View Full Transcript

Carl James   00:00:00

Hello, everyone. Welcome to the latest podcast by Chris and Carl. Today, we're going to talk about tokenization, which is an emerging theme in capital markets. We've had for a number of years, innovations in the traditional finance TradFi space, where we've had settlement go from T+5 to T+2 and the huge infrastructure underneath that. What's currently emerging and has been emerging for the last decade is tokenization. And tokenization is the utilization of blockchain. Today, I'm pleased to say joining Chris and myself is Nupur Singh. Now Nupur Singh is the Head of Product for Fixed Income, and we're very delighted to have her on board. Nour, would you like to just introduce yourself and then talk a little bit about some of the elements around blockchain?

Nupur Singh   00:01:02

Thanks, Karl. My name is Nupur Singh, and I head the fixed income product here at S&P Global. Now when we talk about digital bonds and tokenization, it's easy for the conversation to get tangled up in some buzzwords, blockchain, DLT, DeFi, tokenization. So let's just lay it out clearly. Let's start with DLT. DLT is the technology or the main underlying infrastructure. It's a decentralized digital system, whereas blockchain technology is a type of DLT that was initially designed as a public ledger for Bitcoin transactions, but its potential use cases have since expanded far beyond crypto. Tokenization is the technique of creating a digital representation of any real-world asset on a blockchain. And that token can represent ownership, a claim or a right to cash flows. And then we have digital bonds which are simply bonds that use tokenization and DLT at some or all stages of their life cycle. There can be 2 types of bonds as well. They can be native digital bonds, which are issued directly on blockchain and the ledger itself becomes official record or we can have tokenized traditional bonds where the conventional bond exists off chain, but ownership is recorded on chain. So the hierarchy is simple. DLT is the infrastructure. tokenization is the method and digital bonds are the regulated financial product creating using that method.

Chris Fenske   00:02:30

Nupur, thanks for joining today. This is Chris. Thank you for your time today. And this is extremely interesting. But when I talk to people about this, especially like seasoned financial veterans, a lot of them are calling this a solution without a problem. The settlement system is pretty efficient still. billions upon billions of dollars are processed and settled every day. Millions of bonds are paid every month. What is this doing differently than what we have in the current state of the world?

Nupur Singh   00:02:57

So when we talk about digital asset issuance, people often assume blockchain is equal to heavily computation or heavy competition. But in context of regulated capital market, that assumption doesn't hold true. Digital bond platforms don't use the energy-intensive proof of work blockchain that powers Bitcoin. They actually use high-efficiency enterprise-grade DLT, like, say, HSBC Orion, Euroclear DLT, SDX, et cetera. And there are more public chains like Polygon, et cetera, that are used as well. So yes, there is some incremental compute cost, but it's tiny compared to the cost of today's market plumbing. There is huge efficiency gains, which is the main factor to consider here. In terms of operational efficiency, you have settlement that can be accelerated. We can hit the T+O. Then we can also talk about how all of the life cycle events like corporate actions can be programmed upfront. So I feel the compute cost is more than offset by the operational savings. So in other words, DLT adds a bit of commute, but eliminates a lot of operational drag.

Carl James   00:04:09

Nupur, I think you're right, actually. And one thing I'd say to you, Chris, is that you're right, efficiency is in traditional finance. And we've gone from, like I say, T+5 down to T+2. But going to T+1 second, that would mean the efficiency within the portfolio and cash management is -- could not be improved upon. because you can't go into negative time. So the utilization of cash and the effective underlying assets will be far greater and improved. And all I'd say to you is that you could talk about a 1970s car that got you from A to B very well. You had a great gearbox, you had good wheels, had a good engine. But the cars of today are even better, the automatic driving, cruise control, et cetera, et cetera. So again, this is constant innovation. And for me, moving from traditional finance to decentralized finance is a paradigm shift in innovation.

Chris Fenske   00:05:17

And I happen to agree. I mean, from a risk management perspective, I mean, cash settle, instant settle, sounds like a home run. I mean especially from a privacy perspective, seeing who holds a bond, following the chain of holders over time, home run. Back in the day, one of the things, I mean, Carly run a trading desk as well, failed trades. You sometimes see trades fail for weeks, months, sometimes where a trade happened, but security and money didn't exchange hands. That's a huge liability, especially if the trade gets broken, positions get changed. So I see the benefit of that. When you say distributed, how distributed is this? Is this going to between 100 different systems, servers, 10, 15, 5? I mean, I guess, in today's, I guess, the real world, the same data is in probably thousands of people's systems, right? If you bond reference data or CUSIPs, terms and conditions, everybody that's involved in the security that's -- or that's going to be involved in security has to have a copy of this somewhere. So I guess the end of the day, potentially be compressing it into this, I guess, smaller network of servers. There's some idea of like how distributed this is?

Nupur Singh   00:06:22

In terms of the technology itself, so if I understand your question correctly, Chris, you're asking about what does it actually mean when we say distributed, right? So without going too much into the technical implementation side of things, all I can say is this is held across multiple nodes, and that is the basic premise. So it's held across basic different nodes, but then it all comes together into a ledger, wherein everybody has the visibility of the same copy. So regardless of how many nodes or how distributed it is, which is abstracted from the participants of that transaction, the real beauty is how it all comes together and everybody has visibility of the entire ledger at the same time. It is totally time stamped. You can see what all happened. So the real power is, although this is distributed in nature in terms of the implementation, the implementation just gets -- comes all together when you want to see the whole ledger in one place.

Chris Fenske   00:07:21

Okay. So the number could be scaled up, I guess, based on the size of a market or depending on different performance metrics. So there's no actually set number that could change over time, probably potentially even efficiencies of systems and technology over time, too, as it improves. Okay. That's very interesting.

Carl James   00:07:38

I would say to you this is that I think I heard you use the word it could never. And I'm always a little bit cautious about that absolutism. I mean, let's not forget blockchain will continue to innovate as capital markets are looking to utilize this blockchain. So the blockchain of today will not be the blockchain of tomorrow. It will continue to innovate and scale. So again, you'll start to see -- do you remember the fixed protocol, that's the utilization of transactions codes that different systems could speak to each other. I mean, when it first came out, I think the fixed protocol had a limited number of tags. Once it evolved, I think the last one I came across was version 5.4, but whatever, and it had thousands of tags, so it became far more complex. And that's the beauty of the innovation. And I think when we look at blockchain, it's whether it can innovate and scale so that it is -- it has some utility within capital markets and the scale of capital markets.

Chris Fenske   00:08:50

In my opinion, what you're describing, I think would take quite a while to actually work for the entire public market system. From a private markets perspective, this is like a home run because that's a market where you don't want full transparency, you want strict permissioning on who can see what, who gets paid what, who could actually know a deal exists. And that market is growing as we speak right now. Deals are being created, investments to be created like during this actual session, we're talking right now, there could be 10, 15 deals being issued that we don't even know about and we never know about because it's a very opaque market. So any thoughts on how it could be expanded to something like that, which I think that is a potential home run out of the gate because it's definitely a problem that needs a solution as soon as possible. There's a lot of risk that could potentially be building up that it's hard to actually track.

Nupur Singh   00:09:43

That's another great question, Chris. And I think it will be the right time to probably bring in the concept about the permissioning of the network. So in capital markets, distributed ledgers aren't really thousands of anonymous nodes. They're small controlled networks run by regulated institutions. They are distributed enough to remove friction, but governed enough to meet regulatory standards here. So if we talk about what models we follow, the typical ones you may have heard of are, say, public blockchains. Now public blockchains are highly distributed like Ethereum, Solana, -- these are the networks that you could have heard about. Now anybody can run a node. There are hundreds of thousands of validators here. and this is the most distributed model, but often not used for our tokenized bonds issuance. What you mostly see is permissioned blockchains, which is kind of moderately distributed. You typically have 5 to 50 nodes, not really thousands and only approved institutions can run these nodes, for example, say, the HSBC, Orion, et cetera. But then you also have private ledgers, which are minimally distributed, 1 to 3 nodes. They're all run by the same institution. So there is so much flexibility basis the use case and the appetite of the institution issuing. You do have a different model that you can choose depending on that.

Carl James   00:11:07

I mean when you talk about public versus private market, I'd agree with you, Chris. It would make sense for private markets to go first as it were to adopt blockchain. -- within public markets, and you can see the infrastructure underneath is vast, complex. And as you say, it does work generally, and it is T+2. So it's not as though there's a problem that needs solving. The public markets element is just making things more efficient. So private markets is probably where it's going to take hold, first of all. And there will be some innovation there. Then I would suggest it starts moving into public markets. That being said, we're seeing a lot of tokenization of money market funds, and there are many large asset managers and a few of the large U.S. banks have already adopted the tokenization of money market funds.

Chris Fenske   00:12:17

That makes a lot of sense. I mean money markets are very bespoke, and you want to know who's holding along the chain. They probably change hands a fair amount to all different coupon structures. I could see that making a lot of sense, different credit risk for each money market. One thing, just to change topics really quickly. If you haven't seen on the news, there's a huge AI data center build-out. We talked about compute and infrastructure to drive some of this. That potentially one day could be a low-cost way of providing compute and memory storage for these blockchains. I mean it's going to take a lot of infrastructure to potentially do this for the public markets globally one day. So maybe that could be a relatively lower cost and more efficient way, provide at least the capacity that's needed one day to do this cost effectively for everybody. So that's what I was saying back in my mind.

Carl James   00:13:07

Yes. I think that's a very good point. And let's not forget, you're starting to see the blurring of public and private markets in terms of people's appetite for exposure to both. Now as the private markets move to blockchain and then the public markets move to blockchain, that ability to blur or to create portfolios with both private and public assets will be much, much easier. So again, blockchain will give you the ability to not only have a wider variety of assets, but actually end up with fractional ownership because you're -- if you want to buy a building and it's worth a huge sum of money with blockchain, you could buy a fraction of that building and you have exposure to real estate. And so it goes on. So your portfolio could be even further diversified at a much lower cost.

Chris Fenske   00:14:12

I actually like the diversification angle. You could take several hundred of, say, thousands of private investments, diversify it, molded in a way and efficiently settle it, transfer out of different assets simultaneously. To do that now, it's extremely cost and efficient and not to mention bid-ask spreads and everything else that goes on in the backdrop. But from a settlement perspective, it would cost more than the trade itself with some of these markets today. So it's very interesting.

Nupur Singh   00:14:39

And not to forget the blockchain, which is used in capital markets, it does not really require the kind of massive GPU-heavy AI data centers that we talk about generically. These DLT platforms, which are used for digital bonds, they run on standard enterprise service. So I just wanted to lay it out there as well. So it is not really going to be a massive factor.

Chris Fenske   00:15:01

I must say I'm more of a believer now in all honesty. I mean maybe it might take a while. But I mean, it's -- to our point earlier that maybe private markets is where this really would start getting a lot of momentum. And maybe the lessons learned from private markets and the infrastructure created from private markets and DLT and blockchain could be leveraged one day for the public markets, which is obviously a much bigger task and a lot of firms that have to adjust and invest in actually being able to settle on that type of settlement platform as well. So it's very interesting. I appreciate your time today.

Nupur Singh   00:15:34

And I just want to also bring in some quick stats in 2025 itself, talking of public markets. We've seen upward of 18 issuances, digital bond issuances. So the volumes are speaking for themselves. It's no longer the proof of concepts that participants were carrying out. These are all investment grade. These are all issuances in the true sense of the word. So this is definitely scaling up. It's no longer about if this is going to happen or will adoption happen. It's now shifted to, yes, it is going to happen. How do we scale it? How do we make it more operational.

Chris Fenske   00:16:09

Okay. You covered a lot today. I've learned quite a bit. Nupur, thank you for your time today. And Carl, always a pleasure working with you on these and chatting. This is interesting. This is something that we all have to keep an eyes out for. Obviously, SAP is actively involved in a lot of these discussions with issuers and banks and pushing this forward and sharing our thoughts and our expertise. So thank you again for your time. I appreciate this and looking forward to catching up again, Carl. Thank you, everyone.

Nupur Singh   00:16:40

Thank you.