The Pomp Podcast - #1345 Sandy Kaul | Trillion Dollar Investor Is All-In on Crypto

Episode Date: April 18, 2024

Sandy Kaul is the Senior Vice President at Franklin Templeton. In this conversation, we talk about bitcoin, client demand, tokenization, real world assets, regulation, portfolio construction, future narratives, meme coins, and where Franklin Templeton sees value in the future.  ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠us.espres.so/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. They have a brand new offer waiting for you.  ======================= BetOnline.ag is a proud sponsor of the the Pomp Podcast. Use crypto to bet on sports, play poker and enjoy casino games at BetOnline. Visit https://promotions.betonline.ag/pomp and use promo code POMP100 to receive a 100% matching bonus on any crypto deposit. BetOnline boasts no crypto transaction fees, and processing is anonymous, instantaneous and secure. ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Sandy Call. She's the Senior Vice President at Franklin Templeton, and she has been covering digital assets, Bitcoin, crypto, and much more for a

number of years inside of many of the largest financial organizations. In this conversation, we talk about Bitcoin and why clients are going and buying Bitcoin, why they're interested in it. Then we get into things like tokenization, real-world assets, regulation, portfolio construction, future narratives that Franklin Templeton is excited about, what they think about meme coins, and even an idea around creating tokens of tokens. All of this and more in this conversation really sheds light on what these large financial organizations are telling their clients and where they see value accreting in the future. I'm super excited for you all to listen to my conversation with Sandy Call. Anthony Pompliano runs Pomp Investments. All views of

him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by Espresso, the maker of the world's thinnest portable display. Now listen up. If you're like me, you feel like you are at a command center when you sit down at your desk. I got a gazillion tabs open and different windows for different activities. There's my web browser, my text messages, I have Slack open, and I got a notes app.

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and you'll get a beautiful screen. Trust me, I use mine every day. You'll love the Espresso screen and I think it'll make you more productive. Go check them out today by clicking on the link in the description. this episode is brought to you by bet online do you like making a profit from sports betting well set yourself up to take home the most profit possible using crypto to fund your sports betting

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very excited, but they don't really know what does Franklin Templeton think? And so when clients are asking you all, like, why should I care about Bitcoin and digital assets? How do you all think about that answer? And like, what are you guys telling clients? Yeah, it's such an interesting point in time we're at, because really, we think that what is happening in the crypto domain really represents potentially one of the best growth opportunities and emerging technology opportunities that we've seen really in our lifetimes. But because it is so new and it is so different from the traditional stocks and bonds that everyone is used to investing in, that it has been very slow, I think, for investors to understand the true fundamental case

of what's going on right now in terms of the innovations in the space. And the way I like to describe it is that, you know, we saw with the emergence of the platform economy, this whole shift in the business model, right? We used to have point to point linear transactions, right? I transacted with you. We had a point to point connection with the emergence of the platform economy. We've started to have these multilateral engagement models, right? Multiple buyers, multiple sellers can use the platform to engage with each other at will, and that has been really opening up tremendous new business models for the past 20 years that have changed how we operate in society. We have sharing economy, the creator economy, the gig economy.

These are all things that have been created because these platforms can enable this multi-sided engagement model. But where we're heading now is, I think, to the next pivot. And this is what we call the protocol economy inside Franklin Templeton. And by that, what we mean is protocols are free abilities to program different capabilities, right? We all use protocols every single day when we go on the internet, we type in HTTP to get to a website that is a communication protocol that tells the website to, gives us the directions to get to the website, right? And we are seeing a whole new set of protocols being developed in the crypto domain that are free and available to users, but they're not just communication protocols, they're transaction protocols.

I want to trade. I want to lend. I want to borrow. I want to stake, right? All of these are now capabilities that anyone can draw on to build a business. I don't need to go through the platform to be able to transact. I can build my own engagement app and transact using the three tools that are being provided by the platform. And therefore, we really think that what's going to happen is you're going to see this whole pivot to this new protocol economy where you get the same multilateral engagement between investors, but it's happening without the platform needing to intermediate it.

And I think that's going to be a huge change and create huge value and a change in the way we think about how to invest. But we're very slow to recognize this because it's so different than the way we've operated before. And when people are evaluating this and talking with you all, I'm assuming it's coming through an investment lens, right? They're not coming to you guys saying, hey, how should I use the technology or anything like that? But on the investment side,

how do you guys think about like portfolio construction? Is this something where it's like, hey, maybe toe dip and, you know, one to 3%, is there a bigger percentage? Is it all Bitcoin, nothing else? Is it everything else, not Bitcoin? Like just talk through a little bit as to what you guys are seeing clients do

or how you all are talking to them. Yeah, so we like to think of the space in terms of do you want the beta of the space, which is very valuable, right? to get to the beta of a big emerging growth opportunity is terrific? Or do you want the alpha in the space, which might be a little riskier, but give you potentially higher rewards? And so we think of it in those two contexts. And if you want the beta in the space, we think that this new Bitcoin ETF that has launched in the last few months is a great way to get that beta

exposure, right? It gives you the basic market return. Bitcoin represents over 50% of the current market cap in the crypto economy. And as such, you get a lot of that overall economy beta just by owning the Bitcoin ETF. And if Ethereum ETFs were to be approved, you could get almost 90% of the beta exposure just by owning the Bitcoin and the Ethereum ETFs. So for a beta exposure, we think that this is a great way for people who just want some ability to get returns from this space to experiment. And that would be a fairly low percentage of the portfolio, maybe one to five percent, depending on your risk tolerance. If you're a little bit younger and you have more time in your investment horizon and you're really going to be a good long hold investor, you could

maybe go up to 15 to 20 percent. But it has to be put into the context of these are going to be long term opportunities if you do it in that high an allocation. But if you want the alpha in the space, which is really where I think most of the institutional investors that we speak with are looking to really get that exposure. You're not going to get that alpha in the space through owning the Bitcoin ETF or Ethereum or even those major coins. What you're going to need to do is get out into the altcoins. And this is where we've been doing a lot of research and where our venture capital team has been doing a lot of seed and early stage investing to really identify those new protocols that are going to be mainstays we think of this new protocol economy and therefore

represent tremendous investment opportunities if you can get in early remember owning the coins is like almost having liquid venture capital that you can put into your portfolio and get these outsized returns on if that protocol does indeed take off the way we think so we think that if you want the alpha in the portfolio you want to move more into an individual account an individual mandate that can be tailored to your needs. And there you might want to even think about as much as a three to 4% allocation of the portfolio, because this is really going to provide outsized returns if it hits correctly. And one of the areas that I know that you've written about years ago, and might not have been as popular is tokenization. It seems like now that is becoming

much, much more obvious to folks. And so in that regard, is it something where like their equity position? Let's say they're following close to a 60-40 portfolio, like that 60% eventually is going to be tokens as well? Or how are you thinking about tokenization today? Yeah. So I think tokenization, we're thinking about it in two key ways, right? People call it real world assets. I don't know why suddenly stocks and bonds are considered real world assets as opposed to something physical. But there is this experimentation going on with real world assets and tokenizing bonds, tokenizing equity, wrapping ETFs or equities in a tokenized wrapper. And the main use case there is really about being able to use better transactional rails

to support the trades. The current financial market infrastructure is almost 50 years old, really over 50 years old, if you count the DTC. And this approach that we use to settling securities introduces lots of delays, introduces the potential for lots of breaks and errors as we are forced to reconcile multiple times, and the new technology, the blockchain-based infrastructure that's being experimented with, particularly in Europe and the Middle East and Asia, that's going to enable what we call atomic settlement, where you're exchanging money and assets right away. And if you're able to do that, there's a huge cost savings that could be put into the system. The Blockchain Association recently, the Global Financial Market Association,

sorry, recently estimated that you could save 20 billion in operational costs a year and up to 100 billion in collateral costs per year if we move on to these blockchain rails. So there's this whole case for tokenizing equities and bonds and currencies to be able to facilitate faster and more error-free settlement in the global financial system. So that's one big use case. But the other use case is that there are lots of assets that have always been investable, but they've been very hard to trade. And therefore, they have not been part of most people's portfolios.

And here I'm thinking things like royalties, thinking things like wine, things like expensive jewelry, watches, sneakers, things that people really enjoy owning, but it's hard to get them into funds, it's hard to get them into secondary markets. And these new tokenized structures that can embed a smart contract so that the contract moves with the asset suddenly opens up the potential that all of these, what we're calling cultural assets, can now begin to be tokenized and really can begin to be added into investors' portfolios. And that gives them diversification. It gives them a much more relatable investment that allows them to think of these are things they enjoy having in their lives. They have an emotional connection to them. And so we think this is going to become a very popular category of investments over the coming years and that you will see more and more new types of funds emerge that give us access to a much broader set of assets beyond equities and bonds. and then what if we go and we look at things like regulation um it feels like the approval of the bitcoin etf has really kind of opened up uh this institutional world and a lot of these clients saying okay now i can go put this in my portfolio are there other things that either milestones the regulation front that you guys are looking for or the things potentially that could happen in the regulatory environment that would actually deter people from buying some of

these assets yeah i mean regulation is evolving uh at different paces in different parts of the world. The U.S. at present seems to be a little bit behind some of the other regions, where you already have sets of rules being proposed or in place and getting ready to be implemented that facilitate access to all these new types of digital assets, both crypto assets, tokenized real-world assets, even these cultural assets that I've been speaking about. The U.S. is still a little bit behind. My expectation, though, is that regulators here will continue to see how the set of world rules emerge. We've seen a lot of collaboration with global industry standards bodies getting involved in helping to kind of normalize some of the rules that are coming out

from other jurisdictions. So, you know, I think it's an uneven pace, but I'm fairly confident that a set of rules that are going to make it possible to really open up these opportunities will be in place within the next, I'd say, three to five years globally. And it'll just kind of happen sooner in some regions, later in others. When you think about those different regions, are there things that you guys are seeing with clients that some of them are buying certain assets or maybe more attracted to things? One of the narratives in kind of the Bitcoin world is that the non-developed nations actually understand Bitcoin better because they need it more. It's kind of more of a pain point, whereas in the United States, people are kind of intellectually

interested, but the dollar still works to some degree for what they need to be able to do. So what do you guys see on the geography basis? Yeah, I think that exact formulation that you said is true. And we do hear this from a lot of folks about Bitcoin. What we're also seeing, though, is increasing understanding and usage of newer types of instruments. So stable coins have been a very popular global instrument because it gives you that portability of Bitcoin, but sometimes in a format that has less volatility.

So you're seeing more and more uptake of stable coins. I think you're seeing more and more thinking about how to bring over some of these protocols into the real world economy. There's been some super interesting use cases with Chainlink, which is an Oracle network, right? That's being built into a new Swift network for financial messaging. You're seeing them being explored in terms of facilitating exchanges, getting into tokenization. So I think the biggest trend that we're seeing is kind of this crossover of can centralized financial players like Franklin Templeton use decentralized models in a regulated way? Can DeFi players or players in the infrastructure of the crypto domain find use cases in the traditional non-blockchain based economy? Right.

So I think the biggest thing we're seeing in the regions right now is this kind of cross pollination between the crypto and the real world. I hate that term, but people use it all the time, the real world assets and how they can work better together. And that's, I think, a super positive sign for the overall development of the space. And it will accelerate this move to what we're calling the protocol economy because it's going to put the right rails into place that will allow people to really begin to move their transactions and their assets into blockchain and tokenized models.

Now, when we start looking at some of the underlying infrastructure, obviously, there's companies like Coinbase that are out there. There's now the ETFs. How do you all see that playing out? And, you know, Franklin Templeton is working with allocators to help them also that you guys have an ETF. But where do you see Franklin Templeton's role in kind of the ecosystem and like the infrastructure itself that you all could provide to clients? Yeah, I mean, I think Franklin Templeton is a pretty unique firm. It's one of the reasons that I chose to join. I actually asked to come work here, which is sometimes fun to do, right?

And that's because we have the trust and the brand of a traditional financial player. The firm is 76 years old, right? Very stable, very trusted across the globe. But at the same time, Franklin Templeton is also headquartered in Silicon Valley. our tech teams are very savvy. And we have been operating as a digital native for almost six years now. We run our own node operations. We have built a blockchain-based transfer agency system that operates on public blockchains. We've propagated that transfer agency system and the proprietary wallet solution we built to go with it across five different public

blockchains now and we continue to distribute that system. So we are really also a part of the digital native community. We really understand, we build in the space, we participate in communities, we have proposals in front of DAOs. We are really, you know, in one sense, a crypto native and a traditional well-trusted brand. So I think bringing that knowledge of the future world and our deep understanding and engagement with it into our traditional clients to help them understand their own journey into that world is going to be invaluable. And I think that's one of the key benefits that Franklin Templeton offers. Got it.

And then when you think about kind of the narratives, maybe that you guys are excited about, you know, there was DeFi summer, there was NFTs, like what are some of the things now that you all are starting to research and pay attention to and really think about coming into this next bull market? Yeah, I think that a couple of the things that we're really watching are going to be the speed of transition of real world assets. You asked what kind of wrappers we're thinking about for the future. We're thinking about token of token structures, right?

Where you can own a token that actually has your own portfolio embedded in it, which is a collection of different tokens. So today, a mutual fund is just a wrapper for a lot of stocks. In the future, we think a token is going to be the wrapper for other tokenized investments, and that makes the portfolio very portable, right? I'm going to be able to move it from one location to another. I'm going to be able to post my portfolio as collateral very easily. I'm going to be able to borrow against it, right? These are all things that we think are going to become very possible, and it's going to expand each individual's and each institution's ability to better leverage their own assets to enhance their financial outcomes.

So we think that you're going to need a partner who really understands how to optimize the use of each asset, because when you add the portability and the transferability of these tokenized structures, you open up lots of new use cases for how they can be applied. And that's really going to, I think, open up lots of new opportunities for people to make different types of revenue streams from their assets. How do you think about things like meme coins? That seems to be a huge area that everyone's all excited about. I have no clue if it actually is going to have value or not over the long run, but are clients asking about that or how are you guys kind of handling it?

Yeah, interestingly, you know, we just finished doing a really well received report on meme coins. And what we really noted in that analysis is that even though the meme coins themselves often have little to no intrinsic value, the meme coin uptake drives a lot of network value, right? And in this new protocol economy that we see coming, network value is the measure of where you're going to really see investment return. So even though the meme coins themselves may not be individually worth much, the popularity of having a platform where they are issued and where there is a lot of trading going on around those meme coins can really increase the value of the underlying network, which in turn makes it more likely that other developers will come and want to build their business models on that network. So we don't think that meme coins offer individual value, but they offer network value. And that's a really important new dynamic to watch. It's kind of like a new, almost crowd voting mechanism that the crowd likes what is being produced on this network, and therefore they're going to give more and more support to that network.

Got it. And then when you start thinking about things like governance, like one of the things that I don't think many people in the crypto industry really pay attention to is in the public markets, when you own shares, you own the equity, but you also participate in the governance. And so obviously in crypto, there's a ton of optimization and innovation around governance, etc. How does Franklin Templeton think about kind of participating outside of just, you know, our clients are buying things or we're helping build products, but like the governance component, are there any thoughts you guys have there? Yeah, I mean, part of what drives network effects is that people feel that they have alignment to the network. This is one of the biggest issues that we're seeing in the present platform economy world, right? You're seeing lawsuits against Apple, you're seeing lawsuits against different platforms because they're making it too hard for other people to access their platforms and they're charging too much to the people who build on those platforms where it's being seen as almost a type of monopolistic practice, right? And so you're getting new regulations being put into place. You're getting pressure on them to change their policies. But in the future world with the networks where you own the tokens that the network itself offers, you are an owner of the network.

And therefore, you have a voice in the development of the network. You don't have this divergence between resource providers and shareholders. The resource providers are the shareholders. And so you have to participate in the governance. I had mentioned in the beginning that Franklin Templeton is doing our own node verification, which means that we are part of all the networks that we do node verification, and therefore we vote on the issues before those networks. We are part of that governance system, and we think of that as a fiduciary duty if we're investing in these coins, that you have to be a part of the network to really understand and help guide the network. So I think this is going to become increasingly important. You know, the governance that happens in this platform economy today is all handled by the company.

The governance in this new protocol economy that's coming is going to be handled by the members of the network. And therefore, it becomes a responsibility if you want to influence the business direction of these networks to be part of the community and be part of the governance. And then at Franklin Templeton, my understanding is that this is very much like a top-down initiative. This is not, hey, we have like a little, you know, digital assets team over here in the corner and they're excited, but no one else cares. Like, it seems like the entire company sees the opportunity here is really going forward. Talk a little bit about that.

Yeah, I mean, this is really coming straight down from the top of our organization. Jenny Johnson, our CEO, ran Ops and Tech before taking on her current roles with the organization. So she really understands the revolutionary potential of these new technologies. We have already seen tremendous operational savings by being able to run a traditional mutual fund on public blockchain rails. We've seen significant reductions in operating costs, and we see this as being something that can extend across our whole organization. But most importantly, they really understand that the world is changing and they want to position the firm to be a leader in that future space. So Jenny and her senior leaders meet every single week with our digital asset team to go over the plans we have in place, the strategies, understand the progress we're making, approve future investments and R&D. So this is a very engaged management team who really believes that this is the future.

and is thinking about the right way to not only manage the valuable business they have today inside Franklin Templeton, but to build the valuable business that they're going to be relying on increasingly in coming years. So it's something that the whole firm is engaged in and we are very dedicated to and we're very proud of the progress that we've made and the understanding that we've gained by being involved in the space. And then what are you personally most excited about moving forward? There's kind of, you know, what you guys are doing inside the company, but what are you personally most excited? So the thing I'm personally most excited about is this idea that the new rails that we're building, both for the financial ecosystem

and for the broader economy, are going to allow individuals to really be able to use their own assets in a much more effective manner. Their own assets from the data that I generate through my activities, I'm going to have much more control over that, to any kind of equity I have in my home, valuable assets that I own, securities portfolios that I own, tokens that I own. All of the assets that I have as an individual are going to become potential sources of income, revenue. You know, they're going to give me more opportunities to optimize my financial position in ways that I just couldn't before. Right. And I think that, you know, we've seen institutions benefit for decades from this ability to utilize their assets in multiple ways, but we have not

seen individuals given that same opportunity. And so I think that opening up and democratizing access to investing techniques is going to be hugely transformational. And that the assets that matter to me as an individual, the things that I personally relate to, are going to become a part of my portfolio. And because I can embed contracts inside of them, I'm going to get special benefits and special rewards today in investments that I might hold for the next 30 years. And that's just not possible with the way that the system is set up today. Today, my investment portfolio sits off to the side and I hope throughout my life that it accumulates so that I have enough to retire. In the future, I think my investment portfolio moves to the very center

of my life and the things I own in that portfolio give me benefits that make my life richer while I hold on to them and let them accumulate. So I'm very excited about that vision of my portfolio becoming something that works for me today as well as in the future. I think that that is a a fairly compelling argument for sure. Where can we send people to find you on the internet or find out more about what Franklin Templeton is doing in this space? Yeah, so we have our own,

we publish our reports publicly. So everyone's available to read the thought leadership my team and I are putting out. I can get you the website address for that for you to share with folks. And, you know, we really like to be engaged. So there's lots of podcasts like yours where really intelligent people

are helping their listeners to understand how the world is shifting. And I think that there's lots of materials that we have available from our digital asset team that explain our products and how we are really trying to open up opportunities in the space. Amazing. Well, thank you so much for your time today. I think that lots of people are interested in what Franklin Templeton is doing. Ever since people saw the laser eyes go onto the Twitter account, they were saying, what's going on over there? So I appreciate you taking the time to share with us and we'll to do together in the future. Great. Thank you so much. I really enjoyed our conversation today.