Navigating Tokenized Asset Investments for Institutional Buyers

This conversation is part of our Money Moves series, an X (formerly Twitter) Spaces series that dives into all things “’tokenization’’. If you want to understand what it means, why it matters, and how to participate in a market anticipated to grow to $20T+ by 2030, mark your calendars. Find the audio content from the Money Moves series here.

Guest Speakers:

Hosts: 

For the audio version of this conversation, click here.

We often hear about the pipeline of assets being tokenized on-chain. From T-bills to wine to emerging market debt and everything in between. But what do the institutional buyers think? We explored insights from the buy side, including:

  • Areas of interest for the buy side
  • Key challenges, lessons learned, and practices to consider
  • Avalanche Vista – What is it and what are program criteria?
Introductions

Patrick: I’d love it if you gave us more about your background and tell us how you made your very first dollar. Bring us up to speed and we’ll go from there.

Kevin: Interestingly, my journey into entrepreneurship began by driving an ice cream truck around my hometown of East Lyme, Connecticut – I probably caught the entrepreneurial bug there.

Today, I manage BlockTower Credit, a fund with a distinctive approach. Unlike other funds, we don’t invest in early-stage projects or digital assets. Instead, we deal with traditional credit assets. We tokenize and securitize these assets on the blockchain and leverage it to execute a conventional structured credit and hedge fund strategy. Before my role here, I led the structured credit trading desk at Citigroup, specializing in ABS and ABS CDOs. Later, I managed operations at a FinTech lender called Cap Chase. 

Pete: My first earnings came from clam digging, where I harvested thousands of clams daily. 

I currently serve as the CIO at Artory/Winston, a digital asset investment manager focused on art and collectibles. Our partnership combines Artory’s expertise in web3 FinTech for art and collectibles with Winston’s reputation as the world’s largest independent art appraiser and advisory firm, having handled around $70B in advisory work over the past decade. 

My role revolves around institutionalizing our fund management business. We invest in physical assets as well as NFTs, and my entry into blockchain tech was motivated by issues in structured finance servicing. 

Colin: As for my very first earnings, it’s a bit of a humble story –  I made my first dollar selling crafts that my sister and I created. Looking back, it’s quite likely that my mom might’ve played a role in helping our neighbor buy one of our crafts for a dollar. We all start somewhere.

Today, I’m an independent advisor and investor in various FinTech and blockchain businesses. Until recently, I worked at Victory Park, a private credit fund, where I focused on digital asset exposure for about three years. My career began in investment banking. 

What is Avalanche Vista and why is it such a big step forward for the industry?

Morgan: Avalanche Vista’s significance stems from the Avalanche Foundation’s up to $50M allocation over an extended period to purchase assets tokenized on the Avalanche Blockchain. While many venture capital funds have focused on asset tokenization protocols, they usually stop short of actively buying these assets. Avalanche Vista steps in as a liquidity provider for a wide range of assets, spanning different types, liquidity levels, and maturities. This initiative is a partnership involving both traditional and crypto-native investors, reflecting a holistic approach. 

What are some of the eligibility criteria for project consideration? 

Morgan: The criteria for Avalanche Vista’s investments encompass a few key elements: 

First, the program prioritizes protocols that offer quantifiable improvements in processes, onboarding, and administration compared to traditional methods. This way, institutions can be assured that these blockchain native assets are high quality.

Second, Vista considers protocols with thoughtful strategies for onboarding off-chain capital into these assets, expanding beyond the crypto-native liquidity pool. 

Lastly, Vista looks for protocols that aim to navigate regulatory and compliance landscapes diligently, as many of these assets are classified as securities. 

Now, let’s address the fundamental question that people ask all the time. What’s driving interest in tokenized assets?

Morgan: We believe it’s the realization that blockchain can enhance asset ownership, streamline processes, and open up new investment opportunities. This realization has led to a surge in interest from both institutional and retail investors. 

To concisely preface the buy side vs. sell side: the buy side is comprised of entities like asset managers, institutional investors, and funds that purchase and hold assets for investment purposes. On the other hand, the sell side includes entities like investment banks and brokers who work with asset issuers to facilitate the sale of financial assets. In essence, the buy side buys, while the sell side works with asset issuers to facilitate the issuance and trading process for the buy side. 

Avalanche Vista marks a pivotal step forward because it aligns traditional and crypto-native investors to drive asset tokenization and liquidity on Avalanche, enhancing the blockchain ecosystem’s maturity and credibility.

Kevin: In the credit space, the issuer of a credit asset or a borrower interacts with the sell side, often represented by the brokers like the team I used to lead. The sell side brokers transactions between borrowers and lenders or buyers and sellers. The buy side, on the other hand, includes entities like hedge funds, insurance companies, and private equity that hold capital for the long term. Tokenized assets need to appeal to the buy side, as they are the ultimate decision-makers when it comes to purchasing these assets. 

Pete: While technology can create novel assets, it’s crucial to align these assets with what the buy side desires. This means understanding the constraints faced by different entities and working backward from these constraints to create valuable offerings.

In sum, tokenized assets are gaining momentum as they can bridge the gap between traditional finance and the crypto world. They offer solutions to complex financial problems and are increasingly appealing to the buy side, leading to the growth of the tokenized asset ecosystem. This trend is driven by the recognition that blockchain can address real-world financial challenges, marking a major intersection between TradFi and the DeFi ecosystem. 

If you could solve one problem, what would it be?

Morgan: Kevin, before you answer, I’d like to highlight your blog, ‘’Everything is Broken,’’ from earlier this year or last year. It provides vivid examples of how off-chain processes often fall short and how transitioning these processes onto the blockchain can offer practical solutions to real-world problems. Could you share some insights from that blog that reflect your excitement about applying blockchain to tangible problems today?

Kevin: I passionately believe that securitization, a vital part of the US debt landscape, is unnecessarily costly. Leveraging Ethereum’s Centrifuge, we’ve achieved remarkable efficiency. We’ve securitized $175M in assets for a mere $14K compared to the traditional $200K cost. Smart contracts and shared databases have been game changing, virtually eliminating reconciliation costs. Although we still use parallel systems as pioneers in this ecosystem, we’re determined to replace middle and back-office functions, welcoming a new era of efficiency. 

Pete: I wholeheartedly agree with Kevin. Over my years in this field, I’ve encountered numerous issues like wrong payments and data delays. It’s clear that reducing costs isn’t just about tech; it involves addressing operational and legal aspects. Early adopters like Kevin and I play a crucial role in driving this transformation. 

Morgan: I’d like to emphasize that tackling real-world operational issues is essential. Tokenization often takes the spotlight, but its efficiency gains from solving these problems that hold the real potential for change. Many projects focus on tokenizing assets without considering the cost-saving and efficiency-improvement aspect. 

Patrick: Adding to the discussion, I want to highlight problems like share tracking, a fundamental issue within market infrastructure. Even the most basic tasks can become tangled in a web of complex systems, leading to inefficiencies and information asymmetry. 

In summary, we stand at the cusp of a financial revolution, determined to confront inefficiencies head-on. Blockchain and smart contracts are our tools of choice, and early adopters like us are the driving force behind this change. The future is closer than ever, and the potential for transformation is immense. 

Which asset classes or industries do you believe are best positioned to transition to blockchain, potentially driving sector-wide growth and transformation? And, what types of  asset classes are made possible or enhanced by blockchain and tokenization? 

Colin: In this discussion, we’ve highlighted two key drivers for institutional adoption of blockchain technology. First, there’s a focus on achieving cost efficiency in middle-office operations and gaining access to novel assets. Both of these aspects offer the potential for superior risk-adjusted returns that traditional methods may not provide. However, it’s important to recognize that while the infrastructure supports costs\ efficiency, practical implementation can be challenging.

During my time at Victory Park, I learned that transitioning assets onto blockchain often required incubation or porting, and it may not be as straightforward for many institutions as it may seem. Kevin’s situation with ready buyer assets is unique and not easily replicable. This underscores the need to address not only technical capabilities but also the practical hurdles of adoption. 

Blockchain enables the creation of new assets, particularly those that are cost-prohibitive for traditional securitization, like small-dollar denominated assets. I personally find the concept of creator finance particularly exciting in this context. In conclusion, institutional adoption of blockchain involves addressing both technical and adoption challenges while exploring innovative opportunities in asset classes. 

Question: What is the compelling pitch to institutions for tokenization?

Kevin: I recently encountered an anecdote highlighting middle-office efficiency gains through blockchain technology. While some might dismiss these savings as small, when you consider the colossal global cost of reconciliation, tokenization becomes pivotal. Tokenized assets need to become the new standard to unlock the full potential

Morgan: Most traditional financial institutions are already focusing on tokenization, particularly in private market securities. They see operational efficiencies, and importantly, possess established distribution channels that can facilitate adoption and democratize access to assets.

Pete: Tokenization extends beyond financial services. It offers substantial value in non-financial applications like art and collectibles. Simplifying operations, data management and ownership tracking is a compelling use case, and the creation of shared immutable ledgers for such assets is key.

Patrick: Blockchain provides a shared source of truth and eliminates manual errors, which may be taken for granted in traditional systems. However, there’s still fear of new errors, affecting adoption, which highlights the need for education and transition facilitation.

Colin: The gap between traditional finance and the crypto spaces’ expectations regarding tokenized assets is a challenge. Traditional investors may often expect higher returns and hesitate to embrace tokenized assets. Overcoming this involves addressing both technical and reputational risks.

In essence, the pitch to institutions emphasizes the transformative potential of tokenization, not just as a cost-saving measure but as a fundamental shift in asset management and transaction methods. While challenges exist, the benefits, such as improved efficiency and broader market access, make tokenization an enticing proposition for adaptable institutions. 

Any final words? 

Kevin: Thanks for having us. Shout out to Avalanche and Avalanche Vista for joining us in the tokenized asset space. We were feeling a bit alone in this market, but hopefully, more will follow suit. Excited for what’s to come.

Pete: I’d like to express my gratitude to Avalanche. We’re exploring further development opportunities, and what the industry needs now is action, whether it’s risk management, sponsorship or fostering an ecosystem. The potential in the capital markets is immense, and Avalanche, along with us, can lead the way.

Morgan: Thank YOU for joining us!

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