"Tokenization 101 With John Denza," Banking on Blockchain Podcast, Episode 3
DWT partner Steve Gannon welcomes John Denza, Head of Americas Business Development at AD3, part of Apex Group, for a conversation on tokenization. They discuss the fundamentals of tokenization, why it has become a key focus across the digital asset ecosystem, and how organizations active in the space are helping drive its continued adoption and growth.
Topics Covered
- The fundamentals of tokenization and its growing significance in the digital asset market.
- AD3's experience in the tokenization space and why the technology continues to gain momentum.
- John Denza's background in traditional financial markets, exchanges, and alternative trading systems.
Banking on Blockchain is a podcast exploring how blockchain and digital assets are reshaping financial services. Subscribe on Spotify or Apple Podcasts.
Episode Transcript
Steve: Good morning, everybody, and welcome to another in the Davis Wright Tremaine Crypto podcast series. This morning we're going to talk about tokenization, and we have an incredible guest with us, John Denza, who is the head of Americas Business Development for AD3, which is part of the APEX Group.
We're going to talk about that in a moment, and we're going to talk in this podcast about the basics of tokenization.
AD3 has very deep knowledge about this subject, and it's one that's relevant to everybody since tokenization is really a wave that hasn't yet crested yet. It's continuing to rise. And so with that, John, tell us a little bit about your background and share with us a description of Apex Group at AD3.
John: Perfect, Steve. Thank you for having me today. It's really a pleasure. So a little bit about myself. I had about 25 years in the industry, started out in TradFi. A lot of my background has been in the exchange space, alternative trading space, growing ATSes and volumes at these venues. Originally started at Island ECN where I grew the equity franchise and eventually moved on to another ATS exchange called BATS, which competed directly with the New York Stock Exchange and Nasdaq.
And what we did at BATS was similar to what the majors were doing. We actually had a training platform for equities, and at that point, I also was able to dive into derivatives and was able to grow the options franchise while I was there at BATS. But when I was at BATS, and after we were acquired by Cboe, I kind of got the crypto bug, as crazy as that sounds. About ten years ago, I started looking at Bitcoin and Ethereum and realizing what it could do to the space into finance and more importantly, to market structure. And that's really where I started to kind of really dig in because I saw the opportunities and I had all this experience from years of being involved in TradFi, and I was watching it unfold and was eager to get involved early in it.So from there, I jumped in and I leaped into joining a company called ErisX, and one day where we were highly regulated ATS. And what we did was we actually grew out the spot franchise, and we also eventually grew out a derivative business.
And what was unique about what we did at ErisX was we worked closely with the CFTC to get licensing to allow us to be able to trade derivatives.
So what does that mean? That means that we went to the CFTC and received permission from a DCM to DCO, and that allows you to list and clear derivatives, also while maintaining a very heavily regulated clearing house that the regulators had overseen and gave us permission to launch. From there, eventually, I became the Head of Commercialization for the firm, and we were eventually acquired by Cboe. So I was part of the executive team that became the opening arm, I should say, or the opening asset class to crypto for Cboe.
Steve: That is fascinating, and obviously, it's a great description of the arc of crypto as not only an asset class but how it interacts with exchanges and what role it plays in connection with trading.
But let's talk a little bit about the AD3 and what it does and what role it plays within Apex.
John: Yeah. So to give you a little background, so after being able to be involved in the crypto and launching it being on the digital asset space, I really wanted to get involved and learn more about tokenization. And being involved with Apex Group, you just don't realize the size and breadth of the company in the sense that we have 13,000 employees. We're in 100 different countries, but really what was appealing to me was we have $3.6 trillion in assets being serviced.
And think about those assets. Those are assets that want to be transferable, accessible by the masses, by all. And having the opportunity to join a group where they had recently acquired a company called Tokeny. And what Tokeny is, is a smart contract technology where they adopted ERC 3643. And having that opportunity to work with that smart contract and making those products that only a small audience are seeing right now because of tokenization was exciting, and that's why I took the leap and joined Apex Digital 3.0.
Steve: Excellent. And so now let's get into some of the basics and describe, if you will, for our listeners and viewers what tokenization is, and what role ERC 3643 plays in tokenization.
John: Yep. So think about it this way. Really what tokenization is, is fractionalization, if you think about it. And you probably have some kids that have accounts out there, and they have those stocks that might be Amazon or wherever it may be four, five, six hundred dollars. They don't have the means to be able to buy one share. Well, let's say they buy a fraction of a share.
That's really kind of the entrance to what tokenization is. It's taking something, let's say like an apple, dividing it in five parts, and then being able to sell 20% of that off to different people and being able to purchase that apple or whatever it may be as a product.
So I'd love to reference what we actually did a study with fund managers, and the study was called Tokenization Gaining Altitude Survey.
And really what we did was clearly trying to show the larger audience the adoption rate and how managers are looking at tokenization.
And one thing I found really interesting when we surveyed these 100 managers was when they were asked about what their plans are for deploying or what their strategies were for tokenization, of those managers, just a little background, they're managing between $500 million and $5 billion. 50% had deployed a tokenization strategy.
The other 50% were in a POC strat point where they were proof of concept, trying to figure out what would be best for their business.
And if you even think about it further, within that report, only 7% felt comfortable with their in-house tokenization capabilities.
So that's where we come in and where we have 20 years of experience, not only on the fund administrator TA side of the business, but here we are introducing tokenization in an industry standard with ERC 3643. So it's a perfect marriage between the two, if you ask me, Steve.
Steve: Now I'm going to take a moment and for the benefit of our audience that may not be totally familiar with tokenization, just sort of run through some of the basic steps of tokenization, and then we're going to talk about what that process looks like inside of Apex. So first you have to identify an asset.
It doesn't just pull out of the sky. Second, you've got to verify the ownership and the legal status of that asset. So you want to make sure that if you're going to tokenize an asset, it's not, for example, subject to a seizure order somewhere.
Then you've got to define the structure of the token, how you're going to price the token, how divisible is the token going to be, how many tokens will be issued. And then we get into, this is where 3643 comes in, the good stuff. You have to create the smart contract.
And 3643 obviously is the standard, and this may sound like Greek a little bit to some of our audience, but it's a standard for the creation of a smart contract on the Ethereum blockchain. And so the smart contract is created. Then once you have that, then you have to integrate off chain data into that smart contract usually through Oracles, which are technology that helps make sure that you're ingesting the right data and setting prices correctly.
Then the tokens are minted, and that makes the smart contract live on the blockchain and generates the tokens, and then you're in business.
Then the next step is you market and sell the tokens, and then the final step is you manage and trade the tokens. So it's an eight-step process. But it's something, obviously, and there may be nuances that Apex has. So having gone through the basics, so take us inside Apex and tell us what that process looks like from your perspective.
John: Steve, that was a phenomenal description of the process and the workflow.
Very similar to what you were describing. I think what you just described is exactly what we're trying to achieve when you come to Apex and AD3, and what that is education collaboration.
We want to be the arm where you come to us and we're the source of information, the resource, but it's also collaboration because you highlighted earlier that no two projects are the same. So you actually want to be able to customize that project and that tokenization. Really what it is, it's about learning and listening. But to take it a step further, what is that smart contract?
When you think of ERC 3643, one of the main benefits, yes, as Steve mentioned, is the actual adoption rate and standardization.
And when I think of standardization, I actually have seen multiple articles from Commissioner Atkins of the SEC saying that those that are considering tokenization in the future, think of the processes and the steps that they have actually put in place with their own smart contract. And what does that smart contract include?
I like to break it up into three pillars for ERC 3643. I think of compliance, I think of issuance, and transferability.
Because when we're launching a new project, the GP really wants to control their ecosystem.
Who's being qualified, how they're able to move the investment around, and so forth. So let's start with the first one, the compliance pillar. You're going to be able to use that smart contract to do a series of checks. Is the investor accredited? Are they domiciled in the US? Do they have income over X?
Once you put all those checks in place, it's almost like a funnel, and that smart contract's gonna come through, and then you eventually, if it approves or meets all those requirements, it's approved, and you're qualified.
And the beauty of our ERC 3643 at being qualified is you get what's called an on-chain ID.
I like to use analogies, and I consider that to being like a passport. So if you are a GP and you have 10 different projects that you're working on, you as a GP know that the pain point is KYC/AML. So what better way than to actually put your investor through it only once, and that on-chain ID now can actually be almost like a quick investment link into other investments without having to go through the laborious KYC/AML process. issuance.
Similar to what you were talking about earlier about that minting and redeeming. That's what's happening. You've got this concept of an owner and agent. The owner is overseeing the project; the agent is the worker bee underneath proving the minting and the redeeming, the qualifying, and so forth.
So you've got that layer in there, and then the final layer is the transfer ability. How often am I allowing this product to be able to leave my ecosystem and be able to go outside, maybe to another exchange in a DeFi protocol, maybe to another investor, maybe to liquidate?
So you've got those three pillars that actually constitute the smart contract. Smart contract. And really what it finally comes down to, reduce some friction.
That's what you're doing at the end of the day. And making things transparent.
Steve: So let's talk about that a little bit more, about the absence of friction, and talk about how tokenization can improve an asset. You mentioned access earlier. Let's talk about the entire panoply of improvements that assets can benefit from when they get tokenized.
John: Yeah. Let's talk about the first one, accessibility. We all know that right now when you're trading in the equity market, that the hours are 9:30 to 4:00 every day, which is very limiting. Especially if you think about what if there's a geopolitical event on a Friday night at 12 o'clock? I have to bear that risk throughout the weekend and wait for the market open, or wait for futures to open on Sunday, or the market to open on Monday.
That's a risk that we shouldn't have to have. Through tokenization, we're now having these products available 24/7, 365.
If you're feeling uneasy and going to bed on a Saturday night and you wake up on Sunday morning, you could de-risk very easily. So that's one part about it.
It's accessibility, transferability, being able to quickly move that token. I remember when I was studying the space early on, and I was fascinated by Ripple because you could move money at the speed of light in seconds for less than $1. And then when you think of the swift international movement of money across the world, their fees are 1%. And depending on where you're going and what country, it could take days to get there. So transferability is another big one.
So accessibility, transferability, and lastly, like I said over earlier, it's about reducing friction too. You're actually having things that are definitive.
You're removing actual human error possibly from the equation too.
Steve: Yeah. I'd add one more thing onto that and save you agreeable to this, and this kind of gets to transferability, but the ability to move collateral quickly and to finance that collateral at very low cost. In a lot of instances no more need for overnight repos, no more need for pre-positioning collaterals because you know the funds are going to take two and a half days to get there. So it's a big efficiency driver.
John: And Steve, to add to that, I couldn't agree more, and it's a term that keeps coming up when I speak to customers, but it's about velocity of capital.
Yes. How fast now can I rehypothecate my capital now that I'm not waiting for something to settle? Maybe I want to take that capital and put it into a lend or try to execute another trade. So yes, I agree with everything you said.
Steve: Yeah. So, talk a little bit about how the marketplace for tokenization has grown over the last five years, and to what do you attribute that growth?
John: One amazing statistic, I would say, with the adoption of maturity, which is just fascinating about the spaces. I was looking at it from five years ago, and in 2020, 500 million in capital was tokenized.
You fast forward to today, this statistic is fascinating, I'm reading right now, which is 38 billion. You've got an 80x multiple of growth.
And you say why and where does that come from? And really what it comes down to is its education, its maturity. It's a space starting to adopt this great nascent technology. And when I think about it, what did I say before?
Where is some of this growth coming from? Its philosophy of capital. People being able to access their capital 24/7, 365. It's also when I think to the future and where do I think of the growth. One area I think is going to be explosive is money markets.
Tokenized money markets, which is a product we've been working on, where you can now have people where maybe they have an investment where they are sitting in an account and it's not generating any capital. Now you can actually generate capital and generate a rate of return.
Let's say you're building a high rise in Miami and you actually want to take some of that capital because it's not going to generate any yield.
You can now quickly move it without any friction into a money market, and then within an hour or less than an hour, you could quickly get out of it versus going
to a bank to actually perform that. So the drivers will be institutional adoption and I would say the stable coin adopter expansion and operational expansion benefits of 24/7, 365.
Steve: That's right. To sort of wrap up this session, what are some of the larger tokenization projects going on right now?
John: It's really fascinating, Steven. One of the things I love when I'm talking to these new GPs bringing these projects is the passion and excitement they have in their projects. It's really great to be able to facilitate and help convert those dreams.
So when I talk about one of the biggest ones I'm working with right now, has been AetherStrike. It's amazing. They have one of the largest land lease pieces in the US of a sand tar mixture, which is used for asphalt production. It's fascinating. So what they're going to do is tokenize a parcel of land, and they're going to start to actually tokenize those barrels of oil so that one token will be equal to a barrel of oil.
That's one project. I actually just worked with another one where helping tokenize the infrastructure to a goldmine, where we're going to use the funds to develop the road and actually infrastructure in the mine. Another one that we're working with is real estate, where a building on the edge of a college campus is going to be converted into dorm rooms. So it really is fascinating. And then lastly, as I mentioned earlier, was the money markets, which is a big sector of growth for us.
Steve: I think as we wrap this up now, we've talked a lot about the basics of tokenization. In our next session, we'll talk about some individual use cases and get into a little bit more of the details.
But I think you can see that for our listeners and viewers, what we described is really a new market that is evolving at an incredibly rapid pace.
Well, we wouldn't be doing this podcast if it were six or seven years ago because to the extent tokenization even existed, it was completely minuscule.
But this is an example of how financial markets are changing at an incredibly accelerating pace, and tokenization in terms of how the form, the speed, the access, the accessibility of trading is going to change and is changing right now. And so I think for those who are paying attention, tokenization, and I think you'd agree with this, John, is going to play a big part of the financial future.
John: Couldn't agree more, Steve. It's really been an honor to be here and really enjoyed the discussion. For those, as I mentioned earlier, we at AD3 believe that education collaboration are key for those that are looking to expand their projects. So please feel free to reach out, and if you'd like a copy of our report, "The Tokenization Gaining Altitude Report," which is a survey of those hundred fund administrators, please reach out. It gives you some great color about the expansion of tokenization.
Steve: Very good. Thank you, Steve. Thank you, John.
John: Appreciate it.