Hi guys, welcome to the Fintech Coffee Break, I’m your host Isabelle Castro. This week I shared my coffee break with Ralf Kubli from the Casper Association to talk about real-world asset tokenization.
Seen as a tool to improve efficiency and accessibility to financial instruments, real world asset tokenization is set to be a trillion-dollar market. Despite the ‘crypto winter’, multiple instances of alleged fraud, and the US’ regulatory stonewalling of crypto companies, businesses continue to invest in the infrastructure.
But Ralf feels we could be headed for disaster due to the way assets are tokenized. For him, “The real prize is in the tokenization of financial obligations of cash flows over time. “
Confused? I know I was, which i why I had to get him on the show.
Isabelle Castro 0:00
Thank you for coming on. Thank you for making the time. So, to begin with, what gets you up in the morning?
Ralf Kubli 0:12
Oh, I am increasingly more concerned about the stability of the financial system. So I think it’s all built on 50-60 year old technology, which may crumble at any given time. So,
Isabelle Castro 0:27
okay, so there’s a little bit of anxiety there that gets you up in the morning and gets you going. Okay, so tell me about your career journey to the CASPER foundation.
Ralf Kubli 0:41
Yeah, thanks. So well, I, I studied in ancient times, I studied history and Business Administration. And because historians didn’t have a lot of hours, I started coding HTML at the time, you know, mandatory classes, so I had some, some time to spend. And so that was pre web two, almost, I would say, and in the 90s. And after that, for unknown reasons, to me, I stopped coding HTML and be involved in the web, even though some of my family members who were in technology suggest that I should do only that which I didn’t follow their advice, unfortunately. And then I spent a career in in large companies for a while until 2016 1516, when I when I came across this blockchain technology with ether and and Bitcoin, and I really started to understand how fundamental this will change how economies will function in the future. And I wanted to get involved. And I kind of felt I was given a second chance, after I had missed the first revolution, you know, I spent, instead of, you know, being in a high flying.com company, I spent, you know, time and pouring industrial firms for many years. And I felt I was given a second chance. So I did everything I could in order to get involved in blockchain industry and join the venture capital firm. And then after, after that, I, I now joined a few boards, including the CASPER Association board.
Isabelle Castro 2:23
Okay, cool. Well, it sounds like it all kind of went towards this end goal thing. And you’re in an industry that you love. After talking to you, I realised that. So where are we with asset? tokenization, particularly real world assets?
Ralf Kubli 2:44
Yeah, that’s a great question. So I think real world asset tokenization is kind of a misnomer. When we talk about tokenization, we really think of, I think of financial assets that are tokenized, which many people do, and then of course, tokenization of a Picasso or a car or a machine or a house. It’s kind of difficult to do, right? So how would you break down a house, which is very complex, in all its digital characteristic in a digital form, in order to characteristics right would be very difficult to achieve? Right? So that is, in when you’re talking about physical assets, or, you know, assets that really exist in the, in the in the physical world, I guess it’s more of a question of how you tie the representation on chain to the real to the real thing. But of course, what we are really passionate about and what we are working on is of tokenization of financial assets, so streams of cash flows, that is what we’re working on, and we’re making good progress.
Isabelle Castro 3:49
Okay, so how does it work? How what’s your approach?
Ralf Kubli 3:55
So, as opposed to many other you know, currently existing applications, we believe that you have to start with a clear definition of the financial instrument in an algorithmic representation or form right. So, we clearly define what we call the financial contract, which is the agreement between the parties on the exchange of cash flows over time, that needs to be clearly defined in mathematical terms, by the way that is defined in mathematical terms right today already. We all sign agreements when we lease a car or when we you know, when we sign a mortgage for a house, it is clearly defined how we pay interest how we pay principal, you know how we amortise principal, but the problem in today’s world it’s not standardised. So we build everything we build on an open source algorithmic financial standard, which basically represents the agreements between the parties on the cash flows, they define these cash flows deterministically and Back then is represented on chain in a what we call a smart financial contract.
Isabelle Castro 5:08
Okay, cool. And you guys are kind of closely linked with ACTUS, the algorithmic contract types, unified standards. This is an area that was already in place. I think it was started after the financial crisis of 2008. Tell me about this, and how it links with Casper and where you’re going with it.
Ralf Kubli 5:35
Okay. Yeah, so ACTUS is the algo, as you mentioned, is the algorithmic contract type unified standard as ACTUS. It’s an open source algorithmic financial contract standard, the difference between actors and other standards that exist also in the financial world is that it gives you access defines a data model. So 130 attributes, but it also defines transition function, which means you know, it clearly defines how is an interest rate calculated? How is a rate reset calculated? How is principal amortised? In an annuity? For example? If you look at the swap, how will the swap bit you know a swap that exists that consists of two bonds be constructed mathematically consistently. So the active standard is the result of the financial crisis of 2008, there were a number of individuals who were at the storm. So at the centre of the storm, both regulators people that were modelling large banks, risk managers, and actually capacities, academic capacities and risk management. When they got together and said, you know, we really have to solve this this problem. You may or may not remember, and some of the audience surely remembers when they’re interested in fintech. In the, in The Big Short in the movie, right, so these individuals that were building these models, by reading all the contracts that existed and basically determined that, you know, certain assets were terribly overvalued, or terribly undervalued, and then placed bet against those. That basically is the purpose of the act of standards to make visible to have a granular understanding which can be aggregated at any level of the cash flows that exist in these financial contracts.
Isabelle Castro 7:34
Okay, so this is something that’s already existing and you’re just bringing it on to blockchain.
Ralf Kubli 7:41
We’re bringing it onto chain. Yeah, we think that you have to start with finance first, which is we start with ACTUS. And then we combine this understanding of the financial contract with the unique capabilities of blockchain and what what does blockchain bring to the table here blockchain brains when you think about the smart contract definition of Nick Sabo, which is it brings observability verifiability. And these two conditions enable to enforce they bring enforceability as a consequence. And then next up also defined the conditions for a smart contract as the fourth condition was privity which meant privacy that also of course, is brought by blockchain only, you know, people that have that are authorised to look at something should be able to look at something. So you, you take this unique property and understanding of a financial contract which exists in finance, plus we add this blockchain component, what I just described, and then we are talking about smart financial contract, not just a smart contract, but the smart financial contract, which basically then represents on chain, the obligations of the party, when they have to pay what they have to pay what conditions they agreed to, in case of, in case of a rate reset, for example.
Isabelle Castro 9:04
Yeah. Okay, cool. I mean, real world asset tokenization is quite a difficult subject for a lot of people. You mentioned that there’s another approach like putting the physical assets on chain, kind of why are people going with the physical assets as opposed to these financial contracts?
Ralf Kubli 9:29
Well, people actually, you know, do tokenized financial contracts, right. I think they are just not doing it the right way. They should start with real clients first, and that’s why we start with actors. And, you know, I think it’s it it’s easier to think of a fractionalized Picasso, right or a fractionalized, very expensive car as an asset class, then, then it is to think of a single mortgage Being tokenized and leaving in, in financial, you know, rails or on new rails, right? Although we have to say I mean, that’s what currently, many banks are working on. And, and also many companies, right, there’s a lot of tokenization platforms etc. And they always claim to make illiquid assets more liquid, which, which we agree in principle with. But we also, our deep conviction is that if you in the case of financial assets, if you do not know, the cash flow streams, and if you have no efficient way of understanding the obligations of payments of the parties, in a machine readable and machine executable form, which is what we’re proposing here, then it will be very difficult to generate liquidity for these for these assets, regardless, what the asset what the underlying asset is. And, and I guess, in the real world, it’s just, you know, more interesting or more sexy to tokenize some rare car, you know, then, you know, then to think really hard about what it takes to tokenize trillions and trillions of debt. You know, the other aspect maybe Isabel is important to understand. So, when you look at tokenized financial assets, I mean, you know, USDC is a is basically a tokenized currency or money market funds depending so, it’s cash and cash equivalents, right. So, we have tokenization of cash already today, right representation of over cash. And, and to further however, you get away from a cash like nature, so, when we move away from, from both hard cash or commodity to representing streams of cash flow, which is that, for example, is a stream of cash flow, then, then there was no progress made so far right, in the last four or five years, people have tried to tokenize that. And they have failed to find the market for it. And we believe it is not only the infrastructure that is missing, but it is also the understanding the granular representation in a machine readable and machine executable form, which is preventing people from from reaping the benefits and scaling of tokenized financial assets, because they are missing this link to the granular understanding of the cash flows.
Isabelle Castro 12:37
Okay, I’ve got a couple of questions from that. But I’m gonna go with this one, the first one, there has been kind of predictions that tokenization is going to be a trillion dollar market by 2030. Given the current landscape, the current regulatory things like literally taking a snapshot of now. Do you think we’re on track?
Ralf Kubli 13:04
Yes, I do think we’re on track. We are potentially headed for disaster. But I still believe I still believe we can turn it around. Why are we on track. So as I described, I think cash and cash equivalent in instruments will be represented, you know, on DLT, permissions or public environments, there is there’s little doubt about that, there’s just too much efficiency to be gained. And that alone is a huge market, right? That is really, really large. Also, you can see that equity, like instruments also start to be represented in tokenized form, I think it’s not as interesting, but it also has a lot of efficiency, right? So when you look at what some of the large private equity firms are doing, some fund managers, they clearly understand that, you know, having a distributed ledger that records things simultaneously, ownership simultaneously is very, very efficient, much more efficient in comparison to what exists today. informed management, right, so this, this will happen. I just believe that on the debt side, and quite frankly, the world runs on credit, on the debt side, the understanding of the requirements of a standardised financial contract, which would then give us assets interoperability consistently, not just through the lifecycle of one instrument, but through the lifecycle of many instruments that can that can be interchanged. And that can be built upon each other. That understanding is not yet there, which is why we are also promoting the open source algorithmic standard actors, right. So this is this is the key. So I think we’re on track for large scale tokenization but in that Markets in order to benefit from efficiencies in the middle office and back office, you need to have a truly digital representation of the financial instrument and that currently, in my opinion can only be achieved by using this ACTUS standard.
Isabelle Castro 15:17
Okay, and because it’s not happening, this is why you say that we’re potentially headed for disaster.
Ralf Kubli 15:25
Yes, we are potentially headed for a Belkin iced you know, financial asset, solid financial system on these new rails, right, all these new DLP rails, which potentially is much worse than what we know today, because if you think about it, let’s assume that Blackrock issues a bond, right, a tokenized bond, and some programmer sits down and programmes this bond, right, the representation and maybe the cashflow obligations of some parties. And then, you know, tiro price does that. And you know, Fannie Mae does it and you know, other issuers start issuing bonds like that. And they all sit down and define these instruments, based on whatever they understand they would want to programme or what they think they should programme and then that will result in a really chaotic environment, because we, we then not only have to understand new programming languages, but we also have to understand each individual contract, it will be impossible to create efficient markets, you know, if we do not have a standardised definition, and deterministic standardise that deterministic standardised definition of the cash flow obligations in a machine readable and machine executable form. If they’re all different, we will have no efficiency whatsoever.
Isabelle Castro 17:00
Okay, yeah. My next question was going to be about the interoperability because this is a new technology, there’s a new rails, but the financial system already has old rails that have been dying for centuries, and then you’ve got assets and then you then then this tokenization is supposed to be improving interoperability between those assets. I mean, how do we get around this whole new technology being separate from the other and create this interest?
Ralf Kubli 17:37
By starting with the cash flows? And the cash flows are the only thing that matter? Right. So if we agree on how the cash is flowing, then it doesn’t matter whether a financial asset lives on his horse or on on, you know, on Polygon, or on Casper or on Bitcoin or on ether, it doesn’t matter where these contracts live. They are become interoperable. When we agree on what are the cashflow obligations of the parties, according to the contract, and if we want to be efficient, we need to have them in machine readable and machine executable form and they need to be standardised.
Isabelle Castro 18:18
Okay. Cool. That is a very strong stance, and I like it. So I’m moving to my own questions. Like before we move on, I just wanted city in March released a report which had a prediction that tokenization would reach mass market in about six to eight years. within that timeframe, maybe even before within the next five years. What is your outlook for tokenization? Where are we going?
Ralf Kubli 18:52
Yeah, so I think I think the first people to reap efficiency of tokenization or some of these fund managers, they’re doing this now, right? Just administratively. That’s the first those are the first winners. I think equity tokenization overall, is completely irrelevant. I may make a few strong statements here. So people can you know, leave comments. I think I think tokenization of equity is the fantasy of lawyers that are always concerned where there’s equity is, when you look at the efficiency of equity markets, you don’t need tokenization really you don’t and then, for me, hopefully we really move into into debt tokenization which can be scaled because we have a granular understanding of each individual obligation. I think the other item maybe that I want to contextualise here is look, I do believe that blockchain is the single most important technology in finance since the arrival of or since the introduction of computers in banks. And the industry knows that they all Working on this, some banks more or less, some regulators more, you know, all those less, I think this is very clear, I think where we are incorrect and where we really have to be careful is innovation in payments has been mistaken as innovation in finance. And, and this is where this error comes from, right? Just because I have a more efficient way of paying also with, you know, CBDCs, also with tokenized, you know, stable coins, etc. Just because I have that innovation doesn’t make finance more efficient, you have to really think, How can I make finance, you know, it’s not finance, it’s payment. So, finance is the exchange of cash flows over time payments is the exchange of cash right now. And that that is that is where the, that is where the key lies. And this is why we’re building on the act of stumbled.
Isabelle Castro 20:56
Yeah, I can see this kind of underlies everything that you guys are doing. So before you go, I’ve got two questions. First of all, what is a piece of advice that you have been given that you would be that you would give to someone else? This can be about anything?
Ralf Kubli 21:16
Yeah, so.
So the so the, what I’ve missed, right, in 1995, which is leaving university and going all in on the web. You know, that advice I didn’t, I didn’t hear so I had to wait another 20 years for this technological revolution. So my advice is, if you’re convinced about a deep, fundamental technological revolution, you should really go for it.
Isabelle Castro 21:48
Okay, I like that. That’s really good. And really necessary for all of these technological developments that we’re having. Now your curveball question, how would you explain tokenization in three sentences to an eight year old child
Ralf Kubli 22:14
three sentences.
Isabelle Castro 22:15
Yeah. Well, you could do three words, whichever is easiest.
Ralf Kubli 22:28
Okay, so imagine a digital toy that you can send and gift to anyone.
Isabelle Castro 22:39
Okay. I like that. Okay. Anyone around the world? That’s pretty good. anymore. Oh,
Ralf Kubli 22:48
that was really challenging.
Isabelle Castro 22:51
Yeah, no, it was a difficult one but it was pretty I think it was pretty relevant to conversations. I appreciate it. How can people get a hold of you follow you follow Casper?
Ralf Kubli 23:06
The best way is to Well, I mean, I publish on LinkedIn so if you personally want to follow what I my thought leadership and so on is always published on LinkedIn. And then of course, Casper is Casper.network, the website and what we’ve just discussed in terms of in terms of capital markets, innovation and finance, you will find on nucleusfinance.com.
Isabelle Castro 23:31
Okay, cool. Thank you so much for your time. Thank you for coming on. I’ve really enjoyed having you.
Ralf Kubli
Thank you.
RELATED: Open finance and financial contract tokenization – A crossover to supercharge markets
Isabelle Castro
As always, you can reach out and chat with me or my personal LinkedIn or Twitter @IZYCastrowrites. But for access to great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook or Instagram. You can also sign up for our daily newsletter bringing new straight to your inbox. For more FinTech podcast fun, check out the website, where you can find more fascinating conversations hosted by Peter Renton and Todd Anderson.
That’s it from me. Until next time, enjoy your downtime.
