Why Tokenize? Fidelity on Onchain Assets and the Next Phase of Adoption

We like to think about our product roadmap and really the strategy for how we continue to build this business through the lens of what does the pathway to the adoption of digital markets look like. The next phase of adoption we see as being able to use these assets on chain, making these tokenized assets useful to investors. What is the advantage of doing that? That is actually the most important question that I think anybody who is looking at tokenization has to start with, why are you bringing that asset on chain? What does it get to do on chain that it can't do today? Who are you doing it for? And how is that person going to be able to use that asset on chain? Cynthia, thanks so much for being here. Thank you so much for having me. This is a great little location and fantastic weather. We're glad you could make it. So you're in charge of digital asset management at Fidelity. Tell us what are you responsible for? What are you doing? What is going on inside of Fidelity when it comes to bridging, tradfie and defy? The division that I'm in sits within our asset management business at Fidelity. This unit was really dedicated and stood up within asset management only a few years ago with the intention that from an asset manager's lens, understanding not just how to think about crypto assets as a new investible asset class, but also what does this technology and the evolution of our capital markets being driven by this technology mean for an asset manager. And so also from my team's lens looking at building new applications and looking at new ways to be able to allocate capital on chain and also thinking about the flow of capital between traditional markets and on chain markets. And this is where tokenization and tokenized fund wrappers becomes very interesting as we think about the evolution of asset management. You oversaw the launch of one of the Bitcoin ETP products and also you have tokenized a money market fund. So yeah, what's going on? What kind of products are you launching? What's cooking over there? What can we expect in the future from your efforts? And so we started with the premise of how do we help our clients to be able to get exposure to this asset class and that would be under the hold phase of adoption. So how do we help investors to get access to trade these assets and hold them in their portfolios. And this is where the ETPs have been a fantastic way to introduce traditional investors to these on-chain assets. The next phase of adoption we see as being able to use these assets on-chain and where tokenizing assets is really not the hardest part of bringing assets on-chain. It's making these tokenized assets useful to investors and useful to investors in ways that are different from the way in which they can think of these assets in their brokerage accounts today. And from our standpoint that means making these assets mobile on-chain, allowing investors to use them to deposit as collateral to be able to get access to capital on-chain or to be able to use these assets and make them more easily tradable into a more highly customizable portfolio. And then another use case that we are seeing a lot more adoption on is the ability to generate yield on-chain. And this native yield on-chain through staking is incredibly differentiated from traditional sources of yield and being able to package that yield into a traditional wrapper such as the ETP makes it very easily deliverable to a traditional investor and another introduction into the utility of assets and of these on-chain markets. The third phase of adoption is what we've been calling the build phase. And this is where you have on-chain assets in an on-chain wrapper and the ability to be able to deliver hyper-personalized exposures to investors with these both tokenized traditional assets as well as native on-chain assets and then being able to construct portfolios on-chain. You're talking about bringing assets on-chain. What do you get from tokenizing an asset? And also are there stages of becoming on-chain, like are you on-chain or off-chain or is there some kind of gradation, a spectrum toward becoming fully on-chain? That is actually the most important question that I think anybody who is looking at tokenization has to start with which is the question of why are you bringing that asset on-chain? What does it get to do on-chain that it can't do today in its current form? And who are you doing it for? And how is that person going to be able to use that asset on-chain? And so as we think about what does this mean in terms of the progression of where we see markets going? Today we have on-chain assets in an off-chain wrapper which is the ETP and that is using existing infrastructure for distribution to be able to deliver on-chain exposures. The on-chain infrastructure for distribution is really at the very beginning right now. We see this with our tokenized money market fund that we launched earlier this year. As we've talked about quite a bit in our team, we've spent a good portion of time building out the infrastructure to be able to support the issuance of the token. I think we've probably spent more time building out both the relationships as well as some of the ecosystem development that we need to build in order to make this token more usable on-chain. So you mentioned building out relationships with people. I imagine you meet with lots of people. How do you suss out what's real, who's real, who's got the goods, who doesn't? What does that process like for you? That starts with the premise of not only what are you building or what is the project about, but what's the vision for where that project fits in the bigger picture ecosystem. And the founders that we've worked with over the last few years as we've been ourselves building out our thesis for what this looks like for our products and for bringing more of our customers into the ecosystem to get exposure, both to assets on-chain as well as to be able to get access to capital on-chain, which is what we're working toward. How do we think about what this additional piece of infrastructure or this platform? How do we work with that platform? A lot of, what we found in some of our early conversations with on-chain lending protocols and the so-called DeFi projects is that there are quite a few of them that are very, very progressive in understanding how to engage with institutions and understanding how to work with us to be able to evolve or build the technology that we need in order to incorporate AML and KYC and to be able to open up the platform for more regulated products to be able to be traded. We recently put out a state of crypto report, which is this big data intensive report about the crypto industry. One of the slides that we had is on real-world asset tokenization. It was kind of shocking to me to see that there's now $30 billion worth of assets on-chain. A lot of that is US debt treasuries, I'd say like half as that happens, private credit. But it's stunning because over the past few years it went from basically being nothing on-chain to now being $30 billion, which some might say maybe that's still a small number, but it's extremely rapid growth. And so my question is why now? What's happening that is making this the moment where all of this is now finally taking place? In terms of where we are seeing a lot of that immediate growth that you just highlighted in tokenized treasury products and so-called tokenized money market funds, post the small and regional bank mini crisis that happened a couple of years ago with the deep-hanging of a very large well-known stablecoin. USDC? Yes, I think there was a recognition from a market standpoint that the banking system needed to be looked at from the standpoint of not just access, which is I think where a lot of the early thesis was focused, but also on the flow of capital and the payment system. That was I think where there was an aha moment for the use of tokenized money market funds as a way to be able to bridge that payments and yield gap that today in brokerage platforms. For example, there is cash and brokerage platforms that cash is typically swept into interest-sparing products. So the idea that any payments platform would hold cash and not be able to get access to interest doesn't really resonate with most investors and users with that first event and then of course the Genius Act really just absolutely opened up the marketplace for non-bank issuers to really think about how do we facilitate payments more easily on our platforms and where tokenized money funds play a very important role for the reserve assets and being able to stay on chain for stablecoin issuers and their underlying users. When you talk about giving yield on these money market funds, this really goes back to the roots of the company. I believe Ned Johnson, one of his big claims to fame was the cash management account that he really popularized and enabled people to basically have this sort of hybrid banking accounts, but also money market fund you could gain interest on and that was just like such a hot product for the company. And the other innovative feature was the ability to write checks off of your money market funds. Yeah, that was the huge selling point. It was massive and so this is again where in the non-bank sector. we can create regulated products that allow for investors on our brokerage platform to manage that short-term cash and not have to transfer that cash between multiple accounts in order to do everyday things that they need to do with their financial assets. So whether that is the short-term liquidity of paying bills, whether that is being able to take those assets and invest them for the longer term or if you decide that you want to save for a short-term event or short-term need, that we provide that range of investment assets to allow for investors to do that. And it's really amazing how Fidelity's been keeping up with the times. I mean, even a decade ago, before a lot of people were thinking about crypto, a lot of companies were thinking about it. Your firm was mining Bitcoin. I remember Abby Johnson talking about this back when I was a reporter covering the industry that long ago. I think that goes to the core of what Abby has talked about quite a few times, and I think she said earlier today that this idea of highs in really refers back to this constant and continuous improvement in yourself and in your business. And this idea of mining Bitcoin wasn't just suddenly somebody waking up one morning and say, "Hey, I should mine Bitcoin." But rather, it started with this curiosity and saying, "I just heard about this new thing called Bitcoin." I'm not quite sure whether it's a thing, whether it's not a thing. But I should make it my job to figure out whether or not it is something. And so how do I go about doing that? You have to deconstruct something, I think, oftentimes in order to figure out how to put it back together again to really truly understand how it works. And then you start to think about what are the possibilities for what happens to our marketplace and to our monetary system if there is such a thing as Bitcoin. As we start thinking about this new industry that's arisen, the on-chain economy, how do you decide when is right to buy versus build or partner? What goes into that decision-making process? It's a hard question. And I think if you start from the philosophy of, you've got to evaluate your operating platform in the context of what it is that you're looking to build and what are the most important points of differentiation for your product to your client? What are the touch points that you will have with your client? And I think those elements of the operating platform that give us the most control to be able to pivot and to be flexible in being able to build new functions to really differentiate our product offering. Those would be the parts of our operating platform that we would tend to want to build. There are going to be times when time to market is really also going to drive that partner versus build equation. And that's going to be part of the decision-making as well. After you meet with a startup, what is the post-game analysis like? What do you talk about? How do you decide how a meeting went? Oftentimes I think it's just sort of the human nature of the interaction is did we find a connection with the founders' vision and how they go about articulating it, but also putting that all together. And do they have a good understanding of the regulatory environment that we are looking to operate within? But also, how do we think about those principles as we apply them in this new market environment? And so it's that ability to help us think outside of the traditional lines of where we have traditionally operated. Amazing. I want to hit you with a few very quick lightning round questions if you have a moment. Yeah, sure. OK, what's your biggest productivity hack? Very, very quickly, skimming through whether it's Apple News, I'm a big reader of, because it has gotten to know what I'm most interested in, gives me the headlines and I can just quickly scroll through that. And that's a really good way for me to get a quick download of not just business news, but sports news and entertainment news. I do something very similar. Yeah. What is the worst career advice you've ever gotten? Advice around defaulting to what's comfortable. It oftentimes ends up being the opposite of the really good career advice, which is be open to doing all variety of things, even the things that you wouldn't have ever thought that you would be doing. I started out at Fidelity as the head of legal for asset management, and then very quickly before I realized it, I was way down the rabbit hole in crypto. As happens. And today I am no longer in legal, and I'm now leading one of the most exciting divisions in Fidelity and couldn't have been more excited and happy to be doing this. That's great. Okay, two more quick ones. One is show, a film. The amazing race. I don't know why this just resonates with me, and maybe because I just happen to have seen it. I've been watching this for many, many years, and there's something about putting two people in a situation, how they work out the adversities, and the, oh my gosh, I would never imagine doing this or, oh boy, this is a really awful fear, and I have to go. So it's one of these reality shows that gives you that human condition in ways that just so resonate with a few different audience types. That's a great recommendation. Last question. What is the smallest hill that you will die on? Authenticity, and honesty, and that's a hill all day long that I will advocate for. Do the things that speak to you, be honest, be direct, even when delivering tough news, and I found that it's the best way to be able to continue that connection, and it resonates with people, the honesty and the authenticity. That's great. Cynthia, thank you so much for joining us.