Blockchain is a technology that garners much interest from those who work in capital markets. However, how and when the complex world of asset tokenization could transform banking remains a mystery to many. In this episode, host Jim Jockle speaks with Graeme Moore about what the future intersection of finance and blockchain could look like. Graeme is Head of Tokenization at the Polymesh Association, a not-for-profit dedicated to the growth of the Polymesh blockchain ecosystem. Join Graeme and Jim as they discuss groundbreaking ideas, dispel myths, and discuss blockers currently standing in the technology's way.
Blockchain is a technology that garners much interest from those who work in capital markets. However, how and when the complex world of asset tokenization could transform banking remains a mystery to many. In this episode, host Jim Jockle speaks with Graeme Moore about what the future intersection of finance and blockchain could look like. Graeme is Head of Tokenization at the Polymesh Association, a not-for-profit dedicated to the growth of the Polymesh blockchain ecosystem. Join Graeme and Jim as they discuss groundbreaking ideas, dispel myths, and discuss blockers currently standing in the technology's way.
Welcome to Trading Tomorrow, navigating trends in capital markets. I'm your host, jim Joggle. In my decade plus of working with Numeric's Global Leader in Capital Market's Risk Management Technology, I have launched our Thought Leadership Division, a place where insights, innovation and expertise converge, just like this podcast. Through my journey in the financial realm, I've had the privilege of witnessing firsthand how the capital market's landscape has transformed. The complex dance of market trends in innovative technology has redefined how the finance industry operates, with game-changing innovations just around the corner. We now stand at acrossroads, one where it is more crucial than ever to understand the interplay between these realms. That's what we do here. We talk about current and future processes and technologies you need to be aware of moving forward. Today, we're talking about a technology being called the future of capital markets blockchain asset tokenization. Advocates and supporters say this technology could forever change the financial landscape, and the revolution is already well underway. City analysts have forecasted 4 trillion to 5 trillion of tokenized digital securities could be issued by 2030. For this episode, we want to dig deep into what this technology means for capital markets and the reason behind this push we're seeing for the adoption.
Jim:Joining me today to discuss further is Graham Moore. He's the head of tokenization at the Polymesh Association, a not-for-profit dedicated to the growth of the Polymesh blockchain ecosystem. Polymesh is a public, institutional-grade permissioned blockchain built specifically for regulated assets. It streamlines the antiquated process and opens the door to new financial instruments by solving the challenges around governance, identity, compliance, confidentiality and settlement. Graham is also the author of Be is for Bitcoin, the first ever ABC book about Bitcoin. Prior to Polymesh, graham was the first employee of PolyMath, the creative director at Spartan Race and associate at Canada's largest independent investment advisory firm. Graham, thank you so much for joining us today. Thanks for having me. So can you first just explain to our listeners what is Polymesh and why was it created?
Graeme:So Polymesh is a Layer 1 public permissioned blockchain built specifically for asset tokenization. So, you mentioned, I was the first employee at PolyMath, so PolyMath was really the first company in the world that started building compliance requirements for securities on blockchain. So PolyMath was a company formed in 2017 and we started building that technology all on Ethereum and we got some good traction there. But we were talking to the world's largest banks and custodians and they said they didn't really like Ethereum for securities, and our developers didn't really like Ethereum for securities either. So we said, okay, well, instead of continuing to try to shove this technology into a banks infrastructure, let's build something better. So that's Polymesh. We said Polymesh is a better blockchain. It's purpose built just for asset tokenization, whereas blockchains like Ethereum, algorand, tezos, hashgraph you know, take your pick they're kind of all things to everybody, whereas Polymesh is hyper focused on how can we build the best blockchain just for this one use case?
Jim:So, just to be precise, what is a public permission blockchain?
Graeme:Yeah. So a lot of people have maybe heard of a public blockchain and maybe heard of a private blockchain. So probably the winner in the public blockchain space right now is Ethereum and Bitcoin. And then there's private blockchains like Ethereum, hyperledger and R3 Corta that a lot of banks have experimented with, and what we said is you know, the future is in public blockchains.
Graeme:But just the things we kept hearing over and over again from banks was that they didn't like the totally permissionless aspect of Ethereum, and so what I mean by that is anyone can do anything, no one has to ask permission. So you're making a transaction, and let's imagine you're JP Morgan. You're making $100 million bond trade, right alongside Al Qaeda, receiving funding from another terrorist group, and so that's just something that they really don't like doing. And then, on top of that, anyone can create blocks on Ethereum as well. So previously it was mining blocks, now it's staking blocks, but so anyone who creates a block gets a block reward, and they also receive transaction fees from that block. So every time people make a bunch of transactions on Ethereum, the person who correctly wins that block gets paid, and they get paid those transaction fees. So let's say again JP Morgan makes $100 million bond trade and they pay $5 in gas fees. The $5 could go to North Korea.
Graeme:And so, just again, really, how could we make a blockchain that makes these large institutions that are so obsessed with compliance and regulations? How could we get them more comfortable with blockchain? And one of the ways we figured that out was well, we can make a permission to blockchain. So, on Polymash, for example, all of the users have to pass KYC. So now you can rest assured, at least the users have gone through some KYC process. They probably aren't in Al Qaeda or living in North Korea. And then, on top of that, all the node operators are licensed financial entities, and so what we mean by that is they have some kind of financial license. So it might be a broker dealer, there might be a custodian, there might be a bank, and again it was. How can we solve the problem of JP Morgan not wanting to send $5 to North Korea? Well, now they know they're sending the $5, but in Polymash's case, with much lower fees, they're sending their one penny or two pennies to one of these 18 licensed financial entities.
Jim:So would you dive in a little bit into some of the benefits of using blockchain tokenization specifically in the capital markets?
Graeme:Yeah, I pull it down to to eat efficiency, automation and transparency. So, initially, one of my jobs earlier in life, when I was in university in the summer, was working at a bond fund, and so what I had to do every single morning was come into the office and look at what the custodian thought we had in terms of our bond and our crude interest, and what we thought we had in terms of our bond and our crude interest, which makes absolutely no sense in a world where now we have the internet, where everything should be interconnected, and we have blockchains, where everyone can agree on a single golden source of truth, which is the blockchain. And so this concept of different siloed databases where no one talks to each other and no one knows exactly what each other has and no one can agree, and you have to get someone like me to come in and go hey, you said it was 0.12, but we think it's 0.13, and then we have to go back and look at some documents and look at some Excel spreadsheets. That makes no sense anymore. We have a golden source of truth now where everyone can agree and everyone can plug into. It's called the public blockchain, and so that's one of the big ones for efficiency is just not having to do a lot of this back office stuff. For automation as well, we can now automate things that we can previously automate.
Graeme:So one cool thing that I like to talk about is in the future, what's going to happen as more and more companies bring more of their finances on chain is, as soon as a company gets paid let's say, let's say as soon as they hit $100 million in revenue for the year they automatically pay a special dividend to certain token holders. So that just can't happen. Today. You need a human being to click a button and to approve something and to sign some piece of paper and get a lawyer to sign off. But if everyone agrees ahead of time and you bake that into some kind of smart contract code, you can do that really easily. And then, finally, transparency is a big one.
Graeme:So I recently wrote a piece in Fortune that was about French banks, and so a bunch of French banks got fined a lot because what they would do for some of their clients is right before the ex-dividend date. They would pretend their foreign clients didn't own a French stock so that they didn't have to pay as much taxes, and then the day after the French, their client would magically own the stock again, and so, of course, they're doing that to avoid taxes. Regulators had no idea until years later that this was happening, and so the reason is because all of these databases are closed, they're siloed, they're not open to anybody to look at, and so with a public blockchain, by contrast, regulators can have real-time, instantaneous access, even into private markets, and so this is some technology that regulators really like, and that's the common misconception that happens a lot is people hear, oh, blockchains. Well, regulators don't like that, governments don't like that, and what they haven't realized yet is that all of this information is public, so governments and regulators actually do like this.
Graeme:Anytime someone steals money from someone on a blockchain or hacks someone, the governments eventually find them, and so it's actually a really good technology in terms of transparency, and it's just way easier for record keeping. No one can disagree that something happened in the past, whereas today you might have to subpoena someone or go into a lawyer's office or go into a transfer agent's office and get a bunch of literal pieces of paper. So those three things are some of the main benefits that we see with tokenization.
Jim:You're teeming me up with too many bad jokes today that I'm curtailing myself. I'm ready to go, but obviously you highlighted the positives. What are some of the negatives? I?
Graeme:think probably the main negative is that things are transparent. So that's one of the benefits that we see. That's it. It's a huge undertaking for a bank with a thousand person compliance department to figure out how can we properly hide the things that we need to hide from a PII, personally identifiable information aspect, and then also from a regulatory perspective. So, even though on a blockchain, grammore could be 0x123 and you could be 0xABC and we could transact with each other and no one necessarily knows who we are, over time you could probably figure out who JP Morgan is. You could probably figure out there 0x123, abc, and so that's something that the banks care a lot about and one of the reasons why we don't think we've seen a huge amount of adoption yet for public blockchains. It's going to happen. It's going to happen through things like zero knowledge proofs, but I think it's also going to happen just with a shift in what people are comfortable with sharing on a blockchain. So I love talking about infrastructure inversions and inversions that have happened because of the internet, if you'll indulge me.
Graeme:So previously, a business that was only in person and not online, let's say in 1990, that's a trustworthy business, that's a good business and a business that was only online and not in person. That's a shady, sketchy business. You don't want to deal with them at all. What if they're a little stealier information, or they'll kill you or something? That was things that people actually thought in 1990. And now the inverse is true. Businesses that are only online Slack, facebook, instagram, paypal, all these companies those are the trustworthy ones that you want to deal with. And then the weird companies that are only in a physical location. That's kind of scary. You're telling me they have no website. That's terrifying. Who are they? We don't know who they are. They have no reviews.
Graeme:And so the same thing we think is going to happen with blockchains and securities where previously securities if it's not on the New York Stock Exchange or it's not on the NASDAQ, if it's not a piece of paper held in some filing cabinet somewhere by a transfer agent that used to be the gold standard, oh, that's great. That's the very trustworthy thing. And, oh my God, a blockchain. You're going to trust your assets to be on a blockchain. That's terrifying. But the inverse is going to be true very, very soon, once people realize the power of what this technology can do and they see the transparency aspect, where they can see. Okay, yeah, no, we can actually finally have a perfect paper trail of everything that's ever happened in the past and no one can disagree with it.
Jim:So as someone who got on the street in the 90s, I can validate that it's a very good way of thinking about it. Perhaps you could share some use cases that you're seeing right now of large institutions in the way they're experimenting with blockchain.
Graeme:Yeah, I'll talk about one big one that we love so, bnp Paribat. They're the ninth largest bank in the world, largest bank in Europe, so they have tokenized a bond using our technology. So I mentioned initially that our technology was built on Ethereum before PolyMesh, and so they actually use that technology. It's called ERC 1400, which is an extension of ERC 20. If anybody knows that token standard, they've heard of it, and so they tokenized I think it was about $100 million bond on behalf of an energy client that they had and it worked, and so that was something that definitely took a while for them to get through their compliance process. It took a lot of understanding and learning and literally years of making sure all the Ts are crossed and all the Is are dotted, but it ended up working. Another one, sockgen so again a French bank. I don't know what's going on in France, but they love blockchains for securities. Sockgen is also tokenized.
Graeme:I believe it was $100 million bond, and then a really cool thing that happened and this is, I think, the only bank that has done this in terms of public blockchains is SockGen made a proposal for MakerDAO. Are you familiar with MakerDAO? So MakerDAO is the creator of DAI, which is a stablecoin DAI, and so what they said is we want this bond to be able to be used as collateral so people can mint new dollar stablecoin tokens. And so that's it gigantic bank. I think they're maybe top 50 in the world interacting with a public blockchain protocol, using Ethereum tokens to pay fees for that, to attempt to allow a bond to be used as collateral, and I think that's really one of the cool use cases as well, and so this isn't really as big on the institutional side yet, but lending is a huge one.
Graeme:So, in the past and even today, if I wanna borrow against some of the stocks that I own, if I wanna borrow against my house, I have to call someone on a telephone or I have to send someone an email. I have to maybe go to an office, so I have to wear a suit or something like that. I'm wearing a T-shirt today because I hate wearing suits. I have to talk to someone, I have to convince them that I'm a good person to lend money to, and then they have to confirm that my collateral is good enough, and then they will maybe give me a loan in a week or a month. Today, on a blockchain, I can get a loan in five seconds.
Graeme:I go into a blockchain protocol that has the ability to deposit collateral. Everyone agrees on what the collateral is because it's on a blockchain. It's either Bitcoin or Ethereum or, eventually, some bond token like that sock-gen issued. I deposit the bond or I deposit the stocks, or I deposit the crypto asset into a lending protocol and immediately I get a loan of, let's call it, 25% loan to value, and so never having to talk to a single human being. That's huge and I think people are really underestimating what's going to happen because of that.
Jim:So, thinking about the markets and obviously we have 100 year events every 10 years now, if not less and thinking about Credit Suisse and Archdiocese and thinking about Silicon Valley Bank, are there any examples of things where you and your colleagues are sitting around the office and have said to yourself oh God, if they were only on the chain, this would have never have happened?
Graeme:One of them is the French banks and the tax evasion that I talked about. So there's that one. There are a lot of things I mean. Another thing that even happened in crypto was FTX, and so what FTX was doing, if people aren't aware, is FTX was a very large cryptocurrency exchange. People could deposit Bitcoin or Ethereum or other tokens into FTX and then they could trade those assets, and what FTX said they were doing, what they were supposed to be doing, was holding all of those client assets one to one on behalf of their client. But because FTX's internal structure and custodian setup was completely opaque and no one knew exactly which wallets were theirs and where they were going and what their random hedge fund named Alameda was doing, they actually had almost no Bitcoin left, and so when people started to say, hey, I want my Bitcoin back, they didn't have any of it because they had traded it for other tokens. They had tried to short Bitcoin to make more money if Bitcoin was going down, but it actually ended up going against them and they ended up losing money.
Graeme:And so there's this really cool concept now called proof of reserves. We're using some knowledge proofs An exchange can actually prove, without necessarily verifying to the whole world which accounts are theirs, what assets they have and where. So now you can rest assured. Okay, if there's a run on this exchange, I don't have to pull my assets out today, because I can pull them out next week because I can see that the exchange has proved. Okay, they have 5,000 Bitcoin or whatever the amount is, and so things like proof of reserves. I think that's gonna be a really important thing moving forward, where, especially in a world of non-fractional reserve banking that's something that I would like to see happen very soon and I think it's going to happen very soon where I can actually see okay, I put my Bitcoin or I put my US dollars or whatever into this bank and they can prove that they actually have custody of them today and they haven't lent them out. And if there's a bank run, I can rest assured because I can see exactly where my cash is.
Jim:You know it was interesting one of our other podcasts we got into the discussion of you know the biggest banks, the deepest wallets, the most talent, the most resources. You know most likely they'll be the winners and how smaller institutions can be competitive against them. But he had a contrary opinion, saying smaller institutions can be more nimble. Do you see institutions at this point, you know, coming up that you haven't expected, or they're not the big brands, if you will, that are really looking to do some really innovative things with this type of technology?
Graeme:I think an interesting one is Coinbase right, where 10 years ago, we would have said who you know? I don't even know who that company is, I don't even know when they were founded, but yeah, maybe about 10 years ago, where Coinbase was nothing at that point. And now Coinbase is who BlackRock selects to be their custodian for their Bitcoin ETF, and so I think being nimble is huge, while still needing to have certain types of compliance resources, and so that's become Coinbase's bread and butter is. They are the nimble startup tech-like company in this ecosystem where they still have tons of lawyers on staff. They're the ones that are trying to fight the SEC on a bunch of stuff. They have the legal resources to do that. They have the pockets to do that. They're publicly traded.
Graeme:They can go raise more equity funding very easily if they need to, and so I think Coinbase is a really big winner that we're seeing in the space right now and that we'll see in it coming through in tokenization as well. They have a broker dealer license that they haven't been able to use that yet because Gary has not really allowed them to for some reason, and so, yeah, I think Coinbase is going to be a huge winner, but then we're still going to see BlackRock handling the majority of people's assets. Crypto company asset manager 123 versus BlackRock. Blackrock wins every time, but for something new like custody of digital assets, which never existed before. People thought it would maybe be Fidelity winning that, but a lot of the ETF applications all mentioned Coinbase has their custodian, and so we could really see Coinbase defeat Fidelity there, even though Fidelity will, I imagine, be a close second.
Jim:Well, maybe if the Coinbase guys start wearing suits, Gary will start accepting meetings more. So a recent Polymesh report looked at the leadership role in APAC countries are taking in crypto regulation. Can you perhaps give us some highlights of this report?
Graeme:Yeah, we looked at South Korea, hong Kong and Singapore, and so the reason we wanted to do this was they have been putting out actual legislation and we've seen a ton of interest there, especially for tokenization, from companies in those countries just setting up in those countries too even brand new startups, established players all saying we understand that tokenization is the future. How can we do this? How do we get started? What do we need in terms of regulations and compliance and whatnot? But they've actually put out legislation in those countries, and it's a stark contrast to what's been happening in the US, where people still don't really know what they're allowed to do and what they're not allowed to do, and so I think we really just did that report to showcase, look, what South Korea has done. They have this thing called the Digital Assets Basics Act, where they have I think it was something like 17 legislative proposals that come into effect next year.
Graeme:Singapore has had things out for years now, although they sometimes are a little bit restrictive on who can and who can't hold assets. Hong Kong has sort of flipped hot and cold over the years. Retail are allowed to hold these assets, retail aren't allowed to hold these assets, but now again, retail are allowed to hold assets in Hong Kong, which is pretty encouraging to see. But yeah, it was really just about look at what's happening in this part of the world where companies are starting up. They know what they're allowed to do, they know what they're not allowed to do, and they're actually moving forward, whereas in the US, everyone's at this sort of can we do this or can we not? Mindset right?
Jim:now We've made it to the final question of the podcast and we call it the trend drop. It's like a Desert Island question, and so if you could only track one piece of blockchain tokenization for capital markets, what would it be?
Graeme:and why the one thing I'm set on is dollar value of assets tokenized. I think that's when we know if we're successful or not. Right now, we're in the billions, which is good, but still very nascent. When you talk to anybody in traditional finance, once you hit trillions, then that's when people start caring. That's really what happened in crypto as well, and the cryptocurrency market cap hit a trillion dollars. That's when you started to see BlackRock really care. That's when you started to see a lot of the traditional financial players start to really care.
Graeme:And we're still at billions in terms of tokenization of assets, but it's getting up there and it's getting up in an accelerated fashion. So I mentioned BNP, sockgen, jp Morgan has their ONIX private blockchain implementation for tokenization, and then also there are a number of other players that are just starting out. So KKR large fund they've announced that they've tokenized one of their funds so that they can increase access and availability to who can purchase that, and so there's a ton of stuff that's happened in the last six months, a ton of stuff that I will hopefully be able to announce in the next six months. Yeah, it's really only picking up from here, but yeah, the main thing is what is the dollar value of assets tokenized on chain, because that's when people start to really care.
Jim:Well, Graham, I want to thank you so much. This was a fantastic conversation and I'm sure our listeners are going to really appreciate it, Thank you. Thanks for having me Coming up. Next week we'll dive into data and new technologies and processes driving the industry's growth and prosperity. Stay ahead of the trend by tuning into our latest episode. But first, if you enjoyed the podcast, make sure you hit the subscribe button, leave a comment, a like and check out our other episodes. Thanks for joining.