What's Holding Back Crypto Tokenization | Forbes - video Dailymotion

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Steven Ehrlich, the director of digital assets for Forbes, joins "Forbes Talks" to discuss why crypto tokenization is failing despite having top-tier backers such as Goldman Sachs and McKinsey.

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00:00 Hi everyone, I'm Rosemary Miller here with Stephen Ehrlich, the Director of Digital Assets

00:08 here at Forbes, here to tell us about why crypto tokenization hasn't gained much traction

00:14 after nearly a decade.

00:16 Thank you so much for joining me today, Steve.

00:18 Thanks Rosemary.

00:19 So Steve, as I just said, crypto tokenization hasn't gained much traction after nearly a

00:25 decade after much development and support from top tier backers like Goldman Sachs and

00:30 McKinsey.

00:32 Why is that?

00:34 So tokenization really is kind of, I would almost say it's the great white whale of crypto.

00:42 It's as you said, it's been around for almost a decade.

00:45 To just quickly define it, it's the idea of creating digital representations of various,

00:51 what's called like real world assets or RWAs on top of a blockchain, be it Ethereum, Polkadot,

00:58 Avalanche, Solana, what have you.

01:01 And the idea behind tokenization is that by putting these assets on a blockchain, which

01:07 runs 24/7, 365, with near instantaneous settlement, these assets can become much more liquid,

01:14 it can be much more divisible.

01:16 So theoretically, you could take a share of a private equity fund and let someone purchase

01:21 it at a much smaller entry price than before.

01:25 And sort of this liquid utopia would just usher in a new era of financial wellness.

01:32 That's kind of like the flowery outlook on it.

01:37 And it's been talked about for years, been going all the way back to 2015, 2016, when

01:42 sources of major banks were leading nine figure fundraisers to create blockchain platforms

01:49 that purport to act like real blockchains, but don't have the tokens and sort of the

01:54 anonymous nodes on top of them to facilitate everything from high finance structured products

02:02 to tokenizing gold and liquid assets like treasuries to even tokenizing shares of stock.

02:12 But back then, I mean, those were pilots, those were POCs, some of them were successful,

02:17 they were all announced to great fanfare, but didn't really amount to much.

02:20 And I think honestly, starting this summer, when BlackRock announced that it was issuing

02:27 or trying to issue a Bitcoin spot ETF, tokenization all of a sudden became a big thing again,

02:33 where exchanges like the London Stock Exchange, banks like Citi and JP Morgan, HSBC, and the

02:40 list goes on and on, are now doing token projects again.

02:45 And I wanted to kind of look at the canonical history of tokenization to just see if anything

02:51 was going to be different this time, because we've been having prognostications of billions

02:54 of dollars of impact from tokenization for years, and it just has not amounted to much

02:59 yet.

03:01 So what challenges and debates have held back the adoption of tokenization in the financial

03:05 sector?

03:07 So this is a really important question, because there's a few.

03:10 I mean, for one, the industry still hasn't agreed on what types of assets are the best

03:17 candidates for tokenization.

03:19 I mean, right now, the best or most successful application of tokenization is in stablecoins.

03:27 These are digital dollar representations on top of blockchains.

03:31 I think the total market cap for those is somewhere around $120, $125 billion, two thirds

03:37 of which is run by a somewhat shadowy outfit called Tether.

03:42 And these tokens are primarily used to help facilitate trading in offshore exchanges,

03:48 so not exactly the type of economic value that we're all looking for.

03:52 In 2018, shares of a hotel in Aspen, Colorado were tokenized and sold, but that was kind

03:58 of seen as a poster child for I think what not to do and is seen as a bit of a joke in

04:03 the industry.

04:05 Some people are trying to tokenize stocks and treasuries and very liquid assets, and

04:09 there's questions as to do you really need a blockchain to do this?

04:12 And then for some of the more structured finance products like nine figure, 10 figure bond

04:17 issuances, for instance, those have proven to be successful in kind of pilots and POCs

04:24 and closed off controlled environments.

04:27 And that's all well and good.

04:28 The math on tokenization, the idea of moving something from a T5 settlement to a T0 settlement

04:33 or near instantaneous settlement makes a lot of sense.

04:36 But then the trick becomes, OK, it works under this environment with perfect conditions.

04:41 How do we make it interoperable with every other bank and every other central bank doing

04:46 the same thing?

04:47 We can't just have a web of silos.

04:50 There has to be ways to communicate for assets to move from one platform to another.

04:54 And that's a big hurdle, I think, for a lot of institutions to overcome that are already

04:59 skeptical of sharing tech stacks with with some of their competitors, because you have

05:06 to find a way to make this interoperable.

05:08 The buzzword I keep hearing is secondary market liquidity.

05:10 There has to be a resale market for all of this stuff.

05:13 Otherwise, banks and institutions aren't going to want to keep that under balance if they

05:16 can't offload it, if they can't lend it, if they can't sell it.

05:20 And that's a huge problem for that use case, which I do believe is the best use case for

05:24 tokenization.

05:25 So why does it still seem so far from becoming mainstream?

05:33 It's really funny.

05:34 I hosted a panel last week in Barcelona at the European Blockchain Convention on tokenization.

05:41 Interestingly, I hosted it about an hour or two after the story published, which led to

05:46 some led to a curious discussion.

05:50 There are some on the panel that debated whether or not like eight to 10 years is a fair amount

05:55 of time to judge a technology.

05:58 I mean, they pointed out how the Internet took decades to develop.

06:02 They point out how Bitcoin itself just celebrated its 15th birthday yesterday on Halloween night

06:09 and crypto is still looking for its use case.

06:12 So they they pushed back a little bit on the contention I made that tokenization has had

06:19 a long enough runway to show some results.

06:23 But at the same time, I just at this point, I don't think it's a technological problem.

06:28 I think the technology to do this is well and good.

06:33 It works.

06:34 It is available.

06:36 It's more of like a game theory, economic, political issue where you need to corral all

06:43 these institutions.

06:44 And I'm not just talking about private finance institutions.

06:47 I'm talking about central banks, because for any of these instruments, there needs to be

06:51 a tokenized electronic form of a dollar, a euro, a yen, what have you.

06:58 And that either means tokenizing private deposits at commercial banks or issuing digital central

07:06 bank digital currencies, all of which has to work.

07:08 And that just a lot of projects in the past failed because companies could not agree on

07:14 a tech stack and then find a way to expand it.

07:17 And I'm not sure that this current incarnation of startups has found the code to crack that

07:25 problem just yet.

07:28 So what exactly needs to change?

07:30 What exactly needs to change for it to be widely adopted?

07:35 So I think, again, there's two things that need to happen for this technology to be widely

07:40 adopted.

07:41 There needs to be some sort of agreement on the right types of assets that should be tokenized.

07:48 Not everything that can be tokenized should be tokenized.

07:51 And I think the lowest hanging fruit in that realm is probably like Wall Street, like very

08:00 expensive structured products, because at the end of the day, I mean, I was speaking

08:05 with a lawyer earlier today and he kind of put it in a very succinct, nice way.

08:10 All that these banks want is a way to quickly clear and settle instruments amongst themselves.

08:15 I mean, that's really what they're looking for.

08:19 And then it just comes down to picking up the tech stack.

08:22 There's a couple of different flavors for this and banks and institutions are testing

08:27 it right now.

08:28 I mean, one, there is the permissioned approach where there are these, I guess I would consider

08:34 to be private blockchains where they operate sort of like Bitcoin or Ethereum.

08:40 They have no tokens because only authorized nodes, authorized participants are allowed

08:44 to join these networks and they all kind of work together to clear and settle trades.

08:49 And there's no need for a token because they don't need that economic incentive for for

08:55 pseudonymous entities around the world to work together towards a common aim.

08:59 They're already doing that and they know each other and the benefits will come from the

09:02 cost savings and efficiency improvements.

09:07 That's one element of it.

09:09 The trick, at least for that, is, again, getting everybody to agree, getting everybody to trust

09:14 each other on a piece of infrastructure, which is harder to do than you would think.

09:19 I mean, for instance, JP Morgan years ago created their own platform called Quorum and

09:24 they tried to get banks and institutions to participate.

09:28 And they basically scoffed because why would we trust JP Morgan with commissioning critical

09:33 infrastructure for us?

09:34 It actually had to be kind of allowed into its own separate entity.

09:37 And we're going to kind of see what happens with that.

09:39 On the other angle, there is a bit of a growing movement to try to do some of this on public

09:45 blockchains like Ethereum.

09:47 Avalanche is another one which has some sort of subnets where you can create like a sort

09:52 of a public private hybrid separate entity on these blockchains and therefore you don't

09:59 have to necessarily trust one entity with it and you get a lot of the efficiency and

10:03 throughput improvements that are promised by blockchains.

10:06 But then the question there becomes, OK, risk departments at banks will have to do with

10:11 that.

10:12 What I'm trying to say here is like your question was like, what needs to change?

10:16 The industry is still wrestling with the same questions it wrestled with years ago.

10:21 There's more context behind these questions, but it's still like, what are the best use

10:26 cases and what are the best tech solutions?

10:31 And this sort of like endless parade of pilot projects hopefully will get closer to that

10:36 answer.

10:37 It needs to for tokenization to succeed.

10:39 Well, thank you so much for joining me today, Steve.

10:43 Thanks, Rosemary.

10:44 Thank you.

10:45 Take care.

10:45 [END]

What's Holding Back Crypto Tokenization | Forbes

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