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On-chain asset tokenization and fractionalization
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The impact of the Terra-Luna situation on crypto markets
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The current status of the on-chain tokenization landscape
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How the regulators view the market
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What can and can not be tokenized?
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What is the necessary tech stack?
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What are the roadblocks to growth for this market?
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The significance of the Ethereum merge
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All of Them Are Some Form of Tokenization
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You Can Fractionalize On a Spreadsheet
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It Will Take Some Time for the Incumbent System to Shift
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Not Everybody Can Be a Fast Follower
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Crypto Winter Is Actually Blockchain Summer
Read the best-effort transcript below (This technology is still not as good as they say it is…):
Michael Waitze 0:03
I love that voice. Hi, this is Michael Waitze. And welcome back to the Asia tech Podcast. Today we are joined by Sumit Kumar, a Managing Director of Partner at BCG and Oi-Yee Choo, the CEO at ADDX Sumit, and Oi-Yee thank you so much for doing this. How are you both doing today?
Oi-Yee Choo 0:21
It’s great to be back. On your show, Michael.
Michael Waitze 0:24
It’s great to have you Sumit welcome for the first time. It’s great to have you as well.
Sumit Kumar 0:28
Thank you, Michael. And you know, really excited to join us for the first time.
Michael Waitze 0:32
You sound awesome. By the way, I like to start some conversations like this with definitions for our listeners, and I really want to dig deeply into on-chain asset tokenization. To me, maybe you can help define that for us.
Sumit Kumar 0:44
Yeah, so look, I think, Michael, it’s quite an interesting concept, right? So asset tokenization is taking a large asset and breaking it down into small pieces. And that’s what a token means, right? And the fact that you need to know who owns that token, to actually do that, you have to actually put it on a chain, right? And in simple words, it’s a block, where you actually inscribe Intel, who owns this asset and how the transfers are happening. So in the popular world, we call it the blockchain, right? So it’s literally taking an asset breaking it down, documented it on a chain saying who owns the asset, and when the transaction happens, all of those transactions are noted there. Right? You know, many times people think it’s actually a cryptocurrency, it’s actually quite different, you know, while cryptocurrency and on chain asset tokenization, we’ll use a similar distributed ledger technology. But you know, asset tokenization is all about taking a real world asset, a land, you know, a share, you know, a barrel of oil, you know, a barrel of corn, right, and tokenizing it, it’s quite different than, you know, a classic cryptocurrency.
Michael Waitze 1:48
So I’m so glad you brought this up, right? Because I like I do like to separate sort of the technological underpinnings of blockchain or distributed ledger technology, and sort of this speculation in tokens, right. And I think sometimes we suffer from the fact that tokenization and token sounds like the same thing. And actually, they’re not, they’re not exactly the same thing at all. Or you’re shaking your head. Yes. Did you want to add something there as well?
Oi-Yee Choo 2:11
No, I think that’s exactly right, Michael, and we’ve been at ADDX been fighting this definition for the last two years, right, because people get very confused with tokenization, and tokens and cryptocurrency. And I think the application of blockchain is far, far, far greater than just cryptocurrencies. And the power of the blockchain, which can get into a lot of detail, is it’s if you think about the information in a block, which is what’s me just mentioned, then actually, you can also create code to execute instructions to that block, right? Once redeem the token, and things like that. So I think that’s where the real power of asset tokenization lies as well, not just about cryptocurrency trading, that’s very different.
Michael Waitze 3:06
So this brings up another really interesting topic, right? If the token itself is programmable, and if there’s a smart contract part of this does what happened in the Aetherium market or to Aetherium? itself? Right, this big merge that everyone’s been talking about recently? Does this have impact on what’s been happening? And even if it does, or doesn’t like, what what do we see as the impact of this merge?
Sumit Kumar 3:29
I don’t know, I can quickly go first. Right? I think it’s quite interesting, right? I mean, this whole merge was moving from, you know, proof of proof of work to proof of steak, right? I think that’s, that’s, that’s an important implication. Because if you think of a proof of work mechanism to validate a transaction, it’s much more you know, quote unquote, labor intensive labor defined as you know, energy in that role, right, like the extent of carbon footprint, it will have like external resources, which are required. Yeah. And I think with ethereal, which is the second largest market cap in terms of, you know, the cryptocurrency moving from proof of stake to proof of work. So proof proof of work proof of stake, what you will actually find is that it will actually make transactions cheaper, and faster, right. And that, actually, I mean, if you really think of it today, Michael, what is what is coming in way for us to move full scale to cryptocurrency for doing payments, right? Why can’t it replace a visa master? Right? There are two there are three reasons for it. Right? Go ahead. The first is transactions per second, right? How much TPS can IT support right? Second is what is the energy consumption cost behind this? Right And third is the whole element of cybersecurity and especially when you do interoperability across chains. How does how? securitized, right? So actually, by the whole theory of merge solves one very big issue, right, which is actually moving from a much more resource intensive process to a much more linear process from an energy perspective, right? And that is important because one of the largest chains in the world is actually moving in the direction. And that’s how it’ll actually help to drive many more use cases. And it’ll actually help a multiple layer two chains, which are being built on top to further improve the whole energy efficiency. And the way these use cases can be brought to life.
Michael Waitze 5:17
Yeah, so we want to talk about the difference between proof of work and proof of steak again, I like definitions. And I think some people like these idea of proof of work people can kind of understand the proof of steak is a little bit more complicated. Does one of you want to explain what that means as well?
Sumit Kumar 5:32
I’m happy to. Okay. I think it’s quite simple, right? If you think of, what is a proof of work, right? I mean, if I, if I tried to make it very simple for our listeners, right? Like, you know, when, when a when somebody is trying to do a transaction, right, you have a bunch of people trying to solve a puzzle, you know, solve a complicated equation, and whoever is able to solve that complicated equation and validate it, is actually get gets paid, right? gets paid for doing it. But as so many computers are so much of calculus, you know, so much of computing capacity is going behind that calculation. And that actually leads to much higher resources consumption. And that’s exactly what proof of work is right. Right. Versus proof of steak is is much different, right? I think proof of steak is is about the fact that you actually like different different validators are actually taking a part of, you know, some amount of cryptocurrency and using it to come up to consensus, right? So basically, what is blockchain blockchain is all about coming to a consensus that is this a valid transaction or not, and the validators then just actually go and you you select a set of validators based on the fact that who is taking a specific, you know, the cryptocurrency on the chain. And then that is actually then used to validate the transaction versus, you know, millions of people try to solve the puzzle, right. And hence, this helps to make it a bit more faster and makes the transaction much more energy efficient, right. And that is how the new blocks are created. But whoever actually wins, that proof of stake label gets the right to create a steak that could be in the new block,
Michael Waitze 7:09
it almost seems to me and again, both of you can comment on this, that proof of steak is means that the participants are more aligned in a way with what’s happening, right. And in the sense that if proof of work, it’s just me buying way more computers than you using way more energy than you like running all this water through the pipes to get my computers to be cooled and all this other stuff. And just in a way I kind of don’t care. But proof of stake is like I’m involved as well, I care and I’m willing to get paid a little bit but it also increases the speed to and remove some of the a lot of the energy consumption as well. Can we go back a little bit to this conversation about the crypto markets? Because I think there’s a mindset change that needs to take place for people to continue in the growth of this on chain asset. tokenization. Do you are you maybe you can comment on this as well? What do you think that this Terra Luna thing impacted the way people think about what’s happening in the market? Again, whether it’s directly related to on chain asset tokenization or not? It’s still out there? Yeah.
Oi-Yee Choo 8:08
I think what’s happened is quite interesting, right? Tara Luna has exposed you know, some of the critical aspect aspects of cryptocurrency, stable coins and all of that, in that it exposed the unregulated part of it. Right? Yeah, that was when in well, knowing that this is unregulated. And so the concepts of consumer protection, market behavior have now sort of bubbled up to the forefront and everyone that used to say, Please don’t regulate crypto, right? Please regulate crypto,
Michael Waitze 8:50
which is good, which is good for entities that are already regulated. Yes. That’s
Oi-Yee Choo 8:54
I mean, so it’s fantastic because it does force accommodate because crypto is not just about and Terra Luna is actually within that space. It’s not just about the Bitcoins over Aetherium it’s also about stable coins. And it’s now pushed the regulators to really take a hard look at what is a stable coin? How should it be regulated? What does cryptocurrency mean relative to stable coins and then you know where mes has been in Singapore is start to clearly define the cryptocurrency space and the digital currency space but more importantly, the current digital currency space and the digital securities piece. Yeah. So as someone that I was at of webinar said, you know, crypto winter is actually blockchain summer because in being forced to think about the differences between digital currencies digital securities, cryptocurrency stable coins, the conclusion therefore is blockchain has so much applicability that we have to divorce the thinking we between what is the technology that will solve asset tokenization versus creating regulation around market behavior and consumer protection and cryptocurrency?
Michael Waitze 10:11
I completely agree. And look, I contend and similar, I’ll get to you in a second if you want to comment. But I always contend at the beginning of any new market, or frankly, any new paradigm, that there always going to be these operators off to the left or off to the right, doing things that we don’t want them to do. And sure, we’d love to self regulate. But at some point, everybody looks at them and says, Yes, see that thing over there. That’s why we’re not doing that. So come over to this side, where there’s actually regulation, there’s market structure, and the things that you expect to happen in a regulated market are actually happening. This protects you. So was there something you wanted to add?
Sumit Kumar 10:45
No, I think I just want to add to the whole point, we talked about crypto winter, right? And I think it’s very interesting that how people look and define crypto winter, right? You know, I didn’t say the normal world, people will say, Oh, crypto prices have crashed, right? The world has come down. Prices are down by two thirds, right? You know, the way we look at it is how much code is being committed in GitHub, by developers in the DLT, you know, the DLT space. And what is very interesting is the code that have been committed has not changed. So what is happening in the developer activity has not gone down, right? The speculative activity has gone on, and that’s bang, on to the point that’s actually blockchain summer, you know, all the right projects will get funding, people will actually invest in the right things, people will focus on the right things. Right. And if you also link it to what recently, you know, the American regulators have come out with right, I think that’s really the framework that Joe Biden had requested his own regulators to come out with. And I think the three clear things which very clearly stand out from their right is the fact that you know, how do you protect the interests of the retail investor? Right, weed stable coin or beat any cryptocurrency, right? How do you ensure illicit money is managed? Right? And you’re not doing random money transfer, illegal money transfer and managing that? And third, what does this whole stable coin mean now from a cbdc perspective? And should we actually create your own cbdc? And why not? What is the model? We do it right. So I think all of this is actually going to legitimize crypto much more, because all the authorities will look at it and realize that while there are bad parts of it, and let’s kill it, but there are amazing parts of it. Let’s adopt it. Let’s grow it. And let’s make it bigger. And this is exactly what will happen. The industry, next three to five years will become so much more stronger. And I feel like the right players, and ADX is one of them. But the right players will invest behind it now, we’ll actually emerge as winners, right, the way we had internet winners and the people who actually invested in the early 2000s.
Michael Waitze 12:40
Go ahead. Oh, yeah, it looks like you want to say some Do you want to add something there as well?
Oi-Yee Choo 12:44
No, I mean, I think I completely agree with that. And we see that shift, actually also supporting financial services, that have traditionally been thinking about, Oh, you know, Blockchain as a little project in some part of, you know, square bracket. And today, the discussion is not about cryptocurrency and where it’s at, it’s actually now about interoperability of the chains within financial institutions. So it’s not it’s no longer a question of is blockchain a technology that will be adopted? It is now a technology that’s being drafted and adopted, and being thought of as a network of chains. So that’s a that by itself signals. A very interesting shift in mindset, globally.
Michael Waitze 13:33
Yeah. I mean, interoperability is so important. Is there a regulatory side to this as well, which saying, like, if you’re going to build another chain on which you think that this on chain asset tokenization should take place, that it has to be a good actor in the context of all the other things that are taking place as well? So I mean, what do you think?
Sumit Kumar 13:50
So I think, look, I think, you know, you know, I go and meet a lot of clients, right? And a lot of banks and without naming any of these right, but the first question they asked me, right, you know, do you think asset tokenization can be real? Right? And do you think when they say real, like, can they be huge, right? And what can stop them? Right? I think the whole interesting point there is I don’t think technology is an issue micro right? Inter operability as the technology will mature, and we’ll have it, the problem is the regulatory framework, right? Think of it like this, right? Let’s say I have a piece of land sitting in Singapore, right? And I tokenize that line, I give that token to you. And suddenly you transfer the ownership of that token to somebody sitting in Abu Dhabi or somebody sitting in Brazil, your local regulator and then not be very okay with it right, because you are literally anything and everything which is governed by a local regulator, as soon as you try to move them outside that private chain and make it global. All of these things are quote unquote, security tokens. They are regulated by the local regulator, they are losing control on it. And the biggest thing which will Come in way of the things becoming bigger the regulator’s themselves, how open they are, and how much they allow interoperability for things to move out of your jurisdiction to another jurisdiction. Right. And that’s where the trick is.
Michael Waitze 15:11
Yeah. So this is your right. I don’t think it’s a technological problem at all. The interoperability can be solved through software, all this stuff can. One of the things that I think about a lot, right, and let’s just go back 20 3040, we can go back 50 years, I don’t really care, right, the SEC in the United States regulated the securities markets there. The FSA in Japan regulates the securities markets there. And to be fair, they don’t have to be exactly the same, because the likelihood that somebody is going to buy a Japanese security in the United States was close to zero. I understand the ATR market. Sure. But those regulations were okay in Japan. And if somebody externally wanted to buy a Japanese stock, they had to register in Japan to be able to do that. And then we’re governed by the securities regulators. They’re the problem today, not the problem. The issue that needs to be resolved today, is the regulatory interoperability at some level. Right. And that, I think, is also a gigantic opportunity. from a technology standpoint, are you go ahead, sorry.
Oi-Yee Choo 16:08
You’re exactly right. I mean, what we’re also seeing, and just to combine all the points, the biggest issue is about regulatory cross border issue, right? securities regulation issue. But as you rightly said, this also can be solved by tech, which is why we think that blockchain is such a potentially such a powerful platform. Because if you think about smart contracts, I mean, you may be at one layer looking at you know, what the what the security does, and then executing smart contracts on top of that. But also, can the can the token be traded in the US? Or in Hong Kong? And actually, there’s a layer of code that can drive where this token cannot cannot trade?
Michael Waitze 16:54
Yeah. Yeah, I mean, this is the thing that people have to understand about tokens, right, is that it’s really just programmable software. And sure their VPN is and all this other stuff. But there are ways that you can determine where somebody is from where somebody is accessing that token, based on IP addresses. You can use GPS information if you really want to read but there are plenty of ways to do this with technology. And through what’s in the programmable token, you can then control from a regulatory standpoint, who can and who cannot invest in that thing. And to be fair, it’s trackable, and it’s immutable, right? If it sits on a blockchain, so it’s easy to understand where that’s going on. And you’ve got gigantic companies, and growing companies like Merkel science, doing tracking of all this stuff, as well to try to figure out how all those things fit together. Like to me, I see all these little bits and pieces coming together. And I actually think it’s kind of cool. Sumit did you want to say something? Sorry?
Sumit Kumar 17:46
No, no, I’m aligned with you. I’m perfectly I’m with you. Right. But the big question is, you know, how are which regulators are going to allow me to agree or not, would allow? Yeah, who’s gonna let go? And who’s not gonna let go? Right? Because what’s quite interesting is, you know, we talk a lot of two exchanges as well, right? Like, you know, on Hong Kong Exchange, or an Indian exchange or a UK exchange, right. And the first question we asked a bunch of these exchanges is right, like you are in the best position, right? To actually tokenize everything out there, right and really make it right. But the question is, there is so much of money involved in these exchanges in the process that they run today, the whole settlement process and the way they manage the things by doing all this, you’re taking away all that money from them, right? It’s completely decentralizing something which is being run in a centralized way. And by the way, all these exchanges are somehow very close to the regulators, right? Regulators have a feeling of it helps me regulate, but it’s also money. So it’s, really, it’s a big change that the regulators have to do, right. So technology can enable everything right. But unless suddenly, the human beings are open to it and willing to do it. It’s not gonna be easy. It will happen one day, right? It’ll happen one day, the question is a three year five years or 10 years, the technology will ensure we reach there, right, but just the human element of this, the money involved, the feeling of security, because I can regulate it, and I have control, those things will come anyway.
Oi-Yee Choo 19:09
If I can just add to that, right. It’s very funny when you have these conversations, and we all take it for granted. I mean, I come from financial services, I think, Michael, you as well. And when I say things like t plus two is not acceptable. If 2022 It makes me laugh. It’s not acceptable. But you know, we talk about this floor and we talk about this in euro and the settlement and all that, in reality, it’s an artificial construct, because to not build computers fast enough to solve a settlement. Right, right. We think that Multiplus tourists, okay, and banks have obviously benefited from, you know, floats and all of that. My question by actually is, how much does it cost you to manage that float? And actually is that productive capital? So I think when the central banks and regulators Think about it, there’s actually that t plus two or t plus five or even t plus one is unproductive capital, unproductive because it sits somewhere. So is the does the Velocity of Money, help and enhance the economy and in many ways, but these are very higher level questions that I think regulators should eventually push the intermediaries to solve. Because today the banking system should focus on what they’re good at, for example, advice, Financing Loans, you know, yeah, loans. Yeah. Not worry about the float or you know, fret about the float right, as a manager is the same way.
Michael Waitze 20:41
I mean, Haven’t we already proven that t plus, like, microseconds is already possible people Venmo money to each other? I could send you money right now. And it would before this podcast was over before I even finished saying it, it would already be in your wallet, right? So we know that’s possible. You know, I come out of a Japanese market, which was t plus three, when I went to T plus two, even t plus one. I was like, why? It’s just an electronic thing. And this is from 20 years ago, this stuff should be way faster. Can I also say this? You know, we talked about asset tokenization. But asset securitization has been going on for decades. And at some level, the tokenization provides much more functionality to the securitization of the asset in the sense that it allows you to fractionalize it and there are other benefits, too, but allows you to fractionalize it in a way that couldn’t have been done before. Submit you’re smiling at me is is that fair? But you understand what I mean? Like, because some of your clients who say are asking is the tokenization of assets going to happen. And it’s going to be big. I mean, it’s already securitizations, already a massive business. And tokenization just allows us to take it to the next level. Right? So everything can be tokenized. And in that sense, that means that every everything can now be invested. Is that fair?
Sumit Kumar 21:52
Yes, it’s actually very fair. And you know, Michael, you raise a very good point. Right. So I was talking to a large bank, when I talk to my clients, right, I think that’s the first question they asked, right? When we start to talk about tokenization. They say, How is it any different than, you know, securitization, right? You know, mortgage backed securities have always existed in life. You know, we have REITs, which exists today, right? Like, like, we have reads, we have market based securities. And then there are many other tools like that which exists, right? Some people even say, Oh, we have mutual funds isn’t mutual fund actually tokenization, right, because an asset manager takes huge amount of investments, and then breaks into small small pieces, and then gives it to individual investors. Well, all of them, I would say, are some form of tokenization, because you are actually making an investment size from bigger to smaller, right. And they are also actually making it slightly more liquid. The big, the big difference, right. And at least, that’s not how I feel about it is, first of all, the size at which you can go down to, if you’re using Blockchain as a as a way to tokenize is much, much smaller, right? The kind of liquidity you can create is much higher than, you know, what you can create in a traditional technology. And third, and the most important thing, the cost, if you actually have to tokenize, right, if you take a let’s say, you take a pre IPO block of stock, right, let’s say a pre IPO block of a grab stock, right? And, you know, at that point of time, you know, people are getting blocks at $250,000, right, I want to break it up on a break it up and give it right, if you’re using ledger, normal ledger to record that right, and then use that to transfer first of all transferring is going to be very, very difficult, right. But even if you’re able to transfer before the IPO and record it, the cost is humongous. I think we have done some internal research and, you know, based on our estimates, it’s, it could be like it could be close to 30% of a typical cost of doing something on you know, something like this on a blockchain versus traditional ledger and trying to do it right. So it brings down the cost, makes the token much more smaller, increases liquidity, and really puts a process which is very, very scalable, right, you can go and you know, IPO a small sized private company, right? You can go an IPO small land, you can go and I mean, there are players in Argentina who are literally tokenizing corn and soy and future agriculture produce, you can literally tokenize any kind of real asset in the Word, which I think securitization as a technological concept. Cannot do right, they can do something but not everything.
Oi-Yee Choo 24:20
I well, I, as I say you can fractionalize on a spreadsheet, right? You don’t do that. But fractionalization at scale, and liquidity cannot you can’t do that on a spreadsheet. No. And you know, when you fractionalize And and you create liquidity. What you also mean is you’re taking on credit risk, right? So to get rid of credit risks, you have to create a settlement structure. That makes sense, right? It’s sort of a trustless settlement system that allows something to be what I call fractionalized. liquidized And tradable. Now, if you take that concept and you just apply it, okay, so REITs, right, what’s the smaller version of, let’s say, a residential apartment? Could that be fractionalized? Absolutely. Could that create liquidity and a different asset class? It actually could? Well, let’s take it one step further, as the mayor was saying, you know, crops or soy or whatever, how about a bottle of wine? Right? We all know, burgundy wines are hugely potentially expensive. And the top wines go for 20,000. Which there is already an investment market
Michael Waitze 25:29
for thee products. Yeah.
Oi-Yee Choo 25:31
And it’s just that if you’re, you know, sort of a general Joe Schmo, you’re not gonna buy be able to find or invest in a $20,000 bottle of wine, right? Could you take that, and again, that’s already invested that a wine exchanges, it’s probably very inefficient. It cost you a lot of money, but it exists, right? But to take that, and then say, okay, 100 people can invest in this $20,000 wine and trades and as a price, then it becomes a more investable asset, asset class, and accessible to a different tier of net worth, right? It could be retail, it could be mass affluent.
Michael Waitze 26:12
So to me, this all sounds a little bit like what I used to call the Berkshire Hathaway problem, right? If your stock is trading at 400, something $1,000 A share. Everybody wants to invest in it. But since it’s never split, not everybody can actually afford to invest in it. So what happened was a whole bunch of fund managers grew up around Berkshire Hathaway and said, I’m gonna do that thing, exactly, just whatever they own, we’re gonna own it too, at some level, right. And you could do tilted as well, to make it a little bit more efficient, and maybe a little bit better returns, you could do whatever kind of alpha thing you wanted to, but still, that grew up. And that was really just the fractionalization, or in a way, the tokenization of Berkshire Hathaway because they can then drop the price on whatever that investment was possible. Yeah. This has been going on forever.
Oi-Yee Choo 26:58
It’s the case that technology, you then can actually bet chain that that shifts the boundaries of what you can do. Yeah, exactly. Fascinating point.
Michael Waitze 27:09
So can we talk a little bit about GitHub again, or at least the concept of software? Are there enough people because I want to talk about the the sort of roadblocks to growth, right? We I think all three of us agreed this is going to be big. It’s just like, what does it need to get there? What do we need to get there to get it to be big? Are there enough people out there actually, that can make submits to GitHub? Right. And I think maybe we should just have a GitHub index, it focuses only on like distributed ledger technologies to see if it’s going up down or flat. Could probably tokenize that as well. But are there enough people out there that actually understand how this technology works to be able to sustain the growth that we need to see to be able to build the tech stack to do this?
Sumit Kumar 27:49
Look, I mean, I can give you a quick reaction, I think. I think I think six months back, I was doing some numbers and at least leaning on the reports, right? Yep. At least my personal understanding is the number of JavaScript and web two developers. And if you compare that to the web three developers, it’s a fraction. It’s literally a fraction, right? The numbers and the numbers I had and would love to get corrected, but was more like 15 to 20,000 developers are actually in this space, committed to actually spend at least 25 hours a week. That was the number I had, right? And it wasn’t six months back, right? Compared to millions and millions more than 10 million are JavaScript developers and developers, right? So the extent of people who are actually engaged in this space is much more smaller, right? It tells me two things, right? One is, there is really a big market out there for developers to learn this, because the demand is gonna grow. Right. Second is it’s a great market for people to train developers to learn. If anyone is thinking of starting a business to start training some of the people I mean, it’s a great opportunity to train people, right? But it also tells one thing, right, if you don’t invest in that talent, then you will not be able to fully realize the power of this technology, right? Because if you want to replace a lot of applications, a lot of things on from web to to web three, you will need the developer capacity.
Michael Waitze 29:09
Yeah. I mean, I’m kind of bullish on developers being able to understand how technology works and being able to switch between languages and frameworks, because we’ve just seen it, you know, at my age, you’ve just seen this happen so many times. Right. So I’m pretty bullish on that. It will take time. But I think the opportunity there is so large, and to the extent that there’s a large financial opportunity there, there’s there is a is an incentive for people to learn this kind of on their own. But you’re right. There’s also a massive business and being able to go out and train people how to do this. Are there besides the tech and the regulatory issues? Are there other roadblocks to growth that we should consider?
Oi-Yee Choo 29:47
I mean, we’ve talked about financial institutions and how they’re sort of approaching it. Yeah. My view is it will take some time for the incumbent system to shift. Yeah, thanks. Sometime, it’s not all that different parts of financial services move at different paces. So I think scale adoption. Again, I think there’s enough momentum. But one of the things is just going to be the continual need to educate, demystify, and I think this project that we’ve done with BCG is fantastic, right? Because it helped demystify what actually tokenization is. And it’s the responsibility of all of within a bank, whether it’s the CEO, the chief of strategy, but also the head of risk. Also the head of ops and the head of tech, to understand and apply, or partner or think about building their own sort of tokenization approaches. And many of them are taking different strategies. But I think the more that a bank understands, or a financial institution, or an asset manager understands what what truly this can drive and deliver, but then of course, manage what are the risks? I think those are probably some of the bigger hurdles.
Sumit Kumar 31:11
Yeah, I mean, Michael, I’ll add one more thing, right. It’s the whole consumer education, right? I think it’s a big thing, right? And I’ll tell you, if I think of two two and a half years back right, in this part of the world, and maybe Singapore is a bit of an exception, right? Maybe in Singapore people are people understand things more right? Go to Malaysia, go to Indonesia, go to Philippines go to Vietnam, right and tell them alternate investment assets, you will say, what are you telling? The only thing they will understand is things deposit bond, and equity. Have you even heard of arbitrage funds? Have you even heard of their funds? Where which to, you know, take money from you and put in p2p lending company? Have you heard of funds, which actually do like settlement funds, and there’s so many alternatives, but nobody even knew that even now, people are slowly learning it right? People are slowly learning it now they are teaching a completely new concept with you know, this is a concept of tokenizing. You know, tokenize investments you can tokenize why and you can tokenize power, you can tokenize agriculture, you can tokenize private equity funds, you can tokenize pre IPO, in a market, which has seen a crash, not just in crypto, but also in the global equity markets, right. So first of all, a lot of people will say, Oh, is this another crypto? Is this another of the speculative squid coin, which will go missing tomorrow? What are you talking here, right? So you’re actually struggling with that problem. And the second problem you’re struggling with is, you know, a lot of the assets which are tokenized, by to this technology, is completely unheard of, from an investment perspective to the masses, right? Maybe the top category of people that are really high net worth know it, but they actually don’t even need tokenization right for them, they can actually spend $50,000 $100,000. And you know, if I have to split a 250 $1,000 into five blocks an Excel sheet, easy, I can do that for them, right? There are players who are doing it already today, right? There are competitors of edX, who are doing this on Excel sheets, right and doing it for $2,000. The question is, if I were to solve that segment, I can do to an Excel sheet, right. But the segment which I have to go after is very scared of crypto is very scared of some of these assets. They don’t know it right. So investor education, and getting them comfortable will also be a very important thing in the
Michael Waitze 33:21
sector. Yeah. So financial literacy, to me is something obviously really important, not just in this region, but in the whole world. And I want to make an equivalency and see what you think. And then I’ll let both of you go, you know, in the 70s, and 80s, if I had told you, if I’d sat down with you, and I said, sure IBM is going to go away, they’re not going to make computers anymore, no one’s going to care about their mainframes. And at some point, they’re not going to be this hedged, monistic company that everybody cares about, or the Compaq computer is going to go away. And there’s going to be replaced by a phone in somebody’s pocket, you would have told me that I was crazy. And you may have been right at the time. But I think some of the existing financial institutions that are there today are going to be the IBM’s of the financial services industry. And we’ll look back and think I never actually thought that that could happen. And I think we’re at I don’t know if we’re at the inflection point yet. But I feel like we’re really close to it. And I’ll tell you why. Because I think the education part of it, and also the ease of use was the same. It’s the same construct. Right? As computers became more useful, the growth didn’t just go like this nice and easy. It kind of went like this. It’s like, What’s that old saying on bankruptcy, it happens really slowly. And then it happens immediately, or it happens really fast. And it’s the same thing. Nobody knows how to use computers, and everybody wants one. Right? And I think it’s same things gonna happen in the asset tokenization space, and frankly, in the tokenization of the financial services industry at scale is no one’s going to care. No one’s going to be bothered by it. We can’t even short things. I understand that derivatives side of the market, but oh, yeah, and I’ve already been through this as well. Like, if you really want to have liquidity, you have to have multiple sides of the market. And tokenization allows you to do this at scale in a way that was never going to be possible before. But do you think that we’re going to get to sort of the IBM isation. If I can make up that word of some of these financial institutions and that in five to 10 years, some of them are just going to be gone or just shells? Yeah.
Oi-Yee Choo 35:09
I think financial services companies who see it, anticipate it and pivot, it’s not something that would completely disrupt them or get them if they understand the adoption and how it impacts our grid. mortgage financing. How does it impact securities market? How does it impact wealth management? The earlier they cbdc stablecoins? The faster they understand it, a built positions around it, they won’t be I suspect, they would still really be I think governments still need traditional financial services firm to be around. Yeah. Around. Yes.
Sumit Kumar 35:51
No, I’m actually aligned with that. And I actually feel that there will be three types of players in the future. Yeah. So there are there are these large financial institutions, right. And I mean, in this topic, when I talk to so the, the real large guys right from North America, right? They actually get it, by the way. Yeah. Yeah, they get it. And they’re actually putting a lot of firepower behind it beat money beat technology beat people, right? Even if you take the topic of asset tokenization, and go to papers, and you know, Google search or names or North America, right, the big banks are taking it seriously and making a statement, right. So I feel the big boy is the global big boys will get it right. And I would say not all of them will be able to execute, because it’s not easy, right? Because some of them are too difficult to move. But but some of the big boys will do it right. For me, the interesting thing is how the local or regional champions, at least in this part of the world, still don’t understand it. Right. So they are behind. Now, the question is, the reason they’re behind is they’re basically saying, Let me wait for someone else to succeed. Right, right. I want to be a fast follower. And the question is, look, you can be a fast follower, I’m not saying you can’t be a fast follower, right, but not everybody can be a fast follower. And that is where the problem comes. Right. And I actually think there are some smaller institutions, which actually realize their advantage, and they can become regional champions of tomorrow, right. So you will see birth of new regional champions of tomorrow, you will see a bunch of regional champions get lost behind because they wanted to be a fast follower, but there are too many people we’re going to follow. But the big boy the large big boys, they would figure it out, right, because they would figure it out and the regulators overall will ensure that you know, as you know, as my colleague talked about, right, they will ensure that the system is kept sane and you know, the financial systems exist and that cannot get disrupted because that is that money is in there. And money is something which runs the whole world, right? If money can be disrupted, then the whole world will go zombie.
Unknown Speaker 37:47
me, you know, actually, even if you wanted to be a fast follower, you have to be prepared to follow quicker. Yeah, that that that doesn’t mean that you can just dig a hole in the sand stick your head in like an ostrich. When I come out and things are ready, I will jump into it. Right because you need to stay very much current. What is the thinking of regulators? What’s the thinking of you know, where’s basil going to be with digital securities and cryptocurrencies? Where is where are my own regulators going to be? And then what are the technologies? Am I going to be backing someone now partnering someone now or thinking about building someone building a platform right so even being a fast follower needs work today?
Michael Waitze 38:33
Yeah. Okay, let’s let’s end on that there’s a ton more stuff to talk about. I really appreciate you know, you know how much I love these conversations. I really appreciate both of you doing this Sumit Kumar, Managing Director and Partner of BCG, Oi-Yee Choo, the CEO at ADDX. This was awesome. Really awesome. Please come back and do this again.
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