The Breakdown - Is Tokenization the 3rd Leg of this Bull Market?

Starting point is 00:00:04 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 Sunday, June 29th, and that means it's time for Long Read Sunday. 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, welcome back to another Long Reads episode. There have been really two themes that we've been discussing this week. The first is Bitcoin and market reactions to everything going on in the

Starting point is 00:00:47 Middle East, and the second is sort of the meta theme of this last cycle, which is the increased institutionalization of crypto, and even beyond that, the blending and hybridization of the digital asset ecosystem and the traditional financial system. Now, within that, the big themes so far that have been manifest are, of course, Bitcoin, which take expression in the ETFs, and now more recently, the incredibly in-demand theme of stablecoins. The breakout of the Circle IPO has really made people reevaluate just how much hunger there is for stablecoins, and many people are then wondering, is tokenization the third leg of that stool? To get a take on that, we're going to head over to Galaxies Thomas Cowan. He wrote a piece called What's Next for tokenization.

Starting point is 00:01:30 previous market cycles came with big promises for real-world assets and the tokenization of existing financial products. This time, it's really happening. Now, Thomas is the head of tokenization in on-chain capital markets at Galaxy, so as someone who spends a lot of time thinking about this. So with that, I'm going to turn it over to an AI version of myself from 11 Labs. We'll read the piece and then we'll come back and discuss it. To many of us in and around crypto, this time feels different. Tokenization of financial assets has arrived in ways that we haven't previously seen. As we charge ahead, it's important to zoom out, slow down, something our industry is not known for, and take a snapshot of today and where we are going tomorrow. Stablecoins are tokenization's

Starting point is 00:02:12 first smash hit. While tokenization is revolutionary for financial markets, its adoption to date has been evolutionary. First, we had stable coins as a more efficient means of payment. Then we had tokenized money market funds as a more efficient store of value. What's next? Structured credit coupled with private funds. As with previous technological waves of adoption, tokenization will come slowly and then all at once. Buckle up. We are about to enter the vertical slope of the S-curve. Since the last crypto market cycle in 2021, stable coins have demonstrated clear product market fit. With more than $250 billion in circulating supply, stable coins continue to demonstrate long-term demand and utility. That includes tether and USDC for cross-border payments through companies such as

Starting point is 00:02:58 MoneyGram, Stripe, PayPal, and Felix, oversees dollar access in emerging economies and those with weaker currency regimes such as Nigeria, Venezuela, Turkey, and others, and as the key trading pairs for crypto trades, including Bitcoin and Ethereum. Regulatory clarity, particularly passage of the Genius Act in the U.S. covering stable coins, can only accelerate this trend. The outsized demand for Circle's stock following its IPO is another positive sign. Tokenized money market funds bring a technological and financial upgrade for storage of value on-chain. Market leaders including Buidal, Benji, Ando, and others have shown there is clear demand for the risk-free rate on-chain. That means not only as a collateral and treasury instrument, but also as a stablecoin substitute for crypto-native players

Starting point is 00:03:45 that need fiat-denominated liquidity. While the initial versions offer hybrid structures, with the fund tokens mirroring traditional transfer agents and off-chain shares. We are beginning to see token-native issuances percolate across the industry. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversified to thematic exposure to crypto

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Starting point is 00:04:46 What's next for tokenization? Given that tokenization has demonstrated a more efficient method to move and store value, what parts of the industry are next? To start, we have seen industry leaders tokenize private funds, such as Apollo's Aikred, Hamilton Lane's tokenized fund with Republic, multiple on-chain funds offered by Wisdom Tree and others that have begun to show utility through transparency, defy lending, and liquidity improvements. The value that tokenization is bringing today to different fund structures only scratches the surface

Starting point is 00:05:20 of what is possible, but as defy and tradfi overlap more and more, utility is likely to take off. Structured credit is an ideal candidate for tokenization. Traditionally, it can be complex, opaque, involve multiple counterparties, and can be comparatively expensive to issue and operate. Smart contracts not only streamline and automate debt servicing of a loan pool, for example, but also follow a pre-programmed waterfall for each investor tranche. Couple that with instant settlement within the structure and the cost basis can drop substantially. And, because the structure is on-chain, we won't have the lack of transparency that plagued the financial system in 2008. At the issuer's discretion, holders of on-chain structured credit

Starting point is 00:06:00 products could see the performance of the underlying in real-time, 24-7. This transparency is not only transformative for regulators to better monitor underlying risks, but it also increases collateral acceptance by standardizing and providing more information to lenders. This combination of value and information will mean a more liquid secondary market for these assets as well, while larger traditional institutions can offer some of these benefits, such as transparency or their own secondary marketplaces, tokenization has the potential to bring this all together and standardize it beyond today's walled gardens. tokenizing equities Discussion around tokenizing equities has taken off in 2025.

Starting point is 00:06:42 Though companies, including INX and BACT, have tokenized stocks before, regulatory discussions with security and exchange commission's crypto task force have hastened the adoption timeline. Superstate, Cracken, and We at Galaxy have all announced stock tokenization initiatives to continue to push the industry forward. While the industry has made progress, several challenges lie ahead. The U.S. still lacks the United States. the stablecoin and market infrastructure bills that are needed, though the genius's passage in the Senate

Starting point is 00:07:10 is a notable step forward. Solving K-Y-C-A-M-L remains a barrier holding the technology back from adoption at scale. Private chains are too limiting, and public chain structures without adequate K-Y-C-A-M-L are challenging for TradFi to adopt. Instead, the industry will have to land in the middle, leveraging the benefits of public chains with the regulatory and trust-based K-YC policies that our financial system is built on today. Education on the technology's potential also remains a hurdle. The industry must continue to highlight material use cases and tangible benefits that tokenization can bring not just to traditional finance, but entirely new opportunities and structures that couldn't exist before.

Starting point is 00:07:54 Takeaways. What should we take away from this time? First, we have come a long way from the initial Bitcoin transactions and Ethereum smart contracts that formed a cornerstone of crypto. Now, the industry has partnerships with the biggest names in finance, payments, and technology that lead the global economy today. Second, we are at the bottom of the second inning. We've put some points on the board, but this is just the start. Adoption at scale will require a pairing of the revolutionary benefits of this technology with the timeless trust that has been the bedrock of the financial industry since its founding. This balance of technology and trust is core to achieving the potential of tokenization in finance, to do for value what the internet did for

Starting point is 00:08:37 information. All right, back to Real NLW. I've said this before, but one of the things that was most notable to me, when BlackRock and Larry Fink put their bodies in front of the slide in crypto in and around May of 2023, part of what the break with the past was, a rejection of the idea of the that you had to choose blockchain or Bitcoin. Indeed, when Larry Fink was put to that question after they announced that they would be applying for a spot Bitcoin UTF, he basically said both please and was very clearly very serious about it. Things point was that Bitcoin, as an asset, had some really interesting properties that made it important and valuable, especially in the context of the world that we were moving into, but that of course everything was going to be

Starting point is 00:09:18 tokenized. And this is kind of what it's always felt like to me as well, that the variety of things that you could do if all of these assets were on chain and able to be tokenized, just seemed like an absolute feeding frenzy for Wall Street. In fact, it's surprised me to some extent that it's taken them this long to really come to that. Still, come to that they have, and as Thomas points out, stories that are now starting as a slow, steady drumbeat are going to crescendo here in the future. Now, I don't know exactly what type of regulatory changes plus experimentation it's going to take. As we talked about earlier in this week, looking at some of the experiments, out there, they're still very, very nascent. Republic, for example, tokenizing sort of private stock

Starting point is 00:10:00 from companies like SpaceX show just how far we have to go. Still, it's clear that this trend is coming, and there's going to be a lot of interesting opportunities along the way. It's certainly one that we will continue to pay attention to here. For now that that is going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - Is Tokenization the 3rd Leg of this Bull Market?

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