The Breakdown - Blackrock Pushes the Tokenization Trend

Episode Date: March 21, 2024

A look at the real world asset tokenization trend and how Blackrock is pushing this narrative forward as well. Today's Show Brought To You By Kraken - Go to https://kraken.com/thebreakdown and see what crypto can be Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, March 20th, and today we are talking tokenization. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, there are a bunch of interesting things happening as I'm prepping this. We have some Ethereum FUD with the SEC, we've got Powell's FOMC, so it seems like tomorrow will be juicy.

For now, though, we are talking BlackRock and specifically tokenization at BlackRock. The Big Bitcoin ETF winner has applied to launch a new fund called the Institutional Digital Liquidity Fund. The fund will be launched in partnership with asset tokenization firm Securitize, who are acting as a sales agent. We're currently going off basically zero details, other than the contents of the content of the the SEC filing. The filing says the fund will have a $100,000 minimum investment, an indefinite size, and is paying securitize over half a billion dollars in sales commissions. In other words, it looks like an institutional rather than a retail offering. The filing doesn't specifically describes the assets that will be held by the fund. What we do know is that BlackRock CEO Larry Fink

is very interested in extending the firm's digital asset strategy into real-world asset tokenization. While he was doing his January media tour for the Bitcoin ETF, he refused to accept framing that painted digital assets as completely separate from RWA's. In other words, to the question of Bitcoin or blockchain, Fink was somehow the first of his ilk to answer, why not both? During an interview with CNBC at the beginning of the year, he commented that the Bitcoin and Ethereum ETFs are, quote, just stepping stones towards tokenization, and I really do believe this is where we're going to be going. Chain checkers have turned up a few additional breadcrumbs. There was a token deployed on Ethereum two weeks ago called the BlackRock USD Institutional Digital Liquidity Fund. It has a maximum

token supply of 100 and only a single holder at this point. There's nothing specifically tying this token to BlackRock. Anyone could have spun it up. But still, if BlackRock were going to put a tokenized fund on Ethereum, this is probably what it would look like. The best working theory is that this fund will be an extension of the liquidity fund set up in late 2022 to manage some of Circle's stable coin reserves. That fund gave Circle access to repo liquidity with some of the world's largest banks acting as counterparties. It functions like a private money market fund, with BlackRock handling the financial plumbing to give Circle better access to yield and liquidity. Lending some credence to this theory, analysts noted that Circle had transferred $100 million worth of USDC to an address related

to the securitized deployer late last week. This could be a payment to cede the fund, and of course, it could be Circle making a payment on behalf of BlackRock or a third party. Even though the details are slim, it was enough to get imaginations running on crypto-twitter. DC investor wrote, one thing notable about this new BlackRock fund on Ethereum, this isn't like old LARPs by governments who put some notational debt security on chain. This is the world's largest asset manager actually putting $100 million in USDC on the Ethereum blockchain. Robert Leshner, the CEO of Superstate and founder of compound tweeted, congratulations, BlackRock and Securitize on the launch. This is another great milestone for the tokenization of assets. Fairly safe to say that Leshner is in

the short list of people who are going to have a solid read on what's going on behind the scenes here. Others pointed out that the assumed use of Ethereum for this fund validates the network as a pillar of the industry. Investor Adam Cochran tweeted, I've been having the argument for years that big funds would pick Ethereum regardless of fees. Everyone claimed existing fringe funds didn't count, and real funds would choose cheap, fast chains. No. BlackRock chose the most dependable and decentralized chain that can run smart contracts. Reliability and decentralization are premium products worth paying for. While we want to lower their costs to make it more accessible, some things are more important

to buyers than a race to the bottom on fees. Ryan Birkman's added, BlackRock is happy to pay high fees on the Ethereum L1 for their $100 million USDC to enjoy best-in-class reliability and rub shoulders with other whales. Everyone else can use many L2 roll-ups and validiums for pennies or less. Ethereum is scaling the way the world actually works. Now, of course, just to be clear, once again, we don't have any confirmation of what this fund is yet or whether it will be on Ethereum. It could be a tokenized money market fund for institutions, a stable coin, a digital asset fund, or something else entirely. Still, all signs

currently point to BlackRock coming on chain. As Nate Garassi, the president at ETF store said, the world's largest asset manager is out here tokenizing funds while you still debate whether crypto has any use case. This was not the only tokenization discussion happening yesterday. By way of a couple examples, Swiss Bank, Cignam Bank has tokenized $50 million worth of Fidelity's International Institutional Liquidity Fund. The asset was tokenized on Ethereum Layer 2, ZK Sync. This 50 million represents a portion of Matterlapse reserve funds. The firm has previously expressed their long-term strategy of bringing their entire reserve holdings on chain, using institutional custodians to provide the tokenization. Speaking at the London Digital

Asset Summit on Tuesday, Sigmundem CEO Matthias Inbach said, our vision has always been to be a bridge builder between these two worlds. We believe in permissionless public blockchains, but at the same time, we believe in compliance and the value of regulation, so we see a role in helping the different ecosystem players to work together. Another related story, City and the Brazilian Development Bank, are the two latest members to join the Hyperledger Foundation. Hyperledger provides codebases for institutional blockchains, with members building products and infrastructure on top. The Foundation currently boasts 134 supporting members, including IBM and American Express. The Hyperledger infrastructure operates on an Ethereum client called Basu. The Foundation is also announced

a Basu Financial Services Working Group aimed at bringing together enterprise users and code contributors to improve the ecosystem. The working group's members include Accenture, MasterCard, Santander, and Visa. Third, an asset tokenization platform backed by investment management firm Brevin Howard has gone live. The platform is called Libre and seeks to offer an institutional-grade blockchain experience. Libre is also collaborating with Nomura's Laser Digital Division and private investment giant Hamilton Lane. The system is already live and will offer tokenized access to Braven Howard funds, as well as Hamilton Lane's fixed income products. Libre also hosts a tokenized version of a BlackRock Money Market Fund. That platform is hosted on Ethereum layer to Polygon. Libre founder

Avtar Sarah said, our clients were asking about how they could park their money in a form that gives them money market returns and easily switch over to anything else. We have plugged that in quite quickly over the last two weeks, allowing users from Polygon Mainnet to be able to park cash into a money market account, as well as Brevin Howard, Hamilton Lane, etc. From there, he articulated a much more expansive roadmap stating, ultimately we're going to be launching collateralized lending with Nomura's Laser Digital as the liquidity provider at launch in around early Q3. So we're going to be able to add new services that would normally only be available to those working with tens of millions of dollars. With our facility, you'll be able to get access to

collateralized lending for amounts as small as $50,000. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is. is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry,

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digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. Now, if you found yourself getting distracted with all those details, let me try to sum up which is actually relevant about all this. I think the details of any one of these tokenization products are relatively unimportant, at least for most of your day-to-day lives. They're all institutional products that regular crypto users will likely never interact with. What's more interesting and relevant is that we're starting to see the maturation of this tokenization theme, which is a theme that's been building up over

the past year. It's no accident that a bunch of these announcements were made this week, because they're doing so in coordination with Blockworks Digital Assets Summit, which is happening right now in London. Underlying it all, though, it does strike me that there is a very real trend forming here. During previous cycles, blockchain not Bitcoin may have been the slogan, but that was largely used as a cover story to ignore the crypto industry as a whole, perhaps with some nod to an entirely hypothetical product or perhaps a small pilot program. This time around, we're seeing a range of different approaches to asset tokenization, but the commonality is that all of these firms are legitimately trying to bring products to market. In other words, financial firms are no longer

dabbling in blockchain tech, or doing just enough to be seen like they're doing something, but in fact starting to rush to capture a slice of this digital frontier. Once again, BlackRock CEO Larry Fink really fired the starting gun earlier this year when he spoke about asset tokenization being the future. Now, we're witnessing 100 different approaches to making tokenization a reality. Back over in Bitcoin land, the world's largest pension fund is taking a closer look at Bitcoin. The Japanese government pension investment fund is reviewing their long-term investment policies in response to what they call major changes in the economy and society and rapid technological progress. The fund manages 1.4 trillion in assets held in global stocks and bonds,

private equity, real estate, and infrastructure. The review process is focused on looking at diversification tools, including assets that it previously considered illiquid and chose not to hold. Those assets are specifically Bitcoin and precious metals like gold. This review will take the form of a five-year research plan. At the moment, the fund is simply looking at basic information, including academic studies, analytical tools, and indexes. The study will focus on investment examples, investment philosophy, and how to incorporate these assets into the portfolio of pension funds. Their announcement was clear that there was no guarantee they would decide to invest in Bitcoin, at the conclusion of the study. But still, it once again shows a sign of a shifting time.

Speaking of DAS in London, BlackRock's managing director, Tony Ashraf, spoke yesterday to the extraordinary demand for their Bitcoin ETF and why that demand might be slowing down. Tony said, what we're really seeing over the past couple of months is that pent-up demand is being satisfied because of the ETFs. He believes that first-time crypto investors are the main driver of demand now that the ETFs have broadened access to the asset class. Grayscale CEO Michael Sean and Shine concurred with this view, saying that he's suspect that he's suspect that he's suspected that this pent-up demand has now been satisfied, leaving the ETFs in a transitionary period before institutional adoption begins. Expanding on his views, Ashrough touched on three key drivers of

demand for the Bitcoin ETFs. Firstly, he mentioned the macroeconomic environment and the changing demographic distribution of wealth. He noted that this change in demographics could alter this crypto cycle, noting that investors who purchase Bitcoin ETFs through their investment advisors are unlikely to market sell on a 10% drawdown. Ashraf's second driver was the maturation of the industry. He viewed this cycle as the moment that more venture firms and traditional advisors are warming up to crypto as a legitimate asset class. He added that even simple things are contributing to this trend, like the wide availability of secure custody. Finally, Ashraf pointed to the improving regulatory environment as the third driver. He remarked that more clarity and certainty are starting to emerge,

but admitted this is still in its early stages. Alas, by way of a quick update on ETF flows, the news remains not that great. Yesterday was a new record for net outflows more than doubling the previous worst day. 326 million fled the ETFs, headlined by an increasing 443 million outflow from Grayscale. Inflows have dried up, with Black Rock struggling to reach just 75.2, around a quarter of its average. Fidelity fare no better recording just 39 million. And flows were close to zero for the other funds. With Grayscale outflows picking up again, analysts are also beginning to wonder whether the firm should take drastic measures to stem the bleeding. GBT has now seen $12.8 billion in outflow

since the fund was converted to an ETF. This week has already accounted for a billion of those outflows across just two trading days. The fund began the year with around $29 billion, in assets and still holds $24.6 billion, thanks to the massive appreciation in Bitcoin's price. Still, these outflows seem entirely unsustainable and don't appear to be finding a natural endpoint. On Tuesday, Grayscale CEO, Sond and Shine again said in an interview, I happily confirmed that over time, as this market matures, the fees on GBT will come down. Of course, we anticipated having outflows. Investors have been wanting to either take gains on their portfolio, or arbitragers coming out of the fund, or people unwinding

positions that were part of bankruptcies through forced liquidation. Finance lawyer Scott Johnson tweeted, definitely a threshold pain point for grayscale where they start to worry they're killing the golden goose. More days like we've seen this week and they'll need to make a decision. Nick Carter put it more mathily, don't worry, GBTC can only have an outflow day like that another 38 times. Like I said, with the FOMC meeting concluding today, we will have a chance to see if and how the macro is impacting Bitcoin when we come back here tomorrow. For now, though, I want to say thanks one more time to my sponsors for today's show. Go to crackin.com slash the breakdown and see what crypto can be, and of course, check out the Ledger Bitcoin Nano. 5% of sales will go to support

Bitcoin development. Until next time, be safe and take care of each other. Peace.