How Securitize is working with NYSE to bring equities onchain

Hello and welcome to LairOne podcast. My name is Kelvin Sparks and here's my co-host John Woo. Today we are joined by Carlos CEO of Securitize. Welcome to show. How are we all doing? Awesome. I'm very excited to host this and talk to my friend Carlos. Before we begin, LairOne is a podcast at the intersection of blockchain and the real world and nothing we say on the show is financial advice. Always make sure to do your own research. Now we are getting ready to talk about tokenization. Just before we started rolling, John you mentioned the $3 trillion number that Larry Fink mentioned. But before you get here, I'm curious. How did you guys meet each other? My background started out in, call it Tried Fyre, Traditional Finance. I was a tech investor at some funds both in the public and private side. But I had this notion that the blockchain can make things a lot more efficient in terms of capital formation and provide better access for individuals, especially on private securities and alternative assets. In I think 17 or 18, I met Carlos. He had the same vision of bringing access to hard to own alternative assets to individuals and thought the blockchain construct was a great way to do that. I think for seven or eight years now, we've been both beating our heads on different sides to try to make that happen. And that $3 trillion is just beginning and is finally happening. In 2018, the first transaction that I could remember in the industry where tokenized security traded on a digital ATS that John got a new action letter from the SEC back on those time. That was before Gensler on the Jake late on time for a company called Shares Post that he was the CEO of the digital side of the business. And that's how we met. Actually, Avalanche didn't exist there. Most people think we know each other from Avalanche, but it's pre-Avalanche. And what I realized the early days was that there are three things we need to solve. One was the regulatory wrapper. Another was basically socializing in institutions and individuals even were not ready for that type of capital formation. And then third, you'll probably remember Ethereum had cryptocurrencies where fees spiked and things broke. So the tech wasn't even ready. And I was trying to provide that functionality, recognizing that you can't solve for all of that. And part of the reason why at one time or about one person. So you stuck to the path of creating the regulatory tech or the innovation of using wrappers of existing rules, regulations and licenses to create it so it's compliant. And I became president of Avalanche, recognizing that that was a technology that can solve some of the speed and security and other issues necessary to make this dream real. And over time, even LiarFink has helped socialize it now. So we're going to talk later about the news with New York Stock Exchange and we also launched in 2024 with BlackRock. But the first asset manager, like tier one asset manager that ever tokenized anything in the industry, was KKR back in 2021. And he did it with security ties and with Avalanche. So yesterday, the news of the New York Stock Exchange were actually on the printed edition of the Wall Street Journal. But that day, we were actually on the cover of the printed edition of the Wall Street Journal. Because it was major news, like people don't remember it in 2021, nobody had it. Nobody serious had tokenized anything. We had a lot of projects with small businesses or crypto people, blah, blah, blah. But like a asset manager, like KKR coming and saying, we're going to talk nice something. That was like major news in the entire industry. And it was live real. It's not a test case. It was not a data. It was real. And I mean, it's crazy here to be at DAS live at the Franklin Templeton studio. And to kick it off with you guys started with a bang. I mean, the New York Stock Exchange news was huge. Can you tell us more about what's going on there? Sure. So, you know, one thing that everybody's talking about is tokenizing public equity. That seems to be kind of like now that the regulatory change has happened. That we have a much more friendly SEC, etc. That people have recognized that tokenizing what the most liquid and largest asset class in the world is probably where more interesting things can happen. And then all these changes are now trying to figure out what to do. So, so we've partnered with New York Stock Exchange to do three different things. One is New York Stock Exchange is launching what they call a digital ATS. This is a different venue than the national exchange where, you know, security is straight into additional form. And that digital ATS will trade tokenized equities, natively tokenized equities. Meaning the token represents exactly the same instruments, same rights, same QCIP, same, you know, corporations, etc. And that will be trading on this digital ATS with instant settlement. And as part of that project, security is going to play three different roles. First, we're going to be the first approved transfer agent and tokenization platform to send tokenized equities to that venue. Second, we are the design partner for how the venue is going to work, how the instant settlement is going to happen, how the tokens and the stable coins are going to move in and out, etc. And third, this is an ATS where retail investors will trade through broker dealers. Security dies also has a broker dealer, security dies market. So security dies market is being the first broker dealer approved to trade on that ATS. So it's actually for us, it's a massive partnership because it touches everything we've built and we do with, you know, arguably the largest and most reputable exchange in the world. So it's, yeah, big news, very proud, very happy. And now we know we need to launch it. So I mean Carlos, seven, eight years ago when you began this journey, did you ever think that you would be in discussions with the New York Stock Exchange? It's pretty cool. It's very cool. And actually I did meet Michael Blogort, who is the guy that from IZ, the parent company that did the deal with us and he runs this project. I actually met him back in 2018, when he was the chief operating officer of the New York Stock Exchange. He left and then came back to a parent company and at that time we met but it was unthinkable that we could actually work with a company of that size. Like the industry was not there. We didn't have the licenses. We didn't have the company infrastructure to be able to work with a company of that size. So, yeah, it's a pretty big accomplishment, but then has taken a long time. It's a great accomplishment. If I look back at my early days of trying to tokenize real world assets and I would have thought the first categories were alternatives and things that were-- That's why we still have access. Yes, correct. It's interesting how like public securities where there is a lot of access, not perfect, but there is a lot of access, it's only taking the lead in tokenizing real world assets. Why do you think that is? I think that the reason the industry started looking at alternative assets like private equity or real estate, et cetera, is because one of the things that tokenization does is that allows for better settlement of the trades. You have a tokenized security, you have a tokenized dollar, stable coin, and then you swap them on chain, you settle, you eliminate all the clearing and settlement issues, all the counter-partiaries, et cetera. If you had efficient settlement that a blockchain allows, let's think that then this will make assets that are really liquid, more liquid. And then I think what we learn over the years is that an illiquid asset, even if you settle or trade it very efficiently, it's still a liquid. If there is not many buyers and sellers or the asset doesn't update the price very frequently, et cetera. Over the years, the most successful tokenized asset arguably is the dollar, because stable coins are hundreds of billions of dollars, they are much bigger than the entire rest of the RWA industry. And if you think about the dollar, the dollar is very liquid, it's very accessible. So why would you tokenize it? Well, it turns out that tokenized dollars actually work better than the existing dollars. And I think that the industry has then shifted to tokenize the most liquid assets to make them even better to trade, faster to move, cheaper to transact, more accessible, et cetera, because the underlying itself is already liquid. So this is why the largest category of tokenized securities today are treasuries. So tokenized securities is the largest category, is the $10 or $11 billion dollars. So it's blackrock and fronking temple tone and others that are part of that space. And I think equities and ETFs and bonds are kind of like the next kind of like pissing the puzzle to be tokenized. Yeah, I remember I was at Fidelity, this was many, many years ago, working in trades processing and settlements. And it was interesting just being in the back office, back office operation side of things saying, wow, we have a floor full of 90 people. And I know blockchain exists. I didn't really connect the RWA because DeFi really wasn't even a concept at that point in time. So when you're in these rooms, especially with platforms, what are the biggest questions that they have for you, somebody who's at the bleeding edge, like changing how they operate? I think that if I think about the questions today versus like two or four years ago, two or four years ago, the question was like, what is tokenization? do I need to do it? What problem does this solve? That is not a question. I think people everybody now understand tokenization, they understand that there is value to it. The question today is what do I tokenize? What asset class, what fun? If I tokenize it, how are we going to make it better? How is it going to get distributed? How people are going to consume it? How is it going to integrate with DeFi? That's something we should touch on. What kind of strategies you can create around this asset that are difficult to do when the asset is not tokenized. The conversation has really evolved from the Y to the Y. Which is pretty good. It's a lot easier because you don't have to explain them. They're already convinced they need to tokenize the question is what? We've seen explosive growth in our WA total value locked on avalanche. I think it went from the maybe hundreds of millions to the billions over the past year. John, before there was all this regulatory clarity and huge partnerships, why were people going to avalanche and continue to come back with such size? I ultimately, since we partner so much with Securitization, you should ask one of our partners. I'll give you the MAC grow answer first. It's really about, I think, when traditional entities enterprises, there is finance or other errors. They're looking for, on the broadly speaking, three things. They want certain level of control. They want some connectivity, so interoperability with other chains and interoperability within the avalanche ecosystem. Also, they need performance. On the performance side, the avalanche is, the chain has always been deterministic and instant finality. That's very important in transferring more moving value. On the connecting side, it's EVM compatible and things move around relatively easily. Within our own L1s or subnets with the main chain and with other chains. The control is the aspect of letting whoever's creating it effectively have their own, not effectively, they have their own L1 or their own layer one. Their underlying infrastructure can align with the application on the top end of the tech stack. That helps them for throughput issues, for discovering what gas should be, for also putting compliance embedded, not just at the smart contract level, but also at the network level. For all those reasons, that's why our partners want to choose the avalanche technology. Like I said, one of our great partners is to secure it. They've done a lot of stuff and tokenizing stuff on the avalanche. We should ask him that question. Actually, don't attach to something that is important, which is sometimes we don't realize that RWA's and tokenizer RWA's are securities. For the most part, you can tokenize dollars, you can tokenize commodities, but when you talk about tokenize equity, bonds, fund, alternative assets, those are securities. Security is a regular instrument. Then, blockchains are great for trading securities or settled trades of securities, but how quickly happens and whether the transaction has deterministic finality? It's actually important to the regulators. Because for two reasons. One is, for instance, if the transaction is not fast and then you're less say, trading a tokenize equity here and it trades in Nasdaq there, because you have this price-based execution obligations for Reagan and the securities, they can front-running. So they can send the price here and then by the time it settles here, maybe the price has changed there and somebody can actually front-run the transaction. That's one number one. Number two, deterministic settlement is actually very important because if you settle a transaction of securities and you report to the regulator, we have reporting obligations. Every single transaction of securities, we do a sub-broker dealer, we have to record the transaction and that is what the regulators look at it when they examine us, etc. If something happens and the chain gets reorganized later and that transaction for any reason gets unwind and you have to resubmit it, etc., actually it's a massive fraud. You got to pull the tape and it's a whole. We went through a whole approval of a license in Europe where we got something called a Trading and Settlement System License which allows us to basically trade securities on chain without central securities depositors. They say you don't need a clean house, you don't need a DTC type instrument, you can just settle on chain, the blockchain itself replaces that intermediary and the fact that we had to show the whole system working with real tech, we couldn't just like file a paper application saying we want to do this. No, the regulator wanted to see this trading with a real security before granting us the license and then if we had not done it with a balance that has deterministic settlement and fast transaction, then we would not have to go to the license. That's actually not any compliment to them. This is a reality of something we went through in Europe to get the approval. Well, understood. And I mean that was a big deal given how strict Europe is around securities laws so on and so forth. How is Loli are approving things? I have to emphasize this point. What Securetized has done so well is they've gone through this evolution of call it experimentation to production to actually deployment. Anyone else that has this license, that license, transfer, you know, ATS, they don't have that long history of knowledge and experience that really helps them basically see around the corner and anticipate risks so that their partners have far more better experience. That's important. Definitely. And at the infrastructure level, John, I'm curious how often do you spend educating regulatory bodies and institutions when you're basically preaching the good word of blockchain? Well, the good news is just like Carlos said, we are further away from the education process these days, going from the wide to the what as Carlos said. In fact, I was in a small group meeting with SEC Chair Actions the other day, actually just yesterday I think, and it's amazing how knowledgeable he is and his ability to talk about things that are better by using the blockchain. And he's got a mission. He wants to provide, make it easier to have IPO so that the retail person and other forms of, you know, providing the retail person more access to some of these great American companies that are staying private for far longer than perhaps it used to. I think I introduced it already here. Like we want to talk about something we haven't launched yet, so but we've got the license so that's the only thing that I think that what I wanted to mention is how we got it through our balance, so I think that we already put that. Great, did you want to talk about how you chose Avalanche and the about how you chose Avalanche for the EU license? It's how we chose Avalanche. Yeah, well, so I can repeat it, but it's pretty persistent through food and the deterministic finality, but I hope you do. You're a part of this from us. That's good. So yeah. So I'm curious given you guys have consistently throughout the conversation showed how it came from the actual education piece and how implementation discussions, but what moved institutions to even want to push for this before regulatory clarity? I think in my view, and obviously I'm very biased because it's a customer, but I think BlackRock entering the space in 2024 was an eye-opening for the entire kind of asset management industry, right? Because, you know, the moment you have the largest asset manager in the world and you have their CEO-larrying that I think John Venture had the beginning on TV every other day, talking about how tokenization is a big trend that he thinks is very important for the future of asset management and how to, you know, tokenize assets are going to be able to democratize access to investment products because anybody with a digital wallet will be able to access them, etc. And not only talks about it, but then it goes and actually does tokenize an asset, and that asset becomes the fastest growing and the largest asset in the history of the industry. So I think that completely changed the narrative because at the point in time people stopped questioning whether they needed to do that and it was like, yes, we need to do it. Now the question is what do you need to do? So on that lead to, you know, after BlackRock then Apollo came, then B&Y, then, you know, Panhek, and many other asset managers, you know, also all these just mentioned companies that don't work with us, they invest, go, generate handers, etc. So now, now if you think about it, except with few exceptions, every single large asset manager has at least that has done one tokenization project. And of course, we're just scratching the surface. These guys have trillions of dollars in products. I think that they're you know, very excited about it, but very cautious at the same time of starting somewhere and then grow from there. But I think that, you know, seeing somebody like BlackRock in my opinion was the catalyst for the industry to explore. And then of course, then the regulatory clarity, and then now you have, you know, Coinbase and Robinhood and every single large company talking about tokenizations. I think also, from our experience, working with a lot of partners in TriedFive and Judge General Enterprise as well. Well the thing that they went from why to what flipped the switch in their head was a lot of people in these institutions thought of blockchain as crypto asset speculation. Somewhere along the line because there's a lot of education from people like you, they realize, wait this is also enterprise technology and there are benefits that we can get both on the op-x side but also possibly draw new users and increase revenue for them. And that was the thing that turned people into what they're doing today. And frankly, you know, that's thanks to people like you and a lot of the beta stuff we did with a lot of our partners, Franklin Templeton and others. So it's not like an overnight thing. It took a long time and then between the technology being ready and then people like Carlos has secured ties making the Reg Innovation, Reg Tech Innovation ready. That's what's led to all of this. And so we definitely have a lot more clarity than previously but on the road to 3 trillion where we still lack and clarity from regulators. I think from a regulatory perspective we don't lack clarity. In my opinion, there was a couple of things that happened the last 12 months that were critical. The first one is when you're using a public chain to represent regulated instruments because at that point they've been talking in represents security. So regulators are theoretically their technology agnostic. The regulators don't tell you what ledger technology going to use. They don't tell you you need to be on an Oracle database or AWS or Google Cloud or an Oracle blockchain. But because public blockchains were being used for unregulated activity with crypto and the Hidalazes et cetera, the previous administration had a perception that anything that had a blockchain had to be treated differently. And I think this administration did two things. One first saying, if you're an AC register transfusion like we are and you want to use a public blockchain to keep the record keeping of the who holds the securities, that's completely acceptable as far as you continue complying with the regulations. Because your regulatory obligations do not change. What it changes is the underlying technology use. So putting on an FAQ public available to anybody on the SC website saying public blockchains check they're good. I think that was very important. You don't need to keep dual record keeping or it's not a digital twin like some companies were saying et cetera, this is the record. And then the second thing which people have not realized because it hasn't really happened yet is that now broker dealers can actually do custody of tokenized securities. And the fact that the security is tokenized doesn't change the accounting treatment of the security. In the past, there was a perception that because a tokenized security introduces new risks because you have smart contract risk, technology risk, then the haircut you needed to apply to the security was much higher. And then most recently the OCC had said first the same thing as the SEC tokenized securities are securities. The fact that you tokenize it doesn't change the nature of the asset of the regulatory situation. When you tokenize, you suddenly don't need to follow regulations as unfortunately some people do in crypto. And second, the accounting treatment for broker dealers is the same and for bugs. We then open up all these regulated entities to consume tokenized securities, to the custody of tokenized securities, et cetera. So I think that does what has happened the last few months, that's been very important in my opinion. Do we need more changes? I think more changes will be good to facilitate certain things. But is there anything out there that prevents the industry from growing? I don't think so from a regulatory perspective. I think there's all the issues from a consumption perspective of how simple is to consume tokenized assets, but that's a different discussion. If there's one thing in the Clarity Act that it when it comes and you hope that it will be part of it, what would that be to make it securitize even more? Actually, if you read the Clarity Act, in my opinion, shouldn't have anything about tokenization because it's nothing to do with tokenization. The Clarity Act is about clarity for which digital assets are securities or commodities, right? And how tokenized behavior. Tokenized securities are securities. So all this debate about the Clarity Act is killing tokenized securities because it's basically what we was basically saying the draft that we had before was tokenized securities are securities. And therefore, they're governed by the SEC. That's already a known fact and the Clarity Act shouldn't be dealing with that because there's not debate about it. Nobody's debating that tokenized or nobody should debate that tokenized securities are securities and are regulated by the SEC. So lastly, the SEC came out with their taxonomy with their interpretive guidance. So that is good enough in your opinion. You don't have to have-- No, so in the taxonomy, I think that I was missing one thing which is-- in the taxonomy, they basically said there's kind of like three different ways you can tokenize securities, native tokenization, which is you talk to the issuer, you become their regulatory intermediaries that you transfer to the gen and they talk and represent the security. The other one is tokenize-- I can't remember the terminology. They're used to tokenize entitlements if you want, which is kind of like what DTCC is doing, where the security itself is kept on a traditional database if you want, like book entry with a custodian or a broker dealer. And the token is an entitlement that gives you records towards that security, but the token itself is not the security. And the third one is that the token is actually a derivative of the security. It's a price tracker or a swap, et cetera. So from a taxonomy perspective, this is good. What they should have clarified is whether in any of these price swaps or derivatives, et cetera, can actually be permissionless or they need to be permission. Because as we know out there, there's many people doing permissionless tokens, which they obviously block the US, I guess, because they understand it's illegal here. But DTC, having more publicly stated that, will have helped to bring things into a more regulated framework, which I think is the right way to do it if you want this industry to succeed. If you continue doing regulatory arbitrage and issuing from a foreign jurisdiction, something, and then it flows back to the US, I think this is not going to end well. And this is not going to help bring peace of mind for issuers and asset managers to issue security. So how do you see permission, defiant, permissionless, defiant interacting in the future with respect to our token as actually? The fact that the protocol is permissionless or the blockchain is permissionless, it doesn't necessarily mean that you cannot permission the asset itself. So we interact with permissionless, defiant protocols with permission assets. We have integrations with Abihorizon, with Euler, with Zarta, with LoopScape, a bunch of different defiant protocols where we have created a kind of like a bold technology if you want, where the tokenized asset, which is permission, sits on a bold as collateral for the defiant protocol. And then you kind of isolated it from the rest, but then people can lend against it or borrow against it in a permissionless fashion. We have also announced an integration with UniswapX, which is a decentralized RFQ infrastructure that Uniswap built, where we will trade permission assets on top of it using our broker-dital license. So I think that there's a misperception that if they asset this permission, then you kind of interact with permissionless infrastructure. I don't think that's the case. And so that was for the BiddlePot product, if I remember correctly. We launched with Biddle, but the integration we have will work for insecurity. Understood. So when BlackRock came to you, what did you have that they didn't have the capabilities to build out at that time? Well, we have a tokenization platform. We have a transfer agent. We had a broker dealer that was approved for tokenized assets back then. So we had a combination of both the technology stack, as well as the regulatory stack, that-- and not just BlackRock, but an asset manager typically doesn't own those pieces of the value chain, because that's not the role of an asset manager, is to raise money, deploy capital, create good investment products, and get them to the people, right? And more importantly, they had the experience of already doing it with other assets. So they had not just like the pieces, they've actually used the pieces before, and shown that it could be done. Yeah, makes sense. And it's fine. I think we connected on X directly after that deal, because I was joking about in that, the biggest beneficiaries were securitized equity holders. They definitely got the biggest W out of that. We should talk about that right now. One minute. Yeah, absolutely. Is it good? Public soon. So we got public at $1.25 billion via SPAC, I believe it was. Yes, we are merging with a counterfeiteral sponsor SPAC called Counter equity partners too. It trades, obviously, it's already a listed company in Nasdaq under the ticker C/PT. And then we just file ours for publicly, which means we're kind of on the final stages of the SPOR being effective. And then for public, and at that point in time, we'll switch the ticker to SEC, which is the ticker with chosen. You can read sexy. [LAUGHTER] It's organization. It looks pretty. I don't like it. The organization is very sexy, so we're going to be trading a sexy. Well, first of all, congratulations. Thank you. You know, it's a lot of hard work for the seven or eight years and to get to this point, that's awesome. What does the next seven or eight years look like? What does securitized look like in seven years? Look. That's a good question. So one of the reasons I wanted to take the company public is because I think that we are, I think Teradkin said on Monday here at the conference that we are at the end of the beginning. So for me, these eight years feels and this next stage of the company that comes to the public literary company with now really everybody embracing tokenization, etc. It kind of feels that we are at the end of the beginning, but the real thing still needs to come. If you think about it, we are very excited about tokenization, but we have just scratched the surface. We have tokenized billions of dollars in assets. This has to get to trillions of dollars of assets. So for me, I think that the next, first I hope that the next eight years, the growth is much faster than the last eight years because the last year, especially the first six years, was very slow. And I think that it's accelerated now. So we're policy and in men's acceleration. But I think it's really like the mass adoption. And I always say to people, to me, the day that we will have our mission accomplished is when we don't talk about tokenized products anymore, we just talk about products. The same way that you're too young, but don't remember that companies used to be called internet companies. Now companies are companies, right? Like everybody uses the internet. Nobody says I'm an internet company. Of course you're an internet company. Oh, yeah. I was unconscious at that point in time. Correct. So John and I are more or less ashamed. But so my point is the moment we don't refer to financial assets or financial service products as tokenized. But we just, they are tokenized because that's the default way of consuming them. That's the thing that's the day that I'll retire from the company and somebody else will take the helm and continue writing it. So yeah, makes sense. I think we're good to call it here. That was great. That's great. We're going to have a round out super powerful quote. So Carlos, I really want to thank you for taking the time out of your business schedule. I don't know, of course, this is my pleasure and conversation. Time with my friend John is always a pleasure. Awesome. Yes, John, thank you for stepping in the host. I know Steven was a bit busy this week, so I really appreciate you taking the time. You're a nice person pleasure. Yeah, it was awesome sitting and watching you guys this chat. I get to try occasionally. It was great. So as a reminder, our news remarks tile see you to get you accurate informed crypto news. If you want to stay ahead, read the block. Thanks. See you next time. Thank you. [BLANK_AUDIO]