It’s the (Banking) Network, Stupid

Lucas, how did you get your start, and what brought you to the world of digital assets? 

My background is as a business builder and serial entrepreneur with a focus on digital media, venture capital and then the crypto and digital asset space. I started my career in California's tech hubs, and gained a lot of experience in the startup scene. I was also a managing member of Forstmann & Company, where I had the great privilege of working with J. Anthony Forstmann, the US hedge fund pioneer. For the past several years, I've been a Managing Partner at GenTwo Digital, where our mission is to close the gap between the traditional financial markets and the emerging crypto markets. As for digital assets specifically, I got into crypto in 2016 and I have always been a big believer in the space. 

There do seem to be many parallels between tokenization and Assetization. How can Assetization support tokenization and digital assets? 

Assetization and tokenization are similar. They are both about putting wrappers around assets and letting them loose on a network. But by its very nature, Assetization is far bigger than tokenization. That's because crypto runs on distributed ledger networks, and Assetization on the existing banking networks. And these are far larger than crypto networks. For this reason, I think of tokenization as a subset of Assetization, one of the several different types of wrappers that can be used as an output of the Assetization process. Being able to tap into the banking network with the secur ities that we are building through Assetization is extremely powerful for digital assets. Because guess what? The banking system is where the money is. So why not be there too? If you tokenize you can gain certain advantages, for example automated transactions, enforceable contracts, and a reduced need for intermediaries, but from a purely asset-based perspective being only on a blockchain network also means limiting yourself to a certain audience. 

You mentioned the network effects of the global banking system. How important are these for Assetization? 

The global banking system is an unfathomably large network. Or rather a combination of dozens of networks that are tied into each other. It is questionable if anyone has the complete overview, and there is massive complexity there. It's highly sophisticated, and in its way rather beautiful. And it all works. But many people still fail to appreciate the power of the network effects of the global banking system. Yet we see this power all the time in other contexts. Take a big communication network like WhatsApp, for instance. It is practically unstoppable. 

There are really only three things that can take it down. One is if the government intervenes and shuts it down for some reason. There is nothing anyone can do about that. Another is if there are technical glitches that disrupt service over a long time. Yet it's been estimated that if WhatsApp became unavailable or hard to use, it would still take a couple of months before users would finally switch to another network and not return to Whatsapp once it's fixed. And the third would be if a competitor showed up that was at least ten times better. But it's also been shown that even in this case, the new network would only have an about 3% chance of penetration in replacing the old, established one, despite being better. 

Large networks are unstoppable. The more people or institutions you add to a network, the more it accelerates, and the more unstoppable it becomes. Another great example is Uber. The more drivers you have in the network, the faster you can get a ride. So of course, you're going to choose Uber. Same thing with WeChat. WeChat is an interesting one because it's similar to WhatsApp but they also settle transactions. Such private sector monopolies / networks are exactly what authorities in the world fear, so as not to lose control over the most powerful driver of the economy: money. My point though is that this same dynamic applies to banking networks. Look at SWIFT, for instance which stands for Society for Worldwide Interbank Financial Telecommunications. It is like the WhatsApp of banking. It is not going anywhere anytime soon because everybody knows it, understands it and uses it. Same with the International Central Securities Depositories (ICSDs) and all the other established agencies to settle financial transactions.

So you are saying Assetization gets its power because it runs on traditional rails? 

Absolutely! That's what makes it so powerful. The securities we create can be held in existing bank accounts, transacted over the normal rails, and basically used in all the familiar ways. This has advantages for clients in terms of where they keep the assets, in terms of accounting, and in so many other ways. But it's not just better for clients. It's better for asset managers too, especially those being asked by their clients to handle certain types of alternative or non-bankable assets. How is it better for asset managers? For one, we are creating these securities that run within the banking system so that everybody knows how to work with them. For asset managers, this also means they don't see the asset outflows. Because if you as an asset manager want to get your clients into alternative assets, if it's crypto or art or anything alternative, then you would most likely see an outflow of funds. You have to wire money to an art dealer to buy a Picasso or to a crypto fund to subscribe to an off-shore fund. And an asset outflow is something that hurts everyone in the respective financial services chain. It hurts the asset manager because the cash leaves the bank account. It hurts the bank too because they lose cash off their balance sheet. With Assetization, you don't have this problem because, while the assets are off-balance sheet and asset-backed, the security itself is still custodied in banks.

What other advantages are there? 

Well, there is safety. If you invest into an alternative asset you often don't really have control of the underlying that you have invested in. I mean, yes, maybe in the Picasso example you get a painting that you can hang on the wall, but wouldn't it be nicer as an asset manager at least to have it still be part of your bank account? Or you as the high-net-worth individual, the family office, or you as the end investor seeing it still in your bank account? Wouldn't that make things easier, not to mention ease your mind? 

Another advantage of Assetization the way we practice it is reduced friction. A traditional private placement is usually a ten-to-twenty-page document which everybody has to sign and then exchange, and there's lawyers and there's red tape going back and forth. Now with Assetization, we are attaching an ISIN code, which in effect places the security in the global banking network, and then suddenly you can settle with a delivery versus payment transaction. This is extremely powerful, and very neat and efficient, especially for large amounts of money. And there is no KYC / AML necessary because all of that has already been carried out by the respective banks. And that can be a huge burden otherwise. Assetization transactions are bank-tobank transactions. Compare that with crypto today. And that's the point. We are basically connecting you directly to the global banking system with minimal friction involved and with minimum hassle. And that's to me the winning formula here. There is just a great power in being able to transact within the traditional banking network. 

So does this make crypto superfluous? 

No, quite the contrary. As I mentioned, there are things you can do with crypto, or better said on blockchains, that you can't do as well in the traditional system. Programmability and instant settlement make blockchains very interesting payment rails for instance. I do believe that in five to ten years' time tokenization and digital assets will be so deeply integrated within the global banking system that it's basically a part of it. And then we can probably use sophisticated DLT protocols to settle transactions and tokenize real world assets. And we can make use of the power of blockchains. I think this is all coming, and we will use it without even realizing it's blockchain-enabled, which is exactly how it's supposed to happen. But in terms of the broader digital assets and DeFi space, like I said, I think the regulators will force all of that to become part of the traditional banking system, perhaps another network among all the others. And with Assetization, we offer a bridge to that system already now, for example through securitizing digital assets and making them bankable.

Assetization sounds a bit like DeFi. Would you agree? 

I would definitely agree. I think that Assetization will enable a radical democratization of finance that is akin to the DeFi dream. Consider access. Certain opportunities, often the most interesting ones, are not accessible to most investors. Only banks, qualified investors and institutionals can partake in asset classes like private equity or hedge funds. With crypto for the first time ever in history, an asset class arose where retail investors had, so to say, first dibs on it. Mostly because institutional investors couldn't deal with it. And that was really cool, and I think a fair redistribution of some wealth out there. And now with Assetization we are looking to make all assets accessible in a similar way. So we can now wrap up crypto and make it part of the banking system. And we can also assetize all the other non-bankable assets out there and give people access to them too and also create liquidity. And this will be done without banks as issuers and in a 1:1 asset-backed fashion similar to what DeFi is about 

What are the advantages of the off-balance sheet approach that Assetization relies on? 

Historically, you could only securitize bankable assets like stocks and bonds, the things that banks can easily add and hold on their balance sheet. Now of course you can securitize more things too. But regulated banks have balance sheet restraints. So even if banks would want to issue exotic or alternative investment products, on crypto for instance, they would have to have massive amounts of reserve capital on their balance sheet. So that makes it just not viable and frankly, too expensive. And now with Basel IV coming, risk-weighted assets will require even more reserve capital on balance sheets. 

With Assetization, we offer perfectly legal off-balance sheet vehicles that are 100% backed by the asset. That means that capital requirements don't apply, because they aren't necessary. These are not risk assets. And that in turn means anyone can issue these securities. You are freed from reliance on a bank and its balance sheet, though you are perfectly free to use the bank for custody and transactions. This also makes the system much safer. There is still the risk inherent in the underlying asset, of course. But these assets are by their nature ring-fenced. All of this will help usher in a more demo cratized global financial system, one that becomes fairer by the day.