Robert Leshner: The Next Bull Market Is Finally Here (Institutional Tokenization Boom)

Everyone is throwing irons in the fire, you know, trying to put some fuel on it and trying to see where the actual product market fit is. But right, that goes from the startup to the largest bank in America.

Thanks. I'm the bashful one, I guess, you know.

Yeah, so first off, good thesis. I generally agree with everything you said. We are at the beginning of the maturation of tokenized assets. What does that mean? Beyond all of the industry leaders being on stage shaking Trump's hand and talking about crypto and tokenization, we have the leaders of every bank and every asset management firm on TV talking about tokenization. This is the chapter one and a half moment, I think, for this. There's a lot of pilots out there. There's a lot of proof of concepts out there. Everybody is building products, some of which are starting to get traction, but it's still incredibly early, right? Almost every single bank has announced they're doing tokenized deposits. Literally pick any name out of the largest banks, they're all doing tokenized deposits, right?

They all want to use that as a stepping stone to do tokenized securities, right? Tokenized more complex products than a deposit. You have every asset management firm out there, right? From BlackRock and Vanguard and Fidelity all the way down, all of them are interested in this, right? So the question is not like who is interested, it's who's not interested. And anyone on that list is a dinosaur, and they're going to be out-competed, and they're going to go to zero fundamentally, right? Almost everybody that matters in all of finance is interested. And it's because over the last eight years we've proven out, hey, tokens on a blockchain that are programmable are amazing. They can do interesting things. They can settle instantly. They're super transferable. They're programmable. You can put them inside DeFi protocols. You can open up access around the world. There's a lot of edge case things to figure out, which the SEC and the CFTC are totally on top of to iron out the last gray areas of this, but we're very quickly coming to the point where it's all proven. And now it's just the time to go, go, go, go, go, and everybody is lining up on the starting line to go.

Yeah, it's a great question, and I don't have all of the answers, but I do have analogies to work with with historical patterns. So, if you zoom way out, back in the '90s when the internet and the World Wide Web were pretty novel things, and every single bank offered its services not on the internet, right? They were 0% online. As the internet and as the web came out, everybody was interested. There wasn't a single bank CEO who was going on their earnings call and bashing the idea of the internet. In fact, they all said like, "Hey, we want to figure out how to leverage this." Right? The ways in which they leverage this over time, it started off where they're like, "Hey, we're going to have an internet portal for you." And like, "Hey, eventually it's going to lead to like a Zelle and like all of these things." But at this point, we have 100% adoption. There's not a single bank out there that's not completely scaled entirely into we use the internet to deliver banking cuz it's faster, cheaper, better, 24/7-ish, you know, and just fundamentally better. Crypto rails are just the next evolution, right? And it's just as transformative, especially for any money services, security services, any transfer of value, crypto is equally as transformative. And so, what does the end state look like in 20 years, right? Well, probably every bank, probably every asset manager, probably everybody on Wall Street, probably every investment advisor, probably every portfolio, probably every user on their phone, probably everybody everywhere somewhere is using tokenized assets, right? What are the killer apps, right? There was a lot of different ideas about how to build a web portal for people to use internet plus money, right? And there's still experimentation. It's still not figured out, right? Every year there's like something that's slightly better than before.

I can't tell you with the crystal ball exactly what it's going to look like when tokenization has scaled, right? Do I think the end state is that there's 30 successful tokenized deposits, like Bank of America does tokenized deposits and JP Morgan does and Wells Fargo does, and they all are successful while they're all competing with each other? Probably not. I don't think that's a viable end state. I think there's probably going to be a federated deposit stablecoin where like 15 banks all get together and have one that sort of wins. I could see a single bank on their own succeeding at scale, like a Bank of America or JP Morgan, potentially. I could see a hundred different approaches to tokenized securities. That's a really big umbrella scanning everything from tokenized equities to tokenized private securities to tokenized real estate to tokenized alternative assets that their clients use to everything in between. The things that take off and are sticky and really work has not been proven yet. Everyone is throwing irons in the fire, trying to put some fuel on it and trying to see where the actual product market fit is. That goes from a startup to the largest bank in America.

Yeah, so first off I'll say there's some unannounced things that I can't talk about yet, but over the coming weeks and months, hopefully there's new products that we can talk about. But as of today, the big bet really is on a platform called Fund OS, right? Fund OS is an operating system for super modern tokenized funds to operate, right? Funds that could be a private fund like a hedge fund or a venture fund or something that holds assets only for qualified purchasers. It could be a public fund like a mutual fund or an ETF. And the very first prospectuses by some of our partners have been filed with the SEC to bring public funds onto Fund OS. And it can be novel structures. Eventually, we're going to start to see things that don't look like ETFs or don't look like traditional mutual funds be tokenized as a security on a blockchain that people can buy, sell, subscribe to, redeem from, totally composable with DeFi, right? And so this is an area that we've seen a lot of demand. We have a number of the world's best asset managers working with us right now to tokenize their products. We have a huge pipeline that we're working through of other absolutely incredible asset managers that want to build tokenized products themselves. And we've built out the platform to do this at scale, right? And so, if you boil down like what is this type of security under the hood, if you go into the archaeology of how the traditional finance side of this works, there's a lot of pieces there. What we've done is basically built a software technology system around the way funds work under the hood to make them tokenized, to enable them to just be a token that works on a blockchain. It still has compliance, it still has record keeping, it does tax, it still does all of these really annoying things.

And the end user just says, "I have a token, I can put it into like Aave Horizon, and it's awesome. Like it works the way I think it works."

Yeah, it's a great question. Everyone has their own approach to this. We've historically, and maybe it's because everybody in the industry is so battle-scarred from the Gary Gensler era, right? Some people have taken that lesson and gone totally wild west. Some people have taken that lesson and gone relatively conservative. The Superstate approach has always been conservative because it's always been with the world's largest institutions in mind, who we wanted to sort of be our partners. And so, we've done the hardest thing, which is how do you take a fund and still adhere to all of the compliance and regulatory stuff that nobody wants to deal with? How do we make it where you're still compliant with everything, and yet it's a token that can do really cool things? It can go into smart contracts. It can be programmed. It can do all of that. And the way we've gone about this is by being conservative, by saying, "Hey, the funds on our platform have to either be exempt"—and we're going to enforce that, so it has to be only accredited investors and qualified purchasers; we have to check all the docs, and we have to do this song and dance that is pretty annoying—or it has to be registered, which is what the SEC wants. They want everyone to register new funds. They want people to try to bring the market entirely new products that don't look like things people have seen before. They're not saying everything has to be a mutual fund that looks like things we've seen, or everything has to be an ETF. I think there's going to be registered vaults. There's going to be registered DeFi native securities. There's going to be registered tokens. There's going to be all sorts of stuff over the coming two years that we haven't seen before. But our approach is like it has to be fully legal, right?

What that is can get weirder and weirder. We'll get weirder over time in a good way, but we're maximally conservative there. Now, what we've done is built the system to enable all of that hard work under the hood, and yet the token is still awesome. And so, the really complex thing that we've solved from a technology process that most people don't even understand is sort of like what happens under the hood when we have a tokenized product that we've issued, right? So, what happens under the hood is when we're creating a tokenized fund—let's just call it like USCC, which is a high yield basis fund that's on our platform; at this point it's managed by Bitwise; it's a really cool token; it's integrated into DeFi protocols like Aave, Horizon, and Morpho—we record the owner of everyone who holds this fund, right? This is what some people call an allow list or a white list. We call it an allow list. Everyone's wallet is on an allow list, and behind the scenes, compliance has mapped out, here's who you are, here's Robbie, and here's Robbie's three wallets, right? And so, anytime there's a balance in those wallets, we know, hey, it's Robbie's, right? We know it for tax reasons, we know it for compliance reasons, we know it for all this stuff, and it's integrated with the fund's back office, right? This really boring world of back office things. Like, the fund admin knows it, the custodian knows it. It just all works in harmony.

Now, normally, that's where things stop. It's like, oh, well, we can't lose track of it. How do you put it into a DeFi protocol? How do you put it into a pool? How do you let it leave Robbie's wallet, right, and do more interesting things? And that's where we built out some really, really, really fascinating technology where we actually allow it to leave your wallet, enter a DeFi protocol, if we have the ability to sort of see through the DeFi protocol, understand how it works under the hood, and continue to track everybody's ownership and balances in that protocol even as things happen. So, with a lending protocol, we can add support for lending protocols like Morpho, like Aave, etc. And the way we enable that is cuz we've reverse engineered it from an accounting perspective. So when you supply it as collateral, we're like, "Hey, it's still Robbie's. It's just being used as collateral." If you get liquidated, we say, "Hey, it's no longer Robbie's. Now it's Joe the liquidator." So we track every log and every event in order to keep these records fully synchronized. And so anything that happens, even in a pool that holds a thousand investors' tokens all together and it looks like one address, we don't view it as one address. We view it as every individual beneficial owner of the tokenized fund. So every event that happens flows through the accounting and the record keeping and the compliance and the tax and all of that nonsense, right? And when you have an AMM, it's the same way. It's like it's all pooled together, but we look inside every LP position. We say, "Oh, well, this is exactly how much each LP has." And every time there's a trade, it's modified just a little bit. So there's this incredible harmony between a DeFi protocol and a tokenized security that lets us take this really complex thing, which is how do you have compliance plus DeFi, and do it without making others up?