Data Disruption

A Charles River Podcast Series
Podcast Series

Tokenization in Private Markets

Ever wonder how tokenization might affect the private markets? Join Kali Jakobi & Jay Biancamano, Head of Tokenization and Digital Funds at State Street Digital, as they discuss the current and future state of tokenization in the private markets. 


Kali Jakobi (00:05):

Welcome to Data Disruption, a podcast all about data problems, solutions, and innovations disrupting the private markets. I’m your host, Kali Jakobi. Let’s talk data.


Hey, everyone, and welcome back to Data Disruption. As always, I’m your host, Kali Jakobi, and today, I’m joined by Jay Biancamano, Head of Tokenization and Digital Funds at State Street. Jay, welcome to the show.

Jay Biancamano (00:30):

Kali, thank you for having me. Looking forward to a great conversation.

Kali Jakobi (00:34):

Today, we have a great conversation lined up for you guys. We’re going to be talking about tokenization in the private markets. Jay is by far an expert in this area, and I’m excited to have him on just to talk us through kind of the basics of what this means for transforming private markets. Jay, let’s start very, very rudimentary here. What is tokenization? Please define that for us.

Jay Biancamano (00:56):

You know what? I get that question all the time, Kali, and I probably have a different answer every time I respond to it. But really, what I like to tell people is tokenization is really the process of using blockchain technology in the lifecycle of an asset. So when we talk about cryptocurrencies, everyone’s talking about Bitcoin and Ethereum, that’s just one iteration of tokenization. Actually, that’s the first iteration. Obviously, Satoshi Nakamoto’s white paper was written well over 10 years ago. But really, when we talk about tokenization here at State Street, it’s about not only taking the technology and taking tangible assets such as stocks and bonds and currencies and putting them on a blockchain, but also taking that same technology and applying it to some of the processes and products that we have here.


So if you were to say, “Okay, can I tokenize a stock?” Yes, very easy to tokenize a stock. But then you say, “Okay, what can I do with blockchain to make settlements quicker?” And actually, we could use blockchain to take the T+3 settlement cycle we have today to make a T+ immediate, right? Because blockchain allows you to do two things. It allows you to transfer value and validate ownership. So in effect, everything we do is transferring value and validating ownership, so we apply that technology to any number of products and services here.


And the other thing I like to say is, while tokenization, I think, is an awesome technology, it’s not always a panacea, right? There are instances where we may be able to implement blockchain, but it would be like cutting butter with a chainsaw. It might be overkill. So we have to evaluate where we find our entrance and exit strategy around tokenization. So it is something I could talk about for an hour, and I think that’s what we’re going to do right now. But really, it’s essentially about just being able to take something of value, put it on a blockchain, and be able to create an ecosystem around that particular asset.

Kali Jakobi (02:41):

The butter on a chainsaw is in an illustration I’ve never heard before, but it really gets the point across. Okay. So you talked about the value. Why is there such an opportunity here for private markets specifically? Let’s dive deep into that today.

Jay Biancamano (02:55):

So if you think about private markets today, there’s a lot that is, I would say, inefficient, particularly in this space. And I could probably give you a number of examples, but if you really think about traditional markets such as equities, right? Equities are very efficient. There are a number of participants. Equities are issued the same way, equities are settled the same way, equities are held the same way, and that creates a very efficient market.


If you look at private assets, particularly private debt and private equity, it is very disparate. You might have private equity that is trading essentially like a public asset, and it becomes very efficient. But then you have private assets which are very esoteric, and some of them, they could be held on somebody’s Excel spreadsheet. Cap tables could be monitored using a notebook held in a lawyer’s offices, so it’s a very disparate market. And the reason that is, is because the regulations around private assets are much different than public assets, right? So for me to invest, if you were to come up to me with an idea and say, “Okay, I have this private company,” very easy for me to make a direct investment at a private company. The minute I want to share that information and take that idea to the public, that’s when most of the regulations kick in.


And yes, I’m oversimplifying it, but for the most part, it really is a different marketplace than what we’re used to. And everybody knows how to trade stocks. Everybody knows how to trade bonds. Private assets, very difficult, very disparate, and I would say a very, very inefficient market that is ripe for blockchain.

Kali Jakobi (04:23):

Regarding strategy then, how should private market investors navigate tokenization? The current state versus moving forward into this future state?

Jay Biancamano (04:32):

Well, I think one of the things that is really cool about blockchain is the fact that we can implement it, and the end user wouldn’t even know it, and that’s really what a good technology is, right? If you were to look at how we moved onto the internet, I’m dating myself 20, 25 years ago, if you really got into the weeds and you started looking at how to program, development and everything, it would’ve taken you years to try and figure it out and get into it. But for the most of us, we just let the internet happen. There was an announcement today, I think it was AOL started 25 years ago today or something like that, right?

Kali Jakobi (05:07):


Jay Biancamano (05:07):

Yeah. And most of us, at that time, didn’t know what the internet was, but we all got these little discs in these magazines that we plugged in, and we were online, so we didn’t think about it. The same thing is true about blockchain technology, right? If you really want to think about different protocols, what is Ethereum ERC-20 tokens? Why are people using this type of technology and that type of technology? It’s just going to be overwhelming.


The real beauty of blockchain technology is it allows you to take a process, and that process might be the issuance of private equity, and take that and make it much more efficient, and to do it on a network where participants create this immutable source of information that gives everyone the ability to move assets and transfer value seamlessly and do so confidently. And that’s the big difference that blockchain technology introduced to the market.


There was no real theory about digital cash years ago because we had this issue called the double-spend problem, right? You couldn’t actually take a dollar bill and replicate it on the internet because there was this double spend. Nobody could validate that single dollar bill was the one we were talking about and it couldn’t be transferred to someone else. I guess the anecdote that I’ll tell people about is if you think about Napster back in the ’90s… I don’t know if you remember what Napster was. Napster was actually-

Kali Jakobi (06:22):

Oh, yeah.

Jay Biancamano (06:23):

… the ability for people to take music and transfer that music from everybody. So nobody knew what the original copy was, right? So we were able to go out there and everyone made a copy of the song. What blockchain technology says is we could actually figure out which one is the original one, because the network will say, “This is the original one. This is the one that belongs to Kali.”


And I would say that, for the most part, we were able to introduce the concept of digital cash by using blockchain. And now they said, okay, what else needs to be validated? What else do we need to ensure that ownership is who they say they are? And that’s why we look at other asset classes. That’s why you hear about people taking real estate and putting it on a blockchain, because you can actually validate ownership now, and that’s the network that does that for you.

Kali Jakobi (07:07):

So Jay, tell me more about the problems versus solutions there are currently in the market for private markets?

Jay Biancamano (07:12):

So like I said earlier, private markets are not the same as the public markets that we all know and love. It is operationally challenging. We have disparate operating models. Some of them are very manual, some of them are very primitive. It’s very time-consuming. If you think about the way we transfer assets today, we do so with a two-to-three-day settlement. For transferring ownership in private markets, it could take weeks, if not months. Matter of fact, if you think about real estate, if you purchase a home, you have to wait for these title searches, which are very draconian, which take weeks and are very expensive. So the ability to move ownership is very draconian, time-consuming. And anytime you have time consumption in capital markets, you lose the ability to capture alpha, right? So asset values could be affected.


With it being manual, with it being time-consuming, it’s very high risk of errors, very hard to reconcile. And if you understand how corporate actions are done in a traditional market where somebody declares a dividend or a stock split, very simple. In a private market, it’s very difficult to reconcile. So the entire process, very disparate, very manual, very time-consuming. We have one client that told us that transferring a bond from one fund to another, literally their own funds, can take up to six weeks, so that’s one of the-

Kali Jakobi (08:22):


Jay Biancamano (08:23):

… things we’re looking at. Yeah. And the markets are very fragmented. Many firms have tried to address the issue of price discovery, but as you have these solid markets, these markets where an asset doesn’t trade even on the internet, they might pick up the phone, it’s very difficult to seamlessly move into the asset class and out of the asset class. And it’s just also siloed access, like I said.


And that’s also creeping into the tokenized private markets. Almost all of the tokenized forms of private assets right now are starting to create these silos where it’s very hard to access certain instruments. So for example, KKR announced about six weeks ago that they created a private fund on the blockchain using Securitize as the firm. Well, the only way to access that would be via Securitize. So that’s a problem that’s growing in the tokenized market, but really, it’s the limited access to a wider market. You and I don’t have access to a lot of these issues because of the fact that they’re very siloed. And the other point of entry is sometimes very high, right? While the KKR fund is $100,000 to purchase, for you and I, that’s usually a barrier. At least for me it is, right? I don’t know about you, Kali.


The final real challenge are compliance and suitability issues. The ability for these law firms or issuers to access certain investors, the barrier is it has to make sure that they’re qualified investors, so Reg D comes into play. So there’s a number of regulatory issues that really has to be addressed, suitability issues. And each one of them, like I said, are non-conforming. We don’t have a standardized way of doing this. And I think that’s why the blockchain is so attractive, because it allows us to standardize a lot of the access points to these private assets or private issues.

Kali Jakobi (10:06):

So high points of entry, siloed, difficult to say the least. Jay, can you give us some examples of successful tokenization and digitization strategies that have already begun and started to kind of be the leaders in this space?

Jay Biancamano (10:20):

Sure. So I’ll point out the KKR one. So KKR, Kohlberg Kravis & Roberts, who everyone knows, large private equity shop, they are an issuer of private equity funds. And I’m pretty sure the cost of entry is well above $1 million to participate in these funds, and it’s usually formed around a small syndicate. What they did using a firm called Securitize a few months ago is to actually take that fund, and a portion of that fund was tokenized. So they took I believe it was less than 20% of the fund, they created tokens, and now the cost of entry went from, I believe, above $1 million to $100,000 each. So you could purchase a KKR healthcare fund token for $100,000. That token would be put into your wallet at Securitize, and it would not be freely tradable for at least a year, but it is the first way for them to democratize that asset class. Because now, 15 million, you might have 150 investors now, where it used to be one investor would probably invest 15 million into that fund, so that’s one of the more recent, successful ones.


But there have been a lot of number of proof of concepts. We’ve done a proof of concept using a firm called Symbiont to issue a private placement on a blockchain, which we simulated. And there’s probably multiple real estate type of tokenization projects where people and large institutions were able to purchase portions of a real estate syndicate that normally they wouldn’t have entrance to. So the idea to democratize those assets is actually to increase the amount of capital sources that could access that particular tokenized instrument.


We’re working on a really cool project with some of our clients. We know that WisdomTree recently filed to tokenize their mutual funds, and that’s something that we’ve worked with WisdomTree on for well over a year now. And they’re also using a firm called Securrency, which we have invested in as well, to create that tokenized platform. And the cool thing about that is they’re looking to issue a number of mutual funds in tokenized form for the regular retail investor to actually purchase. The retail investor will actually receive tokens in lieu of shares, or the tokens will represent shares in the mutual fund. And we believe that’s something that’s going to be well-received in the market.


When we talk to other clients who are interested in tokenization, that’s one of the first things they bring up. What about mutual funds? What about ETFs? And that’s really where we’re starting to see a groundswell of support from not only clients, but technology providers, and also the regulators, right? Because the regulators are approving these instruments and these new tokenized forms of assets.

Kali Jakobi (12:51):

So where do you see this going in the next five years? We’ll put a shorter window. I wanted to ask, actually, 10, 15, but I respect that you’re not a future teller. But where would you, I guess, see and hope for where tokenization can take to private markets?

Jay Biancamano (13:07):

Okay. So I am going to go out 10 years, so let me give you my science fiction spiel that I’m accused of here. We know currencies have been tokenized, right? We all talk about cryptocurrencies, but we’re really starting to see a groundswell of support in private assets, so we are working with a number of firms to do private debt, private equity, and real estate. You will see that a liquid asset class start to roll out a number of issues in the next year that are different than what we’ve done in the last couple years.


The last couple of years, people have been tokenizing assets for tokenization’s sake, but nothing that’s gotten the attention of the institutional investors, right? It’s really more of these non-investment tokenization projects. Now, we’re starting to see real interest in institutions to buy private assets. KKR got a lot of people’s attention. There have been several other instances around real estate. We’re talking to clients about doing it with bonds, and the key thing with that client is they want to be able to make that scalable into other clients.


And then we’re also starting to see a number of projects around not only tokenizing assets, but tokenizing the information that are shared. We’re part of an iCapital proof of concept that allows wealth managers to share data on the blockchain, which is immutable, so that is really accelerating. And I think over the next three to five years, you’ll see private assets, particularly private equity and private debt and real estate, start to become normalized with other assets because these tokenization projects are taking hold. And we’re looking at clients that are actually investing in these assets and coming to us and saying, “State Street, what can you do as this world starts to evolve?” And that’s why we’re building our custody solution.


Looking beyond five years, then we start to see something really interesting happen. We all know what portfolio models are like today. Most people have a portfolio model that have equity, cash, and fixed income. Now, think about tokenized private assets, right? One tokenization project might be a series of royalty payments for the Pink Floyd catalog. Another one might be investing in gaming tokens. So if you think about portfolios today and portfolios 10 years from now, the model of cash, equities, and bonds is going to be completely different. And I like to tell people, when I look at what my son and daughters are going to be investing in 20 years from now, they’re going to have some really cool projects in there, because they’re going to get access to it because of tokenization. I mean, there was actually a project to put sports contracts as a series of future payments on the blockchain. That was held back because of regulatory issues, but I see that happening as well. You could invest in individuals.


And then tokenization of data becomes a whole new asset class, which is exciting. When you think about what Gmail does with your information, Gmail has created a trillion-dollar company using all of our information because they share that information that’s valuable. Tokenization will actually change that paradigm, and if we could take data and share it in the form of a token, then that token has value, and that value could find market value. And then you think about large corporations, who are able to add data as a balance sheet entrance, right? Creating this new form of wealth.


And then beyond that, we’ll start to see it creep into the traditional markets. We know that firms have tokenized traditional equities. We know firms have tokenized traditional bonds. Once that is all done, once everything’s put on a blockchain, think about this. In our current market, we talk about the problems in private assets, but that’s also a problem in public assets. We have bonds trade one way and settle one way, stocks trade one way and settle another way. We talked about real estate. So assets in their current form are very difficult to move from one form to another.


But if you’re able to put everything on a blockchain, you can move from a token that represents fixed income, to a token that represents real estate, to a token that represents an equity, and offset them immediately, where the tokens become the currency or the actual assets become the currency. And then you start to see everything on a level playing field. And I honestly think that tokenization will lead to an increase in the amount of investible assets. Yeah. There’ll always be bad assets out there, but there’s bad equities, right? There’s bad stocks, there’s bad companies, right? But there will be, I think, the ability for people to move in and out of assets more seamlessly and the ability to create wealth for the ones that are unbanked today, and we haven’t talked about that.


When Satoshi Nakamoto created blockchain, he did it not because he wanted to create this new form of wealth for people, of the assets. He wanted to be able to allow the unbanked to have access to building wealth, right? And if you think about how the world today, close to 2 billion people are unbanked, in the United States alone, 25% of people are unbanked. But tokenization, or actually the blockchain, has allowed a lot, or will allow, a lot of the unbanked to not only create wealth, but actually make payments, be able to be banked, right?


And then it’s not just cryptocurrencies. It’s everything we talked about, right? And that 1.7 billion having access to the markets globally, it’s exciting. I think I kind of get lost, as you can hear. I get too excited about it. And I wouldn’t do this in a room with a bunch of my managers, but I think everybody gets it. It’s an exciting time, but right now, it’s trickle, trickle, right? It’s trickle, trickle before the flood.

Kali Jakobi (18:12):

Wow. I mean, Jay, I really underestimated your ability to future tell 10 years out. You’ve got me excited. We might have to do a part two on this one later on. But to anyone listening that thinks tokenization is just a fad or a trend that will come and go, I mean, after your last answer, I highly doubt that they’ll think that, but what would you say to them?

Jay Biancamano (18:33):

I find it fascinating people that they get caught up in Bitcoin, they get caught up in Ethereum, and they kind of poo-poo it, and they say, “You know what?” And then when you start talking about the technology, they say, “Oh, I get it. Yeah. Oh, right. That makes sense.” I would just tell them read. I think one of the funny things, I teach a class on blockchain for business, and my daughter, who’s a teacher, did all my lessons for me, right? And the more she started reading about it, she goes, “This makes so much sense,” right? This makes so much sense, and it’s very simple, right? It’s not that difficult to understand. And I want people to understand that everything we do today, just like 30 years ago when people said the internet is going to change everything, blockchain is going to do the same thing. It’s going to change how we interact with each other.


And I think hopefully it becomes a little bit of a geopolitical upswell. It starts to give the public, the unbanked, to make them feel part of the global economic ecosystem. Obviously, that’s a little dreamy of me to say, but I think really it’s a great normalizer. As we said with private equity and private debt, it normalizes things. It gives people the ability, and it democratizes it. So I would tell people, read what you can, ask questions.


And we do this little exercise with my class. We say, “Let’s take something that you do every day and let’s talk about all the intermediaries that are involved in it.” We do things like buying tickets to a concert, and the students will say, “Well, I send my money to Ticketron and then I have a…” I’m dating myself. It’s not Ticketron anymore, right? It’s Ticket Live, or whatever. When I’m done, I’m like, “No, it’s you. It’s your service provider on the internet. It’s your bank, it’s your credit card provider.” In some cases, we go 15 to 20 iterations. And I said, “You see the ones in the middle? We can eliminate half of them using blockchain,” and they kind of get it. So it’s going to affect everything we do, and I think it’s something that people need to not understand, you don’t have to get into the weeds, but just to appreciate. I think that’s what I would say. Just appreciate it.

Kali Jakobi (20:25):

Yeah, absolutely. Well, Jay, I believe that is all the time that we have today to talk about tokenization. I thank you for everything, all the value that you’ve given us today. I do have one final question for you, though, and I always like to add a little bit of personality and personalization to my podcast. So Jay, tell us who inspires you?

Jay Biancamano (20:45):

Who inspires me? Well, I have a lot of people. Obviously, my wife and kids are very inspiring, but if I’m going to use a public figure, the one I always talk about is Elie Wiesel. Elie Wiesel was actually in a concentration camp when he was a boy. He wrote a book called Night. He actually won a Nobel Peace Prize, and one of his favorite sayings was, “Suffering gives you no personal privilege.” And the reason I like that is because we all have our own stories. We all have our ups and downs, right? But it doesn’t allow you to feel that you are entitled to anything above what you earn, and I kind of like that. I kind of like to think that we’re all somehow equal, we’re all in this together. And I think that’s one of the reasons that attracted me to blockchain, because it’s a great equalizer. You know what I mean? I think that’s something that I really feel passionate about.


My wife’s always saying, one of the things I talk about is, “It’s got to be fairer. Things have got to be fairer.” If I was a Jet fan or a Yankee fan, I don’t think the Yankee game was fair, but I thought the Jet game was fairest, but no, but that’s it. I’d really like to thank Elie Wiesel. I would encourage people, if they’ve ever read the book, Night. I mean, here’s a man who was raised in a concentration camp, had a very hard life, and one of the most forgiving and profound people you’ll ever met.

Kali Jakobi (22:00):

Hmm. I love that. That’s beautiful. I will absolutely look that book up. Well, Jay, thank you so much for being on the show. It’s been an absolute pleasure. Thank you all for tuning in, and ’til next time.

Jay Biancamano (22:10):

Thank you, Kali.

Kali Jakobi (22:12):

Thanks for listening to this episode of Data Disruption by Charles River. If you like what you heard, share and leave us a review. It helps others discover the show, and I thank you for it. And if you’d like additional insights related to this conversation or others, go to our website at ‘Til next time.

Information Classification: General


The material discussed is for informational purposes only. The views expressed in this material are the views of the author and are subject to change based on market and other conditions and factors, moreover, they do not necessarily represent the official views of Mercatus and/or State Street Corporation and its affiliates.