutions are coming uh you know they'll be here in six months back in 2018 and it seems you know so took a little bit longer than uh than we first thought but it does seem as though um you know they're here although obviously you know in crypto I think we're guilty of treating all instit institutions as this very homogeneous group when they're very different and you know I would like to understand you know if we're scaling this kind of on a rate on a scale of 1 to 10 one being we're completely separate and 10 there's very little difference in between uh global crypto markets and traditional finance I'm curious how the two of you would rate the integration and what are the seams where we're starting to really blur the lines and you know see some real

business synergies and where are we still a little bit further out. >> I'm happy to go first on that one. Uh slightly pessimistic, but I I would give us maybe three or four out of 10. Um the reason is I I think there's a lot of room for growth on the institutional integrations. If we looked and we said, okay, where where are we most integrated and where are we least at the moment? I would say uh you've seen you know stable coins are now very well integrated. I would say just in terms of the custody set. So you have, you know, Circle um has uh very robust custody solutions.

They have partnerships with with Black Rockck in terms of the the asset backing and I think they uh I think they recently got a got one of the the custody charters as well. Tether has Caner Fitzgerald managing their their T-Bell portfolio. So I'd say there there's an a solid integration there. Then if you look you've got Apollo and BlackRock who have both tokenized funds as well as Hamilton Lane and several others. uh Franklin, you know, Franklin Templeton, Wisdom Tree. So, you've got tokenized funds now. And then in our seat at Maple, where we focus on lending and credit, we've seen uh some of the community banks come into the space and start uh if not already doing then at least looking at and and very seriously

evaluating uh cryptobacked lending. So, Bitcoin back loans, ETHback loans, and we've seen interest from private credit funds. you saw last year JP Morgan made some noise about uh about doing Bitcoin back lending. So I'd say that you know these are the early stages. We've also seen some tokenization of equities but it's not a seamless uh bridge between trady and DeFi. And where we don't yet have uh integration is the big pension funds the big endowments these guys are not you know allocating to onchain credit or onchain yield products or carrying stable coins. That's why I don't grade us as more than a five.

>> Diao, what do you think? >> Yeah, I I I I would probably agree with Sid, but I would say there's just such a massive dispersion across like different segments of the market. So, some places were like way further ahead than maybe a five. We're probably closer to a seven, but some places we're we're still kind of early days of a one. And and for good reason. So, maybe to to kind of put some skin on the bone there is is kind of payments. are actually coming. We're really we are accelerating really quickly um between in traditional markets. You're seeing you know even even the likes of the kind of the the um the kind of storeboards of the payments market and and folks like Visa and Mastercard, they've got really strong digital assets teams. They're talking about it on earnings calls. There's like

tangible data backing up some of the work they're doing. It's not just like in 2018 when it was just kind of people flailing their arms around and talking about things in the ether of of of what they could do. So there there is actual tangible things happening and I think you know I think you'll start to see particularly in the next 12 24 months um kind of particularly internal internal money flows of like large institutions start to move on chain. I wouldn't be surprised if you you see a major bank moving into it's in an internal capital on a public blockchain but probably in a deposit token. Um but then on the other side like the wholesale adaption that Sid's talking about and like tokenization and tokenized assets being slower to move is

is partly because like lots of the stuff that's on chain just isn't good enough yet for these institutions to touch. It wouldn't pass their risk compliance. Doesn't meet the standards of what they already own. So Sid talked about some of those tokenized funds that are in the market. Like lots of the structures for those funds are not of the same or better quality uh that we can go out and buy in our in our traditional markets. We don't have the the enough of a shareholder ownership uh ownership rights that we would get comfortable to pass through our mandates. So there's still a long way to go, but we think there's a huge amount of improvement that's just taking place month or month.

Um the the love thing I would say though is um there's been a massive like what we call like a front officeification of of tokenization and digital assets. Like it used to just kind of sit within the innovation function of some firms where they maybe have one or two uh nerds like myself at the back of the office. But actually, you know, I'm a portfolio manager at Benny Gford. I run a portfolio. I have tokenization leaving my title. They're saying that publicly. you know, there's been this wholesale shift to people who sit at the front office part of the business who run revenue generating parts or or books of business and they're working full-time in in on these on these products. So, that's that's the more interesting kind of wholesale shift is that there's, you

know, these institutions are willing to not just talk about it, but to deploy kind of growth capex and talent into this space, which which is a big shift. Um, we can talk to some of the use cases, but one thing I just wanted to flag is like the biggest thing that most people are talking about in Tradfire when it comes to tokenization like sort of is it's to do with collateral and better kind of capital management. But the other like we talk about this kind of always like tokenization is just unitization on steroids. It's it's what we've all been trying to do in Tradfire for a good long while. And this is just a way of doing it with operational simplicity um and and without kind of just adding layers and layers of uh counterparty and operational risk. So yeah, I guess that's that's exactly

where I wanted to go, which is, you know, I feel like this gets talked about in two different arenas, which is, you know, the first big unlock that really happened on the emerging was the launching of the uh US Bitcoin and Ethereum ETFs, right? that brought this inflow of capital into crypto assets and a bunch of people that couldn't otherwise uh touch or own these assets could hold them in their preferred rapper. I I'm curious maybe we can get into some of the actual use cases of tokenization because it's something that I understand at a high level um and in theory right which is tokenization is a it's a better you know it's a better rapper uh it is um an improvement on securization but it kind of feels like actually for the first time what feels different from my perspective Theo which

maybe rhymes a little bit with what you're saying is that for the first time you know when we're talking to financial institutions it's not like the one you know 25-year-old who's like hey guys Please take this seriously. Come on. This is real. I promise. Uh there are actual teams that are dedicated to this. And it does feel like I mean everyone from you know the Bailey Gfords of the world to the Black Rockcks of the world are serious about um on kind of like the sell side being an asset issuer and bringing some of their funds on chain. I guess the question is what do you do with those? What is the unlock from the perspective of a Bailey Gford here? And then I'll kick it over to you to get your take here too.

>> Um yeah I have to skate that off. I mean to start I think a lot of people have just kind of seen this as a distribution opportunity. Like they just see it as a way of basically touching big pools of capital that sit on chain and offering them differentiated kind of investment propositions. Um and that's why some folks have got away with very poor structuring because they've kind of seen as like a a locked pool of demand and be able to just kind of sell them anything. Um I don't think that flies. uh we talk about this internally that um we should be giving uh the clients that we have on chain with the same level of respect that we give Vanguard um as a as a client because you know these institutions are clients they deserve the same respect level and so I think

that process of that distribution play is now going to become a bit more available to more to more folks more folks are going to get involved but actually the more interesting part is going to be as we turn back into our existing books of business. How can we create a better outcome from the same or or new innovative products? So like we say like the same but better is is our kind of modus operandi. So it has to be the same quality of structuring but it has to have a better outcome. So like what are they? Well I guess like money market funds at their simp like simplest form just basically like essentially risk-f free assets that you can post as collateral. Collateral is a pretty uh boring process. Yes, it's pretty clunky, but there's also lots of kind of

extractive behavior through that that whole value stack where people are clipping parts of interest income, etc. Well, if you can simply rather than posting cash that goes and buys money market fund to be posted as collateral, you can simply just post tokenized collateral. Um, that's, you know, put like removing out an intermediary that doesn't need to be there. And then you've got the kind of post trade settlement cycle, all those different things which are very clunky, very manual. And we've been looking to automate for a while. But now you have like an unlock about how to do this. And before, you know, crypto assets just weren't suitable for that. But you had the technology. Now you've got the technology plus a suitable asset. And it can live natively on chain. So it's

24/7. And so there's this kind of this kind of willingness. It now has product market fit, right, for the for both the internal operational sides of traditional finance and the risk and compliance side because it meets the standards that you already expect. Um, Sid, I don't know if you if you'd agree with that. >> Sid, can I actually kick this over to you, but I got one layer of question maybe to add to you, which is um, so there's the and I'd love to get into kind of the stack and where you're removing intermediaries on the just collateralizing different types of assets. I love though that you called out uh maybe if I'm reading in between the lines here a little bit kind of treating our onchain clients with respect as a kind of a distribution pipe here. You know, it's been really interesting to watch private credit um

and the different way that private credit is viewed in traditional finance which is private credit is kind of like the cowboys over there, right? We've seen these redemptions come through begated for blue owl and everyone's concerned about that. But everyone in crypto is like, "Hey, yeah, like look at this institutional capital coming in." And you know what it almost reminds me of a little bit is like when a US company goes over to China or something like that. Like Starbucks is going over to China and there's a mismatch, right? We're like, "Hey, we're trying to bring our coffee over here." And everyone's like, "Well, we drink tea in China." And I think, you know, I've noticed that a little bit on the private credit side with crypto where it seems, and again, I'm taking a very naive perspective here, which is that, you know, the um,

you know, for some of the large asset managers, it's kind of like, hey, this private credit and crypto could be a fit because you guys like high yields and DGEN stuff, right? But I think the crypto people are kind of like, well, we want a token that's going to, you know, maybe, you know, 5,000x and I'm not really sure that there is a fit for private credit. and said, I'm curious to get your perspective here on like where there has been good overlap and fit and where it feels like we're trying to, you know, squish a square peg into a round hole. >> Yeah, for sure. I think uh I think private credit wasn't wasn't getting as much traction on chain last year because uh yes, it was offering higher yields.

However, the liquidity profile, you know, the these were like 3 to 5 year assets, right? And uh the the average onchain investor as as you alluded to uh Mike is uh is looking for one higher return profile and two has a pretty short liquidity duration or liquid liquidity preference. They want to get their money back within 12 months and that that was why we saw a lot of a lot of private credit deals couldn't uh couldn't find a buy side on chain. I think where it's working better now is that the the utilization across the board is coming down. So, a few things have happened. Bitcoin has traded sideways to slightly down over the last 12 months. And so, people are no longer expecting to get paid for beta. So, now

they're looking at how do I put my dollars to work and how do I get a yield. So, now the interest in the yields offered by private credit are much higher. The other thing is that because Bitcoin is down, basis has been down and so cryptoback lending has had lower utilization and produced lower yields. yields on Ave, Morpho, uh, Athena, you know, just across the board in DeFi yield protocols and including our own are kind of at 12 month lows. And so it's meant that the relative outperformance of private credit versus just regular DeFi lending is is much higher. So that's pushed folks like us and like Ave, you know, with with Stan's piece around funding abundance um towards looking at private credit

allocations. I think the big uh unlock and you can see where private credit is finding more interest on chain is composability. This is one of the things that I think is a major unlock of DeFi is that you can take your tokenized private credit fund. You can loop it. So you can go from earning 8% unlevered to looping it through Morph I think Morpho has a cred and and they recently just think the deal with Apollo to uh to to you know to to use it as collateral and improve adoption but you can you can loop it and go from you know 8 to 10% up into like a mid- teens level with with four or five turns of leverage and I think that's what's really going to drive more interest in it. So that's the

that's the marriage of the crypto speculator who wants you know 15 to 20% internal rates of return with the private credit fund who produces um you know who produces these funds and looks to crypto markets for distribution and for for AUM growth. Before we get back into the episode, here's a quick word from our sponsor, Canton, the only public permissionless blockchain built for institutional finance. Tradfi wasn't built for 24/7 markets. Dei wasn't built for regulated institutions. But Canton [music] is where the power of finance meets the promise of blockchain.

The only public blockchain [music] with institutional-grade privacy, true composability, real assets, real markets. Why reinvent [music] finance when Canton makes it work the way it should? Canton, where finance flows. So, you know, I'm curious when when the two of you think about and this is this is difficult this is a difficult exercise to do, but you know, we've been talking a lot about the supply side here and maybe the advantage that you have as an asset issuer and why they might be what about the demand side? You know, who's on the other side of this equation and it, you know, it's hard to think about kind of an ICP or, you know, a customer profile of who's on the other

side of these transactions. So who wants to hold like uh Janice Henderson's you know CLO you know for instance that exists onchain or some you know some of these private credit vehicles or when if if the asset issuers are thinking about onchain as a new pipe for distribution what is your sense of where the product market fit exists um and maybe it would be helpful to go back and look at how yield has been generated historically I mean the way that I look at it is it's mostly the the first big source of yield was people trying to get long on their Bitcoin at ETH. I mean really ETH um that was mostly the the driver of yield from the a and the makers in the early days. I think Athena innovated on this by bringing tokenizing funding rates um

on sexes. But you know when I look today it's kind of like the market um the re part of the reason that yields are so low is because people generally think prices are going to go lower and therefore there isn't a lot of demand to go long on ETH and Bitcoin and funding rates are down. So, I'm just curious like how would you view the overall state of the market around yield and let's talk about the demand side a little bit like the borrower side here. >> Yeah, I I can I can talk about that. The uh the borrower side is uh suppressed of late. So, since uh since Bitcoin's been down, we've seen less borrow demand.

Maple's still done over three or 400 of loans so far this year. So, I'd say we would be the largest issuer of any any of the CFI lenders in terms of new originations. uh but the borrower side has been uh prime brokers so that that continues to be kind of like evergreen demand although it fluctuates up and down but but consider that it's kind of like your you know your base load power there's like always some demand there for borrowing from these players it just tends to go up when bitcoin rises or when volatility rises we also have exchanges who borrow so uh exchanges will borrow to provide margin or or on lend to their clients then We have uh mining has been suppressed. So a lot of

miners have now pivoted to AI. So they're actually selling down their Bitcoin reserves. So they no longer want to borrow against them. Uh there are a couple who are borrowing against them to fund the capet. So longer duration projects, but by and large most of them have been uh have been selling down. And then uh DATs have not really levered up in in terms of conventional Bitcoin back borrow. We've seen a couple of them do do larger deals uh but for the most part many of them have remained unlevered. Uh and then you have uh the crypto native asset managers who are doing yield strategies on chain. These guys are generally suppressed. They there was a lot of stimulated demand last year when they had new stable coins like there was you know elixir and and others. However,

it turned out the risk you know the riskadjusted yield on those things was not great. And so now the demand to to to borrow to to deploy into those strategies has been generally suppressed. So I'd say prime prime demand is okay. There's some mining demand and there's some exchange demand. But what's fallen off has been uh the cryptonative asset managers who are doing yield strategies on chain that's kind of disappeared from the market over the last few months. >> One one that I I completely agree with Sid there. Um, I mean, actually, I was joking with Sonia Kim from 3F the other day that um, what a what a great time to be an R RWA issuer if you can get some spread in some in in in the market because like stable coin borrowers just completely crash. So, the the product market fit for something that you can

loop is is ideal. But it's it's been a bit it is a bit of a struggle uh for some for some players. I think the the key thing that I would kind of point out is that a lot of cryptonative protocols uh people like even wallet providers um kind of uh you know dow treasuries etc all kind of acknowledging that they need to move towards a more of a sophisticated balance sheet model and so you've seen this kind of even run from from uh from Sky formerly make a dowo this kind of idea of moving towards a more of a Basel 3 style balance sheet so you've got your tier one assets which your highly liquid assets like money market funds, your tier 2 assets which you get maybe a bit more spread etc. And

as those players start to come to the market, you can have like hundreds of millions of just essentially just spot stable coins that not get any yield on. They're going to look for regulated in the for first instance, but also um high quality uh yielding assets that they can deploy into. Um the other one that I think that's very interesting is we see a lot of interest from kind of what we would just determine like family office to an extent but they're often kind of second gen family offices or crypto native family offices where they again are parking a huge amount of capital or they have uh crypto spot which they want to borrow against on a low LTD basis and again they want to park it into assets which they could otherwise buy offchain

but they want to stay fully on chain to basically lower the all-in friction costs. Um, we've seen quite a lot of demand for that. And then I guess the the other last one is like really tapping into like what's the biggest product market fit in crypto right now? It's the dollar, right? And a lot of entities have crossber flow. These kind of entities which have maybe like three to three month to 12 month lockup. They want liquid yielding assets that they can park capital into. And again those have a very very uh decent amount of pulled capital where they can deploy into something. But again has to be regulated. It has to be something where when they go up to their auditors, it's something familiar which can be valued at mark to market. So there's this kind of what I call I call a bit of a web two

sorry a web three sandwich where it's kind of onchain rails but it's actually probably more familiar as kind of almost like a web two front end coming into web two style assets in the regulated space. And that's kind of where RWA's really start to sing. Um, so I think that that that product set is like very deep pool of capital but starting to really mature in a way where you can actually distribute into it. >> I was just going to say I I think on the supply side the people who are buying cap the people who are buying these assets it's largely cryptonative institutions it's the likes of Sky you know Grove um OEX Spark you know the these are cryptonative balance sheets and then you know that have printed

their own stable coins. Um there's Athena as well, but I I think we're seeing a lot of demand is being aggregated around these larger DeFi native balance sheets. We've seen a lot of venture funds stick money in the Sy USDC and syrup USCT products because they don't have an expectation of being able to deploy to deals. So they're instead preferencing very short duration liquidity where they could get in and out, you know, if they wanted same day, um but get a yield that kind of beats the, you know, beats the T bills. And this is because there there's not, you know, as as we pointed out before, the yields on chain have come down, but there's also not a lot of deals to deploy into and liquid tokens have been smashed. So, um, we're just seeing a lot of demand for like highly liquid stuff

and, uh, but the bigger balance sheets have been deploying to to, uh, credit or or private credit allocations. >> So, yeah, you know, you me you guys have both mentioned like the yields getting lower. Can you just give a kind of a quantitative sense of that? And then I I als I actually remember doing a podcast with Guy from Athena about a year ago and he mentioned a really great um indicator for where you are in these sort of market cycles is when the onchain yield dips below T bills um being a pretty good indicator >> definitely there >> close to a bottom. So I think we're we're pretty close if not there already.

Um and and then you know I know uh Theo you mentioned uh 3F so you know disclosure small but uh proud bag holder in in 3F and I think that's also why people are interested in this idea of RWA looping as well and maybe people are exc because the the kind of cure for right low yields right you'd think at some point someone just looks at um you know the cheap borrow and finds a way to take advantage of that as well um so there's kind of a cyclicality here but yeah I guess give us a sense of what the relative opportunities looks like from sorry early here in Montana from a rate perspective in um you know T bills compared to what you can get on chain and then is that a catalyst for I think people are really excited about this idea of RWA looping um so maybe talk a

little bit about that >> how I I can I can go first on that so um you know T bills are in the what three 3.5 to like 3 kind of 75 range um and uh but onchain onchain yields are below this. So I think uh I haven't checked a this morning but like last week it was in the kind of like the high twos to around three. So it's below T bills. Um Athena was kind of sub four. Um Morpho was in like a similar range to Ave. Uh Maple like our syrup USC and USDT yields move a little bit slower than those because we have a portfolio of fixed rate loans. Um so we were kind of in the like high fours. So there's still some

spread to kind of the the other DeFi stuff which also enables looping like as long as you have that spread that's what loopers want to take advantage of. And so I think that's why you are seeing more interest at the moment in either looping stuff like what we have or looping RWA particularly if those RWAs can kind of preserve like a high singledigit yield at the moment. But it's worth noting to Theo's point around how you have, you know, regulated um, you know, like people want regulated products. The the looping trade only works as long as you have DeFi unregulated capital, right? It only works as long as you can borrow at these kind of sub T bill rates at the moment.

So I think the two are inextricably linked, but you have to be willing to dip your toes into DeFi. But this is why, you know, I'm very bullish on the growth of these assets in DeFi. and you know these DeFi yield strategies because I think looping and vaults are going to be uh you know significant driver of growth and something that traditional asset managers have to kind of grapple with. >> Yeah, I agree with the the kind of dipping I mean DeFi DeFi in and of itself isn't either regulated or unregulated. I mean it's definitely moving into more becoming uh within the realm of a a regulated or more of a a comparable uh product proposition to what we have in the regulated world. I mean collateral

management is basically just triparty uh collateral management but you have a smart contract instead of a third party. Um so it's definitely becoming more familiar in terms of uh I mean there are regulators that Ave Horizon is a really good example of the sort of thing that you can dip your toes in as an institution and you have kind of >> who wants to lend in a horizon at 3% right nobody wants to get that yield. So you don't have the key point which is that you get >> but it's not like they're getting >> well I was going to say it's not like they're getting a huge amount more elsewhere at the moment are they said so um I mean so like the the relative different I mean talk about >> T used to be the diff the relative differential used to be quite

substantial you know you'd be getting like three and a half on a horizon be like five and a half on war but that that has compressed but in terms of the in terms of the the kind of proposition you've got uh I mean spreads and It's like it spreads are tight all across finance. You know, you're getting what like 110 sorry 110 uh spread over uh over um uh kind of goubbies on on um tripleB credit. You're getting kind of 170 on on double B's which is kind of going into high yield. So spreads are tight everywhere. Um and so this kind of uh acknowledgement that you know it's hard there's no free lunch at the moment is is I guess is coming like coming

coming home to boost. Um in terms of where you can find that yield though generally there are still pockets. So you know JA I think is still doing high fours five. Um there's the BNY CLO fund as well. But I think the the key thing I was going to just kind of push towards is is around this kind of uh borrow is just also as I wonder like positive question to to Sid you might have a view as well is like as some of these RWAs come on chain and they have a different rates profile. I know like Stani has made the case that you start to see almost like Ave become a little bit like the Fed's fund raids but does it is there kind of almost like a cannibalization you know if you're

seeing yields at you know 56 on a short duration bond fund that comes on chain is there still appetite to lend at 345 and and morpho do people just end up going and buying the spot so does borrower lend get cannibalized by some of these RWA I I don't know the answer to So I think um like for the RWAS to work in the uh as collateral in the lending protocols, they need to be able to be liquidated um and so that you don't you don't have a loss of of principle. And I think uh the the lack of liquidity depth of them has been a problem so far that kind of needs to be solved. um people could go into into bond funds, but the the issue you have is that it's it's not

the quite the same as as uh an account where you're looking at a full return of principal plus plus interest. Because if you have let's say it's a five or 10 year duration bond fund, if if yields at the Fed move 1%, then you're looking at you know anywhere from a 5 to 10% markdown on your principle, right? Uh or you know your your depending on your duration depending on your duration. But but for for the purpose of this let's let's yeah let's assume though that it's a multi-year fund um then you you do carry some some risk right so it's not it doesn't substitute as like a savings product for people which is a lot of which is a lot of um the it's a lot of the reason that people kind of use Ave

and Morpho today is like a very short duration savings product not something where they expect to take a marktomarket haircut on it like a bond >> you know there was a um there was a kind of a bakeoff off that was happening at one point a couple of years ago in between uh Coinbase actually and Coin Shares for some of makers uh the PEG stability module the PSM and Coin shares offered a more attractive rate that basically you know the PEG stability module is the USDC portion which maintains the at that point this was the die uh peg this Greece guy um and they were basically looking to get some yield um on this on the stable the USDC that

was just sitting there and they the what coin shares put out was a you know what you might expect in a proposal like this which is basically just a portfolio of different uh types of fixed income um and coin shares or and coinbase offered some of the yield from their rev share that they're getting on USDC and even though that was lower because they could instantly redeem and you know 24/7 over the weekend they ended up taking it and I wonder if there will be considerations like that in the future as well. >> You know, I've I've heard from some of the big, you know, delta neutral uh funds as well. It's, you know, because at one point I was, you know, this back when uh T- Bells were were trading well above uh you know, what they are now.

It's kind of like why is anyone you know, not to discredit all of the DeFi here, but it's like why are people holding funds in in a well you can you can hold it over the weekend, right? Um and actually that's a huge um it's it's a it is a massive dis, right? First of all, there's a just two days out of seven, you're not able to earn any yield when banks are closed and you can't move funds out if you're actively trading. And so there are other considerations outside of, I think, just the, you know, the yield that you might get. And I think what Sid's alluding to about it being difficult to to liquidate, um, especially private, uh, RWAs where which might have a different liquidity cadence and things like that. I think it'll get

solved, but there'll definitely be some friction I think for >> Yeah, I think I mean I mean there's a decent amount of fixes in the market coming for that. So I mean like I think his point is true when you're talking about funds which are like quarterly look up or those sort of things but you know if you're dealing with like a a UK or a European usage or mutual fund like these are these are daily D instruments. So that it doesn't obviously meet the 24/7 or the the weekend, but then there's also of course once it's on chain, you can have folks make a market around that which then it mimics more of like an AP style relationship to an ETF.

So I think I think that's true, but it's a very like first step like previous analysis of of the market and now we're moving to a world where the assets are on chain. The traditional finance institutions are comfortable with them and they're now flashing out the 247 architecture around them to make them 24/7 and tradeable etc. You know you have digital transfer agents which now operate outside of just single windows a day. So I don't think that's particularly um going to be true or as true going forward. And also to Sid's point earlier about the kind of haircuts to or mark tomtomarket volatility of of some bonds for instance you know um true but you you also have you know in private credit

for instance you have you know your default rates which is very hard to decipher in some of these defiendic and we've seen pain flash pain points of that for example in you know stream for example where you see those those defaults come to come to the the forefront and then um you have vaults having to basically go into crisis management mode. So that I think it's just it comes down to, you know, there's no one product market fit. There's product market fit for different things in different parts of the market. And people are going to want to have, you know, we talk about things as a tokenization triangle, which is kind of liquidity, yield, and asset quality. And every single user, every single institution or chain is going to fall somewhere within that that

triangle. But no, it's not going to be uniform. Um, and that's kind of the beauty of the technologies. they don't have to and the hurdle rate to delivering that to them is lower. I >> think if we look at the market as it is today, you have to just describe the behavior that is. So people use Ave because they can get in and out intraday. It works over weekends and they kind of use it somewhere between a source of yield as you would fixed income but also something akin to like a checking account. And you know we looked at doing a port we looked at um you know allocating to a portfolio of bonds this year. you know, we've been looking at a bunch of private credit allocations. We haven't done any yet. Um, but you know, one of the issues was we said, well,

like what if rates move? What if the Fed moves rates? And we and we have an optim issue on there because it's hard to you can either buy bonds that have multi-year duration. It's very hard to go and buy a portfolio of bonds that are seasoned enough that there's less than than 12 months to go. Um, and so I think there are for sure fixes that that Treadfi investors or or asset managers would roll out. It's just they they don't exist today in the market on chain. You have to kind of like if you look at how um people are are using these things. The reason that uh the yields on RV are low is that there there are not a ton of there are not a ton of allocations that can be made with this capital today. It's really it's primarily the overcolateralized lending

and then we're starting to see things like money markets and other tokenized funds come on chain. It's just that the liquidity profile is not there today. or you have to do things like you have to on board with securitize which could take 2 months is limited to accredited investors. So that's why there aren't a ton of retail holders of acred and also why acred doesn't have fantastic liquidity for liquidations and things because it's a restricted smaller subset of users for it. You might also have like Asian family officers who don't want a KYC in the US or disclose their their their assets to the IRS. Comes comes directly to the point of like product market fit means different things to different people, right? So like you know if you're a if you're a

QPD investor you're a qualified institutional investor and you're able you're willing and able to on board with securitize well you suddenly after the last couple of weeks you do have some secondary market liquidity because of the black rockck bidd can now trade through the unis swap x uh program. So there is, you know, these things are starting to emerge, but it really just depends on, you know, I, you know, the funds that I in our traditional book business sell to retail, you know, might not be suitable or appropriate to, uh, you know, a family office or an endowment fund, for instance. So I mean, this is just this is just like this is just how asset and markets mature. They you work out who who wants what.

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developed in the market as well is I I'm curious how the two of you see RWA being represented from a structural point on chain because you know generally when we look at okay there's a there's a gap that we need to bridge here and you know I kind of just there's like the web 3 the crypto rapper and then there's the you know the traditional rapper and right now we're kind of doing this it feels like a little bit janky like you take an SPV of something and you tokenize that and there are multiple different representations of it and the the version that you have on chain doesn't represent true legal representation but it's just kind of easier. Um, and then there are some solutions that are in the market like Superstate where you're actually issuing, you know, true equity on chain.

And, you know, part of me thinks, wow, it would just be so much easier if we all took the Superstateesque route here. But having seen how some of this has played out in the past, I'm thinking, yeah, but you can do the SPV stuff today. Maybe it's good enough and you get like, you know, some PBS to step in and bridge the liquidity gap and you get some specialized types of liquidators and stuff. H how how do you view you know the kind of good enough solution that exists today which does usually end up taking off versus the best possible representation which is native on shade issuance. I mean partly some of the innovation has happened because the regulatory priority hasn't been there and so for some some jurisdictions and some players it's been you know been forced into certain jurisdictions or

certain types of of structuring in order to do that. Again comes down to who's who's your who's your buyer. So the SPV uh wrapper style of you know going through a tier 2 tier three grreyless geography or something like that might work for some entities but you know if you want to sell it to large uh institutional money managers they're not going to touch that. They'll be asking questions like around cost uh counterparty risk they'll need to due diligence all of these things which ends up just being not worth it. Um and native issuance is really where the value ad is in terms of your ability to say

um I have true uh uniform ownership of the of this actual asset. I don't add a layer of operational risk and I also can go and use it in in DeFi. So it's that same same but better uh mentality. I think you'll start to see like I think the superstate work that they've done is absolutely fantastic. The tricky thing for all of these things is like going one by one is much harder than just going and wholesale tokenizing in an SPV for example a whole USN index or something like that. But one begets the other because by proving that you have product market fit in one it then is a you know if you see your you know mass kind of adoption of or purchase of uh tokenized stock X in the market and you

don't have a native tokenized stock and you but you're a treasurer or you're CFO of that entity or the CEO you'll start to go well is that a investor base that I need to be start to you know acknowledge and engage with and so the issue is like is that at the cost of liquidity fragmentation which is where things start getting really tricky. You don't want several different versions of the same stock because um firstly it's confusing for for investors in particular retail and secondly it's you know it just adds layers and layers of counterparty risk. Um, when we look at fund tokenization, we simply put that for it to grow and be in a in a in a scenario where trady merges with DeFi,

it has to be the fully onchain uh native issuance because it needs to be good enough for institutions but have the utility that DeFi requires. Um, otherwise you're just kind of in a bit of a no man's land. I think uh so I think the uh the gold standard is kind of the onchain issuance. I think you end up with kind of a combination where you have an off-chain SPV but you you never actually settle anything offchain. I think this is the m major issue we don't love is you see people will settle things offchain. You have the offchain legal structure and then you settle things offchain and then you try and port uh you know port uh a copy of it and then do a effectively a duplicated

settlement on chain. What we do is we just settle all of our loans on chain. We don't we don't like Maple doesn't really have um fiat settlement for any of our loans or for accepting, you know, deposits or funds into our pools, but we have, you know, SPVS for legal rights and the ability to contract. We just never actually settle anything offchain with fiat. And I think you can actually work with that kind of solution uh because you get all the benefits of of onchain liquidity, global distribution uh through having the the onchain settlement in stable coins and all of your actual flow of funds take place on chain. But you avoid the kind of the non-reourse lack of creditor or you know

equity holder rights that you that uh become issues when you don't have an SPV or some kind of entity that can kind of contract with other parties. So I think you end up with a hybrid of the two. So you have SPVS but all of the settlements are done on chain. I think that's kind of the the path forward and that's what we found, you know, most effective and and what we've been using for years now. Yeah, that seems to make more sense to me when you really think about the the value proposition of >> Yeah. Like when like what's the point of settling anything in in fiat when when you have uh you know robust flows of stable coins? I guess I guess the issue with that I I like that's probably where we get to in the medium term. But the

issue with that is like how do you start to do if you're like say you're running a couple hundred billion you know and you're trying to do post trade compliance or you're trying to do like corporate actions or governance and stuff like that you know you're adding you know you're adding layers of friction which don't need to be there for instance you know uh this is less true for obviously because you're you're doing your own essentially your own uh origination but say you have like a tokenized stock for instance as a corporate action on that How do you vote on that corporate action through it's through the SPV? There's ways of doing it. It's really complicated and it's not actually that efficient, especially when the the user is is onchain and and quite hard to contact sometimes. So, how how

do you do those things in a way where it meets meets the mark of, you know, if you want to vote on Elon Musk's next pay package or stuff like that? It's very hard to do that and the tokenized SPD. So, I think it works. It really the kind of hybrid model really really works for some parts of the market particularly like Sid's part of the market where he's he's got a lot more he's got a lot more control of what his product actually looks like through a vertically integrated stack and his margins probably benefit from that which is fantastic. But if you're just tokenizing stocks, uh, and you don't necessarily have that look through, it's it's clunky. Um, and like it doesn't doesn't doesn't meet the mark for kind of creating that positive

flywheel of adoption. >> Yeah, I don't dispute that for equities, but I'd say I just raised the point like do most people vote their stocks? Do most people, you know, care about corporate voting actions? Like from what we've seen, it seems to be largely aggregated that Black Rockck and one other entity kind of votes everyone's stocks for them. So I just be like, is is that like is that actually something that people want to pay for or that they really care about? >> Well, I guess that's the nature of you know, you're buying a passive tracker, you're assuming that Black Rockck's doing everything that you need them to do to park your money away. That's that's, you know, that's essentially you're paying you're paying for the privilege for somebody else to do it.

That's that's the asset management business, right? Um and so there's a difference between I think this is really important point coming up again which is like the individual and retail and then kind of wholesale money moves which is essentially um kind of packaged up components of that market. Um and for them to get comfortable it has to be closer to that. Um, again, comes down to who wants what? >> Well, I mean, couldn't Black Rockck couldn't some of these asset managers be a bridge here, right? Like Black Rockck is out there publicly saying, "We want to tokenize all of our index funds." So, presumably that that is the bridge, right? Like that is where the rubber

meets the road. I you know one one additional maybe observation to layer in here is um just watching how some of this has played out over the years like crypto does tend to I mean there's a question where I ultimately want to end with the two of you is when these two worlds swish together I mean how do DeFi and Tradfi work together? I you know I don't want to put it in adversarial terms but like is there a winner you know here like who ends up eating more of this this pie we don't need to need to put it in adversarial terms like that but I uh you know one thing I have noticed is that it seems like maybe as a observational jumping off point and I'd love to get your take on this crypto tends to preede

market kind of changes and like the technology like the analog that I would give you is you know you kind of had in the beginnings of the internet like Napster and Bit Torrent and these kind at first like illegal sort of file sharing protocols and everyone was like oh no no no one wants that and it turns out everyone actually did want that and that that technology ended up changing the market and now you have Spotify and when I look at financial markets in crypto I see a lot of the same stuff it's like you know before crypto markets were uh 125 you know or something like that it was very you know very limited and crypto is making it more 247 and it seems like the market structure changes are being initiated by crypto. Um, and

so when I hear, you know, Theo, some of, you know, what you're describing here, like honestly in the back of my head, I'm like, I get that it's friction right now, but this feels workable. Um, you know, that that it doesn't seem like what's going to prevent this is, you know, Black Rock's voting here. But I am a little bit curious how in the in the long run the two of you see these different worlds interacting. And Theo, you called it maybe a web 3 sandwich. You know, we talk about the DeFi mullet. H how how do these two worlds in their end state wind up looking? I suppose that's a big big question, but however you want to take that.

>> My start of the 10 is like a lot of trap fighters going to have to get comfortable that people like Sid are going to come in and eat their lunch. Like Sid does a great job at at what he does and he's he's got a very a very slick operation that can do his, you know, parts the parts of the market at a probably a much more attractive margin. uh and you know don't want to talk Sid's book of business for him, but I'm assuming maybe a pretty pretty attractive default rate as well. So, I'm sure he's pretty, you know, he's coming in he's coming in hot and they've got to be they've got to be okay with that. Um the the but you know there's there's parts of there's kind of like what do what do incumbents bring? Incumbents bring I guess the scars and operational

baggage of h doing something for a long time which can hold them back but also when a new technology comes in which is disruptive they can also adopt it in a way which is you know they can they can skirt the pain points before they come. So I think like my honest view is that like tradi is going to have to get comfortable with a lot of things in defi that it's new to them. Um, but ultimately, you know, like I'm I'm sort of a tech technological determinist like the tech should win out. Um, but it's it's just about who who manages that disruption risk better. The one thing I would say is that I'm slightly nervous about kind of this kind of um

kind of regulatory uh kind of obscate I can't say that word. uh obiscation >> uh that that's the word I'm looking for. Uh um it's it's because it ultimately it means that >> you know folks what we really want is people to kind of have just unilateral trust in that the technology works and the problem is is that if we try to skirt some of these some of these kind of learned lessons in the past we we lay out something for the systematic risk of the future. Um, but ultimately I think like Tradfi has got to the extent where you've got people in seats who are senior enough to be making decisions, who understand the technology, understand why it's better, uh, want to

be collaborative rather than competitive. Uh, you know, case in point, I've known Sid for a while. I think he's brilliant. Um, you know, and, you know, we're both running, you know, very very different ends of the stack asset, you know, books of business. So it's it's I'd imagine going to be something a bit like you used the Spotify example when the record labels came to the table and discussed you know met met the compromise with Spotify because their book of business was getting eaten from a from an illicit form you know I don't think it's going to come to that for traditional finance or at least I hope it doesn't but I think you know folks are willing and able to come to the table and discuss how they work together for the

betterment of their their end customers First of all, Theo and I have known each other for for uh a while now. So, I definitely applaud what he's doing stepping into the space um on behalf of a big uh traditional asset manager. And I think, you know, it represents forward thinking at uh at some of these larger asset managers. The mental model I use is uh innovator's dilemma. So, I think for a lot of these large asset managers, the market seems small and unattractive. And and to a couple points Theo made it it's not something you can sell to your pension funds or your really large allocators right now because they they are used to a certain kind of product.

Um and this is the same for kind of any incumbent large you know large firm is the same with like electric vehicles. you know, GM's customer base was used to certain types of cars and so the electric car market didn't seem attractive and uh and so Tesla and then BYD were were kind of able to dominate it. So I think you know my job is to find a market that doesn't seem attractive but which I think is going to grow at double or triple digit rates peranom and kind of capitalize on that and then we go up the stack. You know, eventually we will be doing loans against stuff that Aries and KKR and Black Rockck or Black Stone rather than Black Rockck kind of do today and

competing with them using the new technology stack. But right now it looks small and unattractive and I remember writing to Aries a couple of years ago and they told they told me that this was a joke that that what we're doing was kind of stupid. uh but in a couple of years it won't seem that way and then we'll be lending against you know we'll be pitching in some of the deals that they're doing today and so that's the model I use is kind of innovators dilemma and so I think DeFi or or rather onchain asset management or finance however you want to call it will will end up eating a lot of the stack of um that presently exists in trady but I also expect a lot of tradfi firms the ones who successfully make the jump will be doing things like investment ments

and acquisitions to try and acquire the new products and some of them will be successful in navigating that that paradigm shift. But the same way that you have big box retailers today like Walmart and others um Costco and then you have e-commerce retailers, you will end up with that kind of break or divide or bifurcation in uh in in finance between Tradfy and onchain. >> Yeah, you know, it's super interesting. Um and the future's never written. I I think you know we talked about the record labels and Spotify it's it's difficult to understand because I view this as an innovator's dilemma uh situation as well although sometimes that impacts different industries differently like honestly the record

labels actually did okay right when you compare them to let's say mainstream or legacy media outlets who got crushed by the internet and completely disintermediated and actually a lot of it has to do with how well you coordinate and uh yeah I mean I you know >> I know we have a lot of speakers and representatives coming at DA that so I don't want to but you know it's like you're watching the regulator like what what's going on with clarity in the lobbying from the banks in the United States is like the most egregious blatant uh you know regulatory incumbency I don't know I feel like I've ever seen it and you almost have to applaud them for it because I think it's so well coordinated but yeah I I think some of this too depends on how well um you know some of these entities can coordinate

and you know exert influence. I do think the one thing I'd add to that is I do think there's a I I agree with the innovators dilemma mental model the one the one thing I would kind of um the one thing I would kind of slightly posit as kind of a slight challenge to that is it's hard to disrupt incumbents if they're already disrupting themselves. So, I do look at some of the traditional Claire's. I think Sid like names a couple who who yeah particularly might not be um firstly I'm sorry that they they said that to you Sid because they >> show Grist for the for the milk >> but um but I think it's I think there is an element like I look at some of the GI banks who have built like custody solutions or digital transfer agents um

who are like you basically have like Delta Force teams within their own entities kind of disrupting them from the side. Um, so I think there is I think there's I agree to Sid like there will be there's just going to be a bifocation of who who moves quick enough to still remain relevant. Um, and you know that's that's where you start to see I always think um, you know, you start to see like the neo bank is probably quite a good example. Neo banks came and ate a load of people's lunch. But then there was there were enough banks that moved quick enough on their commercial uh sorry their consumer outlets that they they m they maintain some level of market share and didn't get their the large eating to the same extent. Um so it's it's uh hopefully there's enough of us on the on the side

that we can um we can remain relevant uh and uh be helpful helpful counterparties for the likes of Sid in the year to come. >> Awesome guys. Well, uh, I think we're we're we're at time here. This has been a really fun conversation for me and yeah, interest, you know, uh, again, a little bit of a shameless self show here, but excited to continue this at DAS live in a couple of weeks. So, folks, if you enjoyed this interview, uh, come see Sid and Theo live at DAS in New York. Um, and we'll drop the link in the show notes here. But, uh, Theo and Sid, uh, guys, this has been a ton of fun. If folks want to follow you, find out more about your work, uh, follow along in the in both of your journeys here, what's the best way to to do that?

uh for us uh pretty active on X. So we are at Maple Finance, one word. I am syrupsid on X. And then our website is maple. Finance. So if you want to go and check out any of the the lending or or credit products that we have, head to the website. >> Yeah, I would endorse a follow of of Sid generally and Maple. They they're doing fantastic work. Uh for ourselves, Bailey Gford onx um very active on LinkedIn as you'd expect for a chat five entity. Uh, and my handle is TF Golden, uh, if you want to follow me on on X. Um, but yeah, we'll, uh, hopefully hopefully be seeing a number of you at Das if you want to see in person.

>> Amazing. All right, guys. Take care. >> Awesome. Thanks, guys.