Friday, April 12, 2024

finally, a big step forward for tokenization; gold; crypto marketing and more

“The future ain't what it used to be.” – Yogi Berra   

Hi everyone, and happy Friday! Finally! I hope you have good things planned for the weekend – it’s been an intense week.

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IN THIS NEWSLETTER:

• Asset tokenization takes a big step forward

• Gold keeps going

• Tradfi crypto marketing kicks in

• Nordic crypto ownership

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WHAT I’M WATCHING:

Asset tokenization takes a big step forward

One of the things I’m planning to focus more on this quarter is the determined march of tokenization, in which real world assets are represented by onchain tokens. There has been a lot going on, and I’ve been doing some writing on this in the background, not yet published. But much of the recent developments have felt sort of same-y.

This is not at all a criticism as more experimentation is better, and an interesting feature of the same-y-ness has been the breadth of big legacy names issuing securities on-chain. But I’ve been hoping for a sign that we would be moving beyond replicating old formats on new rails, beyond “paving the cow paths”.

The BlackRock BUIDL tokenized fund, which went live last month, just may be that sign.

First, some background, and then I’ll get into why I’m writing about it today:

In March, BlackRock launched the BlackRock USD Institutional Digital Liquidity Fund, represented by the BUIDL token (a fun crypto inside joke, doing to BUILD what HODL does to HOLD). The fund will invest in US Treasuries, repo agreements and cash, accruing yield and paying out monthly in the form of a BUIDL dividend. The token runs on Ethereum as an ERC-20, but is only available to eligible accredited investors. The minimum initial investment is $5 million, with top-ups requiring at least $250,000. Securitize is the transfer agent and technology partner, and BNY Mellon is the administrator and custodian.

Initial reception has been strong, with the fund amassing over $288 million in AUM from 10 holders in just over three weeks. To get an idea of how significant these flows are for a new fund, Franklin Templeton’s BENJI token – which represents a Franklin Templeton money market fund and runs on both Stellar and Polygon – has roughly $360 million AUM three years after launch.

However, there are key differences between the BlackRock and the Franklin Templeton funds that should be taken into account:

1. One is that Franklin Templeton’s token was created under the Investment Company Act of 1940, which allows it to be offered to retail investors. BlackRock’s token is issued under rule 506c, which gives more regulatory flexibility but limits access to institutions and other accredited investors.

2. Another is that holders of Franklin Templeton’s token can only purchase and redeem. Holders of BUIDL have been able to purchase, redeem and transfer amongst themselves.

This transferability is what grabbed my attention when I first started digging into this, as it opens up new utility. It suggests that BUIDL could be sold to another whitelisted user in exchange for USDC, 24/7, giving the product a potential liquidity not available to traditional or other tokenized funds that are limited to weekday redemptions. True, it could be a hassle finding another approved user that wanted to make the swap. But the ability to do so is interesting.

It also hints at potential DeFi applications, such as using BUIDL for collateral in a whitelisted lending pool, or posting BUIDL as collateral for a derivatives trade.

But then, yesterday, BlackRock, Securitize and Circle announced an even bigger step forward.

Now, BUIDL is connected to a smart-contract pool of USDC to enable direct redemptions. This is new, I haven’t seen this function in any other large-scale tokenization project.

Essentially, it codifies 24/7 liquidity for a money market fund. The potential impact on treasury management is intriguing. Typically, a money market fund holder that needs cash on a Saturday night would either have to redeem on Friday (losing a day of interest) or wait until Monday (potentially losing a contract or trade). With this function, holders of BUIDL can be earning a yield up until the moment they need the cash, and then with little more than a click of a button, swap for USDC which can then be sent anywhere in the world within minutes, at any time of day or night.

This is likely to be of particular interest to crypto companies looking for efficient ways to manage their treasuries, which can be large – think of all the blockchain businesses that have raised funds, including builders, hedge funds, even DAOs. BUIDL gives them high confidence access to yield (BlackRock is one of the lowest-risk non-government counterparties) and access to stablecoin liquidity.

Even beyond the crypto ecosystem, this function could be of interest to corporates looking for smooth 24/7 redemptions, especially as stablecoins become increasingly used for cross-border transactions.

As far as I know, existing tokenized funds only redeem for fiat, although some facilitate subsequent conversion into USDC. The BUIDL feature is a direct smart contract transaction, trading BUIDL for USDC onchain, without having to leave the crypto ecosystem. What’s more, other redemptions can take hours or even days. BUIDL-USDC onchain conversion is almost instant.

Here’s where it gets conceptually important. We have a security (BUIDL) that can be converted into cash (well, USDC but close enough) on the same underlying rail. In traditional finance, securities run on one layer, cash runs on a totally different one, and they can only connect via centralized, corporate-controlled points that each involve a considerable amount of verification and information transfer in the background.

One of the most overlooked features of blockchain rails and one of the most intriguing opportunities of asset tokenization is the potential for money and securities to not just exist side by side, but also to meld.

It’s not just the possible applications that intrigue me, with securities perhaps eventually being used as a type of money. It’s also the philosophical blurring of definitions, and the forced re-questioning of what we mean when we use those terms.

BlackRock’s BUIDL token feels like a step towards that new concept, as well as towards a more fluid marketplace that combines savings with functionality and liquidity. For now, its reach is limited to institutions, but this could change should those involved decide to jump through even more regulatory hoops. Meanwhile, we have a live, functioning service whose evolution we can track on chain, and which could shed light on growing interest in onchain utility, boosting not just onchain savings but also stablecoin activity.

Big picture, this feels like a significant step forward in what we hope blockchains can deliver: broader, much-needed financial innovation.

Gold keeps going

Gold continues to make new highs, reaching almost $2,400 earlier today. This is starting to freak out even normally sober macro commentators.