Hello and welcome to The Future Is On, a podcast from Global Custodian and Chainlink. I'm John Watkins from Global Custodian, and I'm delighted to introduce this conversation from Sibos, where Nadine Shakar, Managing Director and Global Head of DTCC Digital Assets, joins Chainlink co-founder Sergey Nazarov. They discuss what it takes to bring tokenization to market scale, including 24/7 collateral management, interoperability, and the infrastructure needed to connect traditional markets with blockchain networks. Here's their conversation.
Hi Nadine, thank you so much for joining us for the Global Custodian podcast. I think it's very exciting what we've put out together, and I'm sure people want to know more about it. So I think it'd be great to discuss it more. So thank you.
Well, thank you for having me, and I'm looking forward to it.
So I think one of the first real questions is that it's useful for people to get the context on what the DTCC app chain does and what it unlocks for tokenized securities.
So we started this journey about 18 months ago, and the first step was to tokenize the assets in inventory at DTCC. And we realized that we can tokenize, put it in wallets, and then what happens? So very quickly we sort of pivoted to saying, okay, tokenization is the first foundational step, but we needed to add utility to this process. Hence, and as we've talked to a lot of clients in partnership with yourselves as well and others, we realized that collateral is really the biggest use case that we can get people excited about. So this is an outlet where you could take these tokens and really turn them into meaningful financial transactions that really unlock value for institutional investors, right? You can free up capital, you can pledge the assets, you could do a lot of different things that make them more mobile rather than putting them statically in a wallet.
Yeah, I agree with you. I think there's been other different attempts to tokenize equity, and then if the tokenized equity doesn't actually have value beyond the fact that it's a token, that kind of stops the process from being valuable, from being useful. And so from what I understand, what you're saying is not only will you tokenize it, but you'll create an ecosystem and enable an ecosystem where the tokenized equity can actually be used as collateral for securities lending purposes and others.
Absolutely. And Sergey, to your point, it really starts at the point of entry with the token itself. So DTCC opted to tokenize the entitlement, and that's really critical because we issue a digital twin that has the same legal rights, investor protection, and a big dialogue in the industry is what happens to investment settlement finality, right, and which is preserved within it. So you've got that piece that's clear and secure.
Now, moving it to — and the app chain is just one outlet, right? It allows for financial — and I want to be clear, DTCC is not doing collateral management services. We're offering the industry common, shareable blockchain infrastructure, where a lot of partners, you included, a lot of the big banks are participating in its design to really help us deal with some of the issues that we face in the industry, right? We have fragmentation. We have time differences, operational complexity. And what we've set out to do with the app chain was, to the extent possible, remove these impediments so collateral can really move fluidly and at the speed of the network. That brings real tangible results: lower operating costs, lower capital costs, better distribution, better trades, more yields. And that is what we set out to do.
Again, I want to emphasize that this was built by the industry, for the industry, and DTCC is just shepherding the process through our ability to gather users to the platform.
Yeah, I think a nuance that not enough people understand is really the legal entitlement and how tokenized equity from DTCC is different from the other forms of tokenized equity that might exist out there, and how the DTCC tokenized equity is really the gold standard because it creates the same or very similar relationship that they have with untokenized equity, but in a tokenized form. And so those legal guarantees, in my mind, make the whole discussion about whether tokenized equity is real or not real kind of go away. And I think it opens up a category of users, mainly institutional users, for tokenized equity that wasn't there before. So I think it's definitely a step forward.
You know, what do institutional users want? They want certainty. They want clarity. And the DTCC approach to tokenization, where we've created a digital twin — as I said earlier, it's got the same attributes that the traditional assets do, has the same CUSIP, because the one thing we want to prevent is the fragmentation of liquidity. But there is also a truth that you and I both know, that while we want everything to tokenize tomorrow, the reality is the old and the new will have to coexist for a period of time together. So that's why it was important for us to treat the new tokens with the same rigor that we treat the traditional assets, right, the same protection, the same legal finality.
And that's what, in our opinion, hopefully will galvanize the industry to have confidence — your underlying assets are secure with DTCC creating a digital representation, and the app chain now is going to allow you to extract an enormous amount of value out of these assets that could be just sitting doing nothing, right? In addition to that, once your assets are in the wallet of your choice, you've got a whole world out there that you can go lend against, you can extract more value, more yield, and all we're trying to do is get the party going and then build an ecosystem around it, which institutional investors will be able to execute their own digital strategies on, which will be super important.
Yeah, I agree with you. I think this creates the type of reliability and guarantees that the DTCC already creates, just for the digital asset world, which will bring in a lot of institutional users. So I agree with you.
And so now that we understand the app chain's unique ability to create this kind of reliability and lack of risk in relation to equity ownership, which institutions, I do agree, find very important, let's talk more about collateral management and how the DTCC, through this, will unlock 24/7 collateral management of digital assets, and why do you feel that that is important?
Collateral is what keeps the world of finance going, right? That is the oil that greases the financial services. And as I said before, most of us come from different backgrounds within DTCC and in the financial industry, and we very much understand that collateral — being able to access your collateral anytime, anywhere that you want — is super important. So as an industry, and present company included, we have spent millions of dollars building collateral systems, buying the most recent thing that's out there, but we've always been plagued by the same things: reconciliation, the inability of moving things real time, time zones are an issue, fragmentation, right? If your US lockbox looks different than your European lockbox. And what we realized is that by developing and offering the industry a common blockchain-driven shared infrastructure, that melts a lot of these problems away. So again, we're not providing collateral, we're providing the infrastructure.
So if you're a fund manager sitting in Japan wanting to finance a trade against US Treasuries today, it's not that efficient, because you got to wait for us to get up, or you can pre-position those assets. In tomorrow's world, thanks to the app chain, your Treasuries are sitting in your pooled wallet and you can execute that anytime that you'd want. And that's why yesterday during your round table you could see I was getting a little bit impatient with the conversation, because we're forfeiting a lot of the goodness this technology brings, right? Faster velocity, faster mobility, lower capital costs, new revenues, and we're focused on things that are very normal when you're applying new technologies. Yes, it's going to cost a little bit more. Yes, you're going to have parallel systems, but all that eventually works itself out as more adoption and more scale jumps in.
So we're very passionate about this. We believe it solves real problems for our members and our participants. You can take control of that. It's the smart contracts that are automating everything, from automation of the CSAs to operational efficiency, and the list goes on and on. So hopefully the industry will find value in it, and the feedback we're getting is very positive.
Yeah, absolutely. I'm very impressed by the amount of functionality that's in the DTCC app chain smart contracts and how robust they are and how many different key operations they can do. And I think people just haven't yet fully realized everything that it can do. And once they realize it, they'll see these massive improvements that we've been discussing.
Well, we're aiming to open up our doors to testing in the November timeframe, so people will have a first chance, because listen, everybody agrees collateral is important. How we're trying to solve it is a little bit differently. We're actually automating collateral operations and everything around it, which is a little bit different from moving a token from one chain to another to post it as collateral. So to your point, hopefully they'll get a chance to hold it, touch it, play with it, and realize that it becomes an important value add in their processes.
And there are already other chains out there, mainly public chains, right? And so the app chain is arriving with this legally binding, better form of tokenized equity than anything else out there. But there are these other public chains, and how do you view them? How do you view the value of connecting them to DTCC's app chain?
So it's no surprise we've opted to go with a private, permissioned chain for collateral management, Base, and the reason we did that — and this is where we partnered with Chainlink — is that we do need to take real-time data feeds, whether it's pricing, it's haircuts, it's all that good stuff. So we just felt that the amount of data we're pumping on these chains could be a bit cost-prohibitive on other private chains. Not all, but some. But we also appreciate the fact that not one chain will rule them all. We also appreciate the fact that other clients may have different use cases that will require leveraging different chains.
So DTCC has announced we're not just exclusive to Base or anybody else for that matter. We are bringing to market a very carefully curated set of L1s and L2s. They need to adhere to a lot of different criteria that are important to us. But at the end of the day, we want to meet clients where they are. And if their chain of choice is Stellar or Canton or somebody else, we could still provide all the support, the operations on Base, and then move these tokens to the wallets of their choice wherever they need to be.
And we'll continue to be open, and this is where our partnership is really important for us, because you do help us with the orchestration. You do help us with tying this infrastructure together, and at the end of the day, this is what it's all about, right? We've proven the technology works. We've proven that old and new will have to coexist, and now it's really starting to bring things together and orchestrate them so they can work together regardless of where they live. Right. And that is the next step of where we're all going to focus.
Yeah, I completely agree with you. So there's users and liquidity in many different places, and I think it's important that the app chain has access to those places to benefit those users, and it grows the reach of the app chain, which is, I think, the way that we've always thought about it and have discussed it with your team. I know that you mentioned that the data is going to the app chain, and that there's also interoperability — like in this case, we had interoperability between the app chain and Ethereum. Just those components of data interoperability and orchestration, how important are those to making this work and to your plans, and how has it been working with us on those components?
Absolutely critical, Sergey. I mean, if we didn't have all these components — multiple L1s, the ability of pushing data in real time, right, and being able to see the valuations — like if we can't do things, and you're very apt in saying that 24/7, 365 risk doesn't go away on the weekends, right? Like clients need insights and to be able to mitigate and hedge their risks whether it's after market hours or on the weekend. And the ability of streamlining all this stuff real time is critical. And again, the chains are really, at the end of the day, where our clients want to go. My concern is to ensure that we're aggregating that liquidity where it makes sense. Don't fragment it.
And interoperability is the buzzword of the day. It has been for a long time, but as an industry, we haven't — I mean, I would say this week we've shown what it's all about, but we do need to push forward. And as you know, DTCC participated in the paper with Citibank and Swift around interoperability. We did the demo with yourself, you just referred to it, that also showed another strand of interoperability. But as an industry, if we want to make this a reality, we do need to solve it. We shouldn't care which rail it's on. We shouldn't care what type of asset it is. We should care that it's interoperable, it's compliance-aware, and that it's operating 24/7 anywhere that a client needs to manage risk.
Yeah, I completely agree with you.
