Are Tokenized Stocks Real? | Gabriel Otte of Dinari

Gabriel:
[0:00] I think the full promise of tokenized stocks, like what we talked about just now in terms of everything becoming on chain and there's settlement across all these different asset classes and things like that, that's exciting.

Gabriel:
[0:11] I believe that is the future. I don't think that future is this year. I think that future is years away.

Ryan:
[0:20] Welcome to Bankless, where today we explore the frontier of tokenized stocks. This is Ryan Chon Adams, just me today. David is out somewhere climbing mountains, so I'm here to help you become more bankless. The question today, how close are we to the tokenized stock revolution? Like, when are we going to be able to have Tesla and NVIDIA and Apple shares all on-chain? It seems like we're partially here, at least over the past month it has. There have been platform announcements from Robinhood and companies like Xstocks. They're listing these on-chain stocks, some of which are available in the European Union. Are these stocks as good as stocks inside of a U.S.

Ryan:
[1:01] Brokerage account? Or are they just some kind of derivative? And when are the real tokenized stocks coming to the U.S.? I just had a ton of questions going into this episode, and all of them, and I do mean all of them, were answered by my guest, Gabriel Ott. So a few weeks ago, Gabriel's company, Denari, received the first ever broker-dealer license to issue tokenized stocks in the U.S.

Ryan:
[1:26] That seemed like a big deal, but it was a press release. I didn't know exactly what it meant. And we discussed that in today's episode. But in order to get there, and this was, in my opinion, the best part, we had to start at the very bottom. When you own a stock, let's say inside of your brokerage account, what do you actually own? This is just an incredibly informative episode for investors, crypto and traditional investors alike. And this episode, I think, includes everything you need to know about tokenized stocks. And yes, they are real.

Ryan:
[1:57] Let's get right into the episode with Gabriel. But before we do, I want to thank the sponsors. Bankless Nation, we are joined by Gabriel Ott. He is the co-founder of a tokenized stock company called Denari. He's also a serial entrepreneur. Coming to Bankless to help us make sense of all these tokenized stock things. Gabriel, welcome to Bankless. Thank you for having me.

Gabriel:
[2:16] Okay.

Ryan:
[2:17] What are we doing with tokenized stocks? Why are people excited? Just give us the lay of the land.

Gabriel:
[2:22] I think overarchingly, the goal for us has always been, how do we bring capital markets on chain in a sustainable and legal and compliant way? It is the biggest asset class, stocks, right? And we want to make that as borderless as possible, as interchangeable as possible. You know, even simple things you can imagine, like swapping an Apple share for a Google share directly. You cannot do that off chain today.

Ryan:
[2:52] Wait, wait, wait. You can't just swap. Wait, you can't just swap a Google share for an Apple share in a one-to-one way, the way you could swap any asset for another asset on Uniswap?

Gabriel:
[3:03] On Uniswap, you can. Well, I mean, we can get into that. What I was talking about is like in the traditional exchanges today, like the Robinhoods of the world, the Schwabs of the world and things like that, you can't do that.

Ryan:
[3:12] Okay, see, this is how, I mean, I do so much stuff in crypto. Sometimes I forget the limitations of like stocks. I mean, the stocks I have are just primarily kind of buy and hold type things. So I'm not usually doing asset for asset. Yeah, that's crazy that we don't have the functionality to just swap one stock for another the way we just natively enjoy that in crypto. We're talking about the benefits of tokenized stocks and we think of other things like, oh, it's open 24-7. It's globally accessible to everyone at the internet connection. But also, you're right. Wow, if we don't have the ability to do asset for asset swap, that's a severe limitation.

Gabriel:
[3:47] Oh, yeah. Yeah, it's things as basic as that, that tokenized stocks can open up. All right.

Ryan:
[3:54] So it seemed to be for a while that the SEC and Gary Gensler really didn't want us to do this type of thing. I'm sure we'll talk about regulation as part of the story. But I guess maybe the bigger meta question here is like, well, crypto has been around for a while. Ethereum is getting ready to turn 10 years old. The ERC-20 standard is not that far behind Ethereum. So it's got to be like, you know, eight or nine. Why don't we have tokenized stocks yet?

Gabriel:
[4:22] Well, securities, and I want to be specific here, right? Tokenized stocks, and when we're talking about tokenized stocks like Tesla or Google or Apple and tokenizing those, those are what's called NMS shares, right? So national market, as in public shares that are registered securities, it's literally called Reg NMS, right, that trade on public exchanges like NASDAQ or NYSE. Tokenizing those is very complicated because those are some of the most regulated assets on the face of the planet, right? Technically, there are securities laws that have been in place for over 80 years now that basically says each stock and who owns it has to be marked on a ledger so that it can be sort of kept track of, right? And those securities laws still exist today. And you can imagine it might make regulators nervous when you start talking about, well, let's tokenize them, turn them into tokens and swap them permissionlessly on DeFi or something along those lines. And then you all of a sudden don't know who owned these securities,

Gabriel:
[5:37] Which runs headlong into these securities laws that have existed for so long. And so I think everyone's kind of coming to grasp with like, How do we enable this awesome technology so that we can gain those efficiencies like swapping Google for Apple directly or something like, which is way more efficient than having to sell the Apple share, wait a day, you know, get the cash and then buy into Google, right? So there's reasons to want to do it. And I believe, unlike the previous administration, this administration really wants to do it. However, the securities laws were put in there for consumer protection and for a reason. And I believe it actually contributes to why NASDAQ and NYSE are so trusted and large and deep in their liquidity as it is today is because of those securities laws. And so it's really about them trying to figure out how do we keep those protections while enabling this new technology. And that takes a long time for them to figure that out.

Ryan:
[6:35] It takes a long time for them to figure that out. They also have to be open to it. And to your point, it does seem like this new administration under SEC chair, Paul Atkins, is open to it. I guess maybe more on that later, but you called these things NMS stocks. Is that the right acronym, NMS?

Gabriel:
[6:51] NMS, yeah. So there is a regulation that governs these NMS stocks. And NMS stands for National Market System.

Gabriel:
[7:01] Yeah. Right. And so it's literally called REG NMS.

Ryan:
[7:05] Okay.

Gabriel:
[7:05] Which was established essentially to enact sort of fair practices in terms of buying and selling of these stocks and all that's through brokerages. With FINRA sort of approving those brokerages and this other company called DTCC that essentially keeps a giant ledger of who owns what stock.

Ryan:
[7:25] Yeah. Okay. Yeah. So you mentioned the NMS stocks are all registered on a ledger. Is the ledger DTCC? Is that sort of the global ledger? Is that like the Ethereum for stocks basically?

Gabriel:
[7:34] Effectively. Yeah. Depository Trust Clearing Corporation is what it stands for, DTCC. Okay. And it's an infrastructure that provides the clearing and settlement and the information services for the for the financial markets.

Ryan:
[7:48] And who runs DTCC? Is that that you said is a corporation? So that's not a public good. It's not like Fedwire. It's not run by a government agency. It's a it's a company running this thing.

Gabriel:
[7:57] It is a company that's running this thing. And that's one of the reasons why Denari exists is I believe it should be a public good, right to to to actually make this something that is publicly available and controlled by people that are using the system, not a separate company.

Ryan:
[8:14] Yeah, it's weird. Do you know much about the history of DTCC? How did we come to have this structure?

Ryan:
[8:22] And you're saying this is the ledger that settles all, basically all publicly traded companies, at least in the US capital markets, is DTCC. How did this organization come to be? Like, what is it? Are they massively profitable? Do they make a lot of money on this or is it sort of thin margins here?

Gabriel:
[8:39] Yeah. So, I mean, they do obviously gain from this. I mean, it's not like a nonprofit entity as far as I'm aware. It is a for-profit entity. But the history of DTCC is like fairly convoluted, but it's kind of, you know, public information. But what happened is in the 1960s and the 70s, as people started moving away from kind of paper ownership of stock to,

Gabriel:
[9:08] Shall we say, the first version of what it meant for it to be on a digitized sort of ledger, right? There is a company that came into existence that we now call DTCC. And that company was one of the first companies to actually do this, that keeps track of this ledger, so not just in paper. And at some point, I'm going to get the years wrong off the top of my head, so I'm not going to guess. But basically... The company started doing the electronic depository of these, you know, paper certificates. And as DTCC sort of, I think at the time it was called DTC, evolved, there was this other sort of industry created a system called National Securities Clearing Corporation or NSCC. And that infrastructure came about in the 70s. And those two organizations essentially came under one umbrella, which we now call DTCC, I think in 1999. And that gave us the first fully integrated kind of a post-trade utility for equities and most bonds. So all of a sudden, everything got digitized and kept track of through this massive sort of conglomeration that happened. And then they essentially became a monopoly over time in a way that the government

Gabriel:
[10:34] blessed effectively to keep track of.

Ryan:
[10:38] Okay. So, Gabriel, maybe you can help me because I think a lot of people don't really think too much about their property rights, right? In kind of the real world, you just kind of take it for granted, whatever property rights. I have the thing, you know, I'm not looking at the kind of the chain of who really owns it and what my rights actually are. But in crypto, we think a lot about property rights, actually. Sure. And it sort of starts at the base level with these instruments called bearer assets, which means if you have possession of it, you just like actually own it. Not a third party, it's all registered on a public ledger. That's what raw Bitcoin is. That's what raw Ether is. So when we're thinking about like stocks, you know, pre-1970s, okay, so I'd imagine this is like the analog era, nothing's electronic. Okay, so DTCC, whomever, they maintain some sort of ledger of who owns what. And then I literally, if I own some, I guess I can't buy Apple. What can I buy back then? IBM. I own some IBM shares. I'm bullish on mainframes. You know, it's the 60s. I'm really bullish on mainframes. And I have shares in IBM. I could actually have like a certificate that says Ryan Sean Adams owns five IBM shares. And I get that. And is that like a bearer instrument? Like would I go keep it in my safe? And like, this is kind of a bearer asset that I can redeem? or is it not really a bearer asset, but it's just kind of a certificate and they kind of maintain

Ryan:
[11:58] the ledger? Like, what was this instrument back then? And then we'll get into like what it is now, but what was it back then?

Gabriel:
[12:04] So bearer instruments, you know, had the connotation that whoever owned that certificate had ownership in whatever company, right? And so you're correct in so far as some point in the history of the U.S., anyone who held a certificate, like a stock certificate in IBM or something like that, is like whoever brought that certificate had the ownership rights to that. The U.S. Largely moved away from the bear certificate model as this computerized model came into existence in the 80s and 90s. In fact, they started getting rid of them in all sorts of different categories, whether it's bonds or stock or whatever, because they found that it was an opportunity for people

Gabriel:
[12:47] To commit fraud,

Gabriel:
[12:49] Right? Or, you know, even worse, you could shoot somebody, get their, you know, stock certificates and, you know, cash it out or something like that, right?

Ryan:
[12:56] Right, right.

Gabriel:
[12:56] And so part of what they were trying to do was to move away from the bearer model to an ownership ledger model where, like, you bought it, it's on a centralized ledger somewhere that it is yours. And so that matters more. And the proof of your identity matters more than some piece of paper that you might have gotten. And then, you know, over time, the pieces of paper that were issued by these transfer agents were named, right? So that it sort of reinforced that. But even then, the papers weren't as important as the underlying ledger itself to avoid scams, to avoid, you know, people taking each other's bearer bonds. So today in the United States, as it stands, there are no bearer shares.

Gabriel:
[13:44] Effectively, they're illegal in the United States. And it was all in the name of, you know, saying we need to protect the end and owners of these stocks.

Ryan:
[13:54] Yeah. And I guess there are benefits of that reduction of fraud. And obviously, there are downsides in terms of if you have a bearer asset, you really have to make sure you're securing that. You can't lose your stock certificates or you're gone. Also probably makes voting in governance, proxy votes, that kind of thing, maybe a little bit difficult. So there's benefits. I guess from a nation state perspective, if they're really looking to bolster their Bank Secrecy Act, AML, KYC type stuff.

Gabriel:
[14:22] And that came out of

Ryan:
[14:22] The seventies too, right? Yep. You have no idea who owns a bear asset. So a nation state that wants to do some surveillance, you know, it's kind of nice to have a centralized database, I suppose. So it's like, what is it, what is it today that somebody owns? Let's say now I own Tesla and I own it inside of my Fidelity account.

Gabriel:
[14:43] What do I actually own?

Ryan:
[14:45] And who are the third parties in that kind of like chain that I'm, I guess, maybe like, like trusting, I guess, I know it's Fidelity, because they're the broker dealer, right?

Gabriel:
[14:56] Yes.

Ryan:
[14:56] Who else is in that chain? At the very bottom, we establish is DTCC. But like, what do I actually own here?

Gabriel:
[15:02] Two different questions, right? Who's involved? And what do you actually own? Right? So who's involved? The broker dealer has an account for you in your name. So it's not like a bank account. You actually own those assets by law. So it's under your name. Ryan has an account at Fidelity, the broker.

Ryan:
[15:19] Why is that different than a bank account that I own in my name?

Gabriel:
[15:22] Because when you're in a bank account, oftentimes if you say you put it into a savings account or something like that, you don't actually own that cash. The bank is going to take that cash and invest it and then give it to you.

Ryan:
[15:34] It's just FDIC backed, I suppose. So up to $250K. But yeah, I don't own it, right? It's basically kind of bank balance sheet asset.

Gabriel:
[15:41] Whereas shares are a little bit more rigorous than that of if Fidelity says you have X amount of Apple shares, there has to be that X amount of Apple shares at that brokerage to be that is explicitly under your name.

Ryan:
[15:54] That's good. So they're not like fractionalizing it and lending it out in the way banks do with fiat.

Gabriel:
[16:00] Right, right. Generally, they're not. I mean, now some brokerages do do that and that's into user agreements and things like that. But so brokers are one party that's involved. And then there are clearinghouses that are sitting behind the brokerages that actually they could be thought of as the custodians of those shares. And the party responsible when those shares exchange hands to sync it back to DTCC, the national repository of who owns what.

Ryan:
[16:32] Okay, wait, so the broker is Fidelity in the case. So I own Tesla shares, my Fidelity account, and I truly own that. It's under my name. And then Fidelity is the broker and they deal with settlement for DTCC. So they're kind of- No.

Gabriel:
[16:45] No, no. There's a clearinghouse. There's a clearinghouse. Sitting behind it, right? So many people might have never heard of these companies like Pershings, for example, is the largest clearinghouse of all stocks in the country. And they, I believe they back like the Fidelities of the world, the Schwabs of the world in terms of like actually holding the shares.

Ryan:
[17:08] Wait, wait, it was unclear. What are they doing? So Fidelity is obviously the end user kind of like app to me. That's where I'm buying things. They do the exchange, all of that. So I understand that. That's kind of like the Coinbase, I suppose, right?

Gabriel:
[17:20] Yes, yes.

Ryan:
[17:21] And then DTC, I understand what they're doing. They're doing the Ethereum thing. They're being the settlement layer for all of the assets. And then the clearinghouse, wait, what are they clearing?

Gabriel:
[17:32] They're actually doing the clearing in terms of getting the shares from the market and acquiring it and making it accessible for the brokerages. Like that's a separate that's a separate responsibility.

Ryan:
[17:43] Why is it separate?

Gabriel:
[17:44] In the traditional infrastructure.

Ryan:
[17:46] Yeah. How did it come to be separate? Why is that needed?

Gabriel:
[17:49] I actually don't know how it came to be separate. I'm sure it was a historical thing. But generally speaking, most brokerages are what's called introducing brokers. And they themselves do not sync to DTCC. They have to work with one of these

Gabriel:
[18:02] clearing partners to actually clear the shares into their brokerages.

Ryan:
[18:06] So are the clearing houses the ones with the deep liquidity? Do they have all kind of the liquidity?

Gabriel:
[18:11] Yes.

Ryan:
[18:12] All right. So these are the deep pools of liquidity. All right. Okay. So back to the other question then. So what do I own?

Gabriel:
[18:18] What do I own? Ultimately, you own ownership, direct ownership of those shares. Those shares are kept in your name. Even at the clearinghouse level, they're kept in your name. at the DTCC level, they're kept in your name, right? And somewhere, there's another set of companies called transfer agents. They're working directly with the companies to keep a cap table for that company, right? And that cap table needs to be synced with the DTCC. And that cap table is kind of the ground truth for if there's a liquidation of that company or something along those lines, who gets what amount of money. So that cap table is the ledger that the company keeps. DTCC keeps the ledger across all the different companies and who owns what. And the clearing houses and the brokerages work together to make it available for the end user.

Ryan:
[19:12] Okay. So that transfer agent then works to maintain the cap table with the company so that if I'm an executive in the financial department of Tesla and I wanna see all my shareholders, right? I could just like generate a table, see all my shareholders, see Ryan John Adams, here's what he owns. And he's not a whale, he's a minnow. But I get to see everybody and I could throw out like governance votes, like proxy votes, that kind of thing, contact all the shareholders through this route as well. Okay, I don't think I've ever fully understood this as well as I do now. So, Gabriel, thank you for that. That was fantastic.

Ryan:
[19:52] So, what's the total value of this publicly traded company? You said it was the biggest market in the world or one of the biggest markets in the world. What are we talking?

Gabriel:
[20:04] The public stocks market size-wise in the world is in the trillions. The numbers, the precise numbers, I feel like vary depending on who you ask. But as of last count, I think that the general consensus is somewhere between $100 and $120 trillion.

Ryan:
[20:23] $100 and $120 trillion. Is that just US capital markets.

Gabriel:
[20:27] US equities? No, that's globally. In the US specifically, I think the US market is something in the $50 trillion market. So we make up half of the global equities market, capital markets.

Ryan:
[20:38] And I presume the other markets are structured in a similar type of way. I'm sure they have their own, eccentricities, like they just have their own nuances and such. But all the markets all around the world have this type of a structure, the same kind of a structure that the US has.

Gabriel:
[20:54] Yeah, varying degrees of, you know, centralized control and things along those lines. But yeah, I mean, roughly, if you're looking at Shanghai, if you're looking at Euronext for the EU or Japan Exchange, JPX, Hong Kong, you're going to see very similar types of structures compared to like the nicey Nasdaqs of the world.

Ryan:
[21:13] Okay. And then just so we have still on the foundation, the grounding of all of this, like what are some of the licenses involved? Like what's a broker dealer license? Like my understanding very roughly is that gives somebody like a Fidelity, the ability to buy and sell stocks on my behalf. Yeah. Okay. So like, how do you get that license? Is it hard?

Gabriel:
[21:33] Oh, it took us two years to get it.

Ryan:
[21:35] You guys have the license and it took you two years.

Gabriel:
[21:37] We do have a broker-dealer license. And in fact, we have a broker-dealer license that can deal in tokenized public shares, which we believe is actually the first of its kind.

Ryan:
[21:46] That was just announced, I believe, what, three or four weeks ago?

Gabriel:
[21:49] Yes.

Ryan:
[21:50] I remember I sent you a message. I said, hey, Gabriel, is this a big deal? And you said, yes, it is. And, you know, stand by. We got more in the works. And we're starting to see more that you guys have. So, okay. So the first company that has a broker-dealer license for tokenized stocks, you're saying.

Gabriel:
[22:05] Yeah. So the tokenized public stocks, right? NMS shares that we're talking about. And I want to clarify this because there's a lot of confusion in the space right now.

Ryan:
[22:15] Yeah, I'm confused.

Gabriel:
[22:16] Of the broker dealer, ATS, like, you know, all these kinds of things. There have been broker dealers or alternative trading systems, which by the way, is basically a new, it's like a feature that you can add on top of a broker dealer, right? There have been broker-dealers and ATS's licenses given by FINRA, which is the governing body that decides who becomes a broker-dealer.

Ryan:
[22:38] And FINRA is under what? Is that under the SEC or is that in Treasury?

Gabriel:
[22:41] FINRA is a private organization that the SEC licenses to do this work.

Ryan:
[22:47] God damn, complicated.

Gabriel:
[22:50] So FINRA is Financial Industry Regulatory Authority, is what it stands for. And they work to essentially execute the securities laws and the opinions of the SEC as outlined by the SEC. And they specifically govern who becomes, like if you were to apply to become a broker dealer, you would apply to FINRA and they would review your application and they would give you the license if they deemed that you were following the rules.

Ryan:
[23:21] Okay, so you guys got a license with them. You guys got a license with FINRA

Ryan:
[23:25] And it took you two years to do this. And you got the box checked for tokenized NMS stocks.

Gabriel:
[23:32] So yeah, so the difference between what we have now gotten versus what others have gotten is previously in the past, others have gotten ATS licenses or broker dealers for tokenized private shares or funds, largely called digital securities is what they were kind of called. And these, you know, basically you were allowed to tokenize, you know, private shares or private funds or something like that. And then you can sort of distribute to sell those tokens. As we talked about, Reg NMS is much more regulated than this, right? And so that included like everything that we just talked about, syncing with DTCC, all that stuff has to still be true. That's mandated by securities laws.

Gabriel:
[24:13] Right.

Gabriel:
[24:14] And so you can imagine how complicated would it be for tokenized NMS shares, tokenized stock to essentially have to sync with DTCC as they sort of move around and things like that. But that's kind of what's required as it stands today to essentially, you know, offer tokenized public stocks without violating securities laws in the United States.

Ryan:
[24:37] Okay. So it's interesting that this full stack all the way down to DTCC is basically enshrined in the securities laws is kind of what you're saying, right? So you need that. Okay. So what does your license now allow you to do that you couldn't do before?

Gabriel:
[24:53] So we are working with the SEC as quickly as we can to get everything up and running. But the hope is before the end

Gabriel:
[24:59] of the year, we can offer tokenized public stocks in the United States.

Ryan:
[25:02] The NMS kind, the one that is an actual tokenized stock, not an IOU for something else. Because we'll talk about the other vehicles.

Gabriel:
[25:10] Yeah, this is not a wrapper, this is not anything. You would have a token in your wallet that represents the actual rights of that share that allows you to vote, that allows you to get the dividends. Any corporate action like stock splits or something like that, you will get more tokens if there's a stock split. It will take into account all of those things. You will have all the rights and protections.

Ryan:
[25:34] So would it be, once you have this, possibly at the end of the year, the same thing? If I own Tesla in my Fidelity account and I own some sort of... Because I know you guys aren't doing the end user thing so much, but maybe you are. But anyway, if I own a Denari tokenized Tesla token, is it the exact same thing that we just described, that full stack? Like ultimately, it's all blah, blah, blah, blah. settled down to DTCC and there's a ledger entry that says Ryan S. Adams has this outstanding share of Tesla and then that gets updated to Tesla's cap table, etc. It's the same thing. Okay. So you said it took you two years to get here. Like what kind of hoops you have to jump through to do that? And was this even possible under the old regime? Like it didn't seem that-

Gabriel:
[26:22] We actually got the green light under the old regime. What?

Ryan:
[26:25] How did you do that?

Gabriel:
[26:26] Initially. I think we structured what we're going to offer that was consistent with the traditional securities laws. A lot of people that are wanting to do tokenized stocks want to violate securities laws existing securities laws right like they don't want to sink back to the dtcc you know things along those lines because well it's very complicated and uh very very expensive and

Ryan:
[26:49] You gotta wait two.

Gabriel:
[26:50] Years cumbersome and well i mean it's it's technologically it's also very difficult because some of their systems are you know more antiquated right and so so you're taking like literally the cutting edge technology of blockchain and trying to marry it to like a centralized ledger and things like that. But that's just where we are today in terms of what we're allowed to do. You know, the SEC hasn't given us any indication that they're going to, in fact, if you were to ask them, what they told us is we cannot change securities laws. That's not the job of the SEC. That's an act of Congress. Right. And so for as long as the securities laws are the securities laws, they can't really green light, you know, this permissionless tokenized stocks that people are wanting to see.

Ryan:
[27:34] Yeah. And these are more of the stocks. Maybe we'll get into some of the other designs for what we've seen called tokenized stocks that are out there. But I just have one more thing that I feel like I don't understand here, which is you mentioned this other term, ATS. I recall this term from earlier days in crypto, like 2017. There was talk of tokenized stocks way back then. And then we had these companies that tried to spin up ATSs and they went nowhere. And I don't know if it was lack of execution if it was time like what it was but like what is an ATS and how is that related to this conversation and do you guys dabble in that too.

Gabriel:
[28:12] The ATS stands for Alternative Trading Systems. And like its name implies, it's a trading system that is not an exchange. So if NASDAQ, NYSE are exchanges, alternative trading systems are places that you can go to that can essentially allow the exchange of securities that are not regulated. So like private shares of private companies or private funds are not regulated by reg NMS, right? Therefore, the exchanges don't touch them. NYSE, NASDAQ don't touch them. But then where do you go to trade these things, right? Where do you go to trade private shares or something like that of a company?

Ryan:
[28:54] OTC, right? Like, I guess.

Gabriel:
[28:56] So that trading system, that's the ATS.

Ryan:
[29:00] That's what an ATS is?

Gabriel:
[29:01] Yeah. Okay. So you have to get licensed to essentially offer those offerings.

Ryan:
[29:06] Okay. But you don't have to... So how is that related to what you're doing with tokenized stocks then? Is it just separate, tangential, not related?

Gabriel:
[29:14] ATS was more designed for these private shares, which we're not currently doing.

Ryan:
[29:18] Cool. Because you're going with the public. You're like, literally everything in the S&P 500, everything in NASDAQ, you guys will have the ability because it's all DTCC. You will be able to tokenize all of these things.

Gabriel:
[29:30] Yeah. We just want to build an on-chain exchange. We want to be the on-chain NYSE,

Ryan:
[29:34] NASDAQ. Okay. That's another party that we haven't explicitly talked about in this whole flow, right? So we talked about the broker-dealers. We talked about the ledger at the bottom. We talked about clearinghouses. These exchanges like NASDAQ and the New York Stock Exchange, what are they?

Gabriel:
[29:54] So they're the marketplace. They're where the clearinghouses go to actually acquire those shares. They're the ones with the order book that matches the buys and sells of the various broker dealers that are engaging with them.

Ryan:
[30:08] Can you give me a crypto analog here? So... Is what is like if I'm doing something on chain? It's funny how I have to understand. Like, I think a lot of bankless listers now have to understand what's going on in traditional markets through the lens of crypto.

Gabriel:
[30:23] So, you know, the AMM pools that you might find on Uniswap or something. Yeah, yeah, yeah. That's basically an exchange.

Ryan:
[30:29] Okay. So they have all the assets, they have all the liquidity.

Gabriel:
[30:33] Yeah, and they're just matching the orders.

Ryan:
[30:35] Okay, they're matching the orders. And what, is the clearinghouse the one that's recording all of these things?

Gabriel:
[30:39] The clearinghouses are the ones that are actually engaging with the exchanges, the market to actually go and acquire those shares and then telling DTCC that they've acquired those shares.

Ryan:
[30:47] I see. That's interesting. Okay. Okay. So that's what the NASDAQ are, the New York Stock Exchange. And you're saying Denari wants to be the equivalent for these tokenized stock vehicles.

Gabriel:
[31:00] Yeah. I mean, Denari wants to offer the entire pool of tokenized shares in on-chain form. in the on-chain market. Yeah.

Gabriel:
[31:11] Okay.

Gabriel:
[31:12] Now it's, it's, again, it's not the reason why I'm hesitating here is there aren't exactly exact analogs always because in, in the crypto infrastructure,

Gabriel:
[31:22] like a lot of this gets compressed, right? The broker dealers, the clearing houses, the, the transfer agents, the exchanges, like all of this sort of gets, can be, you know, compressed down into a single stack, tech stack, right? So we're trying to piece apart these single stack platforms into the various parts of the TradFi market. You know, really what we're talking about is like a blockchain ledger can do everything that we just talked about, right?

Ryan:
[31:52] Okay, so once you have this, then what are the benefits? So again, we're talking about the full vision where you have the exact same type of shares is somebody would own in a broker-dealer, except it's a tokenized version, right? So I start to think about like, God, I love tokenized everything because it's for me and for I think a lot of people who are kind of growing up in crypto finance and digital finance, it's easier to manage. And the user interfaces are better, right? And you can also do things with tokenized assets in decentralized finance is 24 seven. The liquidity is better. You can use whatever wallet you want. You're not kind of locked into, it's 24, yeah, it's all of these things. Like, what are the benefits to you when you're kind of talking about the concept of, it's the same as a... Typical assets, the same as a typical equity, except it's tokenized. What do you tell people in TradFi?

Gabriel:
[32:49] So there's kind of the user facing benefits. And then there's kind of a philosophical benefit of where I think finance is headed. So I'll sort of tackle those separately a little bit, right? On the user side, you know, simple things that we take for granted on the crypto side will now be enabled for stocks. So things like direct swap from one ticker into another. Most people, when they're wanting to buy a stock, they're usually not putting new money into their brokerage.

Gabriel:
[33:16] Oftentimes they're actually coming out of another position and going into another position. And that can be instantaneous now in a way that hasn't been before. Yeah. Right? I mean, honestly, people should try it. If they want to take $10,000 worth of Apple shares and sell it at Schwab, just wait to see how long that money actually lands in your account for

Ryan:
[33:39] It to- Because it has to go through these hops, right? It has to go back to the dollars.

Gabriel:
[33:43] Yeah, it takes a couple days.

Ryan:
[33:44] I know. It's weird stuff too. It's like whenever I go back to like a traditional broker-dealer account and buy some securities, I'm always like, oh damn, I got to calculate the exact number of shares that I want.

Gabriel:
[33:57] Yep. Do the math.

Ryan:
[33:58] I've got X amount of dollars and I want to convert that to shares. I have to like run the math myself. I can't buy just like fractions of these assets too.

Gabriel:
[34:05] So that's another benefit is you'll just say buy $100 worth of Apple and that will be executed. In fact, that's true today in Denari. Like you can literally go and say $100 worth of Apple and you can buy it. So those benefits that we take for granted in crypto will now be applied to sort of traditional capital markets and the capital assets. I mean, T plus two or T plus one It's like a death sentence in today's news cycle,

Ryan:
[34:31] Right? I can't believe that's how stocks worked still. It's really T plus two?

Gabriel:
[34:35] T plus one in most cases now, but it's still a day.

Ryan:
[34:39] And the plus one is like a day from the transaction. That's how long it takes the turnaround time to complete your transaction.

Gabriel:
[34:45] For it to completely settle, yeah.

Ryan:
[34:46] What about when you have these fully back tokenized shares, are we able to use them in DeFi? I mean, part of what I like about tokenization and crypto finance is, of course, everything's composable, right? You do all of these cool, fun things. Some of the so-called tokenized assets that I've seen, tokenized securities that we've seen, they're like whitelisted. They're just like, you can't do much with them, right? They just sit in a wallet somewhere. How about these?

Gabriel:
[35:14] So our tokens are ERC-20s. However, the export of the two DeFi today is not legal in the US. They haven't given us the ability to do that yet. Because again, the idea of true assets actually ending up in a wallet that is not KYC or something along those lines, that's something that the US government is still not comfortable with because it's it's violates the securities laws. That's different from the things that we enjoy on DeFi being available for these assets. So like you can imagine atomic lending and borrowing. So like I have five Apple shares. I want to buy, you know, I want to borrow against that to do leverage trading or something along those lines. That,

Gabriel:
[35:52] Is possible.

Gabriel:
[35:53] That is going to, I think, be allowed. But to do it like in a completely permissionless type of infrastructure, I think is going to be still a little ways away.

Ryan:
[36:02] Do you think that's going to take doing it like making it fully composable, fully interoperable in DeFi or some version of that? Do you think that's going to take an act of Congress, like a genius bill type thing for tokenized assets? Or do you think it's simply a matter of like there's some AML KYC identity system that maybe, you know, Coinbase rolls out or something and, you know, and a whole bunch of, you know, wallets are white listed and within these white listed wallets, you can do things like there's kind of a, you know, a completely open side of DeFi. And then there's sort of the more permission side of DeFi that's somewhat of a walled garden. It's all AML

Ryan:
[36:43] KYC. Is that a path where we could get there without an act of Congress?

Gabriel:
[36:47] That is the path that we're going down right now with some partners. We call it DeFi on Rails.

Ryan:
[36:53] DeFi on Rails. Okay.

Gabriel:
[36:55] So that's a way to bring all of the DeFi features to our end users with our tokenized stocks, but not violating securities laws, right? That's important to us.

Ryan:
[37:09] Okay. Are those the user benefit? You said there was another side, which is structural type benefits.

Gabriel:
[37:13] Yeah, so before we completely move off of the user benefits, there are a couple other things I think probably worth mentioning there. One of which you alluded to, which is I believe tokenization in general is just interoperable protocol for all different asset classes. So if Denari becomes an exchange that can do tokenized stocks, for example... Or Coinbase does, or, you know, whatever, whoever we're working with,

Gabriel:
[37:43] Right?

Gabriel:
[37:44] Then all of a sudden things like moving from ARB or, you know, Sol to Apple shares becomes possible.

Gabriel:
[37:56] Hmm.

Gabriel:
[37:57] For you to trade across crypto and tokenized stocks.

Ryan:
[38:02] Hmm.

Gabriel:
[38:02] So as you're managing your portfolio, you can move in and out of things across asset classes.

Ryan:
[38:08] I mean, that's fantastic for crypto, too, because it gives us like more pairs to trade against, basically. It gives us more liquidity preferences. So it's good for crypto native assets to be tied together with some very deep US capital markets as well.

Gabriel:
[38:23] I agree. And for us to, you know, like for me, what I get excited about is like, you know, being able to manage all of my capital on a single platform one day, which is starting to look like it's a possibility, right? With the Genius Bill now sort of formalizing stablecoins legality, you know, stablecoins I see as proxy for bank accounts effectively in this new sort of on-chain everything world. You have tokenized stocks that are coming on board. You have the traditional crypto assets that are already on chain. And then you have these various companies that are tokenizing everything, whether it's like bonds or property or debt or, you know, whatever it is, right? All of a sudden, if you have an on-chain clearing and settlement infrastructure like what we're building, there will then be brokerages or, you know, the Coinbases or the Gemini's of the world or something like that. They can offer a set of features to the end user that basically says, trade anything you want. You can manage your entire life here, your entire net worth.

Ryan:
[39:25] I mean, that's kind of cool. I think that's kind of cool because like you can do it all in one place and you can also, I mean, crypto gives you the ability to sort of exit those systems as well, right? It's like something that's kind of interesting is like fidelity, you know, old stodgy fidelity. I noticed I got an email in the last week or so and they said, oh, we've got a way for you to now withdraw your crypto assets from fidelity. Like first time ever. Like it's like people have been doing this on Coinbase and Kraken crypto exchanges. Obviously, you can withdraw to, you know, crypto address. Fidelity is just introducing this. The ability to like leave a platform pretty seamlessly and exit all of your assets and port them to somewhere else is a key user benefit too.

Gabriel:
[40:09] Or manage it on your own. Right. And so like, I do believe that there would be a non-custodial solution where it's just like, you have a bunch of stable coin, and you might be able to just click a button in your wallet to basically say, wire this much money to this, you know, bank account or something along those lines. I think we're not that far away from being able to manage your assets in a self-custodied way or with any of these exchanges. And you don't have to ever move off of that platform or that standard because

Gabriel:
[40:40] everything is tokenized. To me, the end user benefit of where we're headed is that.

Ryan:
[40:48] Okay. What about structural? Is there anything for... You know, the, I guess the industry as a whole systemically, I guess we get rid of T minus one, right? Or T plus one.

Gabriel:
[40:58] Yeah. I mean, so when you're talking about, yeah, more an industry level type of a thing, yeah. Instant settlement is good. You know, you, you might run into bankers who basically say, look, I need to sleep sometimes. So 24 seven is actually not a benefit for me. So we might get some pushback there. But generally speaking, I think capital markets want to continue to grow. They want it to continue to be more efficient and they want to be more stable. So actually not too long ago, for example, there were technical glitches that caused, you know, I think it was NASDAQ to go down. Right. And so like stability matters a lot in this day of, you know, cybersecurity being so important and all this stuff. So like, to me, sometimes it frightens me that DTCC, a company, has a ledger for everyone.

Ryan:
[41:51] Right.

Gabriel:
[41:52] And, and so like, why is this not a public good that's on chain? Because anyone who knows anything about blockchain knows it's like, it's hard to hack that infrastructure. Right. And so stability wise and just it being always on and you can trust that it will always be on, I think will become a necessity from an infrastructure perspective.

Ryan:
[42:13] Yeah. And I mean, your plan here, the tokenized stock plan is not to like replace DTCC because ultimately you still sort of have to settle there. But over time, it's almost like making DTCC is a side chain to like, you know, Ethereum or to like native crypto. And then over time, the side chain that's open permissionless to centralize the crypto stuff, that becomes bigger. And then maybe you start to eat away what DTCC is actually doing. And that might be the eventual path where this all converges, right? Because, yeah.

Gabriel:
[42:45] Look, I appreciate the freedom that the DGENs are calling for just as much as the next guy, right? However, I think most people, including a lot of those degenants,

Gabriel:
[42:55] don't want the capital markets to completely destabilize. Yeah. Right. And so the question really is, is how do we transition the capital markets on chain in a way that doesn't immediately destroy the old world, but slowly transitions it such that we gain all the benefits of these assets being on chain while giving sort of the traditional systems, you know, a sundown period.

Ryan:
[43:18] It's funny, those traditional systems are old as hell, too. I mean, we've never done an episode on this, because honestly, I would be bored to tears, so would listeners, but it's all mainframe, COBOL, right, written in the 1970s. Like, underneath, it could use a giant refactor and replacement with something more modern. Okay, you used the term tokenize everything. I'm kind of wondering how this pitch works. Where tokenized assets, tokenized stocks lands in traditional finance. Because I've heard the words tokenized everything from someone else. And that is Papa Larry Think. Okay. So that's been part of his messaging. I got a Bitcoin ETF now, and that's great. And also there's the ability to tokenize things on these platforms like Ethereum, and we're going to tokenize everything. I always thought, okay, what's he doing over there? What's he thinking about tokenize everything. Because so far, the only thing Wall Street has tokenized at scale has really been these ETF type products. So I'm wondering how your pitch of tokenized stocks is landing in the TradFi crowd and what you think the trajectory of this is going to be. Is it just narrative? Is Larry Think just spitting out this narrative to sell more Bitcoin ETF? Or does he really mean I want to tokenize everything?

Gabriel:
[44:40] Yeah. I would hate to speculate on what Larry Fink is thinking because I don't know the guy and I have no qualifications to speculate on what he is thinking.

Ryan:
[44:49] Don't let that stop you.

Gabriel:
[44:52] But I would say that in general, having spoken to the TradFi people that I have spoken to, whether they fully appreciate it or not, they can smell that there is a route to efficiency here. And finance tends to tend towards efficiency over time, because efficiency equals savings, right, in the world of finance. Now, what does that mean in the short term? I think that people underestimate how much manual processes there are in places like BlackRock or Fidelity or Schwab or all these places as they manage people's money, right? Because that's basically what BlackRock is at the end of the day is it's a wealth manager, right? And I'm sorry if I'm insulting, you know, some BlackRock people by calling it that, but like they're managing other people's money, right? And they're investing it. They're wanting to get returns on that on behalf of their customers. There's a lot of manual things that happen there that requires a lot of personality. If you can start automating a lot of that, if you can make it more efficient to go from one asset class to another asset class, do you need as many people?

Ryan:
[46:03] Let's talk about what we have today. So you mentioned that the full idea of a tokenized stock that's one-to-one backed by an actual DTC settled stock on the other side, that's not available right now. That's maybe the end of the year when you will have license. Since I'm sure there are other companies that are trying to apply, get through the licensing process and do something similar. But we do have these things that are called tokenized stocks that are out right now. And I'll name a few platforms. There's one called Xstocks. I think Kraken is doing some work with them. A company called Bact, I believe.

Ryan:
[46:40] And so we've seen screenshots of people exchanging their Tesla for some Fartcoin in Solana wallets. Of course there was an absolutely massive splash with robin hood releasing a layer two and a tokenized stock type of platform and i mean their promise is basically we're going to bring all of the the robin hood and their broker dealer of course all of the assets you can trade on robin hood we want to bring all of those things on chain and they started with um a few type products some of these interestingly were were private assets and not publicly traded companies but We've got that. We've got Gemini doing some tokenized stock stuff. So sort of hitting the crypto narrative world like a tidal wave. And oh my God, these companies are serious. And companies like Robinhood, I mean, they're based on the thesis that the old traditional finance, they have way too many people. It's not where younger generations want to trade and we're going to automate it, make it more efficient, better UX. And so this all culminates in kind of a tokenized stock type strategy. And then there have been other things that I think we've all read, Hey, like these are tokenized stocks in air quotes. And like what you're actually buying is some sort of special purpose vehicle, like IOU type of token certificate that's kind of connected.

Ryan:
[48:03] It has different liquidity profile. It's like a subpar product to like something you might buy in your brokerage, your traditional brokerage account. Okay. Can you just make sense of what in the heck is going on? So if I'm buying something from like Robinhood today, a tokenized stock on Robinhood today, and by the way, I don't even know if this is out. I'm American, so I can't, it's in Europe only. Or if I'm buying these X stock type products on chain, what am I actually buying in this case? And how is it different from what you just talked about?

Gabriel:
[48:36] Yeah, so this is all public information. You can go read up on the X stocks, you know, rights or whatever. So I don't know any insider information, right? I just know what we have read publicly, what our lawyers have sort of discerned, you know, X stocks is not an ownership of the stock. They say that explicitly. They say that this is just kind of tracking roughly the financial upside of those stocks.

Gabriel:
[49:06] OK, now, what does that mean? Well, right now, as far as I can tell, they have a few million dollars in liquidity on Jupiter or something like that. And the prices are already diverging pretty significantly between an Apple share on like X app or whatever they call it on Jupiter versus the actual public markets.

Ryan:
[49:24] And why that divergence?

Gabriel:
[49:26] Oh, because they have a few million dollars worth of liquidity. And the capital markets are much bigger and much more efficient, right?

Ryan:
[49:34] It's kind of the case that they have a few million dollars worth of liquidity in that stock that they've sort of like purchased or acquired by some other means, and they put it in a special purpose vehicle. And what you're buying is like a tokenized version of that special purpose vehicle that's like offshore. I've heard some of these things are like registered in like places like Liechtenstein.

Gabriel:
[49:52] Yeah. So, yeah, I mean, that's roughly it. Basically, you're not actually buying the stock. They claim that it's one-to-one backed, but it's not one-to-one tracked in the same way, right? Like prices are diverging, right? So it's not even really kind of one-to-one financial ownership, if you will, right? If you own an ex-Apple or something like that, there's no guarantee that when Apple ticks up, that you will actually be able to sell at that price.

Ryan:
[50:21] It's kind of the main thing you want in a tokenized stock product you buy, right? Yes, yeah.

Gabriel:
[50:27] Yeah, but so I would say that even saying that this is actually financial exposure that's akin to an Apple is probably not super accurate. And again, you can see that today. You can go to Jupiter or whatever and see that the prices are not the same as the public markets itself. Okay.

Ryan:
[50:47] Well, let's talk about Robinhood because X-Doc, they're a startup. I mean, they're maybe bootstrapping. Maybe they'll have something more sophisticated. Maybe they're going through a similar process that you are with.

Gabriel:
[50:55] So one more thing on X-Docs though. Is I'm pretty sure it's not legal like anywhere as far as I can tell. In fact, if you go to like Kraken's website, I think it says X stocks are not available in United States, Australia, Canada, EU, UK, and other prohibited regions.

Ryan:
[51:09] Okay. So it's a little bit of a regulatory arbitrage type of thing or gray zone.

Gabriel:
[51:17] I don't know what the regulatory arbitrage is. Everyone, every one of those countries and regions, United States, Australia, Canada, EU, UK have securities laws that are similar to the US in the sense that permissionless trading of securities is not going to be allowed. So you think

Ryan:
[51:32] These products are basically a bad idea then? Or like at least... No, no.

Gabriel:
[51:35] I just think if you are a US or EU party that's thinking that these are legal, they're not.

Ryan:
[51:41] Hmm. Okay. There's maybe a PSA for people to go read up on the docs.

Gabriel:
[51:46] Yeah. How about Robinhood?

Ryan:
[51:48] Because Robinhood obviously has a super legitimate business, which is like they're a massive broker dealer and they sell DTC settled actual stocks. So what are they doing?

Gabriel:
[52:01] So they're doing something similar to what we are doing. So in the EU, for example, you mentioned Gemini. We're partnered up with Gemini on the backend to support this, at least on the public shares. As far as I know, they're doing something very similar where it is kind of a one-to-one actually tracked a stock to the token. I don't know if they have decided to confer dividends and voting rights and things along those lines. That's probably up to them, but I don't know for a fact. But I will say that the way they're approaching it, definitely you will find

Gabriel:
[52:36] the prices are the same between the sort of traffic markets and the sort of on-chain. I think you can be assured that there will be some amount of liquidity when you want to move out of that position and things like that. So I'm much more comfortable with what Robinhood is doing.

Ryan:
[52:48] Okay, okay. So you like what Robinhood is doing. Now, they've just released in the EU. Why? Because they don't have the tokenized stock checkbox and their broker-dealer license that you have with FINRA?

Gabriel:
[53:00] Yeah, not yet.

Ryan:
[53:01] Okay, but one would presume their lawyers are working on that.

Gabriel:
[53:04] Have been for a while.

Ryan:
[53:05] But it takes a while. It takes a while, as you well know. Okay. And then the Gemini approach, that is actually powered by Denari. And why is that in the EU? Is it because, I guess getting back to like, why do we have to wait till the end of the year? I thought you already had the license. Why do we have to wait till the end of the year to get this in the US?

Gabriel:
[53:23] So one of the little known things, you can actually see this, this is a matter of public sort of, you can go check it on BrokerCheck, I think is the website that's owned by FINRA, right? BrokerCheck. Yeah. So you can go look up Denari Securities, which is our subsidiary that's actually the broker-dealer.

Ryan:
[53:40] Oh, yeah. This looks like a government website here. Yeah, yeah.

Gabriel:
[53:43] It's a government website. So if you go to the firm tab, you know, and you search by name Denari Securities, it will pop up, right, as a registered broker-dealer. Denari Securities. So if you click into that and you scroll down, right there, licenses. Turns out after FINRA approves you at the federal level, you then have to go and register in each one of the 50 states to essentially actually become operational.

Ryan:
[54:10] Is this like a money transmitter type law type thing?

Gabriel:
[54:12] It's not dissimilar from that idea. So, you know, we're not delaying for the sake of delaying. We're actually in the process of getting registered in each one of the 50 states.

Ryan:
[54:23] For people not looking at this, so it looks like this license is for five states. You got New York. Well, that's a big one. Louisiana Alabama Idaho and Kentucky and so you got about 45.

Gabriel:
[54:32] To go here yep and and we're we're getting through those as quickly as we can the estimate is somewhere between two and three months is generally what it's allotted okay

Ryan:
[54:41] Okay I wonder if I type in Robinhood would they be in here.

Gabriel:
[54:44] Oh I mean they should be Robinhood financial

Ryan:
[54:46] Right they have three three entities.

Gabriel:
[54:48] In here yeah I'm sure all different broker you know just doing different licenses okay

Ryan:
[54:53] So they'd be in here but if I typed in xdocs.

Gabriel:
[54:55] Not not going to be here

Gabriel:
[54:56] backed X stocks.

Ryan:
[54:58] That'd be pretty shocking. Okay.

Gabriel:
[55:00] Yeah. Okay.

Ryan:
[55:01] All right. So why the EU then is just this doesn't apply?

Gabriel:
[55:05] So the EU is governed by different regulations, you know, obviously similar, but different. So under the EU, it's not state by state or country by country. So if you get licensed in one of the EU countries and the license is called MyFID, M-I-F-I-D, similar to MICA, but governing, you know, the security side of things. Okay. Then you just basically have to let all the other countries know. And then you can essentially go live EU wide.

Ryan:
[55:39] With tokenized stocks.

Gabriel:
[55:40] With tokenized stocks.

Ryan:
[55:41] Cool. And so that's what Gemini is effectively doing.

Gabriel:
[55:44] And that's what Robinhood did as well.

Ryan:
[55:46] Got it. Okay. Very cool. And now Robinhood is doing some of this on a layer too. I guess that doesn't, do you have any sort of blockchain within your Denari stack? Or I guess you're just settling it to whatever chain you want to.

Gabriel:
[56:01] Yeah, so I don't know exactly what they're doing with the L2. The L2 is not live yet, right? Right. But I suspect that Robinhood wants to bring some of the DeFi E features, you know, to the users. They want a chain to export, but they can't have it completely be permissionless, right? Because then you're making afoul of securities laws. So I suspect by building their own chain, they can, you know, put some controls in there while still giving people the ability to like transact like they're in DeFi. I suspect that's what they're doing. I don't know that for a fact. That's just kind of speculation. Yeah. What'd you call that earlier?

Ryan:
[56:34] Trad DeFi or something like that?

Gabriel:
[56:36] No, the DeFi on Rails.

Ryan:
[56:38] DeFi on Rails. That's way better. Okay. Yeah.

Gabriel:
[56:41] So, you know, we're also working on an iteration of DeFi on Rails for us that would be legal in the U.S., legal in the EU. that doesn't run afoul of anti-money laundering laws, doesn't violate KYC rules. We're working on that. I suspect their L2 is kind of their iteration of it. We're doing it a little bit differently, where... We don't have like an open chain type of thing. We would rather work with other chains, but we would work with other DeFi protocols to essentially create permission versions of their protocols to allow for, you know, the trades to happen. Similar to what you're talking about with the whitelist and things along those lines and Coinbase wallets and things like, like those kinds of things I think are, you know, scalable.

Gabriel:
[57:23] So we are working on some version of that.

Ryan:
[57:26] I think coming to this conversation, I was trying to figure out like tokenized stocks are they really here or is this hype, right? And it sounds like from where I'm getting so far, but you confirm, it sounds like they're almost here. We've got these kind of like very beta versions of them right now that aren't kind of the one-to-one that we actually want, but we're really close. And in some places like the EU, we actually have tokenized stocks that people can buy and sell. And so this, like is the narrative, I mean, I'm sure you're biased. You're setting up an entire company, Denari, so it's like tokenized stocks, right? But is the narrative overhyped or underhyped? Or like, are we just about right with respect to like how crypto is thinking about it? Because a lot of people are saying, this is incredible. This is what we've always wanted to happen. Now the institutions are here with the largest capital markets in the entire world. Is that accurate?

Gabriel:
[58:25] No. Okay.

Ryan:
[58:28] Sober us up a little bit or give us the realistic picture.

Gabriel:
[58:31] I think the full promise of tokenized stocks, like what we talked about just now in terms of everything becoming on chain and there's settlement across all these different asset classes and things like that, that's exciting. Okay. I believe that is the future. I don't think that future is this year. I think that future is years away. I think the transitioning from traditional capital markets to sort of on chain, even the crypto degen should want that. Right. For all the reasons that we sort of mentioned. However, it cannot come at the sake of destroying the old capital markets because that like you and my property valuations and stock valuation, all those kinds of things, like our livelihood is on that system. Whether we like it or not. And so finding a way to sort of slowly transitioning that system to an on-chain world, I think that is the end goal. And that is exciting, all that stuff. We're not there today. And that also, by the way, doesn't look like, let's just tokenize a bunch of stocks and put them on DeFi.

Gabriel:
[59:36] That's not the solution in my mind. All of that being the promise fulfilled of this end goal, I don't think is true. I don't think putting some shares, a few million dollars worth of shares across 50 tickers on DeFi is the promise of, you know, like we actually tested this a few years back with liquidity pools, AMMs on Arbitrum, Camelot. And what happened was like every time Apple moved by like 2% or something like that, the entire pool, you know,

Ryan:
[1:00:07] Shifts into that. Yeah, that's not good.

Gabriel:
[1:00:09] Yeah. And so like it just went back and forth, back and forth. All the liquidity providers lost money. It was just like it was not sustainable because you're talking about $100 trillion worth that you're competing against. So your few hundred thousand dollars on an AMM somewhere is not going to be able to compete with that. Right. So that's not promise fulfilled. I think Rob Haddock at Dragonfly had a

Ryan:
[1:00:31] Post on this. I saw that. I saw that post.

Gabriel:
[1:00:33] I very much agree with him on that assertion. Yeah. When the promise is fulfilled is when the regulations allow for a slow transition from the off-chain capital markets to bring everything on-chain.

Ryan:
[1:00:45] Okay. All right. All right. Well, then I'm starting to get, just because analogies are sometimes helpful, I know it doesn't always play out the same, but our very first real-world asset win for an on-chain asset was actually stablecoins. Yes. And I remember how Stablecoin started, right? It was like 2015, 2016 with Tether. And it was kind of this weird gray market type product. And like, was it really backed by a treasury? Did they say, we don't know, we don't know. And then we've watched that kind of grow over time. And then we had some more regulated players kind of enter the fray like Circle. And we've even seen Tether sort of become more closely regulated over time. Time and that, you know, the market started at like a billion dollars and then it was 10 billion. And then, you know, last cycle, we got up to like 100 billion or something right now. I think right now we sit at 300 billion and we're on the cusp of complete, I would say, adoption and acceptance of stable coins. So much so that the Treasury Secretary of the US, you know, the guy with, like the guy who manages all this stuff said, we're going to get to 3 trillion, in tokenized and stable coins on chain. That is complete acceptance. And we actually just are on the cusp of getting our act of Congress.

Gabriel:
[1:01:57] Okay.

Ryan:
[1:01:57] So if we look at it like that, and we look at tokenized stocks as kind of a stable coin play, where are we? How soon is it going to take us to get to 1 billion, 10 billion, 100 billion, and then the trillion dollar market? And then once you get there, you're kind of off to the races and you're just on your way to flipping the DTC CC and becoming fully on-chain, right? How long is that going to take?

Gabriel:
[1:02:21] Well, so Circle took 12 years to get here, right? Yeah. They were founded in 2013, right? Yeah. So Denari's been now doing this for about

Gabriel:
[1:02:30] We're going on four years.

Gabriel:
[1:02:32] And so I would say that we have probably another few years to go.

Ryan:
[1:02:37] 2016, 2017, something like that in stablecoin terms?

Gabriel:
[1:02:41] Yeah, kind of. So early recognition that this is going to be a thing, that it is important, that liquidity is starting to flow in, all those things are true. We're still years away from mainstream, and I would argue even stable coins, we haven't actually seen the full realization of what stable coins were meant to be, right? Every bank should, in my opinion, be stable coin infrastructure backed, you know, but we haven't seen that yet. That's, that's like, that's, you know, after the sort of legal adoption, that's when these things start, you know, taking off. And so like, when does the full legal adoption happens on the stable, on the stock side of things. You know, I really hope to see that in the coming short amount of years. But yeah, we're in the, we're in the, let's do the best that we can. And let's do the sort of regulatory sound thing, even as others are not. And we think that doing right by our partners, doing right by the regulators and things like that will eventually get us to the promised land of it being fully adopted and for us to bring capital markets fully on chain.

Ryan:
[1:03:50] I want to bring another piece of the conversation to the table, which is like an idea that's related to tokenized equities, but also I think tangential because everything so far we've been talking about are already existing publicly traded assets, not private assets. And yet there is this hope, there is this promise, there is this meme in crypto. And to some extent it's like very true, which is, hey, this is the democratization of finance, right? Yeah. And so open, transparent, there's a whole asset class, that hasn't been publicly available anywhere. And these are some of the private stocks. I don't know if you read Matt Levine's post last week where he was basically talking about this. And I mean, you can look at this in all sorts of ways, right? It's like companies are taking forever to go public. They're staying private longer. So that basically private investors get all of the upside. And by the time they go IPO, I mean, with your retail investor, you get like what, a 5X over 20 years? after 1,000X, after 1,000X here. And so it does seem like there's something broken about public markets, right? And retail access to those public markets. And I don't know if it's like too many disclosures, it's too expensive.

Ryan:
[1:05:08] Private markets, like private companies just don't feel like they need retail

Ryan:
[1:05:12] investors or what, but it does feel like something's broken when that's the case. Now, Robinhood also, as part of their launch, they're like, oh, and by the way, we have a little bit of open AI and SpaceX tokenized shares to sprinkle out. And it was pretty clear that that's going to be hard to sustain, but there was some sort of commitment, I think, maybe this wasn't expressed, but there would be more of this to come. And my God, that would be amazing if we had tokenized private companies as well, like SpaceX and AI. Is there any path to this, Gabriel? Like, what do you make of this whole private markets? You know, like, we don't have access to them. Like, what do you make of that whole story?

Gabriel:
[1:05:55] So for those of you, those people that have known me for a while, will remember that that was the original pitch for Denari.

Gabriel:
[1:06:03] Really?

Gabriel:
[1:06:04] In 2021. Yeah. Okay. That's why I wanted to start Denari is, you know, all assets, including private shares, should be available to the average investor. We became a transfer agent in 2022.

Ryan:
[1:06:20] That's something else you're going to have to define.

Gabriel:
[1:06:23] Well, yeah. I mean, so the transfer agents are the ones that work with the companies directly and keep their cap table.

Gabriel:
[1:06:29] Oh, right, right.

Ryan:
[1:06:29] You did define that. Yeah, yeah. That's right.

Gabriel:
[1:06:31] So we became a transfer agent in 2022 to do this. Here's the issue that we ran into. Yeah. Every private company, Denari included, has a provision that basically says, if you transfer your shares to somebody else, whether it's a forward contract, as in like, let me borrow some money against these stocks or whatever, and I'll give you the stocks later when they're liquid, things like that. If you do any of those kinds of things, the company can invalidate your stocks. And just to be very clear, it's not just the companies being a jerk. You know, that's not the idea here. There is another regulation called Reg D that actually governs the private company shares a little bit and allows them to not be registered, you know, not have to do all the disclosures, you know, all this stuff. So this Reg D exemption requires certain things, one of which is restrict transfers.

Ryan:
[1:07:34] Oh, my God.

Gabriel:
[1:07:35] And so the companies have to follow that.

Gabriel:
[1:07:38] Yeah.

Gabriel:
[1:07:39] Right. And so every transfer today, because people do do secondaries, right? Like Stripe has done secondaries where they've given their employees liquidity and things like that has to be done, not in real time, but kind of all at once in a piecemeal or in a single transaction with a set

Gabriel:
[1:07:58] of investors that are going to buy it. And the company board has to sign off on every transaction.

Ryan:
[1:08:04] I mean, there's no way to make that scalable.

Gabriel:
[1:08:08] But that's the way the regulations are today.

Ryan:
[1:08:10] Okay, so then what you have to do, at least with the current regulations, is just get private companies to go public sooner so you can get out of the Reg D, you know, limbo.

Gabriel:
[1:08:24] Yeah, I'm actually a proponent of that, right? And candidly, I think there's a route. I have not let go of this goal with Denari. It's just much longer.

Ryan:
[1:08:35] You think there's a route to get the private?

Gabriel:
[1:08:38] No, to make sure that people can win in the same way that sort of private investors can win investing in these companies. And that's when we on-chain the capital markets and we can start sort of auto-generating some of these reports and things like that, because it's all on-chain and it's all transparent, things like this. Then I think the regulatory hurdle and the expenditures to going public starts dropping. And then that's what allows companies to go public sooner

Ryan:
[1:09:09] Right is that what's stopping it is that what's stopping it's the regulatory paperwork all the bs and paperwork.

Gabriel:
[1:09:16] You know audits financial audits that you have to go through on a regular basis you know all this stuff now imagine if everything was on chain then we wouldn't have those kinds of issues you know it's all transparent it's all searchable like to me a world exists where the definition of private versus public companies starts going away you know if you can create this world where you can be like one click and you can be live you know type of a thing now probably you know thinking 10 years down the line 15 years down the line right yeah So it's not going to satisfy anyone today wanting to do this. But I'm saying there is a right way of doing this and there is a wrong way of doing this. And I'm always going to choose the right way of, or at least try to choose the right way of doing this. And the right way of doing this is not to violate the regulations today, but work towards actually making the entire system better. And that can take some time.

Ryan:
[1:10:12] Well, I think we are better positioned to do that when we do not have a hostile US government trying to choke us off and block us from doing that. And of course, this has been talked about on Bankless and crypto media for a while. Let's maybe talk about the new SEC under Chair Paul Atkins. And of course, crypto has long had some allies in the SEC, people like Hester Peirce have talked about regulatory sandbox.

Gabriel:
[1:10:40] And I read one

Ryan:
[1:10:41] Of her recent speeches where she was talking about tokenized equities.

Gabriel:
[1:10:45] I believe.

Ryan:
[1:10:46] So she's always, you've like been pilled on this and she understands like what we're trying to do and the benefits and how.

Gabriel:
[1:10:51] It can help

Ryan:
[1:10:52] Legitimize both crypto and add more efficiency to US capital markets. Now we have Paul Atkins and I was kind of, you know, like watching for signals from him. He gave an interview actually last week. It was like Squawk Box, the NBC interview, something like this. And one of the interviewers, it was Andrew Sorkin, that is his name? He asked him, he was like, hey, Robin Hood is doing this stuff with tokenized private security like OpenAI and SpaceX. How do you feel about that? Because that feels very gray, gray market.

Ryan:
[1:11:23] And Gary Gensler, of course, would be like, I'm going to banhammer all of that. None of that's allowed. I'm the sheriff. You guys better fall in line. Paul Atkins was much more accommodating in that he said, hey, I want to stop you. Let's rewind. The SEC has been overly aggressive and hostile to crypto in the past. The thing that you're talking about, maybe not this manifestation of it, but the thing that you're talking about, tokenized equities on chain, I support that. It's innovation and the SEC needs to lead the charge on innovation. I'm paraphrasing. It was something like this. That was fantastic coming out of the SEC. And we need more of that and a continuation of that across administrations if we're going to get where you want to go in like five years and 10 years. So I guess I'm just asking, how do you feel about the current SEC? What's that been like? Do you think that they are going to clear the path for more tokenized US capital markets on chain? You just describe anything that comes to mind there.

Gabriel:
[1:12:27] I believe fully that they want tokenized capital markets. And they've been working with us. We actually demoed our system to the SEC a few weeks back. They allowed us to demo it, like a live demo of how this all works. This is like a

Ryan:
[1:12:43] Zoom call and we're like, we show you what you got. We got and you take them through that.

Gabriel:
[1:12:48] It was actually for the explicit purpose of showing how we're not violating securities laws in tokenizing stocks.

Ryan:
[1:12:54] And did they seem excited by this or is it like stone faced?

Gabriel:
[1:12:57] No, no, no, no. They weren't stone-faced.

Gabriel:
[1:12:59] Okay.

Ryan:
[1:13:01] And that's a change?

Gabriel:
[1:13:03] Yeah, it's a change. From how it's been? Well, I mean, before this, the SEC wouldn't even grant us an audience.

Ryan:
[1:13:08] Well, that's funny because Gary Gensler kept saying, come into my office and let's talk.

Gabriel:
[1:13:12] Hester has always been great. Yes. Commissioner Peirce has always met with us, even during the last administration. In fact, In some ways, I don't think I'm degen enough for her. But I think she certainly kept the line of communication open always. But this wasn't the crypto task force that showed up on this call. There were like 28 people from the SEC representing the different departments of the SEC that showed up on this call for this demo. change. Yeah. So I'm saying they do want to do it. I think they want to do it the right way. They can't violate securities laws. So it's not from lack of wanting to do it. I don't think Paul Atkins is lying. I think he's actually being very truthful on this.

Gabriel:
[1:14:00] And every dealing that we've had with the SEC is consistent with that.

Ryan:
[1:14:04] Gabriel, this has been a pretty bullish episode. I think we got to the bottom of what's going on with tokenized stocks, but it was also sober. I mean, it's not here now, it's not ready, which brings me to the question of kind of like what's next. So maybe what's next for users, what's next for Denari from a user perspective, right? I would love to buy some one-to-one DTC settled stocks, in particular, some nice crypto stocks these days, you know, a little circle bump. You know, we got to play in these markets or else we use not the value isn't just going to our crypto native assets. When am I going to be able to do this? And like in what venues is this going to start with, you know, crypto native companies like I have to go into like a Coinbase or a Gemini type exchange? I don't know. Can you just give me some insight into the when and to the form factor for users? And then like what's next for Denari? Yeah.

Gabriel:
[1:14:55] So, you know, without giving away the farm, if you will, as I've said, before the end of the year, you know, our brokerage is going to be up and live, right? But as you also alluded to earlier, Denari's model is to work with other companies to be the infrastructure layer, not necessarily the sort of, you know, user customer facing company. So the hope is that, Again, without giving specific names right now, we are working with centralized exchanges. We are working with wallets. We are working with other fintech apps.

Ryan:
[1:15:27] I guess you could go directly to crypto wallets, right? So there's no reason there couldn't be a buy button on a crypto wallet to buy some Apple shares or something.

Gabriel:
[1:15:38] Yeah, as long as they're willing to play ball with us in terms of the actual securities laws, right?

Gabriel:
[1:15:44] So I think as long as those things are true, the hope is wherever you are trading crypto and things like that, tokenized stocks will be there also.

Ryan:
[1:15:54] Maybe as we just end this, give some folks a sense of like your history and your past. And we were talking about this before we jumped on this call, which is you've been doing Denari for four years. So it's been a long slog from that perspective. But how did you get into this? Like, what were you doing before?

Gabriel:
[1:16:13] Before, I was doing a cancer diagnostics company called Freenom, where we develop blood tests that can detect cancer at the earliest points possible. And that was a 10-year slog in and of itself.

Ryan:
[1:16:23] A lot of regulation, I'm sure, to wade through.

Gabriel:
[1:16:25] A lot of regulation.

Gabriel:
[1:16:27] So I tell this to people all the time. If you know what it's like to go before the FDA 15 years ago to describe how a blood test that can evolve over time, learn from the sort of data of people that are tested, like basically an AI based, you know, sort of blood test. You should have seen their faces 15 years ago. I mean, SEC is far more sophisticated and far more willing to work with us than I think the FDA was in the early days. Wow. And so, you know, it's funny, the lessons of how to work with regulators definitely have transferred.

Ryan:
[1:17:06] High tolerance for pain as well, it sounds like.

Gabriel:
[1:17:08] And patience. You know, it's unreasonable for us to expect that regulators are going to be as sophisticated or as much of an expert as what we live and breathe every day. Sure. That's not a fair thing to ask of them. And so you have to sit there and be patient with them. And as long as they're kind of open-minded, they will sit there and listen. So, you know, I've had nothing but sort of positive things to say about my interactions with the SEC thus far.

Ryan:
[1:17:35] But why cancer research to crypto?

Gabriel:
[1:17:38] Oh, well, I mean, there's several reasons for this. I got exposed to crypto, you know, probably back in 2015, 2016 by a guy named Bology, who was at the time building his own biotech company.

Gabriel:
[1:17:54] Called Council. And Freenome's headquarters were literally across the street from Council's. And if you ask Bologi, Bologi actually had the domain freenome.com. So we actually met when I asked him for the freenome.com domain. And he was very kind. He gave it to me for free. But we got to know each other then. We talked about the future of the capital markets as Ethereum was kind of coming online. And so this is something that I've been wanting to build for a long time. It just didn't seem like timing was right. And I was busy doing other things. And when I sort of took a step back from Freenom and I didn't, you know, really have to immediately dive into something new, I spent a long time thinking about what it is that I wanted to do. And there were several things that I ended up doing. I mean, I actually went to seminary and I got ordained. So like, that was like one aspect of it, of, of like really working with people when they're at are lowest when they're, when they're having the worst days of their lives and things like that. And so like, I spent a lot of time doing that because, you know, when you made some money and things like that, you know, what's important is people, it's, it's always, it's always people. So like, I still do that, but the, when it came time for me to then go and, you know, get a full blown day job of starting another company or something along those lines, every part of my body was allergic to this idea of doing a biotech company again, because it really is kind of a, once you know how the sauce is just made type of situation.

Gabriel:
[1:19:20] And I had none of the naive optimism that I had when I first started Freenome, when I contemplated starting another biotech company. Whereas when I look back on my conversations with Bology, I did have that naive optimism, right? I didn't know exactly how hard it was going to be or how many years it was going to take or something like that. But I generally like the idea that, yeah, all these things should be on chain and made available to, you know, the poorest of us in the furthest corners of the world. And how do we make that a fair system? How do we make that a public good? Like all of those kinds of things seem like a really exciting prospect. But I knew just

Gabriel:
[1:20:03] Not enough information there to want to dive into it and do it,

Gabriel:
[1:20:07] Right?

Gabriel:
[1:20:07] That's maybe a lesson here.

Gabriel:
[1:20:09] And so it was because of that. And honestly, my co-founders, Chaz and Brandon, both of whom had their exits, right? Chaz started a company called LegalZoom, and he was the general counsel there for like 17 years.

Ryan:
[1:20:21] Oh, very familiar, yes.

Gabriel:
[1:20:23] And so like that was also like, you know, they like actively got sued by lawyers or something like that for practicing law, like software can't practice law, like they had to deal with that kind of stuff. And he's like the most creative lawyer I know and it's really been amazing working with him and he had taken legals in public so he was like similarly quasi-retired and Brandon started a company called Crunchyroll which was like anime streaming platform that got sold to Sony for a billion dollars and then he started another company that he sold to Stripe and so he was thinking around at Stripe so like part of it was the team that came together part of it was this idea that was planted years ago part of it was wanting to do something different from what I had done before while the skills, you know, like working with regulators transferring. So like, it just felt right, you know, all these things coming together.

Ryan:
[1:21:12] Oh, Gabriel, that's great. I just, I appreciate that you're here doing this stuff. I think I'm glad that you're a bit more naive to how hard it would be four years ago and haven't given up, but it does feel like we are close to an inflection point. And some of this stuff, tokenized stocks is going to look like an overnight success once it fully takes off. And I feel like we're on the cusp of something really big. So thank you so much for dropping by Bankless and explaining all of this to us. I understand DTC all the way up like I never have before. And I'm sure many listeners will appreciate it as well. So we appreciate it. Thank you. Thank you for having me. Bankless Nation, got to let you know, of course, none of this has been financial advice. Notice we didn't recommend any stocks today. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

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