The Breakdown - Tokenization’s Starting Gun

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 Wednesday, December 3rd, and today we are talking about why tokenization could do for finance what the internet did for information. 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 are go to bit.ly slash breakdown pod. All right, friends, our main topic today is some comments

Starting point is 00:00:42 from Larry Fink, but before that, let's do a little bit of price action news, where Bitcoin is back up recovering to a two-week high. Tuesday's Open saw Bitcoin rally by 3.6% across the first two hours to head back above $90,000. Price topped out at $94,000 overnight, but this was the strong rebound that many had been looking for. Alex Kruger declared the time to believe in Santa has arrived. Now, aside from the start of a Santa Claus rally, there were multiple competing theories for what drove the move. Bloomberg's Eric Belcunas thought we were watching the Vanguard effect as the asset management giant allowed their customers to buy Bitcoin for the first time. He tweeted, Bitcoin jumps 6% right around the U.S. Open on the first day after the Bitcoin

Starting point is 00:01:21 ETF ban lifted? Coincidence? I think not. Also $1 billion in Ibit volume in the first 30 minutes of trading. I knew those vanguardians had a little D-Gen in them. Even some of the most conservative investors like to add a little hot sauce to their portfolio. Vanguard saving Bitcoin was not on my 2025 bingo card, I can tell you that. Others were looking two macro factors in Fed liquidity. This week marked the end of quantitative tightening with the Fed no longer shrinking their balance sheet. At last month's Fed meeting, Jerome Powell had pushed back on the idea that the Fed would immediately shift back into QE. However, he did guide that the Fed would add liquidity at the margins in line with GDP growth. It seems that plan didn't last long, with the Fed injecting $13.5 billion into the

Starting point is 00:01:59 banking system through the overnight repo facility on Tuesday night. Bar chart wrote, this is the second largest liquidity injection since COVID. Probably fine, carry on. TXMC pointed out that it doesn't work that way, commenting, it's a loan, bro. Loan or not, use of the repo facility is a sign that liquidity in the banking system is under pressure. Noting that rates in the interbank lending market were still 12 basis points above the Fed's upper bound, Felix Javan of the Forward Guidance podcast wrote, yeah, ending QT isn't nearly enough. Now, it's a bit early to break out the money printer go burr memes, but none of this is a good sign. Raul Paul of Real Vision tweeted, they've got to go to a temporary fix-of-term repo or whatever to get through year-end, or it's all going to get super

Starting point is 00:02:37 messy. Regarding the actual rate decision, the market is now pricing in an 89% chance that the Fed cuts next week. That's basically as good as certain unless something truly unexpected crops up. Added to the Dovish Fed news, President Trump suggested that the search for the new Fed chair is over, stating, we've probably looked at 10 candidates and now we have it down to one. While Trump said that the announcement will be made early next year, the prevailing rumor is that National Economic Council Chair Kevin Hassett will be the pick. Hassett is strong. in favor of interest rate cuts and is expected to be completely aligned with Trump's economic views. We'll see how the rest of the week plays out, but this feels like the first opportunity

Starting point is 00:03:11 for a big Bitcoin recovery. We're also back to Bitcoin's trademark volatility with Morning Brew tweeting, Monday, Bitcoin post worst day since March, Tuesday, Bitcoin on pace for best day since May, hit so over, where so back, etc. Now, coming to these comments that I mentioned before, BlackRock CEO Larry Fink and Senior Managing Director Rob Goldstein have laid out their big tokenization thesis for all to see. In a featured article in The Economist, the pair wrote, it started in 2009 when Satoshi Nakamoto, a pseudonymous developer, launched Bitcoin as a shared digital ledger that could record transactions without intermediaries. A few years later, that same technology, the blockchain sparked something even more transformative, tokenization.

Starting point is 00:03:49 Now, Fink's enthusiasm for tokenization certainly doesn't come as a surprise for crypto folks, but the economist, of course, reaches an entirely different audience. Fink and Goldstein are essentially laying it all out for their Wall Street peers and declaring that it's time to start the tokenization push. The article explains the benefits of tokenization, namely that transactions can be settled instantly, and that paper record keeping can be replaced by code. One side benefit tucked into the settlement point is that tokenization would also function as a global settlement standard, greatly reducing friction. Beyond explaining the technology, Finke and Goldstein took a moment to explain just how transformational this moment is for global finance. They wrote, if history is any guide,

Starting point is 00:04:24 tokenization today is roughly where the internet was in 1996. tokenization could advance at the pace of the internet, faster than most expect, with enormous growth over the coming decades. It won't replace the existing financial system anytime soon. Think of it instead as a bridge being built from both sides of a river converging in the middle. On one side stand traditional institutions. On the other side are digital first innovators, stable coin issuers, fintechs, and public blockchains. The pair then moved to a discussion for regulators that still hold reservations over crypto. They wrote, regulators should aim for consistency. Risk should be judged by what it is, not how it's packaged. A bond is still a bond, even if it lives on a blockchain. This is one argument

Starting point is 00:05:02 that probably hasn't been emphasized enough over the years. Many regulators see tokenization is scary because crypto has a reputation as a wildly volatile asset that's prone to crashes. They imagine that stocks and bonds will inherit those characteristics purely from trading on a blockchain. Thinking Goldstein make it clear that this won't happen. A bond is still a bond with exactly the same investor protections, contractual guarantees, and regulatory protections. It's just trading on a different set of rails. They laid out the basic protections that need to be set up, naming counterparty risk standards and identity verification systems. But beyond that, this is a clear call for the U.S. financial system to start transitioning to tokenized assets in 2006. Legacy internet and infrastructure

Starting point is 00:05:41 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, and scaled to meet the $3 trillion telecom and utilities market. This is fintech for infrastructure, connecting capital directly to builders and returning revenues seamlessly to funders. No middlemen, no bottlenecks, just sovereign, resilient infrastructure

Starting point is 00:06:21 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. Alongside the article, we have several other events lined up later this week. Coinbase CEO Brian Armstrong announced that he'll appear with Larry Fink and Andrew Ross Sorkin to talk tokenization at the Dealbook Summit on Wednesday. Galaxy Digital's Alex Thorne announced that he'll be speaking before the SEC's Investor Advisory Committee on Thursday to discuss the tokenization of equities. Galaxy is notably one of the largest firms to tokenize their equity so far.

Starting point is 00:06:53 representatives from BlackRock, Citadel, Nasdaq, Robin Hood, and Coinbase will also be speaking. The full article from Finken Goldstein is available on BlackRock's website and is well worth the read, but the big takeaway is that BlackRock have officially fired the starting gun on the tokenization of everything. Speaking of, Crackett has acquired tokenization platform backed finance to accelerate their tokenization strategy into the new year. Backed was Crackin's existing partner on the X-stocks product, which launched in June. The platform offers around 60 tokenized stocks and ETFs trading on the Solana and Ethereum Blockings. chains. The stocks can be self-custodied like any other on-chain asset, or they can be accessed through

Starting point is 00:07:27 Cracken's platform. The product has been a huge success thus far, recording over 10 billion in combined on-chain and off-chain volume since launch. With the new acquisition, Crackin will integrate the X-stocks platform more tightly into their own products. They plan to add the tokenized assets to their global money app, as well as expanding to additional blockchains and adding more assets. X-stocks will continue to operate as a consortium, offering interoperability with other exchanges. In a blog post, the two companies wrote, together, Cracken and Backed will accelerate X-stocks expansion, bringing tokenized equities to new markets and extending their reach into everyday financial experiences. The acquisition lays the groundwork for future innovation and tokenized

Starting point is 00:08:02 assets beyond equities, advancing our leadership in building open, interoperable financial infrastructure. Deal terms were not disclosed. The acquisition adds to Cracken's buildout in anticipation of an IPO. Cracken acquired Ninja Trader in May to add a regulated futures market, and added prop trading platform breakout in September and small exchange, a designated contract market in October. Backed rounds out, Cracken's vertical product offering, and should make the company very compelling when they go public early next year. Jesse Schau, the Ventures Principal at Starknet, wrote, Crackin's acquisition of Backed was a really smart strategic move. Rojas vertically integrated the custody clearing and settlement services to easily tokenize more tradfye stuff. This is about to go

Starting point is 00:08:40 beyond X-stocks tokenizing U.S. equities. Bullish news leading up to their IPO. No. Last couple of regulatory stories to round us out, Republican lawmakers pushed regulators to implement the Genius Act at a House Financial Services oversight hearing on Tuesday. Leadership from the Fed, FTIC, and OCC were all present. Representative Brian Steele emphasized that getting stablecoin regulations on the books was a matter of priority, asking each regulator for a status update. The Genius Act provides a one-year window for regulations to be written, putting the deadline in July of next year. However, Steele said, I just want to make sure that we get those done on time. I think that's just really important. We've seen instances across years in this committee where sometimes

Starting point is 00:09:16 bills are passed, but we don't see the regulations come out on time. In his testimony, FDIC acting chair, Travis Hill said that his agency was planning to release draft rules this month. Under Genius, the FDIC will supervise a significant portion of stable coin issuers. Their rules are required to establish capital requirements, liquidity standards, and reserve asset diversification standards. Hill also noted the FDIC is working on guidance to clarify the regulatory status of tokenized deposits, making it easier to issue those instruments. Fed Vice Chair, of supervision Michelle Bowman said that her agency would be working on clear guidelines for much broader crypto activities within the banking system. She said, we need to provide clarity and

Starting point is 00:09:50 treatment on digital assets to ensure that the banking system is well placed to support digital asset activities. This includes clarity on the permissibility of activities, but also a willingness to provide regulatory feedback on proposed new use cases. Lastly today, SEC Chair Paul Atkins has said that his agency can continue moving crypto regulation forward without legislation from Congress. During a CNBC interview on Tuesday, Atkins confirmed that the SEC is providing technical assistance to Congress as they figure out the market structure bill. However, he noted that the lack of legislation hasn't stopped the SEC from developing crypto regulations. Atkins said, we have enough authority to drive forward. I'm looking forward to

Starting point is 00:10:25 having an innovation exemption that we've been talking about now. We'll be able to get that out in a month or so. Now, the SEC can't do everything that Atkins might want, but they can do a great deal through exemptions and rulemakings under their current powers. The legislation is much more about granting the CFTC power to regulate the spot markets and establishing a framework to allow tokens to become commodities. One interesting upshot of this, given the recent news, is that the SEC might have all the authority they need to approve tokenized stocks. Now, while Atkins isn't being held back by the lack of legislation, it's still a clear priority in Congress to move the market structure bill forward. Senate Banking Chair Tim Scott previously said that he plans to have the bill ready for

Starting point is 00:10:59 markup this month, so the clock is ticking. For now, however, 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 - Tokenization’s Starting Gun

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