Public Key Podcast

Everything You Need To Know About the Tokenization of Assets: Podcast Ep. 117

Episode 117 of the Public Key podcast is here and this is our “Live from Links” series, where we showcase our podcasts recorded live at the Chainalysis Links Conference in NYC. Wall Street is buzzing with tons of acronyms like DLT, CBDCs, RWA and Bitcoin ETFs. But what does it all mean? We speak with Naresh Nagia (Independent Senior Advisor, Deloitte) for a thoughtful conversation on everything tokenization and how it will disrupt the traditional financial banking system. 

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Public Key Episode 117: The Disruption of Traditional Banking with DLT

Wall Street is buzzing with tons of digital asset acronyms like DLT, CBDCs, RWA and Bitcoin ETFs. But what does it all mean? Well, Ian Andrews (CMO, Chainalysis) sits down with Naresh Nagia (Independent Senior Advisor, Deloitte) for a thoughtful conversation on everything tokenization and how it will disrupt the traditional financial banking system. 

Naresh shares his expertise in financial services and highlights the potential benefits of DLT, such as operational efficiency and the ability to mobilize collateral. 

He also discusses the importance of legal basis, KYC/AML regulations, and cybersecurity in the adoption of DLT and the implementation of smart contracts into the financial ecosystem.

Naresh expresses his preference for wholesale CBDC over retail CBDC and emphasizes the significance of Project Agora which is a major project launched by the Bank for International Settlements (BIS) for central banks worldwide to explore tokenization of cross-border payments

Quote of the episode

“I think the security is a non-negotiable and the balance to be struck between transparency, which crypto and DLT offer, and privacy. While holding on to sufficient discipline around a trusted intermediary or a trusted counterparty, you got to hold that, you got to know who it is, but don’t give all my information away” – Naresh Nagia (Independent Senior Advisor, Deloitte)

Minute-by-minute episode breakdown

2 | The role of an Independent Senior Advisor at Deloitte and bridging traditional finance and the future of Distributed Ledger Technology (DLT) 

5 | Envisioning DLT disrupting the traditional financial systems

10 | Smart Contracts are neither smart or contracts

14 | Decentralized Ledgers and Bitcoin ETFs: TradFi meets Crypto

17 | Project Agora: How the Bank for International Settlements is pioneering trust in blockchain technology for cross border payments
20 | The future of stablecoins in global finance and debate over retail vs wholesale CBDCs

26 | The realistic applications of Real World Asset (RWA) Tokenization and what to look

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

  • Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
  • Naresh Nagia (Independent Senior Advisor, Deloitte)

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Naresh: The BIS, the Bank of International Settlement, has called DLT, or labeled it a once-in-a-generation technology change that could offer a quantum leap in technology for the legacy financial and monetary system. And so, the future of money, so to speak, could well be on DLT lines.

Ian: Hello, and welcome to Public Key. This is your host, Ian Andrews. This episode is part of our Live from Link series. If you’ve spent any time on Wall Street lately, you know that it’s buzzing with tons of digital asset acronyms like DLT and CBDCs, RWA and ETFs. But what does it all mean, and can we start to see a new kind of financial infrastructure emerging? In this episode, I speak with Naresh Nagia, who’s an independent senior advisor at Deloitte, for a thoughtful conversation on everything tokenization and how it will disrupt the traditional financial banking system. Naresh shares his long history of expertise in the financial services industry and highlights the potential benefits of digital ledger technology, such as operational efficiency and the ability to mobilize collateral.

He also discusses the importance of legal basis, KYC, AML regulation, and cybersecurity in the adoption of DLT, and the implementation of smart contracts into the financial ecosystem. Naresh expresses his preference for wholesale CBDCs over retail ones and emphasizes the significance of Project Agora, which is a major project launched by the Bank for International Settlements, for central banks worldwide to explore tokenization of cross-border payments. Last thing before we dive into the episode, if you weren’t able to attend the Chainalysis Links conference in New York, well, you missed a fantastic event, but not to worry, the Links digital experience is now available on demand. As an attendee, you’ll get to see the best content from the in-person conference, plus some special digital-only content. Whether you’re in the Americas, EMEA, or Asian or Pacific, you’ll have the opportunity to live chat with compliance, investigation, and business strategy experts, while receiving exclusive hands-on view into our latest features. You can register now by clicking on the link in the show notes. Today, I’m joined by Naresh Nagia, who is an independent senior advisor at Deloitte. Naresh, welcome to the show.

Naresh: Thank you, Ian, good to be here.

Ian: Tell me about your role at Deloitte, an independent senior advisor, sounds like you get to work on very special projects, but I’m just guessing,

Naresh: Let’s say very interesting ones. And the independent senior advisor program at Deloitte is unusual, in that, we’re not employees of Deloitte, but we’re rather advisors and consultants to the advisors and consultants at Deloitte. So we typically come from deep experience in one or more fields, and contribute and enhance and embellish the client offering that Deloitte provides. It’s just what the title suggests, it’s independent, in that, it’s not an employee, but it is senior advisor, because you bring to bear some of the things you know well, and you enhance the client proposition.

Ian: And share what your particular area of expertise that you’re advising on is.

Naresh: Yeah, I mean, I come from a lifetime of financial services, and Citigroup was my home for 20 plus years, so I started life as an FX and options trader, and then moved on to things related to balance sheet management, liquidity, and rate management. And after about 15, 20 years in the front line, I transitioned to risk management, and from there on, to more specialized risk management in financial market infrastructure, CLS, which settles the world’s foreign exchange. So it’s pretty much a global monopoly sanctioned, in the nice way of sanctioned, by the central banks, and overseen by 23 central banks around the world, because we settle some of the largest currencies in the world.

So $6 trillion a day is what gets settled, it’s systemically important beyond belief, and smallest wrinkle has some pretty loud and significant consequences, so it’s got to be robust, resilient, designed well, have the right sort of fallbacks in place. And so, that systemic view of the financial system, and with an eye on financial stability, is something that eventually, blockchain and crypto will have to deal with. And so, as we grow and try to leverage DLT into becoming mainstream financial and monetary system, I think we’ll have to keep an eye on several systemic disciplines [inaudible 00:04:37], and that’s where almost, I think of myself as being an intellectual bridge between TradFi and the future of a crypto-based or DLT-based financial monetary system.

Ian: I was going to ask, what brings you to a crypto conference like this? And I think when I first got into the space three years ago, it felt like there was such momentum, where everyone was talking about blockchain and talking about digital assets, it seemed almost kind of inevitable that we were at the beginning of a technology refresh cycle that was going to affect global financial infrastructure. And then, 2022 happened and I think TradFi kind of took a large step back from the edge of the cliff as it were. But all of a sudden, we now have these ETFs approved, and here at the conference, we’ve had a number of traditional financial services, organizations was on main stage this morning, So I’m curious your perspective, where are we in this moment of transition? If the future might contain DLT or blockchain, how far away is that?

Naresh: In the run-up from 2008 to 2022, I think TradFi was very skeptical, cynical, about crypto, and I think over the course of the last two or three years, and perhaps even just before 2022, a realization, a light bulb went off in TradFi space, that while crypto may not be all good, it achieved one thing, which is, it demonstrated the power of DLT, distributed ledger technology. And that light bulb that went off was, we better engage because the future is pointing us in that direction. And in fact, the BIS, the Bank of International Settlement in Basel, has called DLT, or labeled it a once in a generation technology change that could offer a quantum leap in technology for the legacy financial and monetary system. And so, the future of money, so to speak, could well be on DLT lines. That’s not to say it’s done and dusted and finished, it is just, the glimmer and the aspiration, and potentially, the foundation of something wonderful, but a lot of work is yet to be done.

Ian: Yeah, I’d love to hear more about what you see in that glimmer, because I think it’s very common when I hear people start the conversation around DLT being the future of the financial system, that they go right to things like settlement and say, oh, we can go from transaction plus three days to transaction plus one day, or transaction plus one day to instantaneous settlement. My sense is, though, that nobody actually wants instantaneous settlement, there’s a lot of intermediaries that are very large companies that employ lots of people and make lots of money, they don’t want to go away. But also, there’s some risk management that exists by not having instantaneous settlement, like reversing a transaction is actually potentially a very good thing to have that …

Naresh: Indeed, indeed.

Ian: … humans involved in the systems, it’s nice to be able to back something out when I fat finger. Undo send in my email is a good thing, I want it in my financial transactions, as well. So I’m curious, what gets you excited when you think about DLT in the context of this modernization of financial systems?

Naresh: I think the shock absorbers that you made reference to a moment ago, though you didn’t use the expression, the recourse to someone or something trusted that could remedy some breakage in the system, I think is really important. And even if eventually, we get to some decentralized version of DLT, I think the first version in a regulated perimeter is almost certainly going to be something that is permissioned, private, and likely managed and operated by a trusted intermediary that plays the role of legacy financial market infrastructure, but will deliver the service on DLT.

I think operational efficiency is very attractive, you’re talking about cheaper, faster, better, safer. And the legacy payment system, the legacy security system, the T plus four, T plus three, T plus two, whatever it is, has earned itself. There’s too much money being made, maybe, and it is ripe for disintermediation, and if they don’t disintermediate themselves, someone else will do it. And you’ve got crypto and DLT nibbling at the edges, and TradFi has woken up, and it is time, and the time is now, very close, when you’re going to have to distill the best of the one, and bolt on or retain the wonderful things that the payment system of the last 50 years has baked into fundamental principles.

So you will aspire to the speed and the efficiency, and for some of the illiquids, the opportunity to monetize and to mobilize illiquids, call it real estate or private equity or fractional ownership, or whatever it is, you will get those benefits if you take the good parts but retain some of the non-negotiables that are part of the legacy regulated system. And I think there is a vision that has come together, and that vision has to be delivered, it’s going to take likely, years. That’s what the BIS and its vision for a future financial system aspires to.

Ian: What are some of the non-negotiables?

Naresh: Legal basis, that my token on a ledger is going to have a legal basis for ownership, proof of ownership and transfer of ownership, that is on par with my legacy ownership title, transfer rights, and so on. The legal basis is principle one of the financial market infrastructure’s principles, so that is non-negotiable, KYC, AML, and its relationship to money laundering issues, I think that’s a non-negotiable. Cyber security, you would think that cryptographic security in most programmable ledgers is at a pretty good standard where we have the benefit of cryptographics. I think they do really well in not having the ledger broken into, but they don’t do as well and need to do better with preventing the smart contracts from getting hacked, or preventing them from having defects in the first place.

So I think the security is a non-negotiable, and the balance to be struck between transparency, which crypto and DLT offer, and privacy, while holding on to sufficient discipline around a trusted intermediary or a trusted counterparty. You got to hold that, you got to know who it is, but don’t give all my information away. I don’t want that to be public, I don’t want the public on the same chain to be able to see all my transactions, so that needle has to be threaded. But those are some of the non-negotiables, and I think that’s what we’re trying to bolt on in the regulatory perimeter, get the best of that and fight for the best of what we have, and that blend is what is going to deliver.

Ian: The legal point is a big one that I think a lot of people miss, and I had someone say earlier in the conference, actually, that smart contracts are neither smart nor contracts.

Naresh: It’s a catchy line, but I would quibble with that.

Ian: Yeah? Tell me more.

Naresh: I think they’re smart, you could simplify them into, they’re automated, but they’re more than automated, they are conditional contracts in very special ways. They add speed, efficiency and cost benefits to the current process of doing sequential anything, the whole end-to-end process, from transaction through settle. I think smart contracts are smart, but that is not to say that they don’t need oversight. They need to be secure, they need to be just like you have model risk governance now. Smart contracts are just another model that is automating a set of conditional outcomes that are agreed by contract, so … Well they are smart, they are contracts, and they are automated. I would not agree that they are not smart and they’re not contracts.

Ian: I think the person, while they were certainly attempting to be glib, was specifically making the point that the legal basis for a smart contract actually being a real-world contract, in the sense-

Naresh: That is a must-have. As we said at the outset, the legal basis for those smart contracts on a program of a ledger is a must-have as part of the trust that you need to build for that broader legal basis, legal basis of the token, legal basis of the transferability of that ownership, and legal basis for the smart contract. You can’t legally deny something that happened on-chain as a result of a smart contract, because you have agreed to those conditional next steps and sequences in the law before. So that equivalence is all part of the broader concept of legal basis.

Ian: It feels like we’ve got some work to do, though, for that to actually exist.

Naresh: A lot. A lot. We are not anywhere close there yet, to make it even more interesting, and to push the achievable reality even further out. It’s hard enough to get all of this legal basis defined in one jurisdiction, take that across the world, even if you’re taking it to the top 10 countries with the most evolved legal systems and legislative systems. I know how hard it was at CLF. We had 18 currencies, and getting the jurisdictional equivalence of legal finality in each of those jurisdictions was a nightmare and remained an annual heavy lift, and is one of the primary reasons why there are only 18 currencies and not 50.

Ian: Interesting, I didn’t know that.

Naresh: Because the legal basis must hold, and if you can’t get it in Russia, you can’t get it in India, you can’t get it in China, on the same basis as everybody else, doesn’t happen.

Ian: Yeah, you have to have universal agreements of the terms, right?

Naresh: A common legal basis that is defensible and enforceable in each of the jurisdictions that own the currency or issue the currency that is settling in the CLS context. So that’s a prime example of how many layers this thing has gotten.

Ian: Now, you made the point that the likely first meaningful adoption will be permissioned chain, private parties only. Do you have a sense of where that comes from? Is it in the US, or do you think it happens outside the US first?

Naresh: I think for wholesale payments or wholesale securities, the business of what we call the monetary and financial system, everywhere, in at least the top 2025 jurisdictions in the world, is likely to be private permissioned. You will want to know who’s on the chain, you’ll have to know their identities, you have to filter who’s in and who’s not allowed to be in. There are qualification criteria, and you want an adult in the room all the time until you get comfortable with it. And there will come a time when this works so well that we can start to distribute some of the responsibilities, not at the outset.

Ian: And give us a timeframe to kind of imagine around that process. So are we talking, that unfolding happens over the next decade? Is it two decades? Is it longer?

Naresh: It’s only a guess, but two steps. First, when does something serious get onto a distributed ledger or a programmable ledger? I think that is, I’d say, five years out, but getting decentralized, double that, at least. With what I know, and I think what we as a financial community know today, it’s not imminent, and it’s much further out. We will have progress along the way, and all of this will get modified, but these are just expectations at this point in time.

Ian: Yeah. How does the recent ETF approval in the US fit into this whole picture? Obviously, the ETFs themselves are not on a chain at all, but it seems to have been a catalyst for a lot of excitement across both crypto people and TradFi people, and certainly, we’ve seen the asset prices move up pretty dramatically since the start of the year. Does that matter? Is that a bit of a red herring, or how should people be thinking about the ETFs?

Naresh: I think the Bitcoin ETF is a sign, it’s symbolic of a certain level of acceptance within the regulated community of a reality, and a benefit that comes from, or that Bitcoin and DLT have brought to the financial systems. It’s come into the regulatory perimeter, I think it is most meaningful from that perspective, and it is a sign that the regulated community has taken on the challenge of trying to do what we were talking about a moment ago, which is to distill the best of what crypto has proven works, but not do it the way crypto is executing it.

And the BIS has said in its vision that crypto is a flawed system, and maybe I paraphrase, and does not deserve or will not adopt or inherit the mantle of money so said the BIS in their vision. And therefore, the regulated system has got to do it itself, and the way it’s being envisioned is two-tier banking system, central bank reserves, which is the ultimate payment. Any payment you do anywhere in the system, to preserve the, what’s called singleness of money, you need to have a dollar of money, private or public money, a dollar of money must be equal to a dollar at all times for everyone. And stable coins in the shadows right now, that’s an automatic question, are they on this side or that side? Stable coins don’t yet preserve the singleness of money, and therefore, they are not yet, I think, squarely in the regulated perimeter, but they might well be. They’re not yet there, right now, it is just a two-tier banking system and digitized or tokenized central bank reserves, CBDC.

Ian: Quick break here, Naresh shares some interesting thoughts on stable coins, and how it hasn’t quite met the traditional monetary system requirements. On the main stage at Links, the funny and equally knowledgeable, Howard Lutnick, shared his thoughts with Chainalysis CEO, Michael Gronager, on how stable coins are going to shape the financial ecosystem. Let’s listen to that conversation and their takes on the importance of stable coins in the current ecosystem.

Speaker 4: One of the things that I said in my keynote yesterday, and I think is most exciting thing in the crypto space, is that it has become an infrastructure for finance. So it’s no longer just moving like funny monkeys around with NFTs or intrinsic tokens, and something that gets a value, and a lot of those things that might have use cases for people, you never know. But one of the things that excites me the most is that the majority of value transacted on blockchains is not crypto, is not NFTs, it’s stable coins. So stable coins has become this actual use case for crypto, currently, so what are your thoughts on the stable coin piece?

Speaker 5: What interests me is what’s great for America, and the dollar is great for America. The American language dominates the world’s economy, but in the same way, the dollar is fundamental to the United States of America, that, if you’re in the G7, you like your currency. The pound is fine, the yen is fine. No one wakes up in the morning with the Swiss franc and thinks, I’m going to lose my money with the Swiss franc. But imagine I transport you all to Argentina, and all our bank accounts just turn to pesos. Everybody wants the dollar, and stable coins are the most practical, efficient, logical way for these people in emerging markets to hold the dollar.

Everybody wants the dollar in these emerging markets, so a stable coin, a proper stable coin, properly backed, properly redeemable, allows people in the emerging market to use their phone to hold the digital dollar and to have local digital commerce with the dollar. And that dollar hegemony, fundamental to the United States of America. It matters to us, to our economy, to who we are in the world, and so, that’s why I am a fan of properly backed stable coins. I think these are wonderful assets of America, and I think it’s good for us, for us, for all of us, and for America.

Ian: Well, I found that very intriguing. The insights from both CEOs definitely explains why regulators and financial institutions around the world are spending more time focused on stable coins. Let’s get back to the episode, where I asked Naresh about his thoughts on grassroots adoption of cryptocurrency in emerging markets that Howard discussed on the main stage. I’m curious what you think about emerging market adoption of cryptocurrency. The research we’ve done at Chainalysis suggests that the largest grassroots adoption is happening in markets, where they often have some combination of very high inflation, punitive currency controls, that make it very hard to move money in and out of the country, unreliable banking system, unreliable rule of law. Not all of them exhibit all of those characteristics, but some combination tends to be highly correlated to countries where we see lots of grassroots use of crypto.

Naresh: And that tends to reason the appeal the barriers to entry are lower in those kinds of jurisdictions, and people in the more developed economies and more developed monetary systems would say, hey, our system and process works well. It makes you feel safe, it works reasonably fast, it makes relatively few errors, and you have a lot of eyes on it. You’re working with a two-tier banking system, where the banks not only have regulation, but they’re backed up with supervision and backed up further with insurance. So that is a multi-layered set of safeguards that say, hey, before we take on anything new, even if it’s faster, let’s make sure it’s reliable, and let’s make sure that there isn’t any breakage in terms of identities and AML, and so on.

So yes, I think the barriers to entry in those kinds of jurisdictions, and which is why we’ve seen a few examples of that, but there are examples of a few that are trying it out anyway, like India and China, or both on pilots, and relatively small scale. They’re still trying it out, it’s not official official, and that’s the only way to go, but they have pretty substantial developments in that segment, and everyone’s watching to see what they’re learning, and I’m sure they’re sharing their learnings at the BIS.

And in fact, BIS is kicking off a project as we speak, I think it’s called Project Agora, and it’s seven central banks under the auspices of the BIS, and they’re going to pull in a whole bunch of commercial banks to participate with them, and they’re looking to prove out some of the things we’re talking about and take the 40 plus experiments and proofs of concept and pilots that the BIS and central banks have been doing around the world for the last two years, many of them quite successfully, but each one tackling a small piece of the puzzle, demonstrating the success largely of the technology, in terms of its function. But the trust elements not in place, at least not on chain. If the trust elements have to come from off chain, then the bridges are vulnerable, and I think that conundrum has to be worked through. But Project Agora is something that is really worth looking forward to, it’s going to kick off in the next few weeks, I think.

Ian: Exciting, I wasn’t familiar with Project Agora, but we’ll link to it in the show notes. Where I was going with this question about emerging markets is, do you end up with global two tier system, where potentially, a asset on an open, permissionless chain, maybe a stable coin that’s US dollar-denominated, which seems to be increasingly popular, becomes the de facto currency in certain country markets as a digital implementation rather than traditional fiat one. And then, there needs to be an interface, basically, into Western Europe, North America markets, that obviously have the existing financial system, like you said, works relatively well. Any chance you imagine that playing out?

Naresh: I think stable coins need to find their rightful place, either inside the reg perimeter, and be labeled as private money that belongs with the singleness of money, or to be merely an on offer app capability to trade or transact the rest of crypto. And let’s see, time will tell, I think we’re looking for stable coin regulation in this country. Could take the shape of money, market funds, be backed by the right kinds of stuff, and be reliable to not break the buck. Does that satisfy the singleness of money enough? I think time will tell. Europe is a little closer to drawing stable coins into the mainstream, but let’s see where they collectively end up. I think the jury’s still out.

Ian: Yeah, in the European market, it seems like there’s an appetite to actually create retail-facing CBDCs in order to break some of the banking payments monopolies that have occurred through the results of years of consolidation. We’ve had guests on the show previously, talking about projects happening in Norway, where the government is very purposely trying to create an alternative to existing payment service providers to give consumers better options, and ultimately, probably, lower costs. But that seems very different than some of the other CBDC projects.

Naresh: Yeah, that’s the price it comes with. And so, the whole debate around retail CBDC is exactly some of the points you’re raising, I think the Scandinavian version of it is whether government wants to retain control that they are losing over cash. Cash is legitimate, it’s government money, it’s a token of sorts, but there’s less and less cash in circulation, so what is the replacement for that? And I think, in order to retain control over that type of money that governments are ambitious about, retail CBDC, it involves a huge lift for the central bank itself.

Ian: Is that primarily because central banks aren’t used to dealing with retail, [inaudible 00:27:16] deal with banks?

Naresh: No, the KYC information on every citizen and every entity to reside in one place at the central bank is not practical and not desirable. And I may be wrong, but maybe it’s actually been denied in legislation in a few places, that the central bank shall not hold that kind of information on the entire population at the central bank and who knows what will evolve there? There’s some possibilities. Speaking for myself, I’m not a fan of retail CBDC, I’m a huge fan of the potential of wholesale, and I think the potential for the future monetary system is much bigger with wholesale CBDC.

Retail could stay with banks, I am not in favor of disintermediating the two-tier banking system. I think it is very powerful, it has worked, and has the potential to continue to work. In the age of DLT, you still need private money and public money, and private money in the form of bank deposits, if they are tokenized, could continue to serve a very desirable purpose of doing the filtering and not having the burden fall on central bank to keep all of that information, but preserve some of the KYC and identity elements and privacy elements that are currently in the banking system. I think it’s one of the privileges for the public that we can continue to retain in a DLT, tokenized world. And this is a personal view, I’m not a fan of retail CBDC, I think there’s much more excitement and much more to be gained in wholesale CBDC.

Ian: Yeah, it seems like that’s a much more practical application to impact some of the interactions between banks and the central bank.

Naresh: At RLN, the regulated liability network, which was an experiment Deloitte was involved, experiment, proof of concept. I think that attempted to solidify the value of the two tier banking system and how the money loop of tokenization … There’s tokenization of all these wonderful things, securities and real estate and art and everything else, financial and non-financial, on the one side, but on the other, it’s the whole money loop, the payments loop, that will pay for those assets and enable the transaction, that need to come together, either in a bridged ecosystem or in a unified ledger, as the BI has called it, that is possibly the future of money.

Ian: That’s really interesting, because I think a lot of people are very excited about this real world asset tokenization, but I wondered, well, who are the buyers for … Take a piece of real estate, and you maybe break it up and so you can sell shares in a large building, like one of the ones in Manhattan that we’re in right now, who’s on the other side of that transaction? I can imagine that someone may want to sell something there, but who’s actually showing up to buy and how do they enter that digital ecosystem?

Naresh: It’s a good question. On one level, it may not help retail, but commercial real estate can still be fractionalized, so there is an opportunity there, but retail real estate can be fractionalized at a different level, [inaudible 00:30:46] securities, or CMBS, commercial [inaudible 00:30:50] securities. I think there is potential value in being able to review and analyze the underlying tokens which is sitting in there in that security. I think there is value leveraging fully AI or just analytics to be able to understand what the risk of that particular tranche of CMBS or RMBS is. The applications may well be richer there than at the base level of the individual mortgage or the individual building.

Ian: That makes a lot of sense, I can very much imagine a world where we rewind back to 2008, and instead of relying on a third party agency who had very little knowledge, it turned out in the end, what’s in any of these mortgage backed securities, you’ve got a reputable data source that allowed thoughtful analysis, that gave us some perspective on a realistic default rate to expect, and you avoid, potentially, the entire global financial crisis [inaudible 00:31:49].

Naresh: I think that’s absolutely right, but there are many other kinds of assets which can be mobilized and made more liquid and made more accessible. But yeah, I think on real estate, some of these, what exactly is the value proposition, are very worthwhile questions, and some of the answers are difficult.

Ian: It seems like there’s so much infrastructure necessary, though, to actually achieve that level of transparency. I think about the difficulty of getting basic information into a DLT transaction, and sort of the cost of it, and theory of network, gas, busy network, a large amount of data that you’re trying to write to the chain becomes suddenly, a very expensive transaction. And I think about this idea of taking all the underlying data that represents the assets contained in a single mortgage backed security, all the necessary metadata to actually do an analysis of the likelihood of default. Putting that all on chain today seems like a daunting [inaudible 00:32:42].

Naresh: I’m likely to be the first use case. I think some of the lower hanging fruit is out there, I think mobilizing collateral is one of the lower hanging, more desirable, easier accessible …

Ian: Interesting.

Naresh: … outcomes or use cases out there. There are a couple in the US which are operating, but they are only half the full story. They are doing some of it on DLTs, mostly the post-trade, but the actual transaction may not be happening on the ledger, at least in one of the cases. In the other, it’s happening, but it’s not scaled yet, it’s still very small, and it’s got private token running the other side of the payment mechanism. But the mobilization of collateral is very valuable for intraday repos, that is a use case that everyone’s hungry for. I think that is promising to be, or threatening to be, one of the early wins in this, let’s bring this function or this particular product or type of transaction on chain, partially or fully. And maybe it’ll happen in steps, you bring the post-trade process onto a ledger, and eventually integrate the actual transaction itself onto the same ledger, with all of its price discovery and KYC and everything else.

Ian: And the reason why there’s utility, and specifically in collateral on chain, is because today, there’s a bunch of inefficiency, where I’ve got collateral allocated for multiple days, it’s actually no longer needed because I’m waiting through the settlement period.

Naresh: That’s right, and for getting everything back from the custodians in time, assessing it, reconciling it, and then saying, okay, I’m good to go, just takes too long for an intraday of [inaudible 00:34:26]. So wherever there are inefficiencies in the current system, those will get teased out, and then, there will be opportunities to replace them with others. The defense is that some of those traditional approaches, mobilizing collateral, for one, wholesale payments, for another, just makes itself much more efficient. Look at what Swift has done in the last five years, they have speeded up their messaging. There used to be delays of all kinds in the past, and more recently, they have changed their system, they have got more certainty of a very high proportion of their messaging around payments to get to its destination within a very short time, and so, the barriers to entry are actually going up.

Ian: Oh, that’s interesting.

Naresh: They are defending their space, so it helps TradFi rise to the challenge and say, oh, not this one, you’re not going to take this away from me yet, because I am going to get better at what I do. And will DLT be able to replace it at reasonable cost and develop its value propositions? Sometimes not, so then you’ll have to move to a use case that lends itself with a value proposition to disrupt. So you got to be choosy, not everything is ripe for disintermediation.

Ian: My customary closing question, what are you excited and looking forward to in this space over the coming year? What should we be keeping our attention on?

Naresh: With my focus on wholesale payments and the monetary system, I’m watching for CBDC, and Project Agora is right here, and it’s the first time so many central banks have actually come together with a sense of purpose and optimism to try and leverage the technology. And I think to get the money loop addressed, to complete the tokenization of other financial and other real assets, I think if we progress the money loop in the two-tier banking system through CBDC, I’m most excited about that, and that’s what I’m going to be watching for the next year.

Ian: All right, we’ll keep an eye on Project Agora. Naresh, thanks so much for joining us on the program.

Naresh: Ian, thank you so much. Appreciate it.

Ian: Hey, there, thanks for listening to another episode. If you enjoyed what you heard today, do me a favor, open up your podcast app, rate the show, give us a review, tell us what you liked. Even better, you can share the podcast with your friends. And of course, make sure you subscribe so you don’t miss the next episode. I’ve just returned from a trip to Istanbul, Turkey, where the weather and the views were equally beautiful, and it reminded me that Chainalysis just dropped our crypto spring report, where we’re assessing the crypto comeback and provide readers some recovery insights and explore some growth opportunities. In our crypto spring report, you’ll get original research and analysis, including many of the subjects that we discussed on today’s podcast, like ETFs, institutional adoption, real world assets, and the cascading effects of institutional activity on the crypto industry at large. Our team also reveals ecosystem development and scaling, and the rise of layer twos and other initiatives that are improving major blockchains. As always, you can head to the show notes to find a link to download these new insights, and hopefully navigate the post-winter crypto market with confidence.