Episode 134 of the Public Key podcast is here! Tokenization of real world assets is all the rage and we have Chris Tyrrell, Chief Risk and Compliance Officer of Ondo Finance, to share their role as a frontrunner in tokenizing US treasuries. Chris shares regulatory compliance challenges, Ondo’s global operations and partnerships with major players like BlackRock, while showcasing future plans to expand into more asset classes and engage with both DeFi and traditional finance institutions. If you are in TradFi or DeFi, this is the episode you want to listen to.
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Public Key Episode 134: DeFi vs. TradFi: Bridging the Gap with Tokenized Real-World Assets
Tokenization of real world assets is all the rage in crypto for 2024 and Ian Andrews (CMO, Chainalysis) sits down with Chris Tyrrell, Chief Risk and Compliance Officer of Ondo Finance, to share their role as a frontrunner in tokenizing US treasuries.
Chris shares regulatory compliance challenges, Ondo’s global operations and partnerships with major players like BlackRock and how throughout his career he has bridged the inferentrial gaps in conversations when speaking with traditional institutions and regulators.
Chris discusses the significant shift in 2017 that brought institutional attention to cryptocurrencies and explains Ondo’s approach to the compliant tokenization of US treasuries and the planned expansion into more asset classes.
He emphasizes the benefits of tokenization such as composability, rapid settlement and an innovative approach to yield distribution, contrasting it with traditional stablecoins and underscored the importance of robust risk management tools, highlighting the integration of Chainalysis for Know Your Ecosystem risk monitoring.
Quote of the episode
“Know Your Ecosystem. I really think that the way in which token issuers have to think about the risk once their asset starts moving around in the wild is they have to be able to see that risk and they have to take steps to where they can stem that risk.” – Chris Tyrrell (Chief Risk and Compliance Officer, Ondo Finance)
Minute-by-minute episode breakdown
2 | Chris’ journey from crowdfunding, TradFi and changing his mind about crypto in 2017
7 | The benefit of having tokenized US Treasury Bills on the blockchain
10 | Ondo Finance’s global operations and regulatory approach
13 | Managing ecosystem risk and compliance in DeFi assets
16 | Ondo Finance’s strategy for global tokenization of real world assets (RWAs)
22 | Tokenization and institutional partnership with BlackRock
27 | Bridging inferential gaps in Tradfi and blockchain conversations
30 | How Ondo Finance uses Chainalysis tools to balance compliance and tokenization
Related resources
Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.
- Website: Ondo Finance: Institutional-Grade Finance, Now Onchain
- Website: Flux: Lend and borrow stablecoins against tokenized US Treasuries
- Blog: Introducing “Know Your Ecosystem” (KYE): The Next Frontier in AML for Token Issuers
- Blog: Introducing Ondo Global Markets – A New Paradigm for Securities Tokenization
- Blog: Bridging the Gap: Institutional Insights on Tokenization with Ondo Finance
- Blog: North America: Institutional Momentum and U.S. Bitcoin ETPs Propel Crypto Further Into the Mainstream
- Webinar: On-Demand Series: Crypto Adoption Webinar Series: What Drove the Crypto Bull Run in 2024?
- Reports: The 2024 Geography of Crypto Report (Download now!)
- YouTube: Chainalysis YouTube page
Mentioned Episodes
Ep. 132: How Tether is Building Resilient and Decentralized Financial Systems
When we think about the crypto company that has cracked the real world adoption problem and given access to people internationally who want access to the US dollar and foreign currency, we have to describe Tether as being that company. In this episode we talk to the CEO of Tether and CTO of Bitfinex, Paolo Ardoino about what the future of decentralization looks like for finance, communication and the exchange of value.
Speakers on today’s episode
- Ian Andrews *Host* (Chief Marketing Officer, Chainalysis)
- Chris Tyrrell (Chief Risk and Compliance Officer, Ondo Finance)
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Transcript
Ian:
Hey everyone, welcome to another episode of Public Key. This is your host, Ian Andrews. Today I have a special guest for you, Chris Tyrrell, who’s the chief risk and compliance officer with Ondo Finance. Chris, welcome to the program.
Chris:
Thanks, Ian. It’s great to be here.
Ian:
Chris, maybe let’s start with the thumbnail sketch. What is Ondo all about? Because I know we’ve got some listeners out there that probably haven’t come across your firm before.
Chris:
Sure. Ondo is the largest tokenizer of US Treasuries. We’re a Web3 native asset management company, and our mission is to build a more open and accessible financial system by launching institutional grade assets services, and infrastructure on public blockchains.
Ian:
Awesome. We’re going to go deep into all of those things in the episode, but I always like to get to know my guests a little bit better. I’ve done a little LinkedIn profile stalking, and it looks like your career came from the world of traditional finance. You had a long run at Goldman Sachs. Where did you first encounter crypto? What was your entry into this unusual world of on-chain tokenization?
Chris:
Everyone has the why I wish I had bought crypto the first time I was introduced to it story. My introduction was in 2012 and 2013, so relatively early. I was part of the crowdfunded securities movement that helped implement the Jobs Act. I was, in fact, the chair of the trade association for crowdfunded securities called CIFRA, and for early on in crypto’s arrival in Washington, there was this brief period of time where there were a lot of people who were both into crowdfunding and into crypto. And so I don’t remember the exact first time I heard about it, but in that era, 2012-2013.
Ian:
And was the first look at crypto like, oh, wow, this is clearly going to change the way finance works and this is something that I want to be a part of? Or was it maybe a little more skepticism?
Chris:
I really wish I had been that prescient to see the changes that would’ve come back then, but no, it was highly skeptical. I was highly skeptical of crypto. I believed the narrative that it was primarily used for criminal activity, and I thought it was technologists trying to play with money and that it wouldn’t succeed the way it has today.
Ian:
What changed for you? Because obviously now you’re many years into the space.
Chris:
Yeah, 2017 was a big change. I was at Goldman when the 2017 bull run happened, and I think that bull run was really a wake-up to institutional players that there was something different about crypto. It was something worth paying attention to.
And I think 2017 created the context for a lot of the institutional conversations around crypto. I think a lot of them started then. Some people arrived before and some people arrived after, but I really think 2017 was an important moment, and I know it was for me.
Ian:
What was that like being at Goldman? Because I wasn’t in crypto in 2017, but the thing that I’ve learned reading the history was this massive wave of ICOs, and I think about Goldman Sachs as being the preeminent company you want to work with if you’re taking a company public. And the ICOs seemed like an alternative venue to access public capital. Turns out maybe not so legal under American Securities laws in retrospect, but at the time, that seemed to be the plus. Was that what made it seem more legitimate in your time, 2017?
Chris:
No, I think in fact, I think ICOs actually put more risk, if not too much risk on the table because they were, a lot of them were behaving exactly like Securities offerings without following the Securities regs. So I certainly don’t think it was ICOs in 2017 and the wave, a lot of whom, many of whom got prosecuted right after that for having broken the Securities laws. That really wasn’t the interest, 2017 was the first time institutions wanted to figure out what to do with spot crypto and maybe what to do with futures on crypto. And so I think those were the conversations that were really getting started in 2017.
Ian:
And so take us from that moment in ’17 where you’re like, “Wow, this is something I want to be a part of.” How did that lead you to Ondo Finance?
Chris:
Well, so in 2017, or maybe it was early 2018, I forget the exact date, Goldman hired Justin Schmidt, who’s now at Ondo and Justin hired Nathan Allman, the founder of Ondo, and they worked in the global markets division at Goldman where I was a compliance officer and I was their compliance officer.
And so I ended up dealing with a lot of the digital assets things because the way in which it was structured, a lot of the things that were digital assets from across the firm came through the digital assets group that happened to sit in one division, but had a very horizontal view of all the different things that people were thinking about doing in digital assets at Goldman at the time. And so I became responsible for a lot of the compliance work around all of that.
Ian:
You had to have been one of the first compliance professionals to really tackle that challenge I would imagine at that point in time.
Chris:
It was early days, you could have fit the compliance professionals in a small New York restaurant. All of the compliance professionals working on digital assets at that time could have shared a meal together and we wouldn’t have crowded out the place.
Ian:
I would imagine you maybe Noah Perlman who’s over at Binance now could have been part of that table, perhaps a couple of the folks who are at Coinbase now I would guess maybe. What was maybe the craziest thing that you saw that somebody at the firm was contemplating, if you can share? I think we’re beyond the statute of limitations now from 2017.
Chris:
Well, Goldman has a particular view as to how long the statute of limitations runs on the confidentiality of what happens at Goldman. So I probably can’t say, but the things that I thought during that era that got done that were big, kind of the 2017 to 2021 era when we were doing these things at Goldman, the things that I think really shone in that time period were the ECBs bond, the bond issuances that got done with multiple banks, Santander, SocGen, Goldman, a lot of people participated in, that was probably one of the biggest institutional projects to try to do something genuinely on chain.
The futures markets got launched during that time period. CME launched futures on Bitcoin, futures on ETH and real institutional desks started trading those products, including at Goldman. And so I think a lot of them sounded crazy when you first heard about them and you thought, oh, this will never get done, especially if you involve multiple institutions. But a lot of those things did get done, and I think people, institutions were patient with themselves and with other institutions and really worked through a lot of that.
Ian:
Yeah, it’s sort of incredible progress when you look at it retrospectively. It’s not just the crazy crypto winner bull run market cycles. It’s like, no, no, no, there’s been consistent forward progress on a lot of this stuff in that timeframe. So maybe shifting gears a little bit now to Ondo, so you described it as the world’s largest tokenizer of US treasuries. Maybe start with the why behind that. Why does anyone want to have a US Treasury on chain? What’s the benefit?
Chris:
Sure. I think besides speed and 24 7 on chain settlement, I think there are a lot of different aspects of having a tokenized Treasury bill on chain that make it valuable. Composability is a big deal. I think that composability creates new opportunities for utility, some of which you don’t know until you make something composable and put it out into the wild, but once you have an asset that’s composable, it’s compatible with DeFi, it’s quasi permissionless, that’s more than just an asset in TradFi that’s been defrictioned and can settle faster. That’s an institutional grade asset that can be used across a number of use cases.
And we’re seeing our assets used in lending and borrowing, cash management, payments, there’s a lot of uses of the product that are enabled by the fact that it’s composable and on-chain. And then that value of how fast it can settle, it’s not just that you can settle it 24 7, that you’ve got 24 7 mint and redeem capability, it’s also enhanced by the fact that the asset’s digitally native and digitally available. So people might use it in the digital world for a particular thing, but they also might just not move it around in the digital world and just use it as yield-bearing collateral somewhere. So we’re constantly deploying our assets into new use cases.
And then of course, because I’m the risk and compliance officer, I’ll say that the fact that it’s on-chain and that it’s on a public blockchain means that we have more information and more tools to do risk management and compliance over the asset. So the transparency of public blockchains, the provenance of the asset that’s available on the blockchain, that really enhances your ability to do risk and compliance over the assets. So the benefits aren’t just commercial.
Ian:
If you compare it or contrast it to maybe a stable coin like Tether or Circle’s token, how should people think about this as being different, more or less?
Chris:
It’s different in a couple of ways. It’s different in, I mean, the primary difference is that the yield goes to the person holding the token. Most of the yield is not being kept as it is by the companies that run USDC and USDT and other stable tokens that aren’t yield bearing so where the yield goes is different. But it’s also different in that it should change the way people think about using it. So now you’re not using an asset at a cost, when you use a stable coin, you’re effectively accepting the cost of inflation and the cost of the depreciation of the value of that promise.
You’re accepting the risk inherent in dealing with any organization that’s giving you a promise to return you a dollar digitally, and providing you with a stable token and you’re getting something different. And in our case, you’re getting yield and you’re getting yield that’s been designed to be bankruptcy remote, to include other investor protections that are designed to try to keep the asset more safe. And so the compliance and security of what we’re doing are different than stable coins, and we think better for the people who are purchasing the digital asset.
Ian:
Yeah, this is a great point. I’m on the ondo.finance website right now and there’s substantial interest that’s paid to the asset holder it looks like, but I noticed when I click through, it detects that I’m sitting in the United States and it says you can’t go any further-
Chris:
Welcome to compliance controls.
Ian:
Absolutely. I feel like that webpage is probably designed by someone on your team. So where does Ondo operate in the world today? Is it everywhere outside the United States, or is it narrower than that?
Chris:
It’s narrower than that. There are other places where on an asset by asset basis, we’ve done an analysis and determined that we shouldn’t be in particular jurisdictions, but we primarily operate out of the United States, both of the entities that produce assets or in the United States.
Ian:
Okay, interesting. So you’re able to produce the assets in the United States, but the investors or the asset holders are ex US?
Chris:
Right, this is the SEC regulation S, which allows for offshore offerings of onshore issuances.
Ian:
Okay, do you have the ability to control the secondary market? There’s been in the primary stable coin world this conversation about primary issuers and secondary issuers and what’s really happening in the ecosystem with the token. So I had the opportunity to interview Paolo Arduino from Tether recently, and he made the point that they have a very tightly controlled primary market where they’re issuing only to a handful of well-known entities they’ve got standing business relationships with. But then obviously there’s this secondary market that’s large and largely uncontrolled, although they’re now taking steps to attempt to monitor that activity as well. How do you all think about that structure at Ondo?
Chris:
Yeah, I think you use two different words. One was control and one was monitor. And I think when you deal in DeFi, control is not really available to you. People will participate in DeFi the way they want to participate in DeFi, and they will use or attempt to use assets in DeFi. But monitor I think is really valuable. And I, last week or the week before, published a blog on what I think is the next wave of anti-money laundering and compliance work in DeFi capable assets, which is know your ecosystem.
I really think that the way in which token issuers have to think about the risk once their asset starts moving around in the wild is they have to be able to see that risk and they have to take steps to where they can stem that risk. And so we’re working with Chainalysis to start building the tooling that we need to see that risk in our ecosystem.
And I think that we’re in the very beginning of both this kind of expectation that we have that we want to go find that risk and do something about it as well as a market awareness of it, and I think even the beginnings of a regulatory awareness about it. In the recent MiCA legislation on asset reference tokens, there was a paragraph specifically on ecosystem risk and monitoring for ecosystem risk for asset reference tokens. And I think the awareness that risk that occurs in the ecosystem, that people have the responsibility to look at that and find ways of responding to it. I think that expectations going to grow.
Ian:
Yeah, we’ll link to the blog because it was a great write-up explaining the problem and the approach that you all are taking to solving it, which I think is exciting. One of the things that I wonder about is do you actually have the ability to freeze assets? So if you detect say a malicious actor or maybe stolen funds have occurred, are you able to freeze those on chain and potentially recover them?
Chris:
The tooling for freezing assets is different by chain. And there are some chains where there is the capability for a token issuer to do that and some chains where there are not. One of the things, so we’ve talked about our USDY asset as quasi permissionless. And the quasi there is that we can still control where things can move based on the smart contract that moves assets. And there we’re using Chainalysis sanctions oracle to make sure that assets aren’t moving to sanctioned addresses.
Ian:
Yeah, and that’s always the biggest concern for compliance teams given the strict criminal liability associated with sanctions exposure. Do you have a framework on what you consider to be similarly serious? How do you make decisions about is this something that we need to worry about in the ecosystem or is this something that is probably fine and we’re not going to intervene?
Chris:
Yeah, we certainly do, and it evolves over time. We recently refreshed our view on which risks and at which level we consider them severe versus high versus medium versus low. And as you know in the transaction monitoring environment, those have been kind of common procedures that people who do transaction monitoring have gone through regularly. And we do that as well where you set your risk tolerances around specific risks that appear on chain.
So for example, we would treat child sexual abuse material as extremely as we treat sanctions and sanctions related problems. And so you assign a level of risk and a risk tolerance to the various things that you can see on chain.
Ian:
Yeah, that’s great. I’m glad that you’ve got that framework in place. Maybe shifting gears a little bit, one of the things that we’ve talked about is Ondo’s goal to bring more assets on chain. And I’m curious because looking at your ecosystem map on the website, it seems like you’ve got a number of chains that are supported today. I’m sure there’s a roadmap of future chains.
Is there any one that you look at and say, hey, this is really where real world asset tokenization is going to take hold and institutional players are going to show up? Or is the strategy just be in as many places as possible and you don’t necessarily pick a winner?
Chris:
Our objective is to be as omni chain as possible, but because we think access is paramount, but security and compliance are important too and our resources aren’t infinite. So that means we’re not going to be on every chain. So we’re going to be widely omni chain, but we’re going to select which blockchains to make our assets available on based on security, availability, customer demand, and useful utility.
So different blockchains are useful to different users for different reasons. I’m not sure there’ll be just one winner or one primary chain. So we are trying to engage with chains that look like they have a strong user community, some interesting use cases available, some interesting feature sets and the right level of security and compliance.
Ian:
How does Flux Finance fit into the story? I see that they’re connected into the Ondo ecosystem, what role does that play for a user?
Chris:
Flux, which is owned by the Ondo Foundation, is a market where people can lend stable coins against tokenized treasuries.
Ian:
And the separation between the Ondo Finance and Ondo Foundation, so you don’t really have direct involvement in Flux, they’re an independent entity from what you’re working on-
Chris:
Correct.
Ian:
Yeah, got it, okay. But it seems like Flux would likely drive demand for your on-chain assets at some level, I would expect, right?
Chris:
So if there are people who want to buy our assets and then borrow stable coin assets, Flux is what lets them do that. So it’s effectively a feature of our asset that it can be used in Flux.
Ian:
Yeah, yeah, got it. And it’s good to understand, when we talk about tokenization and particularly real-world asset tokenization, you all have started with US treasuries. Do you see that expanding over time? I think like Paxos has had a gold product for a while, Tether just introduced one. Should we anticipate Ondo having a much wider portfolio of tokenized assets in the future?
Chris:
Yes. We’ve spoken publicly about our view of where the tokenized markets will go. It’s a vision called Global Markets would also be a valuable blog to link to if you can, because it really explains where we think tokenized assets are going and how the pipes of the TradFi world and the pipes of the DeFi world will connect together. And Ondo’s going to be a core part of that asset expansion, that infrastructure expansion.
Ian:
And what does it take to tokenize a new asset? I mean, is it as simple as Ondo acquiring some pool and access to the asset and then creating a smart contract that allows for purchase and a mint and burn, if I can be that simple about it or is there a lot more behind that process? And I’m particularly interested maybe from the compliance world where you sit, what that looks like.
Chris:
Yeah, there’s a lot more behind that process, not only technically but operationally. Because one of the other things that makes something institutional grade is the operational rigor around which you handle assets. So the physical security of the assets, particularly anything where there’s something off-chain and something on-chain that need to be connected or reconciled. So it’s building in the operational rigor. And then of course, it’s the legal structuring. In order to be compliant with laws, you have to build in compliance by design.
You’ve got to figure out, I mean, are you offering this asset under reg S, reg D, something else? How are you complying? If it looks like it might be subject to the 40 Act, how are you exempt from the Investment Company Act? And so how are you tax compliant? How are you TEFRA-compliant or other tax rules?
And so there’s a lot that goes into making those choices, making those determinations, creating the legal structures for the assets and deploying them. Creating a new asset is technically can be as easy as creating a smart contract and putting it out in the wild, but there’s a lot that goes behind doing it in an institutional-grade way.
Ian:
Yeah, I’m glad you unpacked that for us, because I suspected it was far more complex than my simple smart contract mint burn function. Where in the roadmap to that that ultimate all assets end up on chain perspective? It feels like we’re still in the early innings of this. What accelerates that? Is it institutional demand? Is it retail demand? Is it technical capabilities that are missing in the ecosystem? What pulls that forward for us, do you think?
Chris:
I think it’s all of those things. I think in the future global markets, there will be both retail and institutional demand. And until those grow, people can’t economically build lots of new products or build the infrastructure that’s required to move those products around in a secure, compliant, risk-managed way. And so as all of those things have to move together, the institutional interest and demand and what institutions need in order to deploy those assets or use them or interface with them.
The retail demand I think is one of the things that will allow people to monetize a lot of what will go on in this future ecosystem as they’re able to take more cost out of retail transacting, but do it at greater scale or allow retail to access assets that they haven’t previously had access to before. And so we are working with many institutions, as you may know, we brought on Ian De Bode who used to be the partner who ran digital assets at McKinsey, who’s been working with tons of institutional players to have a conversation around global markets and around how we’re going to be able to be in the middle of the conversation between institutions about what’s going on as this technology and service offering develops.
Ian:
Yeah, and you’ve established some large relationships with big institutional players like BlackRock. Can you talk a little bit about what that relationship is and how that builds into the strategy?
Chris:
Sure. We’re leveraging some of the features of BlackRock’s tokenized treasury product, which is called BUIDL as an asset that collateralizes our product, OUSG. Some of the things that their product allowed us to do was offer lower minimums, offer lower fees, offer instant investment and redemption 24 7, and provide for the tokens receiving increasing in value based on the value of the underlying assets, basically daily NAV from a technical perspective.
And how do we get there? Well, we originally launched that token in January, 2023 before BlackRock had offered a tokenized treasury product. In fact, it was the first time people could get exposure to US Treasuries on chain, that product. We knew that we wanted to get to 24 7 instant mint redeem because we thought that was necessary to kind of really open up the promise of the blockchain and of tokenizing a treasury. But that’s expensive because you have to maintain large… If you don’t have something behind it that can also be moved into and out of relatively easily, you have to maintain prohibitively high reserves in order to offer 24 7 mint redeem.
And so when BlackRock and Securitize launched the BUIDL token and partnered with Circle to provide liquidity for that BUIDL token, that arrangement was a material advance in where tokens could begin in the whole token landscape. And so that convenient bridge between stable coins and access to real world assets allowed us to improve our product.
And so we migrated the majority of the reserves backing OUSG into BUIDL. We enabled a smart contract that allows for instant mint redeem daily distributions of interest value, the lower minimums and fees that I mentioned. And then we started, sorry, adding multi-chain support.
Ian:
I mean, that seems like a tremendous improvement in terms of capabilities for users. So that’s an exciting advance.
Chris:
And it’s not really just the features. I mean, obviously BlackRock is a huge brand and the value of what they’ve done across the ecosystem I think can’t be overestimated. I think they’ve really brought an expectation in traditional finance that this is the direction of things and that it’s a marketplace that other institutions need to pay attention to. And I think we’ll start to see other institutions coming in over the course of the next 18 months. And I think BlackRock’s participation was a really key unlock to that.
Ian:
Any breaking news you want to share there? Any particular institution that we’ll see partnerships with in the near future?
Chris:
No, I’m going to have to keep you waiting on that one. I don’t get to decide when we talk about our partnerships. So that’s someone else’s job. You have to get Ian on the podcast.
Ian:
I feel like that should run through the compliance team. It’s an important decision. No, it’s totally fine. We rarely break news on this podcast, but I thought I would give it a try.
Chris:
If I have some breaking compliance news, I will call you and we can talk about whether we can break some compliance and risk news, but that’s just not usually done as you know.
Ian:
Yeah, I’m curious about the token holders. We talked about this kind of mix of retail and institutional, and I’m guessing you probably won’t disclose specifics, but when you look across the folks that hold the token today, is it primarily retail or institutional?
Chris:
Because of the structure of our assets, we have relatively high minimums in the asset. And so it leans towards institutional, and we are, but I can describe for you the kind of operator that is buying the asset, it’s a significant market exists for yield amongst crypto native folks that when they have their assets out of the market, want a place for it to be where it’s not depreciating in value.
And so for people who are market participants generally, who want a place to store their assets that provides yield, they come to us, they become our customers, they keep their assets in our products in order to receive the yield while they’re waiting to do something else with them.
Ian:
And that was actually going to be the second part of my question was split between traditional finance versus crypto natives. And it sounds from your answer like it’s predominantly crypto natives.
Chris:
Well, there’s another kind of customer, and that is the traditional finance operator who wants an entry point to DeFi or wants an entry point to the tokenization world. Those are also customers and potential customers.
Ian:
Yeah, interesting. And as you look to the future, do you see or anticipate that you’ll have more and more of those traditional finance institutional players adding the asset to their portfolio? Is that the ideas-
Chris:
We Do. We do. We think that in fact, we’re going to continue to build assets for that customer type as they come into the market, as they bring their own processes and assets on chain, we’re going to be building assets for them.
Ian:
What does that imply from a compliance perspective? What are you doing in your area of the business to encourage that? Because I have to imagine that’s where a lot of these good ideas go to die inside of a TradFi organization is when it hits the desk of the role you used to hold.
Chris:
Right, so there’s a value unlock for compliance and risk management in a company like ours is being able to have conversations with folks who sit where I used to sit in the compliance operation of a large organization, and to answer their questions, to get them comfortable with why we’ve made the decisions we’ve made with the infrastructure that we’ve built. And to provide them effectively with our bona fides. Look, we are building for them. We are building something institutional grade, but everyone knows that people’s view of what institutional grade is is different.
And so you have to prove to these institutions sometimes one document, one certification, one conversation at a time that you’ve done it right and that you’ve built what they can accept. And so I’m involved in those conversations.
Ian:
What’s the hardest question that you get in one of those conversations?
Chris:
The hardest question, it’s not a question, but the hardest thing about those conversations is the need to explain in a very pedantic way what’s actually going on to people who don’t have any experience in blockchain or crypto or DeFi. And there’s this tendency that I used to joke about at Goldman to end up in a metaphor, and the metaphor always breaks. The metaphor is never perfect.
And so someone who’s only thinking about the construct of what you’re doing in terms of the metaphor will generally get it wrong. And you have to eventually get out of metaphor and be talking about the actual facts of what’s going on. And there’s so much baseline knowledge. One of our colleagues, Brennan Flores, who’s a managing director here, loves to talk about inferential distance. And so the inferential distance in those conversations is very wide, and that makes it so much harder to communicate.
When the inferential distance is wide, you have to explain a lot more, and there’s a lot greater opportunity for misunderstanding around context. And so I think that’s one of the most difficult things about a lot of the conversations that you have with TradFi compliance and risk personnel is just they haven’t spent a lot of time with this yet. It may be just coming on their radar now for some of them.
Ian:
Yeah, so those conversations I would imagine may often start with technology basics. Here’s how blockchains work, here’s what a token actually is, and here’s how it’s exchanged between parties. Are you at that level of-
Chris:
Sometimes it’s that level of pedantic, not all the time, but sometimes it is. Sometimes it’s here what we’re actually doing. And what you usually don’t start with is the tokenized part. The conversation usually starts with, here’s the legal and compliance structure of the thing we’re dealing with so that you can see that it is something that you’re used to dealing with. It just has this tokenized form.
Ian:
How about the regulator side? I mean, we touched on earlier, right now you can’t offer to people in the United States, but I would imagine you’re dealing with regulatory authorities all around the world. Is it a similar level of start from the beginning and carry people through your legal structure, your compliance posture, technical details of what you’re doing? Or are you finding that there’s organizations in particular countries that are maybe a little more sophisticated in their understanding?
Chris:
Sometimes, but much more rarely are you having the very basic conversations because most regulators that have significant interest in the space have hired specialists, have trained teams. Last week at a conference, the New York superintendent said that they think they have the largest organization of 60 people who specifically address digital assets at NYDFS.
Ian:
Yeah, this is Adrienne Harris. She’s fantastic.
Chris:
Adrienne Harris, yeah, and so there are plenty of organizations around the world, and they don’t have 60 people in their digital assets division, but they have a few who, many of whom know very well what they’re talking about and have a deep understanding of the technology and try to keep up with it and come to the conferences and engage.
Ian:
Yeah, care to make a prediction on when your platform could become available in the United States?
Chris:
So we do have a product available in the United States. I want to make that clear.
Ian:
Okay, great.
Chris:
OUSG, our permissioned product that can be used on Flux is available in the United States. That product is permissioned. It’s a limited partnership interest. It’s offered under Regulation D, and it’s a fund, it’s an exempt fund, and people can invest in that.There’s an on-chain white list, and you can only transfer it to addresses on the white list.
Ian:
Oh, interesting. It looks like looking on the website that I need to be an accredited investor in the US in order to participate-
Chris:
Not only do you need to be an accredited investor, but you need to be a qualified purchaser, which is a higher bar than an accredited investor.
Ian:
I see, okay. And how do you restrict the addresses that the token can be transferred to?
Chris:
Once we’ve finished the KYC onboarding process for a customer, we’ve asked them to submit addresses, which we screen with Chainalysis tools, and once we’ve accepted the addresses, then we white list them.
Ian:
I see, okay. So as a token holder, I’m able to supply, these are my counterparties or likely trading partners that I would want to move the asset to, you then screen determine there’s no risk there.
Chris:
Well, no. Those counterparties would also have to on board with us.
Ian:
I see.
Chris:
Would have to go through our KYC process, so there’s no… One of the constraints of that asset is that everyone who touches it has to go through our KYC process. There’s no distinction in the KYC, so to be transferred, someone would have to have gone through our KYC process.
Ian:
But the token is on a public blockchain. Everyone can see these transactions.
Chris:
Correct.
Ian:
Okay, very cool. I should have done my research a little bit more closely and realized the distinction between the two. I clicked on one and was shunted off to the page that said, not available in the US and I gave up too quickly.
Chris:
I think a lot of people don’t realize that there are different assets designed for different customers, including different jurisdictional availabilities, different ways of transferring them, different technologies behind them, different compliance and regulatory requirements. And I think that’s going to continue to persist.
I think people are going to continue to, I think the number of assets is going to continue to expand and some of the confusion about which assets can be available, where and how the certain technologies around assets work is going to grow.
Ian:
Yeah, well, maybe that leads us to a great place to wrap up the conversation today, which is give us your view of the future around real world asset tokenization. What does this look like over the next 18 months?
Chris:
This looks like expansion and growth, significant expansion and growth. We are now on eight chains across all our products, and we’re seeing new use cases on a regular basis for our yield bearing assets. I think the growth of the industry is going to expand significantly over that 18 month period in terms of new use cases, new asset types, new services, new participants, including new TradFi participants.
As I said before, I think BlackRock opened the door, and I think other institutions are going to step through it.Thanks so much for joining us today, Chris. This was a fantastic conversation.
Chris:
Thanks for having me Ian, really enjoyed it.