How Institutions Are Being Forced to Tokenize with Theo Golden

0:00tokenization lead at Bayley Gifford live from DeFi Day at ECC. And so we're going to be chatting about RWAs. Why they're not at $1 trillion yet. And how we're going to boost these numbers up. We were coming off of Digital Assets last week, Digital Assets Summit in New York City. And now we're here in Can. We've got Theo Golden right here with us now. Theo, welcome to the show. Great to meet you man. Yeah, absolute pleasure. How you feel? Yeah, great. It's great to be here. It's like, people keep on saying DeFi is dead and look at this crowd. I mean, it's absolutely heaving. It's very much alive and kicking and we're having a lot of fun. So it's great to be in things and having me. Absolutely incredible. I mean, we can't agree anymore. I'm just curious. Maybe for anyone who's unfamiliar Bayley Gifford has entered the Digital Assets space, the tokenization space. Why don't we get a primer on Bayley Gifford for anyone who's unfamiliar and then we'll get into what exactly Bayley Gifford is doing in the tokenization space. Yeah, absolutely. So Bayley Gifford, we're one of the biggest UK Assets managers in, we run about $300 billion of Assets under

1:02management across like public equity, private equity, fixed income, multi-assets. We're based in Scotland, which is beautiful, but less familiar. But we're a very active house. We only run active products where we're adding value through our investments and our kind of investment process. We're particularly specialising in high growth equity investing, one of the most famous investors in SpaceX, early in Tesla, and in the Thropic Revolution, etc. But BG as a whole, we tend to think in decades, not quarters, and that's really our edge. We have a very, very long-term view. For us, Crypto Digital Assets, that's firmly within that. We seek to invest in the most innovative companies. Really, with Crypto, we're looking to almost disrupt ourselves and bring that innovation in-house and be a positive influence in how we can help crypto-native teams really scale up in a way where they're building products that institutions

2:04are going to not just know and use, but also love and time. And as the tokenization lead at BG, Bayley Gifford, what does your day-to-day look like? Are you helping more crypto-native teams? Are you educating a lot of the traditional financial institutions, helping bridge the gap, bring them on chain? What does your day look like on a normal basis? The day is long, but it's very fun. It's a bit of everything. I also run a bit of money as well myself, so I run a bump up fuller as well. But in my tokenization role, I'm very much focused on building tokenized funds. We can talk about that for fully-native tokenized funds, what that looks like, and how we do that in a way, which is both defy-native, but regulatory and compliant, and it's in a way which our existing client book not only would be applicable too, but also is better to the extent that they would want to move over from traditional product. The other side is working with crypto-native teams, helping them think about how they go from just being kind of a point in time product to being a scalable platform across and basically cannibalizing ingrained intermediated parts of the tradify market and really taking them

3:10into the regulatory, clear area and thinking about how do they beat the incumbents, and yeah, as you say, talking to our existing client base, helping them educate what why use a tokenized product? What do you need to go and buy a tokenized product? What's the utility beyond simply owning a mutual fund or something like that and taking them on that journey? Because BG is a private partnership, we don't have any external shareholders, there's a trust element. We're not trying to extract anything from them. We're just simply being kind of subject matter experts and taking them on that journey. So let's start here with the sophisticated investor and user, that customer. Why is it better? Because we've talked a lot about how tokenization can help make a lot of these markets more efficient. Lower settlement times ultimately provide some value in terms of understanding better risk topology as far as where the money is at any given time. Lower settlement times unlock a lot of idle capital. But a lot of those efficiencies

4:11happen at the enterprise level. They can save a lot of money, increase their bottom line. But ultimately, from the end user perspective, it may still look like the same security through a broker dealer that they're used to purchasing. So what is the benefit of tokenization for the end user? Yeah, definitely. I mean, maybe take a bit of a journey here. So like, when Bailey Gifford, we think about anything we do in the crypto space has to be what we call the same but better. And we say, like, so anything we do in terms of product creation needs to meet the same standards, the same structuring, same quality, same ownership rights that we do in the traditional space, but it needs to have a but better element. And that can come in many, many different veins that can come from better utility, the ability to post its collateral, get kind of, you know, or it be it through composability, being able to build like a vertically integrated kind of portfolio across a stack. It can be through speed efficiency, but you know, it can also be cost and you know, Bailey Gifford is slightly different to other people. When we save costs, we pass on to the end customer. We don't enhance our bottom line. We see that there

5:11is a, you know, that we're able to do that because we don't have external shareholders. And we say, look, there is a fair market value to investment expertise. That's what we currently charge. We don't extract any any value above that or below that. We simply, we know what we're good at and we do that. And anything that we, because ultimately, if we're saving costs for customers, we're also enhancing that outcome in terms of better financial outcomes. You know, two basis point, you know, saving over 10 years will compound over a 60 year life or savings like that will compound over time and be truly meaningful. And so it's in our message. It's in our fiduciary duty to pass that on to customers. Some of the, I mean, some of the use cases I get particularly excited about, you know, there's obviously the collateral piece for money market funds, you know, being able to post collateral to kind of, you know, enhance like effects, efficiency, meet, you know, cashmage matches. So I'm not going to sell down parts of my portfolio. And then buy them at two days later, just to meet a two day funding cycle. Those things, I mean, they're quite obvious, but they're very kind of, you know, for the end kind of customer for retail, particularly, they feel quite unfamiliar. That's much more for me with my portfolio manager hat

6:11on. That feels, you know, a nice woman cuddly thing that I'd like to do. For end retail, it's much more about getting access to kind of services that you wouldn't have had otherwise had. No, so, you know, obviously it's today talking about kind of, you know, we're thinking about Borreland, etc, being able to essentially use your capital, collateralized your capital in a way where maybe, you know, the top 10%, 1% of asset holders are able to do because they have access to private banks or something like that. So democratizing access to those services. The other thing that I think is super important is, you know, I talk about tokenized funds in particular being a little bit like a gateway drug for a trade fight, because what it enables us is to build the operating stack that we need to touch tokenized assets. And once, you know, you've got your digital asset custodian, you've got your digital transfer area, you've got all of these things, you can then start to build fully on chain stacks and be a player in underlying tokenized securities. You know, we're a big investor in US stocks. I'd love to run a fully on chain US stock portfolio, which is just run out of a vault. Well, guess what? You know, my cost of running that fund probably drops about 60 basis points. You know, and I can pass that on to customers. So that's when,

7:14you know, those folks really get to fill the full utility. The last thing I was going to say is in terms of some of the stuff that feels a bit unfamiliar to people in retail, they people forget that a lot of retail, though, is then packaged into institutional flow. You know, if you're going through a vanguard, a black rake, you know, you are buying, you know, often institutional, it's being packaged into an institutional product and then often goes and, you know, is then like, goes through the financial system, etc. So even those things that feel a bit distant and weird and like things like collateral for effects or, you know, composable portfolios or funding cycles, all those things, or even just custody in TA, you know, then becoming fully on chain and native, dropping that cost, dropping the human error, dropping the manual processes, that will have tangible value. It just, it feels several orders removed. We like to think about it is in if we get this right as a traditional finance and a decentralized finance community and coming together as finance, we are going to basically improve the risk-adjusted outcomes for everyone in this base, because we'll be reducing the human error, the operational

8:18risk, it simply just becomes the tech risk of being on chain. And hopefully you can also save cost, which will increase the, you know, the financial outcomes. And if you pull that all together, you should be getting a better kind of sharp ratio for your assets. So that's the better piece. You also mentioned like as secure, right? And because you are taking the on-chain risk, and maybe you're minimizing a lot of these other risks, you're making these more efficient, ultimately passing on the lower cost in terms of cost savings to the end user, the end customer. But, you know, I really like your framing the same but better. And so, you know, talk to us about how on-chain risk might compare to some of the human error and some of these risks that you're mentioning that are currently embedded into the system in the off-chain system. How does the on-chain risk compare? What is currently in place? For sure. Yeah. So there's, what I mean, there's a couple of things. What do we mean by the same in the first instance as well? You know, when we, we tokenized the first fully-native tokenized fund in the UK, which was actually the strategic bond fund. And we did that. And when we mean by fully-native, we mean on-chain books and records. So we're utilizing the block chain as the

9:22legal source of truth of ownership 24-7, combats in a bit, because it leads into your question. And then the second piece is also it's fully-native. So there's no kind of SPV, there's no beneficial ownership structure, there's no, you know, extra layer of cost risk and particularly counterparty risk. And this is the direct tokenization model. Yeah. Recently we've heard quite a bit about the wrapped token model. Anything to say is just as a quick tangent on the wrapped tokens for tokenized equity tokenized funds. Yeah, I think so. Look, look, to me, different product has different meaning to different people, right? And you know, it's really about building products that really fulfills the risk profile, but different customers want to hit. So for example, the wrapped token makes a lot of sense for particularly retail. They just want access to the asset. They want it in the form that they want it in. They don't care as much, you know, potentially as about like corporate actions, pay disputes, you know, they don't mind that it's an SPV out of the British Virgin Islands. They just want access, you know, they just want to deploy. That's fine. And you know, and that works for a lot of people and they're doing really well. And I think that's going to have really

10:25strong, you know, the on-dome models of the world is going to really have traction long-term, because, you know, they will have, you know, potentially greater utility because of the aspects of being, you know, I guess more fully on-chain than they're not limited by the structure that's off-chain. With the direct issuance model, what you're getting, and this is what's going to be appropriate for the institution. So like the next, you know, 650, 600, almost 700 trillion of assets that come on chain is like, for our mandates, we can't take that extra layer of counterparty risk. And we don't really want to because we don't have to today. And so if you're trying to say to people, this is better. This is, you know, there's cost involved in that capex to come on chain, and you can only do that. You won't do that if you think you're going to get a worse product. And so the direct issuance model where you have direct recourse to the underlying, you have regulatory clarity, you have the ability to, you know, in species or assets out of the structure, you have the ability to pay, you know, vote on next, you know, must pay dispute, whatever it is, you know, we have a fiduciary duty to do those things. Our mandates compel us to own those structures. We are heavily regulated institutions. And so direct issuance

11:28is basically going to be the model that we have we're forced buyers of that. Got it. So that's, so this is part of the, the on chain risk, but the risk on chain is somewhat dependent upon the tokenization model. Exactly. And the rap model adds layers of risk, but it adds layers of, you know, potential more utility. So, so it's a different sharp ratio, right? It's a different, they're different trades, if you think about it. And that's, that's how we tend to kind of think about it. Because, you know, there will be things that, you know, we might do that the rap model might be more appropriate for. They'll be, you know, you know, particularly if we're trying to onboard our existing book into crypto, they're only going to want to buy the direct model. So, you know, we have to play flexible. We have to be making sure that we're getting the right product to the right people and being that kind of institution of trust. But also kind of the institution with defy ideals. So, with the ideals of self-custody, with the ideals of 24-7 and not, you know, exaggerated counterparty risk. To your point about like, what are the kind of the savings for people about being on chain? Like, what's actually better in, I mean, the big one for me is like

12:31transfer agency. Like, this is the most, potentially the most boring part of track fight, which is. Sometimes the most effective. Yeah. Who owns what at what point, right? And then in a mutual fund or a usage fund, you know, we basically go daily, we go, this person, this is the shareholder of this, right? We go once a day, these people own this fund, this is who our clients are, these are the beneficial owners, right? If you start to use the blockchain as the legal source of truth, you get two extra things. Firstly, it drops the human error risk, you drops the kind of the reconciliation that you have to do, you just have one legal source of truth, which is automated. We say, we like to say that, um, tokenization is just unitization of steroids because it's just programmatic unitization. The second component is also, you know, once you start to do that, you're able to do it, you know, outside of that one business day and out, one hour of every business day. And you know, that's really important because, you know, we want assets to be traded, we want people to use and not be limited by our cash flow requirements. And if you are 24,

13:31seven, then that's great. It's important to say, but that's only really available right now, and in, um, you know, particularly for tokenized funds where they have an on-chain books and records, and most tokenized funds in the market don't. They have what's called a mirror book or hyperbook where they basically have, you know, a proxy, a shareholder register on-chain, but it's syncing once a day to the legal source of truth. Right. This is the represented, uh, uh, share of tokenized assets right now. Yeah. Um, which, which if, you know, you can go on RWA.XYZ, and you can see the split and the predominant share of RWA is our current this representative form where they're sort of just using the blockchain as an accounting layer. They're not tracking the pure true ownership of these assets using the blockchain. And they're not legally, but they're not leaked, they don't have legal records. Right. So, for example, like the, the source of truth is the thing that has that once, once a day kind of point in time sync. So trading between, you know, you're taking counterparty risk in that, in that moment. Yeah. How long has this method been available to us, uh, I know in the US, it's only, you know, been recently that we've gotten some

14:35regulatory clarity in terms of, hey, these things are digital securities. There's no disputing that. What do you think was the trigger moment that ultimately opened the floodgates? And now we're seeing firms like Bailey Gifford. We're seeing more firms like Morgan Stanley and others. Now, get back to Morgan Stanley in a second, but we're seeing more and more of these institutions finally, you know, open their doors to tokenize funds and start to issue assets on chain. Yeah. I think so, so in terms of like the ability to do on chain books and records, it's been pretty new. So they, you know, Benji and Franklin's tokenized fund, they can use on chain books and records in their Luxusits. And we can use it for the, the FCA vehicle that we had. And the, um, the, you know, but we had to get like special emissions for that. We had to really put it, it wasn't just like a uniform, like blanket approach. Um, that's increasingly we think, you know, changing, I think, especially as the regulators are doing an amazing job and they're thinking kind of, you know, how do we, how do we get best in class as a jurisdiction? And that's, that's been, that's been brilliant. Um, so it's, it's, but it's, it's also worth weighing up that, you know, doing

15:36on chain books and records takes longer through compliance, it takes through legal, through regulation, but it also, it imply it does have a, um, it's harder to do, right? It's, it's, but once you've done it, the kind of incremental cost saving over time, the ROI of that process is very high. Who's in the, in the position to be disrupted the most as a result of the direct tokenization model, my understanding right now is that we do have some broker dealers where the broker owns all of the shares and then it deals the shares to its end customers in terms of the retail users that are using the broker dealer platform. Are those firms about to be disrupted as we have this, this moment that unleashes peer-to-peer finance, these shareholders are able to own tokenized shares directly without needing a broker dealer of sorts. I think, look, a broker dealer is a certain type of license. It's still incredibly important and broker dealers will have particular role in secondary market liquidity and those sort of things and the kind of the distribution, like it will start to just look more like a, a trad-fi-esque distribution relationship,

16:39but there will be kind of less kind of intermediaries between them. So you might go, so like there's a really good study by Dr. King, which kind of said in the UK, um, if there are 19 intermediaries from pound to product, pounds as being our kind of, our currency to product, right? And I think what you'll basically see is that 19 might go down to three. You know, it might be issuer broker dealer wallet, that sort of model and that reduction book and you might be like, you know, you'll be reducing the, the custody might be on chain, the TA might be on chain, the fund admin might be on chain, if these assets underlying us are on chain as well. And so, you know, I haven't seen this unpacking, this unbumbling of the 19, these 19 intermediaries. If you could just call out maybe one or two, who do you think are most at risk in that stack? I think, so I think like a lot of them change and they, they become so like they become so TA becomes less of a record-keeping role and it becomes more of a KYC role and it becomes more of a uniform product probably with custody. You see like the big banks moving dead, you know, most big banks don't really make a huge amount of money on their custody business. Custody is a cross-selling thing. They bring you in as custody and then they try

17:43and cross-sell you TA, etc. And I think that's going to be the same thing here. They're going to, you know, TA that actually become like a KYC AML program. And so I think they'll change. I think the biggest ones who get disrupted are kind of like, particularly they're kind of, I guess, the AJ Bells of the world, where you're kind of your distributors in that respect, where, you know, particularly in a world of AI when you can get, you know, wealth management advice, you know, the click of a finger and you're just simply getting it potentially in wallet as we know, a lot of wallet producers want to do that. You know, those sort of players, they're kind of, you know, value add is ready questionable, but, you know, charging 30 basis points for a platform fee, you know, you really start to question, are they required? And I guess the key point here is that the D to C model, the direct consumer model, is much easier to do in a token as well, because you're not having to have, you know, APIs for every fund, every product, you just have oracles, etc. And so the hurdle rate to the hurdle rate to access is lower, the hurdle rate to being a financial participant is lower, and the ability for us to have direct relationships with

18:44them is higher. So I think those are going to be the big disruptions. And I think, you know, I actually think the banks could be relatively big winners of this. I always say to people with particular one talking to startups, there's two ways of disrupting. The technology is disruptive, well, your company is disruptive. And, you know, for a lot of spaces, places now, the technology is disruptive, and it's very hard to disrupt incumbents if the incumbent itself is disrupting itself, right? And I think that's particularly true in this space. So I think there's, you know, there was a massive opportunity if the banks, particularly don't let bureaucracy get in the way, and they are able to really empower the people. We have fantastic people now in those seats at the banks. I think we've seen that, particularly in the last couple of weeks, to kind of get out of that way, and enable them to innovate in a really, really creative manner. I think they have the ability to be phenomenal winners in this space. And same goes for the asset managers as well. You guys are doing incredible. You're extremely forward thinking and fast paced, BlackRock as well, it's doing incredible things as part of supporting tokenization as a whole, almost disrupting themselves

19:49before they can be disrupted, very much an adapt or die mentality, and they're choosing to adapt. Only a couple of questions left for you. You mentioned working with startups, working with some crypto-native teams. Same question, maybe just from the other side, who do you think are the crypto-native teams that are most poised to do the disrupting? It's very interesting. I won't mention any names, but I think the players who really like the best way to, you know, I think the best example I think is those who are, you know, thinking about being institutional first, and with the kind of principles of DeFi. And so I think the players who are can, you know, try and basically, I always say, don't over-complicate it at the start. As soon as you add complexity, the beginning you've lost. And so you don't want to necessarily reinvent the wheel because finance is actually pretty efficient. What you're trying to do is take things that already work today and just make them, you know, quicker, faster, better, automated, low account party risk,

20:50all of those things. And we've seen a lot of players come to the space who are thinking, okay, this thing already exists off-chain. Four, on-chain assets to have a real flywheel effect, this thing is awesome. So I always think about, you know, secondary market trading, like market makers are actually a really big winner, I think, in this space. And their ability to, you know, as you take air gaps out of, you know, the cash settlement cycle, well, if you take air gaps out, you need to put liquidity in. So liquidity providers, I think, are going to have, you know, particularly in the meantime, have an ability to almost like name their price. I think that's going to be really important. But the secondary market liquidity piece, as well, is really interesting. You know, we need to be in a world where tokenized funds can be traded, make a market in them, and we're not taking like 2% haircuts because, you know, ultimately, if you take your 2% haircut on an underlying portfolio, like what was the point in doing it in the first place, unless you're a four-seller. So I think those things are going to be really important. And then I think the, you know, stablecoins are the thing that have real, like, impact in the real world today. And so, anything which is kind of stablecoin adjacent infrastructure, which actually makes them usable across the stack, rather than just simply, you know, payments, you know, just in time payments,

21:56because actually most players, corporate banks, et cetera, don't want to be just in time. Like, actually, there is a premium you're willing to pay. There's a cost of carry that you're willing to pay for peace of mind, as an issue, as a CFO. And so people who are able to take stablecoins beyond just simply the kind of the cross-border, just in time payments, peace, and expand it out beyond just yield as well, just expand it out across the stack through the banking system. They're going to be going to be the real big winners. And that might not be issuers, that might be infrastructure, that might be, you know, might be market makers. So I think the, I guess, the big thesis I would leave you on this question is like, currently in finance, you have vertical leaders, you have asset managers, you have banks, you have exchanges, et cetera, you have these vertical leaders who define a category. In the next 10 years, I think there's going to be basically a complete breakdown in those barriers. And you're just going to have expanding terms, total tangible vegetable market, but they will be collapsing into each other. So wallet providers

22:58will be competing with exchanges, banks will be competing with asset managers, asset managers will be competing, you know, with, you know, direct lenders, and the competition is going, people will be cross verticals, and they'll be able to, because the technology reduces the edge that you have in a particular vertical, it allows you to both compete but also have to defend. And so I think the big thing is that you're going to have this time grow as a collective, as finance, but we're going to be able to essentially move between those verticals and not just be defined by the thing we already do today. Yeah, incredible. I feel like we could go for another hour, but I think that was such a great point to leave off on because it really does open up our minds as to how these colliding worlds might start to intersect with one another and what can potentially shake out as a result. And so I'm going to, I'm going to let that one, I'm going to let that handle that. And we'd love to do it again sometime soon. Thank you for having me. Really appreciate you coming on. Really appreciate it. Thank you for having me. Absolutely. Yeah. Cheers.