The Breakdown - DTCC Puts US Securities On Chain

Starting point is 00:00:00 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 Monday, December 15th, and today we are talking asset 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. All right, friends, well, the depository trust company has obtained approval to start offering asset tokenization, marking a huge step forward for crypto infrastructure. The DTC is a subsidiary of

Starting point is 00:00:46 the Depository Trust and Clearing Corporation, or DTCC, who handle financial assets clearing in custody for the entire U.S. stock market, as well as many other stock markets. They clear quadrillions in trades each year and are one of the most critical providers of financial infrastructure. The approval comes in the form of a no-action letter from the SEC. It allows participants in the DTCs, network to tokenize a defined set of highly liquid assets on pre-approved blockchains over the next three years. The asset set includes every stock in the Russell 1000, ETFs tracking major indices, as well as U.S. Treasury bills and bonds. So essentially every security that trades in U.S. public market in any real size. The DTC said they expect to launch their service in the second half of next year.

Starting point is 00:01:26 Frank Lassala, the CEO of the DTCC, talked about this initiative in terms of updating the stack for the entirety of U.S. financial markets. He said in a statement, I want to thank the SEC for its trust in us. tokenizing the U.S. securities market has the potential to yield transformational benefits such as collateral mobility, new trading modalities, 24-7 access and programmable assets, but this will only be achievable if market infrastructure provides a robust foundation to usher in this new digital era. We welcome this opportunity to further enable and innovate for the industry, our participants, and their clients. We look forward to partnering across the industry to tokenize real-world assets safely and securely while advancing the future of finance for generations to come.

Starting point is 00:02:02 The pre-approved blockchains have not been selected at this stage, but the DTCC said they would soon present an approval process for L1 and L2 blockchains. In addition, they said they would share details of onboarding requirements, including registering wallets. This likely won't be a free-for-all, as we've seen with some offshore tokenization projects. Instead, it looks to be a fully compliant onshore offering with all of the usual KYC and AML requirements that currently exist in electronic stock trading. Still, the DTCC said they would be looking to leverage the, quote, benefits of blockchain and tokenization technology, including mobility, decentralization, and programmability, all with the same protections and accountability that DTC provides. The press release specifically discussed the ability to transfer assets across borders 24-7 and the ability for traders to access their assets more directly. The SEC approving the project

Starting point is 00:02:45 through a no-action letter is also notable. While a no action letter isn't as permanent as rulemaking, it allows the SEC to bypass the notice and comment process to fast-track approval. A pilot of this magnitude could have easily been caught up in an endless cycle of comments and hit pieces, so this method is likely the only way to approve wide-scale tokenization by next year. It's also notable that the DTCC was the one to be granted approval to begin the initiative. While it cements their monopoly over financial plumbing for another era, it also ensures that the U.S. tokenization effort is centralized within a highly credible existing financial institution. This pilot allows the DTCC to set the common standard for asset tokenization, while brokers and crypto firms can participate according to their relevant

Starting point is 00:03:23 specialties. Essentially, the DTCC is the only entity in the current financial system that can dictate that a token represents a unit of stock or a treasury bond as they also handle the existing ledgers. Still, it seems like centralization will be relatively limited. The press release recognizes that decentralization of custody and the ability to self-direct transfers is important. We have no idea what the system will look like once it's implemented, but for the moment the DTC is saying all the right things. In summary, this is the big one, the first opportunity to realize the concept of decentralized stock markets. SEC Chair Paul Atkins tweeted, U.S. financial markets are poised to move on-chain. Under my leadership, the SEC is prioritizing

Starting point is 00:03:59 innovation and embracing new technologies to enable this on-chain future while continuing to protect investors. He mentioned the approval allowed brokerages to transfer tokenized securities directly to the wallets of investors, with those changes in ownership reflected in official DTC records. The DTCC already has prototypes up and running. In a live stream on Friday, they demonstrated the tokenization process as well as executing a trade on a rudimentary decks. They're anticipating settlement within seconds and available around the clock, a massive change from the current one-day settlement of electronic trading. Michael Winnege, the global head of strategy at the DTCC, provided a lot of reassurance to the Tradfai world. Through comments to Bloomberg, he said these tokens

Starting point is 00:04:35 will have the same legal entitlements as electronic stock certificates. He also noted that the DTCC will ensure they have the ability to freeze and force transfers if assets are stolen, commenting, this enables participants to adopt and integrate because they know there is a trusted party that can recover their securities as needed. In other words, this doesn't appear to be a small pilot, but instead the beginning of a gigantic systems overhaul. Winneke said that although only the top thousand stocks had been approved, the DTCC's goal is to tokenize the entire depository. Reflecting on the gravity of the moment, former Tradfai executive and long-time

Starting point is 00:05:04 crypto venture investor Jill Gunter tweeted, the DTCC tokenizing its assets has been a holy grail for this industry for 10 years. Legacy internet and infrastructure are brittle, plagued by downtime, coverage gaps, and outdated financing models. Communities and builders are left behind while capital sits locked out. Althea is changing that. Since 2018, their technology has powered resilient, sustainable networks across the U.S. and abroad. With Althea L1, they built the world's first blockchain purpose built for utilities and telecom, turning infrastructure into a transparent, investable asset class. Through liquid infrastructure, networks can now be financed in real time, operated more efficiently

Starting point is 00:05:41 and scaled to meet the $3 trillion telecom and utilities market. This is fintech for infrastructure, connecting capital directly to builders and returning revenue seamlessly to funders. No middlemen, no bottlenecks, just sovereign, resilient infrastructure that works for people, communities, and investors alike. Learn more at Althea.net and find them on Crackin to join the future of infrastructure finance. Now, in similar themes, Coinbase is set to launch their tokenized stock and prediction market products later this week. Bloomberg reports that the new products will be unveiled in a showcase live stream on Wednesday. Details are relatively slim, but screenshots of the products in action have been circulating on Twitter throughout the past week.

Starting point is 00:06:19 Sources said the tokenization product will be fully in-house, built on their own infrastructure, and presumably running on base. Prediction markets weren't mentioned, but a recently formed partnership coalition with Kalshi suggests Coinbase will be offering access to their liquidity. Presumably, Coinbase will be launching tokenization with a similar structure to Crackin and Robin Hood's products, that is, tokens that are merely depository receipts for stock held by a third party, rather than the token representing actual ownership of the stock. This is, of course, one of the reasons the DTCC news is so important.

Starting point is 00:06:47 It opens the ability for the coinbases of the world to offer actual stock on chain, complete with all the legal rights of stock ownership. For now, it's just speculation and we'll know more on Wednesday, but expect this to be another big product launch that advances Coinbase's strategy of becoming the everything exchange. In another big first for tokenization, J.P. Morgan has issued the first on-chain commercial paper in the U.S. The bank said they issued commercial paper on behalf of Galaxy Digital. Commercial paper is similar to a commercial bond, but generally doesn't have a liquid market. The debt deal was worth $50 million and was issued on Solana. In a press release, Morgan called this a global milestone. Scott Lucas, the bank's head of market digital assets said,

Starting point is 00:07:21 in the first half of next year, we intend to build on this momentum by exploring how the structure in J.P. Morgan's role in it can be expanded, not just in terms of the investor and issuer base, but also security type. We're confident there is strong demand for this type of innovation, and we're committed to supporting our clients in the market as we move forward. In addition, early this morning, news broke that J.P. Morgan will launch their first tokenized money market fund on Ethereum. The new private fund will be seated with $100 million of the bank's own capital. JPMorgan Asset Management, head of liquidity, John Donahue said, There is a massive amount of interest from clients around tokenization.

Starting point is 00:07:50 We expect to be a leader in this space and work with clients to make sure that we have a product lineup that allows them to have the choices that we have in traditional money market funds on blockchain. Tether is also getting an on asset tokenization, but for their own purposes. Bloomberg reports that Tether is considering tokenizing their own private stock after they complete their gigantic fundraising round. Tether is currently in the middle of raising as much as $20 billion on a $500 billion valuation. tokenization is viewed as a way to allow investors to access liquidity without taking the company public. If this plan is carried out in a relatively open manner, Tether could become the largest

Starting point is 00:08:20 on-chain IPO in history and could dramatically change the course of financial markets. But that's not all there is to the story. Bloomberg sources said the plan came about after at least one investor attempted to offload the stock at a steep discount to the target $500 billion valuation. They reported the numbers were a billion dollar sale at a $280 billion valuation. Blockchain capital was also reportedly interested in divesting until news of the fundraising broke. In a statement, Tether said that they've received confirmation that the sale will not proceed. They added, it would be imprudent and indeed reckless for any investor to attempt to circumvent the established process led by Tier 1 Global Investment Banks or to engage with parties not authorized

Starting point is 00:08:54 by Tether's management. Sources noted the current fundraising round doesn't include a liquidity offer to existing investors, so they're stuck holding the stock for the time being. The article noted that Tether is also considering buybacks to get investors the liquidity they're demanding. Presumably, if Tether goes through with tokenization plans, their stock wouldn't be available to retail investors in the U.S. There's also chatter of trading being restricted to investors approved by Tether, which wouldn't meaningfully change the liquidity of the stock. Still, the offshore tokenization of one of the largest private companies in the world, rather than a regulated IPO, would be a big shake-up for global markets. Now, interestingly, Nidig thinks the benefits of

Starting point is 00:09:27 tokenization won't move the needle for crypto assets. In a Friday note, Global Head of Research, Greg Zipelaro wrote, the benefits to networks these assets reside on, such as Ethereum, are light at first, but increases their access in interoperability and composability increase. At first, he added, the benefits will merely be the trading fees gathered by hosting market activity. Layer 1 fees have been in a bare market all cycle, so unless tokenized assets see a ton of volume, this probably won't change. However, Cipollaro noted that there's potential for, quote, increasing network effects from hosting the tokenized assets. With time, he continued, one could see these real-world assets being part of defy composability, either as collateral

Starting point is 00:10:01 for borrowing, an asset to be lent out, or for trading. This will take time as technology develops, infrastructure is built out, and rules and regulations evolve. Summing up, Cipelaro wrote, In the future of things become more open and regulations become more favorable, as Chairman Atkins suggests, access to these assets should become more democratized, and thus these RWAs would enjoy expanded reach. Investors should pay attention even if the economic impacts to traditional cryptocurrencies are minimal today. This is a pretty common view, with many doubting that tokenization will drive prices for crypto tokens higher. Block space has become abundant over the past cycle, and cheap transactions have become the norm. The tokenization story is a huge narrative boost, which

Starting point is 00:10:36 could drive price action, but the story is really about democratization of access rather than number go up. The malaise was evident to VC Jason Choi, who was on the ground for Salana Breakpoint in Abu Dhabi over the weekend. He wrote that it was, quote, probably the most somber sentiment I've observed at a crypto conference in a while. OG's quiet quitting, VC's not doing well, record redemptions for liquid funds, minimal net new projects, general stupor from builders carrying out on inertia, not excitement. And it's not just price. Even in 2019, 2012, and early 2023, when markets were hardly doing great, there was a palpable electricity at conferences like this, a genuine belief that everything will be viewed through the lens of crypto one day,

Starting point is 00:11:11 similar to how AI is perceived today. This time, that's rare. Generally, the only semblance of enthusiasm from people is around more flavors of stable coins and more perp-dexes. Austin Campbell suggested this feeling is sweeping over the entire industry as we watch Tradfai institutions adopt the technology on their own terms. He wrote, The slow-motion realization that reinventing finance is not actually easy and can't be done by purely winging it with vaporware tech continues. The beatings will continue until craftsmanship improves. So that is the tokenization story from here, and that is where we will close today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other.

Starting point is 00:11:45 Peace.

The Breakdown - DTCC Puts US Securities On Chain

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