Alpaca’s Instant Tokenization Network Panel Discussion - TOKEN2049 Singapore

Hi everybody. I'm Arish Seagel, head of crypto alpaca. Uh today we have a very special announcement and an amazing panel uh to just discuss tokenized stocks. So I'll make this real quick so we can get the special guests on stage. Okay.

So who's Alpaca? We are a API first brokerage. Uh and we allow enterprises, fintex developers to build investment services into their apps without building a brokerage from scratch. And what does that look like? We have on one side a selfcleing broker dealer clearing at the DTCC SEC registered.

Uh and on the left side we have a crypto exchange fully licensed in the US and globally. And we connect all the rails together. So we offer all these different asset classes. We're a multiasset brokerage. But what importantly, we're API first.

We're very well known for our API. So, it's no surprise that we have some of the best tokenizers uh using us on as the custodian and executing broker for the tokenized shares. We have over 6 million accounts uh brokerage accounts uh 280 client firms using Alpaca in over 40 countries. Uh we've had great success especially this last year. uh growing extremely quickly.

So it's no surprise you know we have XOXOs dinari and many others some who whom we can't name are actually using us under the hood and that means we're holding their shares at the DTCC. So if there's anyone who knows anything about tokenized stocks and how they work and the inner plumbing and the problems and how we're going to bring the whole industry on chain, it's us and the few people I'm going to bring on stage today. Today we're announcing a very special product because one thing that these guys are all telling us is that there are still critical frictions involved in bringing to uh stocks on chain. Uh there seems to be some kind of invisible wall between the two. Um you it's very difficult to get your shares basically on chain.

uh today there isn't a uh a way to do that seamlessly instantly uh partly because of the T+1 settlement system uh and partly because these are technologies that have been developed in isolation especially in the US today we're changing all of that with the instant tokenization network we allow participants to instantly mint their shares their traditional shares into tokenized versions through the ITN network. So as you can see on the right hand side we have market participants some of the largest market makers in the world who are launch customers of ours and then on the left side token issuers uh also the largest in the world. Uh and together we comprise the vast majority of the tokenized stocks industry. And today we're announcing that you can now tokenize your stocks instantly going between your traditional share and the token and back again. So you can redeem as well.

This is going to be a drastic transformation for the industry. It's a foundational technology for everyone to build on top of. On top of this, you're going to have now loan protocols and prime brokers who can take tokenized stocks as collateral and have the confidence that they can liquidate those in the trady markets 24/7. So you can understand how this is uh a revolutionary concept for for the industry. I'll pause there and bring on our special guest uh on Dinari uh Xtocks and DRW.

One thing, the first thing I want to cover here is why there are so many different versions of tokenized stocks and it's our belief alpaca that there's a reason for all of them and there will be niches that open up and the people cater to these niches. Can you tell us each of you uh what specifically makes your version of tokenized stocks unique? Starting with Roberta

back finance was incorporated looking at the stable coin industry. Basically we wanted to create a product that would be permissionless that would be fully backed by the underlying but that would also be fully compliant such as the circle stable coin I would say and uh it was very hard to combine all these three properties. H I think we managed to do that. So we have a fully compliant product that is regulated in Europe uh permissionless and fully backed. I think in in that sense it ticks all the boxes.

Yeah. Um I mean I think we generally agree with facts. A lot of those properties are the most important things about tokenized equities. For us the reason that we felt we needed to still innovate in the space was really largely around liquidity. Um, I think when you're allocating capital, it's important for you to know that there's going to be enough liquidity on the way in, but it's even more important to know that there's going to be enough liquidity on the way out.

Um, and really the only way to do that is to prove to the market that you can handle large volumes without any kind of slippage. Um, I think the market speaks for itself, right? Um, our liquidity model with instant minting and redemption is just much more capital efficient. Um, so the fees are zero, uh, the slippage is zero. We've handled trades up to like a million dollars.

Um, and I think when you look at a lot of the users of tokenized equities today, a lot of them are whales and they want large allocations and they can't be sitting there doing it, you know, $100 at a time. So, it's all about liquidity for us. DRW overall is a principal trading firm. Uh, we provide liquidity across different instruments and across different platforms. Uh so we work with a number of these partners on the stage in order to be able to provide the best prices possible.

So at Dinari we focus primarily on what is the token that you are buying actually mean. There's different models of this and you know Arouch to your point um that could end up having different use cases but our focus is to have a token that is a digital twin of the backing security. So I think you know a lot of people when they buy a tokenized uh stock there there's maybe a perception that what you're buying is essentially the stock itself and in our model uh we preserve the economic rights uh over that stock and a lot of the benefits of being a shareholder in that stock. So you know things like cash dividends um things like buying and selling through to the traditional market where you have uh the liquidity depth um that you need in order to you know get NBBO pricing um and uh you know good trade execution. So we've we've prioritized this model where you know we say okay securityurities laws exist.

We're going to we're going to build something that is uh complies with those laws and give you as a token holder uh all the benefits that you want from actually holding the security.

Okay, I'm I want to start asking some dicey questions now. All right, we were talking backstage how this is kind of like the UN because typically you guys are all competitors in a way. So, it was very difficult to get you all on stage together. Thanks for turning up. But let's start with the competition between Trad and DeFi.

So, Sam DRW with your experience working in uh you know the suit and tie space. Um these tokens obviously trade 24/7. We trade on the weekends.

Yeah.

This is the first time we've seen real pricing, real price discovery happening when markets are closed. Um, let's say I'm a risk manager in Wall Street and I'm trading other people's fund, other people's money. Do I have a fiduciary responsibility to be active on the weekends now because the crypto dgens have forced Wall Street to get out of bed and work on the weekends there? So, setting aside for a moment the word fidiciary responsibility, I think you're going to go out of business if you don't actually trade on the weekends. Taking a step back, any well functioning market needs two things.

Liquidity providers and liquidity takers, traders. Liquidity pro uh provision side, you already have that with partners such as DRW and others who have market making agreements. And when the opportunities are in the market are there, they'll be there. Then you have the liquidity taking side. Retail is already well demonstrated that they actively want to trade on the weekends.

You'll also, I think, have managed money where when events happen on the weekends, if they're not trading those events, price action does happen. If you as a money allocator have the option between two money managers, one who only trades five days a week and one that trades seven days a week, those five days a week people will not stay in business very long.

Anyone else want to comment? Yes, Roberto. And we recently had an interesting event in which a Tesla share traded on Friday at 395 and on a Monday it was at 4:15 and the liquidity onchain of this asset reached a stage where you could see how price discovery evolved during the weekend. then we could see how our market makers were changing the price during the weekend to reflect that. So this is starting I agree depends on in sufficient liquidity liquidity is key but when sufficient liquidity exists price discovery will happen on the weekend.

Absolutely.

We're seeing the markets reach efficiency very quickly too. I remember when we first started talking in on July 31st when X stocks launched the spreads were quite wide on the weekends and as we've been developing these conversations with market makers the prices have compressed like the spreads have pressed even just in the last couple of months. Um

yeah, but I mean try try trading $20,000, right? Like it it still moves those markets quite a bit, right? Um

yeah,

I think our outlook on it is is basically that that the 247 market and the like onchain native like AMM market is going to take potentially years to reach that level of maturity. Um and so you know for us really our priority is like getting people access as opposed to you know building the ideal efficient market discovery mechanism. Um obviously the efficient market discovery mechanism is really cool and someday that will take shape but I I I think for us it's it our perspective is that it's better to prioritize the needs of the users today um if possible instead of like sitting there and hoping that LPS will deposit into into the pools right I think there are also very different norms based on the asset class for example FX markets It's precious metals markets. Those are pretty much already 24 23 and a half by six markets. So, you're just continuously moving that needle over and and I don't think it will be a giant jump to eventually get to 24 by7.

We probably need fiat US dollar rails to operate 24/7 100% 100%.

That probably is a blocker. Um, will tokenized stocks, price feeds become the de facto price feeds for derivatives, the 24/7 derivatives like equity per like CFDs or tokenized stocks, I think you start to leg into that uh first by weekend and holidays, right? If you if you have CFDs and you're looking for what those CFTs should be based against, then I think the obvious was where is the most liquidity? And then when you start to go down that path, tokenized equities make a lot of sense. Not to go too in the the weeds, but like an interesting I think thought exercise is what do things like reggg NMS mean?

Basically requirements from different brokers to go through the best route of execution at the best prices. And maybe there's a there's a world in which you have a hybrid structure. Monday through Friday you're more on traditional rails at least in the near term and then weekends and holidays when those traditional rails are not operating your best price is arguably going to be in the tokenized equity space.

I think I think you are absolutely right about that. Uh that's kind of the I I think there's this world today and then there's this world that a lot of us in the space like to talk about that it could be a year from now or three years from now or 5 years from now but there's this entire universe that occurs between those two points where regardless of how much liquidity you know we kind of have onchain the market the big market is not on chain and the liquidity is orers of magnitude higher out there and so I you know I think that's the model that when we look at this that's what we see is this you know this gradual pulling of liquidity on chain um but reg is very important to that execution's very important to that and kind of unifying these two worlds in a way that makes sense is I think going to be the critical path

great let's talk a little bit about derivatives actually because I think this unlocks derivatives in a way so if If you think about the global stock market, 100 trillion, global fixed income market 100 trillion, real estate, commodities, you add it all up, it's 400 trillion. With derivatives, it's 900 trillion. So, it's the vast majority of trading flow and liquidity. So, these derivatives markets are probably going to be bigger than tokenized stocks. So, do you um Matt, do you have anything like special coming down the line with regards to derivatives?

I mean, it's definitely top of mind for us. You know, I I think a big part of the reason why we landed on the model that we did is because it has both liquidity and permissionlessness and the ability to use assets within DeFi is like kind of in my mind the the goal that we're all solving for here. Um so step one is going to be borrow markets, right? Uh you should expect to see that in the very near future like on the week to two week horizon um for Mondo. Uh, and then going forward, I think, you know, that that gets you access to like a little bit of margin, right?

Um, going forward, I think you're going to start to see more complex asset classes, things like options coming on chain. And with our liquidity model, you can do that, but like you could never do that on an AMM, right? Um, and it's not just options. It could be FX, right? It could be futures.

Um, it could be, you know, soft commodities, hard commodities. Um but then from there I think really like the holy grail of a lot of this at least on the speculative side is going to look something like pers. Um and so spot is still very important for pers as a product is that uh for pers as a product because it allows you to collateralize you know and capture the cash and carry trade. Um and you know I would say that keep on the lookout per is very much within within our road map.

Okay. pers I think man if I had a penny every time I heard equity pers at this conference we know this is going to be huge um okay so let's talk a little bit about tax this is boring but actually very interesting um Anna why don't you tell us like what does tokenized stocks unlock with regards to tax what's something new that is going to happen now that we have this new technology

yeah so um we were talking about this earlier and um taxes is one of those things you're not going to see a lot of marketing content around but I think it's like the unsung unsexy hero of tokenization in a way because if you think about it um I think we've barely begun to scratch the surface of what tokenization can achieve for an investor. So, you know, we're talking about tokenized stocks here. That's today. But now imagine you can have things like, you know, crossasset trading. So, you never, you know, you don't ever have to go back into fiat, which of course has tax implications.

Um, you can have things like multi-asset uh indices. You can have direct indexing that is enabled by this uh by this technology in a highly scalable and cost-effective way. So, things that right now only ultra high net worth investors can do. uh suddenly starts to become very accessible to basically everybody. And again, this isn't like exciting in the way that you know many of the headlines you've all been seeing about tokenization are exciting, but it's one of those things that isn't it's can be an absolute game changer.

Let's just explain to the audience what you mean by direct investing and what exactly is it that these high net worths have access to that we do now.

Sure. So, uh, just to give you an example, you know, a lot of people here are probably invested in the S&P 500, right? Like you buy an ETF or, you know, something like that. Um, if you have sufficient capital, instead of buying that index, you can just buy all the constituents of the index. uh you know this is something that uh tokenization can really start to unlock where you have this very scalable way of buying constituent uh members of whether it's an index or a strategy or some kind of thematic uh you know approach and you can start to you know if it's the S&P 500 you can start to do tax loss harvesting in a way that's much more targeted uh so you know instead of kind of trying to do this in the clunky way between uh between ET FS you can actually just do it on the constituent holdings that you have again like no one's staying up late like partying up for this subject but um but it does have ma major implications for you know what investors can start to do in a in a scalable way that again only ultra high net worth people have generally had access to.

So if I have a Tesla share in my brokerage account uh and I can and I convert it to a like a dinari version or an Xbox version, we don't know. My understanding is that we don't know yet how the IRS for example would treat that if it's a taxable event or not. Right? But either way, if it's a taxable event, then I can do tax loss harvesting easily, right? without losing price exposure to Tesla.

Like I'm in a loss. I'll convert to a next stock. I just harvested the loss. If it's if it is considered a taxable if it's not considered a taxable event, that means that I can now start going between X stocks or Dinari shares and the underlying have access to DeFi within my tax optimized rapper, my ISO account or whatever. And there's going to be much more free flowing liquidity.

So, I guess there's a benefit either way the IRS decides. So, it's

you guys have a preference or idea of what's going to happen.

I mean, I I think it's going to I mean, not to hog the subject at all, but I think it's going to be a little more nuanced than that because what you have I mean, you have three different products on this stage and you have there are fundamentally different approaches to tokenization. So, in a way you have fundamentally different products, right? I think we can say that fairly. Um there are you know there's number of providers out there that are taking a number of uh uh tactics for what what does the token mean like what is it that you are actually buying um and I I do think once we get to the point where the IRS is involved uh my you know personal view on that is going to be you know it's going to be dependent on what that product actually is right uh is it is it a you know are you is it a a

an asset that tracks price or is it you know

so we may even have see different tax treatment between you guys' tokens even if it's the same underlying share.

I mean I think even within that like issuers also have the ability to to choose say multiple models you know and issue multiple vehicles uh and take multiple routes for like in kind creation and redemption. Uh and then the clients can ultimately choose which one which route they want to go down. Um, I guess just building off of off of Anna's point though, if you want to do this like highly complex, you know, index rebalancing or, you know, tax loss optimization within like an ETF, you need to have liquidity on like every single one of the like constituents of that index. Um, and I I genuinely think that like our model is the only one that scales to that because right now we have over a hundred equities and ETFs live and ETFs are like by far like the largest component of that. Um, but if I want to do like tax loss optimization on that and the S&P 500 has 500 members, then I either need a liquidity pool for every one of like 500 assets, um, which like even with 50 assets now, the the competitors just can't scale their liquidity to that many, it's not going to work for 500, right?

So, we're going to need instant minting and redemption to to make this possible.

I I have to disagree with you there. Um, I mean, we have two fundamentally different models. So, you know, I I'm sure you can explain yours better, but you know, we we're we're kind of more along with how you guys are thinking about this where there's, you know, there's kind of direct connectivity the traditional markets because as we were talking about earlier, this period in between today where the vast majority, I mean, it's, you know, what is on chain is a blip compared to the, you know, trillions in the traditional market, right? um between today and this this future where onchain liquidity is a thing. Uh there is this interim stage and so the you know what we have built actually today pushes out all transactions to the traditional market so that you can get that MBBO pricing so that you can get that liquidity depth.

Uh and our view is that this is going to come onchain. This is why we built the dinari financial network to be this neutral playground that people can start to you know have this interoperable liquidity between chains and between onchain world and the off-chain world. Um, so you know, I think it's a it's a different model, but I mean to your point, you would have to have pools for all these different assets, whereas, you know, in another in another world, in another universe, um, and the one we're building, and we'll kind of see what it's used for and what these different models, uh, end up being successful at is is working toward, you know, building something that works for today, for the next year, and then for the next, you know, 3 to 5 to 10 to 20 years. um when we can have that kind of uh massive you know onchain when when the markets are onchain and then that's the primary market right and then the secondary market is a traditional rails market okay let's move on from tax [laughter] we can talk about this all day you and me but um all right let's talk about how different regimes are treating regulated order books versus unregulated permissionless order books and what you guys are seeing out there. Can someone who's nonkyc trade with someone who's KYCed?

Like what are the dynamics? How is the industry developing here? Are we going to see a bifocation of liquidity that basically you know KYC can only trade with KYC and then unregulated non KYC order books will spin up permissionlessly on different chains and they just won't mix. I mean,

I'm not sure that we'll see a diversification. Basically, the liquidity is one as long as the product is permissionless, as long as the token is permissionless. I think the stable coin model is is a good example of basically how the first step can be can adhere to laws of countries to to regulation and the second step basically attends defi and its needs for composibility and nonc at the end of the at the end of the day I also agree that we are only starting to scratch the surface of aum then come on tokenized stocks are what half a billion in total it's it's a joke even tokenized debt is a joke in size compared to the potential and it's people like to say it's already very big I don't know maybe 30 billion it's a joke it's nothing it could be 10 trillion easily

so I think many of those dynamics will evolve with size And in my view, there is practically no way of guarding a

right to product.

Yeah. I I we I mean we again we have a fundamentally different thesis I think than than your company and that you know it's kind of since 2021 when dinari kind of got started. It's been our point of view that the SEC is never going to be comfortable with permissionless trading of NMS shares. Um Greg NMS exists. it has existed for a long time.

there's reasons for it to exist and uh KYC AML is not uh uninteresting or unimportant to regulators and you know generally speaking I you know someone asked me the question yesterday like well okay well maybe that's for the US and then XUS is just going to be you know whatever else something totally different u but the reality is that uh the US still kind of sets the tone for global securities regulation and you know to you know to your question about are there going to be you know the KY is there going to be a KYC world and a non KYC world I think there's going to be a world where institutions and kind of regular consumers feel comfortable and then there's going to be you know maybe like you know people spinning up stuff on chain and you know maybe that achieves some scale but I think long term it's our point of view that that is not uh that is not a sustainable long-term play from a regulatory perspective and I know there's different points of view on this but we've you We've taken a pretty strong tack on the side of, you know, there are regulated entities around the world. The SEC is very highly unlikely that they're going to let the crown jewel of the US financial system, the US capital markets kind of run unchecked in a you know kind of totally permissionless way. Uh and that's kind of what we've we've built our platform.

Okay. So your view is there's going to be a walled garden around DeFi in the US. But as Roberto is saying you it's per crypto is permissionless. If I'm taking custody of coins, even Venari coins or whatever coins, nothing's stopping me from putting my my tokens in a in a onchain order book somewhere.

I I think part of the challenge there from a liquidity provider standpoint is liquidity providers, especially those who can do so at scale and capital allocators at scale, uh will actually still be prevented from doing so due to regulations, right? large liquidity providers are not going to say well I can physically do it so I'm just going to do it right there they still follow those rules I think we already live in that world of fragmentation and yeah I don't necessarily see that as possible another thing to keep in mind is if trading is truly 24 by7 it's not just a US and rest of the world thing it becomes a pretty complex uh question of well that that book that's being managed from a training standpoint needs to be able to operate 24 by7 so it's probably going to be passed around geographically. It suddenly becomes a question of what are the regulations where your traders are actually physically located, where support staff are physically located, where things like compliance and everything else uh from a support standpoint are located. So it becomes like a very complex set of questions across many jurisdictions and the sub aspects of people's roles in those jurisdictions. I mean, I think basically for our perspective is it's all about access, right?

Like that that is the point of doing all this. Um, and there's no I we just can't wrap our heads around a reason to have such stringent restrictions on yourself as an asset issuer if you're able to not do that in a legally compliant manner. Um, and it's like no mistake that like in three weeks we've generated three times the TVL of like all of our competitors combined, right? Um, the, you know, the ability for crypto to create these permissionless decentralized marketplaces, I I think truly is kind of like the use case. And if we're going to start cutting our TAM and like segmenting people geographically and doing all of that because we're worried that maybe in the future there will be some kind of regulatory regime shift, then like I feel like we've kind of lost the pot and we're better off taking a measured amount of regulatory risk that we're comfortable with and pushing the boundaries on like what's possible the the way that stable coins did.

Yeah, that's a very interesting approach. a little bit more dangerous, but I applaud you guys. Um, okay. So, let's the final topic, the trillion dollar flows. Everyone's talking about trillions of dollars now, right?

Coming into DeFi, but we're in the trenches. We see how this works. It's very difficult for these trillions to come on chain. What do you think is stopping the large majority of the flows? Like I was talking to Arjun from Kraken uh the other day.

I was like, why don't you guys ICO? Like why you're doing a lot of noise around your IPO. Why don't you pull the rug on Wall Street on the last day and just do an ICO, right? Because you've sort of established the pricing with the market. just go public on a chain somewhere and then wrap the ICO token into a DAT and go public on the public markets, right?

So, when are we going to see the first company that does that like the reverse of what's happening today and like blockchain becomes the the native to go public? I

mean, there's a there is a reason why everyone every company wants to go public on NASDAQ or NY, right? It's this is a huge liquidity. I mean the access to capital is is unmatched right but why is it unmatched and there is a level of trust in these markets obviously you know anyone who's dealt with an IPO process that I've ever met has always talked about how ownorous it is but that creates trust right because there's reporting standards there's a some kind of hurdle you have to clear to even be able to do that there's standardized financials that people can investigate and and interact with u and that is one of the things that unlocks the capability of that market to be so effective uh for an IPO. So I mean maybe I don't know just one person's opinion but maybe if all you care about is crypto users for your token then maybe that's a good strategy but if you want access to the entire breadth of the US financial system and the global financial system uh you know maybe the more maybe there should be standardized uh you know reporting

we'll get to that. Okay. So, I just want to make sure that everybody has a chance to answer here. Roberto or or Sam, let's start in order.

I I think to twist your question just slightly. What would be very interesting to me would be a dual track approach. Um do both a traditional IPO as well as a tokenized version. And I think you it would be a very interesting experiment in terms of what's the price action on the two. And I think ultimately we we're of the belief let the market decide.

If ultimately the tokenized IPOs get better price action then absolutely it's a data point for the rest of the market.

Yeah. I mean I I guess we don't really feel strongly about the IPO like pricing process in and of itself. Um, but what we can tell you is that like on day one when that asset IPOs there there will be measurable like organic demand on chain for sure and being able to like make that happen as quickly as possible. That that's kind of our role to just give access to the newly IPOed stock on chain. If you would take this bottle of water and open it up and turn it on upside down, the water doesn't spill all at once.

There is friction and there's also friction of move of capital between dreadfi and defy and these processes take time because people take time to make decisions. So I think we're going there. It's a generational shift and at the moment there is much more capital in Treadfi still. Maybe in 10 years things would be different. Maybe if we have built that trust, you know, that that's the right place to do it.

I think we'll all be very happy with that. Uh regardless of how things,

we're we're out of time. I really want to thank you guys for coming up. It's very brave of you guys to come uh and sit together. Hope we get to do it again uh maybe next year at Token. So, thanks everybody.

That's a wrap for us.

Thank you very much.