The Pomp Podcast - Will Tokenized Stocks Actually Work? | Ian De Bode

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Starting point is 00:00:44 save and invest conditions apply visit scotiabank.com hisa to learn more scotia bank you're richer than you think why the heck do we need tokenization doesn't the stock market work perfectly well? What is the purpose of doing this? Putting something on chain just enables programmability, 24-7 movement of the thing. It becomes a better version of the asset than it can be in traditional Rails. If 10 years from now, tokenization doesn't happen, what's the most likely reason it didn't happen? No, but if it doesn't, I think the key thing that the space wasn't able to figure out is... What's going on, guys? Today, we got a great episode with Ian DeBode. He's the chief strategy officer at Ondo Finance. Now, one of the biggest questions I keep

Starting point is 00:01:32 getting is what is tokenization? Is it real? Does the tech work? Are people actually going to do this? And guess what? I don't know yet. It's interesting. Maybe it works. Maybe it doesn't. So what I did is I went and I found someone who's actually building the technology and they've got views. They've got some stuff that's already on the track record and they're building a lot of new things. So we get into it with Ian talking all about what is going on with tokenization. and I play devil's advocate. I want the cold, hard truth. Tell me, is this going to work or not? Here's my conversation with Ian DeBoot. All right, Ian, here's what I want to do today in our conversation. I'm going to play devil's advocate. A lot of people who like tokenization

Starting point is 00:02:06 don't like tokenization. Some people think it's going to be valuable. Some people think it's absolute nonsense and hyperware, all that stuff. What I want to do is I want to ask you all the questions I hear people that are constantly debating this, starting off with why the heck do we need tokenization? Doesn't the stock market work perfectly well? What is the purpose of doing this? I love it. I appreciate you asking the question because it's the number one question I get. We believe tokenization is helpful for two things. Number one is enabling global access to an asset that people want, but historically have struggled to get access to. The second reason is tokenization enables you to put something on chain. Why do people want their asset on chain?

Starting point is 00:02:45 because they can also use it in DeFi, primarily as collateral. So putting something on-chain just enables programmability, 24-7 movement of the thing. It becomes a better version of the asset than it can be in traditional rails. All right, let's go back to global access first. That's nonsense. Come on. Everyone's got access to the U.S. stock market, doesn't it? Oh, no.

Starting point is 00:03:07 Who does? All right, explain. All right, so people in the U.S. kind of look at it and be like, why? I mean, I can open up my brokerage account. no problem whatsoever. I want to come back to that because I think even for U.S. investors, tokenized stocks are a much better mousetrap. But I don't think people in the U.S. appreciate just how bad the system is the moment you leave the U.S. Access to a brokerage account really is not easy whatsoever. Globally, there's a bunch of, you know, minimum asset balances that they require, the fees that they charge, even if you qualify for a brokerage account, the fees that

Starting point is 00:03:43 you get charged even to go from local currency to dollars from dollars into the stocks you're literally looking at five to ten percent just making the investment right um so i think people don't really appreciate how difficult it is to get access to u.s capital markets it's very similar to what a stable coin did for access to the u.s dollar quite frankly like we've seen that stable coins clearly have product market fit why because they enable global access to the u.s dollar and they facilitate the liquidity into digital asset economy. But the global access to the US dollar is a big deal because a lot of people don't want to get stuck with their local currency and would much rather hold their assets in the US dollar. Same thing. A lot of

Starting point is 00:04:28 people do not want to invest in their local stock market. The capital controls are real. The investor disclosures are very different. When you look at the returns on US capital markets, they are far exceeding most other, almost any other capital market out there. So giving access to US capital markets to a global audience is a, we believe, real driver of global wealth creation in the future. All right. Now let's go to this on-chain idea. I'm in the United States. I got access to the stock market. So global access, it's nice for the people who don't have access, but I got access. So my value proposition would be this on-chain component. What exactly does this mean like give me a specific example of what could i do with a tokenized stock that maybe i

Starting point is 00:05:13 can't do otherwise yeah most people in the u.s have multiple brokerage accounts right i have the pleasure of having multiple brokerage accounts so i can compare them even in the u.s your brokerage account differs right in one brokerage account i've got 24 or 5 trading the other one i don't the um margin i can get in one brokerage account i can actually take off the platform and the other one i can't you can just use it to invest one and in fact i've got two brokerage accounts so all the time my assets are split in two uh because depending on the fees i may select one versus the other and then my crypto assets are in another different account right so now i have three different investment accounts so even in the u.s the landscape is very fragmented brokerage looks

Starting point is 00:05:58 different depending on the account that you have but once you tokenize these things in a similar form like you can do with stable coins all of a sudden you can transfer them between your various platforms if i want to take out a margin loan i can actually shop around in the various defi ecosystems depending on what i want i can do that 24 7 god forbid like normal tri-fi rails they're often you know during normal market hours if you're lucky 24 5 so there's even in the u.s context tokenizing your stocks really opens up the landscape of what a brokerage account can be what you can do with it. It's kind of also, again, similar to what a stable coin did for a bank account. I'd say most people in the US, at least the crypto natives and on-chain natives, appreciate

Starting point is 00:06:43 that a stable coin is much better than the cash you can have in your bank account for a wide variety of reasons. But even with a bank account, at least I could transfer my cash very easily from one bank account to the next. In a brokerage account with stocks, you can, but it's pretty, pretty difficult. So the leap that we can take by tokenizing stocks, even for US investors to just enable interoperability between brokerage accounts, you're being able to shop around margin, it's pretty meaningful. All right. So let's say that all that is true, which I think generally people are starting to kind of wake up to because they see stable coins, they see kind of the promises of this technology. But talking of technology, okay, none of the technology works.

Starting point is 00:07:25 Everyone wants to do this. There's this big promise, but I hear tons of people saying the tech doesn't work. How do you think through maybe what's working, what is being worked on, where it's going to be and where we are today? Yeah, I mean, particularly for tokenized stocks, it's been an interesting narrative over the past couple of months. You had some big announcements from Robinhood, Coinbase is getting involved, Kraken launched their Xstocks product.

Starting point is 00:07:49 So it's clearly that people are waking up to the fact that tokenized stocks could be interesting. But when you look at the adoption today, it's not super meaningful. And I think in part, it's because, to your point, the tech right now or the way that people have done this doesn't really work. A lot of these tokenized stocks are de-pegging left and right. When you buy a tokenized stock, you just want to buy the stock at the normal price as is available in a brokerage account.

Starting point is 00:08:15 You don't want to have to worry about you buying Tesla and it being 10% de-pegged. It's kind of like buying a stable coin. when you buy a stable coin, you want to make sure that you can buy it at $1. And even more importantly, you want to be able to redeem it at $1 anytime you want, right? That is the most important thing. Explain that real quick. When you say that a stock is being de-pegged, let's say that Tesla is trading at $420, which seems to be a price a lot of people like with Tesla. What is de-pegging? Does it mean that it's trading at $450, $400? Explain how that works. Today's episode is brought to you by Zappo Bank, where eligible members can unlock the power of

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Starting point is 00:10:05 slash pomp today that's right so when you tokenize stocks when you want to buy talk stocks on chain the most important thing is when you go to your robinhood account and you see Tesla trading at 420. When you buy it on chain, you want to be able to buy it at 420. But in some of these implementations, instead of being at 420, it may be sometimes it's at 400, which would be great for you. But sometimes it's at 450, which is less great for you. And even if you then want to easily swap these back into stable coins, that liquidity may not really be there. And the reason that this is happening is because there's a disconnect between the trading and trap buy on the NASDAQ, the New York Stock Exchange and the like, where all of the liquidity for these assets

Starting point is 00:10:47 is, the 420 price really is set on these centralized exchanges like NASDAQ and the like, because that's where the trading happens. But then you've got these on-chain assets that in some models out there rely on different liquidity pools. Think of DEX pools that people have deposited these things in that people can trade in and out of. There's no connection between the two. And so as a result, the price that happens on-chain that is available these dex pools and the like can drift up if there's no connection to easily orbit down that's when you get the deep pegging it's kind of the same thing that we saw with stable coins you need 24 5 to 24 7 ideally minting and burning like connectivity between the traffic rails and the

Starting point is 00:11:29 on-chain rails to make sure that these prices stay in equilibrium okay and so how do you think people will solve that problem like that seems like a uh theoretical easy thing to solve but obviously technically it's probably hard to implement so how do you do it yeah it's the number one challenge you have when you tokenize an asset uh because tokenization in and of itself is pretty easy almost anyone can tokenize an asset but figuring out that liquidity and how you bridge that is the key thing uh when we go live with our on the global markets platform this has been the number one challenge that we aim to solve uh i can't disclose necessarily all the secret sauce but needless to say is that we have found a way to buy a wide variety of integrations

Starting point is 00:12:09 capital, all these sorts of partnerships that we have with the TradFis and the like, we have a way to instantly execute whatever happens on-chain, off-chain, and vice versa to make sure that when a user wants to buy or sell these assets on-chain, we can immediately execute off-chain for the same amount and mint the asset so that there's clear connectivity between TradFi liquidity pools and on-chain liquidity pools and our assets will not be paid. as you build the technology where are people going to make money just long and short stocks like they normally would or do you think that there's going to be people who kind of more aggressively try to find the d-pags and like you know kind of event driven type events like how do

Starting point is 00:12:50 you see this market forming yeah i love that question because i think it's the number one thing that's not clear at least in my mind like we speak a lot about the global access piece and And I think it is very, very clear that people globally want access to U.S. capital markets. Does that mean that they want to be conservative investors and invest in the S&P 500 or Russell 3000 and just buy and hold? Or are they going to be buying micro strategy leverage and try to figure out the DPEGs or do perps on equities? I don't know. Given the on-chain crowd and their risk appetite, maybe it looks a little bit more like the micro strategies, but a little bit TBD. I do think you hit on an important point of like how people are going to make money. It's going to be initially very interesting to see which use cases truly take off.

Starting point is 00:13:42 There's going to be, you know, some arbitrage that happens between on-chain, off-chain. I'm sure some sophisticated actors are going to be very interested in that. Some people are going to find ways to arb margin rates between off-chain and on-chain. But I do think the number one thing that I'm interested in is what assets and what product structure really is going to take off. Is it going to be perps on microstrategy with 10x leverage, or is it going to be an S&P 500 buy and hold? I don't know.

Starting point is 00:14:11 But the good thing is our platform is going to make all of that possible. What about regulators? They're not going to let you guys do this, right? That sounds like crazy that they're going to lean in and say, okay, fine, you guys can be innovative. under the previous admin i would have said yes you are correct luckily this admin has taken a different approach um and it's clearly taken the view that the u.s should lead in on-chain innovation and really solidify the position of the u.s dollar in the on-chain economy and that

Starting point is 00:14:42 that's the main reason why we now have the stablecoin legislation because they see this as a way to establish the dominance of the U.S. dollar globally with new rails. And a similar argument can absolutely be made that says the tokenization of stocks, ETFs, equities, and the like is a way to establish the dominance of U.S. capital markets globally on the same rails that stablecoins run on. So I think what the U.S. obviously and the SEC and the various regulators, they're very concerned with investor protections, as are we. So the way that you roll this out has to take into account investor protections in the best possible way. People, you know, these assets need to be bankruptcy remote design in a bankruptcy remote way. You want to make sure that people can redeem.

Starting point is 00:15:27 There's a lot of things you need to take into account. But I don't think what the U.S. wants and what the regulators want at this point is for an ecosystem to flourish outside the U.S. of tokenized stocks and ETFs with a lot of innovation, but no ability to do that onshore in the US. And so far, the conversations we've had with the US administration and the various regulators is they very much understand that and want to make sure that the US can lead. Now, you guys previously, before you've gone to equities, tokenized a government bond fund. I think it's called OUSG. Great name, Ondo USG. I got it. Very clever on your marketing team. What did you guys learn from that? I think part of what I always find interesting is there's

Starting point is 00:16:11 like this theoretical exercise that's going on and um you know in sports i don't know if you ever watched the old like jerry mcguire uh movie and he's like you know show me the money here it's like show me the results right like what is the thing that you guys learned in doing that that now gives you the confidence to go do equities yeah i honestly think we would not have been able to pull off equities if we hadn't started with treasuries first um we started doing it with OUSG. That one, because it was the first, OUSG was pretty innovative. It was launched in early 2023. It was the first time that a tokenized treasury fund could actually be transferred between two addresses on-chain, peer-to-peer, 24-7. It's still a permissioned asset. You have

Starting point is 00:16:53 to onboard with us to hold it. But once you held it, you could actually freely transfer it with other investors that have been onboarded with us. With the previous iterations of tokenized treasury funds, that was not possible. So people looked at that and said, oh, that's pretty interesting. In fact, when BlackRock launched their Biddle fund, a year later or so, they basically copied the OUSG structure. So we saw that as a sign of flattery, obviously, BlackRock copies you. But the reason why it was impactful is because not only could you transfer it between different people, you could also whitelist a smart contract. So then you can start doing the OUSG into USDC transfers.

Starting point is 00:17:34 You could enable it as permission collateral on certain DeFi protocols. So we liked that product structure quite a bit. It showed us the limitations of how you can integrate a permissioned asset into broader DeFi. There's clear limitations on it, but it was a meaningful innovation and it taught us how to think about tokenizing these funds, figuring out the liquidity, the redemption liquidity in particular, like people want to be able to invest in a tokenized treasury asset, park their cash, but then immediately be able to transfer back into stablecoins. Those stablecoins need to come from somewhere, right? So how do you figure out the liquidity mechanics to make sure that you can always do redemptions into stablecoins

Starting point is 00:18:16 in size 24-7? That was the key learning for us, quite frankly, with OUSG and why we integrated it into the infrastructure that Biddle deployed and a lot of the other asset managers, but it had limitations. The next iteration of our product is called USDY. That one is a little bit more like a stable coin in that it transfers permissionlessly in secondary markets. So we took the learnings of OUSG, we figured out how to do the redemption liquidity and the like, but we wanted to structure USDY in a way that it had the best bankruptcy, investor protections and bankruptcy to remoteness. And we wanted it to be easier integrated into DeFi by making it permissionless in secondary markets. That product structure worked really well. It's on 10 different blockchains,

Starting point is 00:19:01 100 different DeFi protocols. Both assets have about 700 million or so in AUM, which makes us the second largest tokenized treasury provider behind BlackRock. That USDY product structure we're now replicating to stocks and ETFs. Let's talk about these stable coins that bear yield, right? They basically are able to do this. I've always thought that is fascinating that in the United States, we all complain and whine that, oh, they're only paying me 0.3%, 0.4%. You know, it's like nothing in your bank account, your checking account. Savings account have a little bit higher and a high yield savings account is, you know, groundbreaking at like 3% or whatever it is. A lot of people around the world don't have access to yield. That's not

Starting point is 00:19:40 a concept that they're used to. And so it makes sense to me that if we can export the idea of yield to kind of everyday citizens, like that can be pretty powerful. Stablecoins historically have not paid it. Obviously, you know, Tether being the king of stablecoins for a long time, they make a lot of money. Well, how do they make money? They're making it off of the treasuries that they're holding, right? These yield-bearing stablecoins seem to be a stablecoin that shares the yield with the holder of the stablecoin. You correct me if I'm wrong on that. And do you think that that's going to end up being bigger than the non-yield-bearing stablecoin? Today's episode is brought to you by Simple Mining.

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Starting point is 00:22:23 of others in exploring the largest bitcoin defi ecosystem there are over a hundred live apps in the network and the deepest liquidity in all of bitcoin defi get off zero and start earning yield on even just 1% of your Bitcoin by going to stake.cordow.org slash POMP. Again, that's stake.cordow.org slash POMP or go click the link in the description. These yield-bearing stable coins seem to be a stable coin that shares the yield with the holder of the stable coin.

Starting point is 00:22:52 You correct me if I'm wrong on that. And do you think that that's gonna end up being bigger than the non-yield-bearing stable coin? Yeah, I mean, the mousetrap of a yield-bearing stable coin is pretty good because to your point, like USDY, that's that second product that I was just mentioning, we paid 4.29% out on a daily basis to everyone who holds it. So in that sense, I would say it is a superior product to a stable

Starting point is 00:23:16 coin in the sense that it still has better investor protection and it pays out yield on a daily basis. Now, is it fully wholesale going to replace a stable coin? You know, probably not because a stable coin right now has very entrenched liquidity in trading pairs and the like. But it's kind of similar to what we've seen, I think, in the U.S. with, you know, checking accounts that are very good for payments and liquidity purposes, money market funds that are very good investment vehicles to park your idle cash and not necessarily make payments with, although you could. Money market funds in the U.S. have been on an absolute tear since they were introduced, and they're increasing their share of, you know, overall checking deposits

Starting point is 00:23:58 in the banking system. Regulators are quite fearful of that for good reason. But you start to see the same thing happen in traditional banking from checkings to money market funds. I think the same thing is going to play out with stable coins, where over time you're going to see migration from stable coins into these yield coins. Is that going to happen tomorrow? Probably not. But we do believe fundamentally that a yield coin probably is a better form of money ultimately, because it has the best investor protections that you can think of. And all the yield that being generated on these treasury assets is being paid out to its users you previously uh were running the digital assets team at mckinsey you are friends with people who are inside all these

Starting point is 00:24:37 institutions what's behind the curtain what's the conversation behind closed doors are they like they really believe in this stuff or they just you know blowing smoke and people don't care like give us some inside information here on uh on what's going on inside these firms yeah that's a great question. Do they really believe it or not? I mean, at this point, most of them have to believe it because digital assets are not slowing down. I first started my career at McKinsey doing digital asset work back in 2016. And it was talking with some French banks and all of them were interested in blockchain, not crypto. Since then, obviously, a lot of them have changed their tune. Although not all, you can still find the skeptics very easily. And the higher up you go

Starting point is 00:25:20 in the banks the more easy you find the skeptics the older they are usually the further away from the technology yeah it makes sense the general divide the generational divide is real and to be fair to some of these executives too like if i were 55 and close to retirement do i really want to go big on a technology that i know nothing about probably not so there's just inventive misalignment with some of these institutions to not really pursue this new thing but i do think increasingly within TradFi, you have very smart people who understand exactly where the puck is headed. They have been waiting, but quietly developing their capabilities to move at an accelerated pace the moment regulation would allow. Regulation now allows them to move onto

Starting point is 00:26:04 public blockchains in a much bigger way. So the amount of movement that I'm seeing right now within TradFi is unlike anything I have seen in the almost 10 years that I have looked at it. it's not even close when you think about if 10 years from now tokenization doesn't happen what's the most likely reason it didn't happen what's the biggest risk or the biggest obstacle or the pothole in the road the fact that well i should say i don't believe that will happen but yeah of course of course you're not allowed to believe that you're building you can't you can't believe my career on it right um no but if it doesn't i think the key thing that the space wasn't able to figure out is just the ui ux the holding of the assets in non-custodial accounts and the like

Starting point is 00:26:55 the just an inability to provide for a better experience ultimately than the traditional version that is still the main issue that i like the the vast majority of people right now who do investing in the like they're all web 2 brokerage platforms right it's the robin hoods of the world the interactive brokerage and the like um if we can't figure out a way to have a better mousetrap of these tokenized assets but in a secure way and that a user ultimately almost doesn't care that it's on a blockchain, then I think we may fail. But there's a lot of innovation happening in the space right now to kind of abstract away that layer.

Starting point is 00:27:38 So I do think it's actually a lot closer than what we think. But fundamentally, I don't think a user should care at all what the underlying rails are. They should just care about what is the asset that I'm buying? Is it the real thing or as close to the real thing as possible? And what are the different things that I can do with it? When can I do them? and on all of those metrics i think tokenization can either solve it or provide a better left

Starting point is 00:28:01 track you think people really want to trade stocks at night and weekends they got people talk about i talk about it you think people really want to do that i think it's so interesting because right now no one does it and so would i be in the weekend behind my laptop trading stocks probably not because it's not an established behavior but the moment it becomes possible you know certain global events happen over the weekend and at this point crypto markets react but equities don't which is rather absurd if you think about it just because the rails don't support it i don't think that divide is going to hold and i also think increasingly people who grew up investing in crypto particularly outside the u.s are going to expect the same asset mobility

Starting point is 00:28:48 and opening of markets as they've seen in crypto so i do think it is an inevitability will it happen tomorrow or will that user behavior change tomorrow maybe not but there is a real appetite right now to crack 24 7 on equities via tokenization and then what's like the 30 second pitch on what you guys are doing better or different than these other ones i think people now um just talking with you know some people in bitcoin and crypto but a lot of people are frankly, outside the industry, they keep hearing tokenization. And now they're getting an onslaught. There's all these people who are going to do it. And they're like, what's the difference? You know, it's like all these bullets flying at them. Yeah. Well, I mean, when most people talk about

Starting point is 00:29:30 tokenization still, they think about like real estate and private equity and a bunch of these illiquid assets. We don't focus on that at all. We don't think, I mean, I hope someone cracks the use case for the tokenization of illiquid assets, but tokenization doesn't magically create liquidity once you put it on crypto rails. So I think, you know, 80% of what you see out there on tokenization, quite frankly, can be discounted mostly because tokenization doesn't magically create liquidity.

Starting point is 00:29:54 In fact, the real trick about tokenization is cracking how you take the liquidity that exists on stocks, ETFs, treasuries, and cash, like with the stable coin, and bring that on chain in such a way that your asset always stays pegged to the underlying. You can execute and redeem in size whenever you want. And because it now runs on crypto rails, you can make it available to a global audience.

Starting point is 00:30:17 And I think particularly on all of those metrics, our solution is significantly better. If we do issue these assets, not in a permissioned version, like what you're seeing, for example, with Robinhood, it's just a permissioned walled garden. We will issue our assets as freely transferable 24-7 to a global audience. We have figured out a way to bridge the liquidity that exists in TRAP5 into DeFi in doing that just in time so that these assets that you're holding on-chain can actually remain pegged to the underlying, and you can still freely move them 24-7, use them for margin purposes and the like. so i do think our solution is significantly better than what exists out there once we launch people are going to be able to see that and i look very much forward to seeing the adoption that it finally gets because when people think of tokenization of stocks right now they're kind of a little bit like meh you know look at the current metrics it hasn't really taken off but we would

Starting point is 00:31:14 argue in part that's because the underlying product structure and market structures is not very good yeah i think that makes sense where can we send people to find you on the internet or find out more about ondo and your tokenization efforts uh you know ondo.finance uh go there check us out a lot of the content will be geogated because a lot of our activities happen outside the u.s or now um i would recommend them to check out our twitter account and the like we post a lot of blogs we really focus on user education on you know why liquidity matters in tokenization why our model is, you know, different than others. So it does, you know, we are working on the user education for all this stuff. But we're pretty confident that, you know, in hindsight, people

Starting point is 00:31:58 are going to look at this stuff and say, Oh, my God, it was so obvious, right? If a stable coin can really enable distribution of the US dollar to a global audience, then tokenized stocks and ETFs can do the same thing for US capital markets. Makes sense to me. Let's see if you guys can get it done. Good luck. We're super excited and we'll do this again in the future. Awesome. Really appreciate it.

The Pomp Podcast - Will Tokenized Stocks Actually Work? | Ian De Bode

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