Trading U.S. Stocks and Bonds On-Chain Is a Reality

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1:31Hey, guys. Welcome back. We've got a great show for you today. Tino Lehe's, co-founder and managing director of Swarm, is with us. And Philip Piper, co-founder and CEO of Swarm, join us. Guys, welcome to The Daily Briefing Crypto. Thanks for being here. It's wonderful to have you. Listen, we've got a lot to talk about, a lot happening in the news cycle. But before we do that, I want to take a look at price real quick. Let's check in with Bitcoin. Bitcoin down on the trailing 24-hour basis, about 3.5%, 3.64 % on my screen. Seven days off about 6%. Significant decline there. We're going to talk about that in just a second.

2:06Ethereum down about 3.5 % on a trailing 24-hour basis. Seven days down about just over 4%. There's a lot going on in these markets here that I want to talk about that I think is important for people to understand in terms of what's happening. Spot trading volumes at Binance have been cut in half, down nearly 50 % in April. This is according to data from CC data as reported by Coindesk. Coindesk also reporting that spot trading volumes more generally on centralized exchanges have fallen over 40 % in the last 30 days. So some substantial declines in trading volume, decline in liquidity. I also want to zoom this in to something that happened yesterday, talking of volume and liquidity issues.

2:47as you can see there on that chart from Bloomberg. Just as we were wrapping up the show yesterday, Bitcoin plunged about 5%. It dipped below 27 ,000 briefly, just as we were wrapping the show yesterday. I want to read this quote by Bloomberg to inform exactly those points. While trading volume surged during crypto markets first quarter price rebound, a closer examination shows that volume is the lowest in several years after a series of industry scandals, bankruptcies, and tightening. Here's the point that's really interesting that Bloomberg is reporting. That has led to a pullback in activity from Jane Street Group and Jump Crypto, two of the world's top market-making firms.

3:27Is that a quote from Bloomberg? A lot going on here. Bitcoin right now on my screen, 27 ,139. Ethereum, 18.06. Listen, we've got a lot going on. We've got Mean Coin Mania. We've got the aggregate market cap of BRC20 token surpassing$1 billion for the first time. Guys, before we get into what you guys are doing at Swarm, because it's very interesting to me, I'm always interested in regulated products. What's happening right now in the markets overall? Yeah, I think there's a couple of things we're seeing. I mean, you know, there's obviously a bunch of stuff going on with Bitcoin, which is kind of, let's call it a new type of activity that we haven't seen before.

4:07So it kind of started out with the, you know, the ordinal kind of implementation and that phenomenon. And then, you know, BRC20 kind of building on that. And then all of a sudden there's like this whole conversation about like what Bitcoin should be used for and why and why it's kind of having a little bit of its crypto kitty moment now is kind of, you know, take us back to 2017. Exactly. Something similar happened to Ethereum at the time. So, yeah, I think there's like some some kind of, you know, effects of that nature that we're seeing. And then obviously, but I think the bigger factors are what you just described with, you know, the reduction in liquidity out in the market.

4:41and it just becomes absolutely much more volatile as a result of that. So I think those are all contributing factors. Very well said. Let's define BRC20 token for folks who may not be familiar with that particular bit of jargon. Obviously, this is a Bitcoin-based blockchain, and it is a standard fungible token that is being used for ordinals and other types of projects. Let's talk a little bit about what some of the use cases are there. How do you guys see BRC20 tokens more generally? you know we haven't built on any we haven't built on it at all it's obviously very novel um i think we want to kind of take a little bit of a wait and see approach there uh to see kind of where that you know where that goes um you know i think we're you know we we actually left the ethereum network for polygon um about a year ago uh just because we had issues with the gas fees on ethereum so we've already kind of made one move into an environment where transaction and fees were lower.

5:36So I think we're just going to kind of sit and wait and see what happens. What I'm surprised about is the number of BRC20s that have been created. I read a number yesterday that there's like 7 ,500 BRC20 tokens being created or something of that order, which sounds like a very high number. I'm not surprised that there's a lot of activity that's kind of bogging down the network right now. Well, you know, it sort of reminds me about what we're seeing here in Pepe, obviously, which has been pretty volatile, crashing 70 % from all-time highs. rocketing up, rocketing down. These just in many cases seem like technologies in search of a use case.

6:12Is that too cynical, guys? Yeah, I think first of all, let's BRC20 first of all. I think there's another comment to be made. I think it's the first time that actually the Taproot chain has actually sort of been in function and actually at volume. And I think it's very visible right now that it's actually sort of disrupting a lot of the sort of the way that Bitcoin actually works. And miners are celebrating this, right? because there's an additional minor revenue. But I think that, you know, a lot of the basic use cases of actually transaction fees being too high are being disrupted. If you look at, you know, people from El Salvador that suddenly have, you know, for any kind of$20 transaction, they incur$20 in transaction fees.

6:52That's obviously not healthy to actually sustain sort of a functioning blockchain for which the Bitcoin blockchain has been built now. So I think there's a there's a general conversation amongst the communities to have, like how useful that is. but you know what it's it's it's fair game everyone's playing around and i think there's you know an extension of nft mania last year i think there's just a a new discovery that is being made and now we have to test how that's going to play out from a community perspective but also from a you know from an appeal perspective what it really delivers over time uh with meme coins i think you know we've always seen obviously seen you know everything from doge to shiva and everything So how could we have all missed Pepe as a main meme in the space, right?

7:35I think it's pretty phenomenal that now it's coming up. It has its certain communities that are following this. And, you know, I think in a market that had much of Sidewars movement, it's obviously something that is welcomed by, you know, people to play around with. So, you know, it's another gamification of, you know, of something that the space loves. whether that has long-term value or not is up to decide for the communities to engage there. So, yeah, we'll see. But what exactly, like talking about Pepe, what exactly is the use case here for a coin with five leading zeros before the decimal point, other than to sell it back to someone at a higher price than you paid for it?

8:15I'm not going to give you any kind of additional use case because I don't see one, but I think it's fun. I think it's something that people then decide that they want to be entertained by and just basically sort of, you know, kick back and forth. And then there's people that benefit from that. But, you know, whether that actually fulfills its use is a big question mark. But, you know, it's a space that is sort of, you know, that's a culture aspect of the space. And, you know, we'll see whether that actually sustains over time. I don't think it's going to be something long term. Yeah. Anybody need to add, please?

8:47Yes, I have like one observation is like, you know, I kind of met the Doge community manager, if you will, about a year ago. And his view was basically like, well, you know, once there's sufficient kind of interest and momentum behind, you know, a meme coin, that's when you can start forming a community and actually start doing something with it. So there's almost like, you know, there's like a reverse order of things here where there's like first you drum up a bunch of, you know, activity and hype and attention around a meme coin. And then maybe, maybe somebody has like, you know, the willingness to kind of create like a direction, which is interesting to people and then create some use out of it.

9:24But it's like, it's all very kind of obviously speculative at the beginning. And it's very uncertain that anything tangible will come out of it at all in the end. So in other words, you build the community, you build the market capitalization, you build the awareness, and then in theory, you graft on a use case once you essentially have a kind of critical mass. I mean, I guess the only question I would have for that is, has that model ever worked in the past? Is there an example that we can point to to show a success from that model? No, I think there's like, I think Doge is the one that came the closest so far, but I think the answer is no.

9:58Yeah. Listen, talking of which, it's really interesting to me what you guys are doing, because in many ways, what you guys are working on is the opposite end of the spectrum from where meme coins sit. This regulated markets, the idea of tokenizing actual assets that are securities and then trading them in a way that is regulated under, in your case, German law. But tell us a little bit about the project. What do you guys do? How did you guys get into this and what problem were you looking to solve? So we started engaging in the space in 2015-16 and we're sort of sideways observers and a little bit of investors in the space but actually from the get-go both Timo and myself had backgrounds in the financial markets and we were basically always thinking about how to use the single source of truth that the blockchain offers as well as the instant settlements to actually improve things in the financial market.

10:50So from the get-go, we're looking at sort of how to do tokenization of different values that are off-chain. Today, they're called real-world assets, but over time, they were called security tokens. They were called digital securities, all sorts of different names for it. Obviously, that was not something that was doable in certain regulatory environments. And then, you know, long story short, actually, then in 2020, suddenly Germany came along and actually became a very forward leaning, very holistically defining jurisdiction of what you can do, not just with utilities, utility tokens and with payment tokens, but also with security tokens.

11:26And so we jumped all in and said, well, what if we could bring real world assets that are known, that are basically valued outside of the blockchain ecosystem and make them one part, one Lego piece of the world within the blockchain space? So basically turning them into Lego pieces that are usable within DeFi and, you know, that are available for those people and those communities that are used to actually working with the blockchain and with wallets, etc, etc. So we just launched actually sort of, you know, a couple of months ago, we launched actually the ability to tokenize any kind of public stock and bond.

11:58We started with Apple stock and with, you know, Tesla, as well as we got a few T-bills. We're now extending that by another set of seven different, you know, securities. But, you know, the goal here is actually to bring collateral and to bring assets into the space that obviously then are usable to either back stable coins or to be available as investable units when someone wants to sort of escape the crypto volatility. So it's just another piece in the puzzle that I think is going to be quite critical. And it's obviously going to bring new use cases to these securities. And other way around, it's going to bring DeFi and trading models that we're used to in blockchain, maybe to security trading.

12:37Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

12:46So let's talk about what you guys have already done, because it's incredibly interesting, the tokenization of real world assets. I don't know why they chose RWA. It sounds like risk weighted assets to me. Terrible acronym. But let's talk a little bit. This is an industry thing we should point out, not a swarm decision. But let's talk a little bit about what you guys have done in terms of tokenizing Apple stock, Tesla stock. And I believe the bonds that you've tokenized, and correct me if this isn't right, you've tokenized essentially ETFs that traded. I think it's the iShares U.S. Treasury bond zero through one year and iShares U.S.

13:19Treasury one through three year that you guys have tokenized. Correct. And I think like one of the key aspects here was like, well, certainly against the backdrop of 2022, it's very important, like how you actually implement the real world assets on chain. So, you know, how do you ensure that there's a transparency all the way through from, you know, whatever number of circulating tokens that are out there is actually matched by a one to one mapping to a real world assets in the underlying whatever like custodial environment you have. So we chose to build it in such a way that, like, basically, we have Apple shares and Tesla shares and other and these bond ETFs sitting in an institutional brokerage custody account.

13:57And then against that account balance, we're then issuing the number of tokens that, you know, for which there are a number of shares outstanding. We're issuing the number of tokens on chain. so it's basically with the idea that anyone could at any any given point in time go and verify that the underlying assets are there which we think is super important given like what happened last year and all the kind of the issues around collateral um you know not being there or not having the expected value what have you where here we have like completely uncorrelated well i shouldn't say completely by and large uncorrelated you know assets that have very deep liquidity on the other side so if you look at it like basically the way that we kind of think about this is like the digitization of public stocks and bonds basically provides a 24-7 capability to trade and settle instantly set these trades right so that's really cool like you know instead of looking at trading hours you're actually looking at a 24-7 global market so that that's kind of one of the main benefits and we think that that's one of those like enabling layers that would just like who knows where that's going to end up in terms of benefits going forward i just think that this is like this is the direction that the market must take you know and and while this is happening you know through the stuff that we're building you know the kind of the trad fi industries is working towards t plus one you know to be implemented next year uh at least in the u.s and then we'll see what happens with the rest so i think very exciting space uh to be building something completely new in and you know we're focusing a lot on like you know both being a regulated counter party but then also providing a trust structure for how rwas are kind of proven to actually be backed by the proper underlying assets and not just some balance sheet or some derivative or some you know game theoretical price action so those are really key elements and then yeah we have some other pieces in that flow as well that are that are important such as redemption flows obviously so if i hold a token how do i know that i actually have access or have the right ownership right to the underlying asset and then so by redeeming you can basically prove that well So why don't you just redeem your token and then see what happens?

16:00And then you get either the underlying asset itself or you get the economic value of the underlying asset sent to you. So that's how people can kind of verify. There's a lot to discuss there in terms of the implementation. But I just want to say, before we started the show, my producer, Archer, and I were batting around some ideas about why you'd want to tokenize assets. Because I think that is a question that people do ask unironically. Like, it's interesting, but why do you guys want to do it? And sort of in my list was basically 24 by 7, 365 trading of all assets all the time. The ability to have instant settlement and execution.

16:31Infinite fractionalization of assets. You can trade these in any size, in any fraction of a whole. Atomic swaps and collateralization. The ability that you can tie assets together in a way that we couldn't before. And of course, the ability for better or worse to create an infinite variety of synthetic structured products around these types of assets. But before we get too into the weeds here in terms of the potential future use cases and the opportunities here, I want to talk about exactly how you're implementing this. The devil is in the details as always. Talk a little bit about what you do in terms of ensuring that transparency to people who want to invest in these products.

17:10And also explain a little bit how the functional mechanics of this works. I mean, the assets themselves the underlying assets are not traded on chain uh so there's always going to be some sort of delay uh between uh between the execution and of course the clearing and settlement of those assets how do you manage those risks and how do you provide transparency so that uh so that people who are investing get what they believe they're getting so let's start actually with a lot of the trust elements because i think um timo sort of touched on sort of the um the the separate you know, issuance happening in a dedicated entity that is structured to be, you know, very, very much insolvency proof.

17:50So even if you if you hold a token, it's very much like a depository receipt that allows you at any point in time to actually go to the central custodian and actually say, I want my stocks out or I want them to be liquidated or I want the redemption to happen. Right. So this is critical because it's actually making this independent from us as an organization, us as individuals, us as actors, albeit we are regulated, which is another security layer on top of it, right? So we effectively went the extra mile to actually not just be qualified to do the issuances, but also to be qualified to do the trading and to do that actually under purview of regulatory views.

18:31So that's, first of all, that's a full stack of things that we can go into detail of, you know and you know basically that replicates itself on chain we have basically um you know transaction ids that are tapped into the issuances we have something called ky a where you have know your assets data that is connected with the tokens which then actually gives full conclusive transparency of what's what's actually this linked to who are the the participants that are in this whole equation participating in different roles etc um but then again also So if you go actually to the issuance site, which is all linked on our site, you can actually go and drill down even into the individual stock purchases.

19:11And, you know, it's all the documents are, you know, they're displayed live. We're still working on actually getting direct access into the system of the central custodian, which then actually, you know, number one, we can offer to the customers then directly or over time then potentially actually have other people verify that, not just the auditors, but also other people actually holding the token audit that too. So it's probably a very different quality of transparency that we're aiming to build here than has happened in the past. And it's challenging because, you know, some of these systems are not built for that kind of access and are basically very hard to get into and actually make that data available in the most unbiased fashion.

19:50So let's talk a little bit about how the functional mechanics of this works. I'm curious how you guys handle price discrepancies. Do you guys have to hold cash buffers against volatility in terms of price changes? In other words, if you get an order where someone's buying the token, you have to step into the open market and buy the stock. If there's a delay between when those two things can take place, for example, it happens after hours. How do you manage those price deltas? Yeah. Go ahead, Timo. Okay. Yeah. So initially, because this is like the, let's call it the early days in this market, right?

20:27So we decided to basically prime the pump by just making balance sheet purchases to put out some tokenized stocks and bonds in order to basically demonstrate how this works and also that it works. We thought there was a lot of value in just being live with something that people can basically onboard and kick the tires with. And it's not some conceptual thing talking about, you know, stuff happening in the future. But it's actually something if you have a MetaMask wallet, you have a Polygon, you know, access. And then you have, you know, a bunch of coin there, USDC. Then you can actually go and buy the digitized version of an Apple share and try it out yourself.

21:03So that was the purpose of this, like, first phase. So let's just call that priming the pump to show how this works. now in order to scale this now comes the next phase which is really to look at like okay so who are the market makers and the other institutional participants that we want to have part of this like you know ecosystem to make sure that there's basically sufficient participants that would want to have take on the role of basically you know making money off of the you know on-off trading hours situations and price discrepancies that happen and the way one of the ways that we're handling that today is basically by ourselves.

21:37It's just by removing and putting in orders that follow basically the trading hours in the TradFi markets. So basically every morning we basically issue new DOTC orders on our system. So it's a decentralized OTC ordering system. And then you can just go and buy those tokens at that price that we've set on that particular morning. That's a pretty crude way of doing it. We're basically updating it every day, and basically managing it ourselves. Next step of this is definitely institutional participation. People want to move from traditional equity market making into managing these price discrepancies on chain and off chain.

22:14And so that's the natural next step of this. And also let me add one thing. I think one thing that people misunderstand often is that you don't need to build the depth of liquidity that actually matches the depth of liquidity of the financial markets as long as you actually have the time closeness of actually doing the redemption on the financial markets, which means that if you, Ash, say, OK, I hold one Tesla stock and the market is open and I press a button and I request a redemption, it should trigger actually the immediate execution of that sale, get confirmed and even get the financing of the two, two and a half days of redemption before the settlement actually happens already done.

22:55So you can actually right there and then you can actually benefit from having an immediate settlement. That means that you don't have to build the same kind of depth and liquidity on chain that actually already exists in the financial market. So it's more that managing that whole bridging between traditional finance and the DeFi markets is going to be key. Hey, everyone, we're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

23:25That only works, presumably, if you can keep the time delays very short, which means that you can only do it effectively during this phase, at least during hours when the market is open. Otherwise, you wind up accumulating de facto long or short positions relative to stock, depending upon whether it's a buyer sale. Correct. Yeah, really interesting. So tell us a little bit about who your customers are and who you want to serve in this market. Yeah, so one topic actually, and you had an excellent list that you listed up in terms of benefits there, and we subscribe to every one of them, and some actually being more valuable than others.

24:00But one item missing on that list is obviously composability, which means that, and you're sort of touching on it with this synthetic portion, right? But I think composability is a big, big step here, right? Because, you know, once you have these Lego pieces that can then be used to actually drive other derivative products and those products being built on a smart contract, you know, in a transparent fashion, that is a big deal. So give you an example. If you actually have, you know, a sort of a Ustis fund that is driven out of Luxembourg, you know, that, you know, basically has a very simple allocation of category investment.

24:37So you say, okay, 25 % energy and 50 % tech and whatever. And then you pay, you know, 100 basis points or something like that to the administrator that does that. There's no actually active management there, but you still incur a lot of cost. Well, that kind of, you know, that kind of fund structure can be put into a smart contract. There's no challenge there, right? So at that point in time, there's a huge amount of material benefits that actually users and consumers of these kind of assets can get down the road in creating new things. And by the way, then coming back to the customer question, there's a whole range of customers that have the need in today's market.

25:18So it starts with backing of stablecoins, where we've seen obviously that stablecoins that have been backed by only crypto assets have had a great challenge in certain market situations to actually sustain the value. And we've seen projects like MakerDAO already go in the direction of so-called real-world assets, incorporating some of those T-bills, but more in a much more static process. And the same applies to trading organizations that want to escape volatility. So far, they go mostly into USDC. Well, they could actually go into T-bills that have stability, but also have four and a half, maybe 5 % of return that they can actually rehab while they're exiting the market from a volatility perspective.