Podcasts Between2Chains B2C0041: The Future of Digital Asset Securities (w/Jerald David and Rayne Steinberg)

Episode Summary

Jan 25 2022 . 54 MIN

B2C0041: The Future of Digital Asset Securities (w/Jerald David and Rayne Steinberg)

In this week's episode of Between2Chains Rayne Steinberg and Jerald David of Arca join host Peter Hans to discuss digital asset securities and the emergence of the Blockchain Transferred Fund (BTF). They discuss the invention of the mutual fund, the innovation of digital asset securities and how both lend to the newest pooled investment vehicle innovation.

Show Notes


In this week's episode of Between2Chains Rayne Steinberg and Jerald David of Arca join host Peter Hans to discuss digital asset securities and the emergence of the Blockchain Transferred Fund (BTF). They discuss the invention of the mutual fund, the innovation of digital asset securities and how both lend to the newest pooled investment vehicle innovation.




1.     Peter starts the podcast by asking Jerald about his background and some of the things he did before getting into the blockchain space, as well as how he got interested in this asset class.

2.     Rayne and Jerald explain what they do at ARCA labs and how it was established.

3.     Rayne explains why tokenized securities are not traded by regular broker-dealers.

4.     Jerald shares his thoughts on the automatic trading system (ATS).

5.     Peter inquires of Jerald about the market's next move and the next big catalyst or event that we may anticipate in this market.


NOTE: Following transcript is generated using AI. Minor errors might be present.



Welcome to the real vision Podcast Network.



Before we get going, we want to remind you that Jeff Dorman is the co founder and chief investment officer of ARCA funds. And Peter Hans is ARCA funds managing director. The commentary and opinions expressed in this podcast are solely those of the podcast participants and do not necessarily reflect the opinions of our funds or its affiliates and are subject to change for any reason without notice. Any discussion of investments or investment strategies within this podcast are for informational purposes only, and not to be construed as a recommendation to buy or sell any particular investment security, digital asset or strategy. Investing in digital assets involves a high degree of risk and volatility, including the risk of the total loss of principal and now enjoy the show with your host Peter Hans.



Hi, everyone, this is Peter Hans. Welcome to this week's episode of between 2 chains. I'm joined by Rayne. How are you doing?



Hey Peter nice to see you again,



always and a new guest this week and someone who I've gotten to know over the past couple years in this space. Jerald David, who is incredibly knowledgeable has a background in more traditional finance and working with broker dealers and exchanges and is doing some some very interesting things on the on the innovation and security side. So, Jerald JD How you doing?



Hey, Peter, great to be with you. And I'm sorry that I've missed the show the past? How many now? 20-30? How many of you don't?



Don't know, this is this is season two. But it's been a few. It's been a few of them.



Great. Well, hopefully I'll be up.



sophomore slump. In season two, we don't want to downfall. So quality high.



We will we will we will definitely try our best. It's a JD before we start, why don't you just give the audience a little bit of your background some of the things that you've done kind of pre entering the blockchain space and then kind of how you got involved in this asset class overall.



Totally Peter, thanks. Um, so I actually come from the infrastructure side of the business and really more of the derivative side. So more CFTC land and SEC land. And I kind of grew up at the NYMEX. But many years there was really fortunate that you know, how they made this organization, I was allowed to do some really cool stuff really allowed to work on, you know, product launches on bringing different services to market, you know, kind of being involved at a very early age and doing things like demutualization and IPOs. And just really, really neat stuff. And after creating clear port, which was the first time really that, you know, kind of the over the counter brokers and the exchanges really were cooperating together in order to drive liquidity to a central clearing house. Essentially, OTC clearing was the first initiative, I spent a bunch of time working in setting up the divine Mercantile Exchange the DME, and then ultimately moved to Dubai to run that organization. And that was a joint venture between the Government of Dubai, the government of Oman, and then also the NYMEX at the time ultimately the CME Group. And the goal there was to create a Middle East sour crude oil benchmark for trading of oils. So essentially, the thesis there was if 80% of the world's proven reserves come from the Middle East, why is it that the majority of the trading takes place off of a benchmark in the North Sea in the form of of Brent crude oil, or in West Texas in the form of WTI. And we successfully worked with the Omani as they pledged their crude oil, we created a futures exchange that 15 years later is still up and thriving in the Middle East and the DIFC. So left that kind of came back to the US, after living in Dubai for three years, helped create a joint venture between several of the banks, Morgan Stanley, Goldman Sachs, JP Morgan, and others. Some of the IDB is some other private firms. To create a carbon exchange, I did the very same thing ended up moving to the UK launched that exchange and then ultimately exited that and sold that back to the CME Group. And it was around that time that I started getting involved in FinTech and then ultimately in blockchain, in around 2015, I was working with a company that was creating one of the first ETF applications, and it ultimate ended up becoming submitted and then was transferred to DAC. And at that point, the CME hadn't even launched derivatives contracts. In fact, they were working on creating their index for settling that product. So that index proceeded the actual listing of the derivative by a full 12 months. So helped work with, you know, kind of the team of the CME, ultimately to get that push through, because it was very important for us to have believe it on a futures based ETF that's what we thought was gonna get approved first, and that's ultimately that ETF application was spent some time working on in exchange for two years here in the US, and then ultimately, about almost two and a half, three years ago, found my way to ARCA and you know We're working with Rayne and yourself and the team over here to do some pretty cool stuff.



Interesting. So there's a lot there. Congratulations actually never heard most of that before. So from the, you know, I guess, I guess, you know, talking about Dubai Mercantile Exchange to, you know, carbon trading and transferring to kind of getting directly involved in kind of the blockchain space. What, what was the catalyst that drew your interest over there?



Yeah, it was, most of the things that I'd worked on in my career revolved around pivotal moments and change. So clear point that I mentioned before, it was transformative for the way that markets worked, created, creating, you know, a futures contract a DME, and then ultimately, again, at the green exchange, again, was very transformative. We created things that hadn't existed previously. And when Ryane and I were talking about, you know, joining ARCA, that's precisely what we were talking about, which is how do we, how do we plan and anticipate you're creating a business knowing that the future itself isn't really settled, and there isn't really a path forward. And if we're going to be creating this business, some parts are very clear, like creating Asset Management arm. But the idea of ARCA Labs was very much, you know, kind of a blank canvas and arco labs itself, you know, kind of has a broad remit and the remit itself, and it originally was in the creation of the first BTF. Right, the blockchain transfer fund, and in creating that BTF essentially, what ARCA Labs was doing was testing the limits of regulation and understanding how it is that we could utilize blockchain technology in order to enhance products that are created under the 40 yard.



Yeah, can I also just do first.



entered before you go right, just escuse what I take a step back here because, you know, a lot of this is going to be new, you know, frankly, it's new to me. So a lot of it is going to be new to new to the the audience it real vision. What, you know, I think, pretty much everyone unless you're living under a rock, this area's familiar with ARCA and what you know, Jeff and his team are doing what is ARCA labs with you know, that JD runs and how, how do you both kind of envision it?



Sure. Let me start with first, ARCA Labs is the innovation arm of ARCA, where we're where we're really working to combine or utilize decentralized ledger technology blockchain technology to enhance or create new products. Initially, the focus was on asset management products, where our expertise was and that was the genesis of our coin, and the ARCA US Treasury funds. So the first is JD said the first blockchain transfer fund, we look at this as a just for the audience, a blockchain equivalent of an ETF. So an ETF like structure that settled and traded on the blockchain. Sounds simple, very easy to say, ton of devil goes into the detail. And then just for people to think about this, what was so exciting when JD goes through that very impressive, you know, long list of accomplishments and places that he's worked and things that he's done, the thing that really immediately resonated with me, was the Dubai Mercantile Exchange. And this is what we're talking about, when we're talking about something like the blockchain transferred font or doing anything in the regulated space, where we're here to talk about securities, you know, on this call, and what what does that mean for digital assets, digital securities, what's going on there? The idea of somebody of JD's experience at the time, going to Dubai, being given an incredibly broad portfolio over a strategically important, you know, somewhat a vitally nationally important resource like oil, tons of different competing political entities, stakeholders, people that would win or lose competitors having to work together, all these things to balance these types of things where you'd actually have to create a two sided marketplace where one didn't exist, this is one of the hardest things to do, especially when there were analogues like Brent crude, West Texas, where you're only getting a marginal benefit by pricing off of the local asset. So you're having to convince everybody where there's this very strategic, well entrenched system that works to create this new one with a benefit, but it's going to be in the distant future, dedicating a ton of assets and resources now might fail, and lots of downside and working together. So that experience that was for me, of all the people that we talked to the best analog for what we were trying to do at Oracle labs, especially on the BTF product, which is create something that's like the ETF ecosystem where you have authorized participants for doing creation, redemption, broker, dealer, market makers, this whole infrastructure that makes ETFs so efficient, people just buy and sell ETFs they don't understand all the the backend that goes into it. recreating that in the digital space, so decentralized on blockchains in a murky regulatory environment, We still need a lot of unaffiliated people participating to make an ecosystem. What he did in Dubai was, I thought, the most interesting and immediately correlated experience that I had ever heard. And that's why I was so energized to speak with them. But then also, when you look at the timeframe of how long it actually took to do in Dubai, to set it up to actually get the things set up, and then I forget when it was JD, when we talked about when the when they actually started pricing off the contract. How many years after you actually got done there? What was that number



it took us about? It took us about 12 months to lock down the Omani is to get that tight, like to pledge their oil, it's actually price off of a brand new exchange, yeah, in price discovery that they basically took 98% of the work their economy out of their own hands,



right. And these are very long tail things that you do not have certainty of success, and you really need commitment, and drive to drive it through. That's what we were talking about. I'm on labs with that first project of our coin, which is still there are regulatory questions that still need to be answered before it can be, you know, really utilized the way we want it to be, you know, in a liquid trading environment, all sorts of things like that. But you need somebody that's bringing together this diverse set of ecosystem participants had a history of doing that did similar things at the green exchange, but I thought that experience at Dubai in that strange a little bit strange environment, you know, unknown unknown unknowns was, was what we needed. And that's what we've seen happen. So that's, that's the way I think about it, for labs and what JD has experienced contributes to it.



Yeah, and rain, you know, there are two things that I thought about, as you were just mentioning that and thank you, for all the compliments are totally unnecessary. But there are two things that, that you mentioned that I that I just immediately, I had clicked as parallels. Right. You know, the first one is that, you know, kind of at the DME, much like, I would say, probably with the BTS structure right now, um, you know, woman ought to be, you know, very successful. The other one, obviously, we're, you know, kind of working in nurturing. And, you know, we'll be successful over time. That's the BTF. But the difference, I think, are the similarities between the two are the following one, I think that we were early at the DMA, as well, which I kind of believe is the conventional wisdom here. And then the second thing, which I think translates very well, is that education is paramount now, right? We're dealing with a part of the world whereby futures and derivatives weren't, you know, Brent customary. We're bringing, you know, educate, we're educating folks and bringing them involved to get them to participate in a brand new market class. Again, very, very similar. There are challenges and risks that were solved, which were, which caused it to go the regulated route, as well over in Dubai. So there are a lot of similarities now that I think about it after having this conversation. So you know, three years later, about, you know, kind of what we did in Dubai, and how that was playing out here at ARCA



interesting, there's a lot there. Again, I've said that a couple of times already here. And I am going to probably keep like walking it back. Because I think I think the risk here is is, you know, this this asset class is is confusing enough and new enough, right. And what we're touching upon here is an entirely separate element of the asset class and that, you know, everything I tend to think about and focus on every day and especially in this show, is the investable opportunities that are born as a result of Bitcoin allow Bitcoin shit, Blockchain allowing for you know, digital assets, in essence to exist on a cap table, right and to be used for all sorts of various purposes. But, you know, creating kind of that investable entity with you and Rayne essence talking about with you know, you mentioned the acronym BTF. Or just basically like for those that don't know, a blockchain transferred fod, right, where the blockchain basically just serves as the transfer agent, the custodian of some sort of find a vehicle or some sort of some sort of asset. But it is, in essence, not dissimilar from like an NFT. Right, like the rapper, in which something is contained. And, you know, one of the things that, you know, that kind of runs, I don't want to say parallel to the overall asset class that is unregulated is like, there is a regulated portion of the asset class and you can have, you know, blockchain and digital assets, or you can have digital securities, which are, in essence regulated securities that are just digitized. I mean, how much of this is what you're thinking about and focused on every day? JD,



uh, all of it, and all the time 365 hours in a day. So, um, I, I, I think that that's right, Peter. And I think that when I think about, you know,



it's, there's less hours than that.



Yeah.24 hours,



24 hours, okay. It's very detail oriented, don't worry about it.



I think that kind of what you're mentioning upfront is really kind of important, right? And it's a differentiation digital assets and tasks. Security. And I think that's one of the places where a lot of people get tripped up. And I think that, you know, kind of people look at the equations, if we say that all digital assets, and all digital assets are just securities, that's not the case, all digital asset securities are digital assets. But the former is not true. And, you know, kind of the, you know, for us, there's two different types. Obviously, there's public and there's private, when you're dealing with, you know, kind of a public digital asset security, what you're really talking about is a security that has an element of blockchain that's interwoven into it, right. So when we talk about things like the BTF, the BTF, differs primarily from an ETF exchange traded fund, simply because blockchain is involved in the delivery of the digital asset security to the subscriber.



Yeah, let's I want to, I want to just focus for a second, though, on security versus non security. And just when we're talking about size and importance of things. So right now, the vast majority of the digital asset ecosystem is either not a security or a security that is not contemplated security, the regulator's may say what you thought was not a security security. So that is the vast majority, you know, the several like two and a half trillion dollars or whatever word that is there, and then the size of the digital securities market. At the moment, it'll acid securities market is like almost a billion, and even in that is only made up of like one or two or too large issuances. So the scale is completely different. And all the energy right now is on digital assets. When you look at the traditional world, it's obviously flipped. All the things that we think about are in the hundreds of trillions, you know, global equities, bonds, things like that. And then when you talk about institutional demand, and what they need, that there's when people talk about institutional adoption of digital assets, and when are the institutions going to come with, there's a huge swath of institutions that cannot actually participate in the vast majority majority of digital assets, because of the lack of clarity of if they're securities, if they're not legal rules. So they're actually intimately interested in the expansion of digital asset securities, that gives them clarity that they can invest in. So I just wanted to frame it up for people, while most people on your show are very interested in the investment, you know, prospects or you know, the performance or how digital assets can be used in companies. There's a whole, vast, vast realm of institutional investors that can even participate in that area because of the lack of regulatory clarity. And a lot of the things that can be done by digital assets, if they were made securities, and conformed to securities law, or eliminated the gray area, or regulators eliminated that would actually open up huge swaths of capital. So I just wanted to frame that. That's what we're talking about. So securities laws, regulates, you know, securities offerings, which have certain characteristics that the SEC has said, this defines it. And not everybody in our space is conforming to securities laws, even though they should, what we're finding out is that the regulators are taking a lot more close attention to this asset class, and are, you know, starting to opine on things that weren't necessarily securities before. So where this small kind of unknown little piece, because of the difficulty of dealing with it, all the energy being over here, is going to grow in size and importance. And I think your audience would actually be interested, though, in it as it grows in prominence over these periods. I know that was long winded, I just wanted to give some people some ideas.



Yeah, but the issue right now is just that, you know, you're talking about digital assets, securities, that the infrastructure isn't set up basically to like comply with the regulation, right, because these are, these are not assets that are custody and settled in the same way that traditional assets are. And so broker dealers, I would imagine, like largely don't really know what to do with that. And, and then by the same token, like all the exchanges, and you know that transacting digital assets don't have securities listed because then they'd be like, basically unregulated exchanges offering securities correct. So, so I'm actually surprised that you say it's a $900 million bargain because I like me, I can't even figure out what that would be. And, and like, what, what do you think needs to happen here?



So I think they're a couple things. So the first, you know, point, Peter, to your to the question you're raising is that that $900 million at market cap comes from the aggregate of about seven or eight different ETS is that have been licensed through FINRA that are trading SEC registered securities and the listings are not necessarily get below Look at the the market cap is Ryane said before, when you're talking about, you know, 3 trillion versus 900 million, with the leading asset being about $200 million in total market cap. So we're talking about a relatively immature market to begin with, and the ETFs that are out there, I think are, you know, highly regulated register and operating in a very efficient manner. But I do think that the one of the things that, you know, kind of we've predicted, you know, an Arca for 2022 Is that the ATS themselves will receive additional credible listings, and those additional credible listings will then bring additional liquidity to the marketplaces, and generally speaking in the form of financial institutions, because I don't think that it's very likely that, you know, kind of a blue chip financial institution, Citibank, Goldman Sachs, Morgan Stanley, is going to be trading on finance us initially, right? My suspicion is that, you know, kind of, they're gonna crawl before they walk and walk with a run. And to me, that path looks very closely aligned with something like, you know, kind of offering existing vehicles to their clients and offering access to CME futures first, and then ultimately figuring out what products they want to offer digital twins, so taking some offerings they have from their private banks or other different offerings, and then creating a digital equivalent of that, and instead of offering a share certificate offering a digital asset security to them. And then ultimately, our belief would be that as those level of comfort, comfort takes hold at the banks and large scale financial institutions, that as these credible products continue to be listed, specifically ETFs and other products like that on these ATS, it'll gain the attention of these banks, these asset managers, these large scale institutions, which will then generate liquidity on the ATS's.



An ATS. What does that acronym stands for?



Automated trading system.



not blockchain specific it just be anything essentially.



Yeah, these are generally speaking, centralized institutions all off chain, and all, you know, registered with FINRA,



and automated just meaning like literally, they're just matchup bids and asks like, like anything else, there's just no human market makers, things like that



central limit order book, you know, market makers, market participants all full AML KYC, basically, a, you know, kind of registered, registered, registered exchange, where buyers and sellers will meet each other, but ultimately, you know, kind of there's a level of oversight by an agency.



How do traditional, how does NASDAQ view that that market,



it's interesting, one of the places where one would have expected in thought that you would see additional activity within the incumbents. And you did see something originally happening with nicey in the form of backed, which originally started as an exchange, but seems to have morphed now, you know, kind of in what their mission is, I believe there is still a central limit order book component. But I think the model has shifted a little bit, but generally speaking, but generally speaking, the the folks that are, you know, kind of creating these, these alternative trading systems are generally upstarts, and their names like t0, INX, Oasis pro markets, sim bridge names that you're probably not very familiar with.



And why do you think that is?



Um, I think there's both. So I think there's two reasons for that. First of all, I think the regiments are very complicated, right? If you take a look at the other side of the equation, when you're dealing with registered trading, right, that would be in the derivatives market. And there's really only three or so derivative markets that have been created right, outside of the CME Group, there's FTX. Now, which bought ledger X, and Coinbase, has recently acquired another DCM at a DCO. So there's really only three different three different venues right now that are out there for derivatives trading, when you take a look at the securities market. I think that folks are looking at the total addressable market size, I think they recognize what the opportunity is. And I think that's the main reason why you're seeing so many folks that are clamoring in the space, because they recognize that, you know, you're talking about all the traded volume at noisy all the traded volume at NASDAQ, that ultimately over the course of time, is going to become securitized and digitized. So I think that people are taking a look at that addressable market there and saying, hey, you know, kind of let's, you know, let's figure out how it is that we could get a slice of this pie.



So why concern for maybe these are stupid questions? Why would a traditional, like broker dealer not trade tokenized securities? or have any Is it just because literally, they don't have the infrastructure to be able to custody them? Is it because the fees aren't high enough? Why Why would they not be as involved?



I think there's a whole host of reasons. I think the first of which is really kind of maturity and liquidity. I think that's the first thing. So if you take and then we'll get to infrastructure, which we'll do with custody and all those different elements that are out there. But um, when I take when I when I think about liquidity, I think about the conversations we're having with broker dealers and others that are out there, like generally speaking, if you're going to invest, you know, kind of in building out a desk, you're more likely to invest in building out a desk or about there's real opportunity right now. And markets are choppy, and there's tons of liquidity. And I'd say liquidity both in you know, trading on the ETS, as well as the over the counter market. Right. And I think that what you're seeing right now, at least, is that folks are waiting for credible offerings to land on the ATS's, and once those credible offerings are there, you're gonna see a bigger movement. Now there's all folks who come in to different places, Peter, right, they can come in on new products, like things that we're creating an orca labs, or they could come in, you know, kind of, as I mentioned before, this format of being a digital twin, whereby there may be a fund that's out there already, and it may already have, you know, kind of shareholders near you a minute, and then ultimately, you could transfer that into a digital format and list that on an ATS. Now, that would help a lot right, in the respect that you would have a credible instrument, it would have built liquidity, he would have, you know, Aum in the fund as well, if that's the structure you're taking, and I think that that would be a big advancement. The second reason, I think you're not seeing a ton of movement, really, you know, kind of from the broker, dealer community, is education. As I mentioned, I think that there's a broad based misalignment amongst market participants as to what digital asset securities are. And I think that generally speaking human nature is that when you don't really understand something, you tend to shy away from it unless you're required to really fully understand. And right now, the markets and the new cycle is dominated with things like NFT's and other different assets within this space, which is cannibalizing a lot of the attention. And absent a lot of attention on digital asset securities, I think that a lot of people are going to wait until either A, the credible things happen or B some of the assets that are out there already are deemed securities, right. So you can take you know, there's there's several cases that are out there that are well known XRP. And ripple is probably the most well known as well, whereby, you know, kind of management has been embattled with the SEC regarding whether or not XRP is a security or not, well, if you take XRP, and its market cap and not familiar with what it is right now, I know it's a top 10 You know, asset. But if you took that, and you listed that on one of these digital assets ETS's, I would say that that would be a huge injection of liquidity directly into whoever gets that listed. And all that's going to take is going to be something like that, that's going to spark the marketplace and force the demand and force market participants to have to be be active in the marketplace, or they're going to miss out an opportunity. And that's not going to continue to have.



Got it. No, I think all that. I think all that makes a lot of sense. So then, you know, coming full circle, and you know, rain, I'll go to you when you think about you know, innovating this space and like for lack of a better term, like trying to think about where the puck is going. How do you think about that, and or you driven more by client demand in terms of what people are looking to do and providing solutions,



we, the we have really a fantastic, I would just say opportunity at ARCA that we get to kind of look at it both ways. We get to work on things that are structurally the most appropriate to give our clients access to digital assets in a form that they can work with an audience appropriate way. But still mitigating risk and all the things that we do, you know, on the fun side of the business, and that we can be, you know, very linear, and it's very settled in the way those structures work. Now for these, these longer term things, when you're dealing with regulation cycles that may take two years, you know, we filed, we talked a lot about our coin or ETF structure. This was something that we filed with the SEC in November of 2018, and received exemptive relief in July of 2020. And I would say that's actually fairly fast. And my experience is prior to this, you know, I co founded the ETF company WisdomTree, where took us a similar amount of time about two years to get our equity ETFs to the SEC, and this is back in the early 2000s. So when you're dealing with regulated products, especially novel ones, it just takes a little bit longer. So you for to do this, to work on digital asset securities. And in this space, you just have to have a little bit more of a commitment to this longer view, but just by the timeframes and the amount of stuff it takes. So you actually have to put a stake in the ground, commit to something that might be around for a while. before it's even usable. And like I said, our coin, we still have, you know, questions about the custody rules for broker dealer to hold it and all of these things. So you really have to have a view about it. But this is where I get excited, Peter and this this goes back to a JD conversation that he was relating to me the other day he was talking with I would say what top five bank in the world. That said, I believe you give the quote



we're talking about exactly the same conversation we're having here, right and we were talking about what is the future for digital asset securities and what's it going to take for large scale financial institutions to move and you know the comment and This is a top five global bank, maybe top three, the top five on the globe. But the response was that I believe within the next three years, that there'll be more Tesla traded in a digital asset security type fashion, so traded digitally than traded traditionally right now.



So those things securities that are on exchanges, New York NASDAQ, the shift, the undeniable efficiency gains by blockchain edits, you know, at maximum deployment where you're actually getting, you know, infinite fractionalization 24/7 during all the benefits of blockchain technology, applied to the security space, just like ETFs, at 4pm, close mutual funds lunch, it's just a better a better way of transferring value for non securities and securities alike. So the people that are building that infrastructure, that are laying the groundwork that are doing those things, at massive amounts of capital are going to flow into these things. And like you see from the size, but very few people are working on it right now, really, because of the difficulty, the money you have to expand not knowing there's going to be a definite pay off the length of time. So there's a huge, wide open space and giant opportunity, but a lot of uncertainty. So that's why I think about it.



And Rayne, just, you know, follow that up. And I think that it's gonna be read. I know. You know, at length here, you know, an ARCA. But for the viewers that are out there, there was a great report that came out from JPMorgan. It was authored by Ken Worthington and Reginald Smith. And it basically, you know, the thesis of it is basically the 2022 is the year of tokenization of assets. And, you know, kind of, you know, Ken and Reggie talk in that report, and they talk about, you know, credit credit, they talk about real estate, private equity equities, and basically anything that would be in an investor's portfolio. So I think that, you know, that's a real public example, you know, whereby JP Morgan has said it, but I think these are the kind of things that we're hearing, you know, amongst the network that we're involved in, in the conversation we're having, specifically with financial institutions.



Yeah, I think I'm and how have those conversations with financial institutions changed over the past year or two? And have there been like any catalysts, or is it just time?



I think there are a couple of catalysts. And I think that the original conversations, and the original conversations revolved around comments like this, that our bank, you know, is, is unable to touch anything that's either that unless it's been registered with a, you know, agency, or it's been rated, again, by an agency. And I think that that was the hard line that you saw for a lot of time. I think that, you know, kind of dating back to, you know, 2015/2016, you know, the keywords were, you know, POCs and labs and pilots, and the banks have done an incredible job of testing, what blockchain technology can do, the hurdle that they have right now is how do you effectively test blockchain technology and at the same time, also get comfortable holding digital assets on your balance sheet. And that's really the place right now, where I think that the large scale financial institutions have to get comfortable. And I would say that, you know, kind of along those lines, and other top five banks that were talking to you and having ongoing conversations with, they're not even offering access to outside funds, or their customers access to, you know, derivatives, because they themselves are not yet comfortable, that holding derivatives on behalf of their clients is not having assets on the balance sheet of the bank. So these fundamental questions are the kind of things that the banks themselves are grappling with. But you know, kind of, I would say, it will, should come as no surprise to anybody that whether it's the end of this year or the beginning of next year, you're going to start seeing a lot more adoption from the financial institutions. And when it happens, it's gonna happen fast, because the competitive pressures between all the bags are gonna be so great, that once one moves, the rest of them are gonna have to.



Yeah, I think that's right. That's me, that's typically the way it works. You know, I wonder if I wonder how regulation comes into play at all, meaning that is, is Is there is there is there a regulatory, you know, shooting drop, because that implies a negative connotation. But is that is there? Is there something from a regulatory side that needs to take place for, you know, say banks to move forward likely? Or is it really just purely a business decision at this point?



I think that I think it's going to be driven by two things, you know, regulation has not been fully drafted, nor communicated to the marketplace. We talked about the custody rule, for example, which is a little bit of a challenge. If you're trading in digital asset securities and your broker dealer and you don't have the ability to hold them on behalf of yourself or others, it's going to be a problem. That's friction in the marketplace. And I think that, you know, a lot of those unanswered questions, and we grouped them into two different buckets right here at arco, right. We look at it in two different perspective to two perspectives. The first is to make sure that there's sound AML and KYC clarity, and the second is with reference to custody. And I think that once those broader questions are answered, there'll be a greater level of comfort on behalf of FI's to recognize that the fail safes and the risks can be overcome. And it will not prove to be a huge challenge, where someone's gonna have to answer, you know, at a board meeting that are publicly traded bank lost money, because they didn't have the right protections.



yeah, yeah, and I think that, you know, one of the things I've heard too is like, you know, there's a lot of narrative focus, right. AML concerns, things like that. Which, you know, I think we can, we can we can discuss, but there's probably not, not much of a need to, frankly, yeah, go ahead. JD. Yes.



Yeah, but but but going full circle, though. Peter. Right. So I think about the way these conversations are interconnected, right. So what we're basically saying is that large scale financial institutions are going to need comfort before they get involved in the marketplace, that comfort is going to be, you know, kind of dictated by the level of regulation. And once that finally arrives in the few places, it still needs to be concluded. And then ultimately, once that happens, there need to be additional safeguards for the banks and for the financial institutions. And the safeguards can be found in digital asset securities, right. So then those safeguards are found in the in regulation, and then other different protocols that can be pre programmed, for example, you know, there are protocols that are out there called the DS Protocol, or 1404 standard that essentially are permissioning layers built on top of the Ethereum blockchain, in this case, specifically, that will allow for additional enhancements for digital asset securities. So what does all that Burbage mean? It essentially means that, you know, kind of if you've got a digital asset security that was created under the DS protocol, which is proprietary to securitize, what that essentially means is that if you lose your wallet, right, you drop your Ledger in the Hudson River, right? If you end up having a fire in your house, if you lose your piece of paper, what you essentially can do is you can go to a transfer agent, again, which is mandated under the 40 Act for a digital asset registered security. And you can go to the transfer agent, ask them to create an investigation to understand what happened with those tokens. And if the TA then agrees, and believes that there was some sort of, you know, kind of loss or theft or whatever it might be, that transmission has the ability to recreate those tokens and destroy burn the original ones. So what that does really is it eliminates or mitigates the concern that large scale financial institutions have and mitigates that risk tremendously regarding custody, and what happens if someone's tokens are compromised. And again, it sounds like a small thing. But that provides a tremendous amount of comfort, when you're dealing with, you know, kind of hundreds of trillions of dollars, which is the notional size, the market we're talking about.



Yeah, it's interesting. Okay, you know, so much of what I hear about his protection from, like the investor and consumer standpoint, like protection from the bank standpoint is a is an odd perspective. But I understand that, of course, because obviously, if you're the bank, you You only care about the banks.



And, Peter, one more more point here, right. And this is the fun, this is like the intellectual stuff that goes on, right. But the crazy part about this, and the fun thing is me watching the future to see what happens with these incumbent banks. And let's take at least the three digital asset charter banks that have now come into existence in the form of, you know, avanti, and Anchorage and others. And what's going to happen as you move down this path, and where do they converge? Right? You know, do you see a place? Where is there a place in this world whereby the startup banks take over the incumbent banks? Right, there's been little consolidation on a broad scale course. And that's a little there's been some consolidation, but nothing that's really been that meaningful, we're talking about, you know, the industry titans that are being built in digital assets and digital asset securities converging with kind of the Titans that have you know, existed over the past century.



Yeah, JD, you're having some internet issues, I think, where you cut off a little bit there. So not sure, who really caught the back half of that or so. But I mean, part of the issue here, why a lot of this exists is is, you know, the fact that, you know, the part of DeFi has been muted, it's all relative, but there's call it like, at least successful, whether in practice or theory, is that, you know, there is a massive amount of distrust of banks and, and very misaligned incentives. So, you know, part of me gets what you're saying and from market standpoint, don't disagree, and you know, importance, and if you want to grow the whole pie, like that's typically the way it's done, but the other, you know, part of me kind of thinks, you know, the whole point of all this is to kind of displace a lot of this, you know, the the existing kind of banking system and maybe there's differences, obviously, between, you know, retail, commercial banking, lending and products and, you know, like, institutional trading and market access and things like that, but it's, it's an it's a dynamic that, I think is very much not on the radar right now of most people in the market. Yeah.



One thing I would offer there to just when we think about displacement and Adoption and things like that is still the largest pools of capital are institutional. And the still probably the biggest risk to this, at this stage, I think too big to put the genie back in the bottle and digital assets, our whole business is, you know, designed around that. But Stranger things have happened with governments and regulatory bodies on things that they can't control what you actually get, we have a big tent approach for adoption, we want regulators to see the benefit, we want them to see, you hear a narrative, digital assets can be used to go around or circumvent AML KYC, and be used for illicit activities, it's actually a very bad way to do that, as we know, with a permanent ledger that can always be locked up on you that there's actually ways to embed the regulatory goals of agencies and investor protection, safety, lowering error rate efficiency, lower costs that really overlap with them. It doesn't help for a lot of the people in our space to be say, hey, actually, these don't need to be regulators regulated, we got it. And also, by the way, our entire industry obviates the need for your regulated regulatory device to exist. This is not the way to, you know, welcome these people in, you bring them in, they see the benefits, just the same way institutions and people that were very distrustful or suspicious, and rightly so of digital assets, are now seeing their benefit and this explosion of interest in it. Not that so much has changed in the actual value proposition of these things over like the past few years. But you could literally be fired at an institution for saying, I want to investigate digital assets, or or or Bitcoin. So I think part of what we're doing is also kind of inoculating our industry, against regulation or against being stamped out if you're right now, these are very powerful interests. And if your entire value proposition is replacing money, replacing regulatory bodies, replacing the entrenched financial institution that shares your stated mission across the board, I'm surprised surprised if they don't get on board and use their incredibly powerful influence to try to stamp it out. Yeah, you know, bring them in, show them that there's benefits and often on the institutional side, where you know, retail and people that are investing, see massive upside, you know, 10 100x 1,000x type of return spectrums, very early stage venture like returns and liquid vehicles, all very exciting. Institutions are interested in, you know, shaving pennies off trades, making things more efficient at scale, you know, more efficient allocation or capital and settlement methodologies, which is quite boring and not really that, you know, meaningful to the average person, you know, the average person isn't caring, necessarily about their inter company or intercell. You know, capital requirements are how that works. But large corporations, where this is very meaningful for their stuff, it does make sense. So, you know, it's it's different timeframes, different scale, different things that are being looked at, but we just think more adoption, more utility, more people that you bring into the digital asset tent, whether it's securities, unregulated or regulated, the more traction we get for this ecosystem in general, as well, and more safety for everybody.



Yeah, no, I think it's a fair point, especially about, you know, like, how would one expect, banks are going to act and look, there's a wide range of, like, outcomes and desired outcomes, you know, like, replacing the US dollar, like, I get that as some people's goal. It's a completely unrealistic goal in my mind, and not one that I particularly care about. But I do understand that that is a mater of some.



but there also was a really interesting op ed that Jay Clayton had authored at the last kind of days of 2021. And in that piece, he advocated for, you know, a joint public and private effort to create a digitized treasure. And he went as far as to draw the argument that that is a issue of utmost importance for national security, and basically would be a step that needs to be taken by the US government in order for the US to protect its turf, you know, as kind of the leader in you know, kind of financial services around the world.



Well, sure, but I did it digitized dollar is not the same as you know, nothing, nothing is different. There is just the means in which you exchange and custody and hold $1 doesn't replace the dollar but yeah, no, I totally agree with you. Completely. Yeah. You know, interesting. All right. Well, I guess So we covered a lot of ground and like a lot of new ground here. You know what? So we have this kind of BTF structure like what do you think we see next JD in this in this market that kind of gets everyone to take notice? And and you know what's like the next big catalyst or thing that we can expect to see in this market?



Yeah. So I think there's one thing that is important to just highlight here is that within the portfolio of digital asset security, you're prohibited under SEC regulations to hold digital assets. Right. And that essentially, is the reason why there's no Bitcoin ETF, right, because it's a digital asset that we placed in the portfolio of an ETF under the 40 Act. So like, by the same, you know, kind of by the same token, were precluded from putting digital assets into the portfolio to create the next ETF. And although that's something that we're kind of super excited about, and we're looking forward to the opportunity at one point in the future to doing so, we're working within the confines of traditional assets right now. So, you know, the next iteration of the ETF is very likely to be a portfolio and will be a portfolio of traditional securities. Now, the question is that equity portfolio will not be comprised of derivatives, and what is the composition of that, and we're currently working with multiple different parties in the marketplace, trying to understand how we can meaningfully meaningfully advance change and adoption within digital asset securities. And you'll be seeing news coming out of ARCA relatively soon regarding what those products look like, and how it is that we hope that they'll transform the way markets work. Additionally, Peter I would say, you know, for anyone who's listening to this podcast and is interested in learning more, as I mentioned earlier, you know, on education is paramount for ARCA as a whole. And we will be putting on a full day seminar on registration details can be found @ ar.ca on the 20th of January, and the keynote led by Hester Pierce, Christian Karla will be delivering the second keynote there, we've got industry leaders from Fidelity from Citi Bank, from Morgan Stanley, from the large the bulge bracket names, as well as a lot of the traditional firms in the TA and the ETF space as well, that will be helping to answer questions and help to educate the marketplace regarding the opportunity for digital asset securities. And what those differences are between traditional securities and digital assets is what



I think you're on mute. Mr. Han's



that's what happens when my my dog barks too much. Now, that's great. I mean, that's, that's gonna be a it's gonna be a hell of an event. Very cool. Very cool. What else you guys had?



I think JD summed up the, you know, the next steps definitely attend this. This conference, if people are interested in securities or any of this regulated space, there's very interesting stuff going on. And not always obvious. So definitely check that out. I would say generally, this concludes the serious part of between two chains. And when you ask us important things like 80s movies, since this is audio only a bizarrely non descriptive way I might be dressed. What did you got for the the audience for people that have stuck around through digital asset security Peter?



Oh, gosh, I feel like get a turn it in a in a majorly different direction. But you know, for that, I'll turn the tables on you. What do you what do you want to know? Right? What questions do you have?



I want to know if one were to get a child's championship softball ring lodged on one's hand how would one go about getting that off? This is I feel like an expertise of yours.



It is often that often does happen to me there's a couple ways you can go about it. Depending on how attached the finger you are you can cut it off



Can I see your right hand how did we go for you? I was still on



I still have on my fingers are still



it is still on his weapon.



no no no I gotta I gotta often if he twist enough, it'll come off. You know if you really need to, you know get it off. You can use some like, you know, any sort of like lubricant like a petroleum jelly or vaseline or something, you know?



Alright, so cut it off, lube it off or twist it off. Alright, that's good. All right. And on the run to it have you partaken of 1883 yet?



I have not is a good



It's fantastic



I've seen I've seen like part of the first trailer. I do. I do need to Watch it though. I've been what am I've been doing? I think working busy. I was Yeah, I did watch Wheel of Time on Amazon Prime.



How was that?









Do you read the books



I have.



It's good.



All right.



I mean, you know, as much as anything else, I mean, even



though they were doing that that's how to touch I had no idea that was even occurring. That seems like a giant undertaking. We'll have time. Oh, my God.



Yeah, I mean it. Broadly speaking, I think they did a good job,



JD any opining on fantasy TV series? 1883 or soft child softball championship ring removal or your own category that you would like to opine on?



Yeah, no, neither of those two topics. I would say that I am. I did catch up and kind of, you know, ran through you. If you haven't seen that. That's a little tweak on



Oh! you viewed the show on Netflix. You Yeah, I've seen the first two seasons. After the second season. I'm just like, really? Like you're doing this again. You know, come on



somebody told me this was autobiographical of my life. I haven't seen it yet. Should I be insulted or should be concerned?



Or you're a serial killer.



I was told they took broad liberties. But that sounds about right. So,



Peter, you're smarter man than me. It's a cue to the second season to draw that conclusion. I'm like two episodes shy of the end of the third season. And I'm just now.



Because I was like, at the end of the second season, I was like, okay, you know, he's got his like, wife they got a kid like good for him. You know, even though he's nuts. Right? And, but then he likes turtle. I'm like, I can't do another year this I can't do that this year. Some of this. Okay, I guess I have to watch it to see it's the first season is great. The first season is very, very good. And the second season solid.



This is from Gossip Girl.



I've never seen Gossip Girl



ever seen Gossip Girl. Come on. Alright, guys. That is the cultural touchdown for our generation. Peter, you should watch it.



I mean, I don't gossip and I'm not a girl. Other than that, it sounds like the perfect show for me.



Bingo. You'll love it.



I feel like Jeff would like Gossip Girl.



It's that is loosely based off autobiographically off of our CIO Jeff Dorman. It's gossip arose the Jeff Dorman story, I think loosely. Yeah, that's right.



And that now, look, guys, this is great. I, it's fascinating, because like I, you know, I don't even know where to start with this stuff. You know, intuitively, it makes a lot of sense. But there's just like, I mean, it is literally a whole new world, right? That's kind of going on in parallel. But I agree, you know, in terms of like, ultimately, you know, Blockchain is this technology and, you know, the digitization through a blockchain of assets, custody, and transfer and increasing the velocity is inevitable. And, you know, we are at the true infancy of what that's going to look like, I think, you know, even more so than just kind of digital assets broadly, because there's so many other things to consider a great set of better. Cool. Alright, guys. Well, I appreciate the time. And see you next time.



Thank you, Peter great talking you man.



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