"Tokenization in Practice: Real-World Assets, Stablecoins, and Corporate Treasury," Banking [on] Blockchain Podcast, Episode 4

DWT partner Steve Gannon continues his conversation with John Denza, Global Head of Development at AD3, part of Apex Group. Building on their discussion of tokenization fundamentals, they examine practical applications of tokenized deposits, stablecoins, real-world assets, and money market funds. The conversation explores how tokenization can improve settlement, liquidity, capital efficiency, and treasury management while expanding access to investment opportunities.

Topics Covered

• The differences between tokenized deposits and stablecoins, and their respective roles in banking, payments, and treasury operations.
• How real-world assets, including real estate, commodities, fine art, and money market funds, can be tokenized to enhance liquidity and accessibility.
• The potential for tokenization and decentralized finance to support faster settlement, yield generation, and more efficient capital management.

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: Welcome again to our guests for this next in the series of the DWT crypto podcast. We talked in our last session about tokenization in general, and now we're gonna go a little bit deeper with John Denza, who's the global head of development at AD3, which is part of the Apex Group.

We're gonna talk a little bit more in specifics about tokenization use cases, and I will, as the lawyer, talk about some of the legal issues that come up. So let me start with this, and this is one of the a very popular use cases we hear about these days, John. Tokenized deposits. What can you tell us about tokenized deposits? And we learned in the last session how you would tokenize deposits, but now tell us about tokenized deposits and why are they attractive to banks?

John: It's really Steve, it's great to be here again and thank you for the opportunity. But it's really a fascinating space when you think about it because there's so much opportunity in the banking space when it comes to those deposits. And really what that is, it's a digital representation of a bank deposit. But more importantly, it's giving you access to your capital 247-365. We all know what the pain point is of "it's Friday, it's three o'clock. I gotta get a wire in before the window. I missed the window and now I have to wait till Monday for it to open up again." Or we know the mysteries of having to go to a Western Union to try to ship money. But now we actually remove that friction from the system and now you can actually make those wires or actually have things happen in real time. So you're taking greater control over your capital in the end.

Steve: And one of the things that's interesting is tokenized deposits have a relationship to stablecoins. But there is a difference between the two because tokenized deposits are actually insured deposits. They are representation of the deposits held at the bank. They have full—if they're U.S. deposits—they have full FDIC insurance. And usually what they do is they move inside, it's usually a closed ecosystem. They move inside something akin to a walled garden.

And there are networks that exist. They can move intra-bank, as JP Morgan has built with its Kinexys system, or they can move between a network of banks. But usually that is the confines for how tokenized deposits move.

Stablecoins, on the other hand, are not representations of deposits, and so they don't carry any insurance. They're representation of other assets, usually cash or very short-term treasuries that are audited, and the stablecoin is backed one-to-one by those by those reserve assets. But unlike a tokenized deposit, they can actually be used outside of that particular internal perimeter. And they are usually open-source. So they have they have additional utility, let's say, in the payment space and in particular in the retail space. And so the they're sort of competing visions right now, but I think banks are really doing a very good job of figuring out what is the best instrument choice for their customers.

So starting with—we started with one well, actually, two use cases of tokenization—tokenized deposits and stablecoins. Now, let's move to what other assets are being tokenized: financial assets, besides merely deposits. And if you could mention a few of those, then I'll talk about how those things migrate into a fund structure and how those things work.

John: Yeah, Steve, it's been it's been great being able to listen to some of these new projects that have been coming through. And I see some of the more popular projects I'm seeing are being commodities, people looking for oil and gold or real estate and data centers have been really popular ones. But when you think of tokenization of real-world assets, what you're doing is you're converting the ownership of that asset and making it into a digital representation on the blockchain. And when it's on the chain, it can now be moved and transferable or fractionalized. It gives you greater flexibility when it's on the chain.

So hypothetically, let's say Steve and I decide we want to ... Steve owns an apartment building, I should say, in Miami. And he sees an opportunity to purchase another property in the city of New York. He has a couple of different options here to raise capital. He could a), decide to take that property and tokenize that property in Miami and decide to say, you know what, I'm going to take it and I'm going to fractionalize it into a hundred different pieces. Each piece would be a million dollars. I'm going to take 50 million and make it available to a group of investors. Those investors will take the Coke token and purchase it. He can then take that capital, rehypothecate it, and invest it in another property.

Another option he could do when you're thinking about tokenization is he could make those shares. He could say, you know what? I'm going to give everybody an active interest in this building so that they can all own a piece of it. And then I'm going to generate a yield because of the people that are residents that are renting from me. And I'm going to share the yield. And at the end of the term of that project, the tokenization project, I'm then going to sell the building. So not only are these people going to generate yield, but they're also going to generate the appreciation of the building. So I've shown you two investment ways that you can actually consider tokenization.

Steve: And we're gonna ... I'm gonna give a little bit of a teaser to our listeners and viewers. We're gonna talk about generation of yield, particularly through decentralized finance in a moment. But one of the things that's interesting to talk about in terms of fund structure, pardon me, and I'll only touch on this just for a moment. One has got to realize that when, for example, money market fund, is tokenized, it improves the accessibility of that fund, it improves the tradability of that fund. It potentially improves the ability of those who own the tokens that represent shares of the fund to generate additional yield on those funds because they can be traded into the DeFi world.

However one of the things we have to remember is the underlying asset stays the same. The underlying asset does not change merely because it's a tokenized money market fund, there are still money market instruments backing it up. And so that's one of the fundamental things we've got to remember about fund structures. They're definitely an improvement on what went before, but the underlying asset itself does not change.

John: So one of the things, Steve, I just would love to add about the money markets is the settlement component too. Because traditionally, if you have a money market, I gotta go down to the bank. I have to fill out paperwork if I want to get the funds. I want to exit my money market. It might have a penalty for leaving early. Maybe it takes a couple days for me to get my funds. God forbid I have a family member that's in need of money because there's an emergency. I have to wait at the mercy of the bank versus if it's tokenized money market, I can actually quickly get in and out. Possibly within minutes, if not seconds, and be liquid cash.

Steve: Yes. And that ability to settle instantaneously, or some people call it settle atomically. is a key part of one of the benefits of tokenization. So let's talk about some other tokenization of other real world assets. You mentioned you mentioned real estate. What about the other broad range of assets—fine art, for example, intellectual property, for another example? Are those things also tokenization use cases that can sort of get the benefit of all the factors we've been talking about so far?

John: Absolutely. If you think about the collectibles business, it's been a tremendously growing and thriving business where you can now have an opportunity to invest in products that you would have never imagined in the past. Who's to say that a Rembrandt doesn't become available? And now you can actually say to your friends, you know what? I own a fractional piece of that Rembrandt and it's going to be exhibited in this museum next week. That's a great talking point and it's a great investment, if you ask me, Steve.

Steve: Right. People invest for a whole lot of different reasons. So talk a little bit about real estate: when real assets, real world assets are tokenized, how do they get priced? So that people who are buying and selling them have confidence that that price is the right price, that it reflects reality and it's not just something picked out of the air?

John: Yeah, I think that if you think about the traditional way of when we price these products, you know, they might have 20, 30, 40 inputs that you might have to double check before you come up with that NAB, that net asset price. Now, if you do that and you're actually doing it in a manual way, you open that up to manual editor. You open it up the latency and you basically are creating a process that's potential for failure.

If you put that on the chain, you can actually set it. Hey, you know what? I want to actually do an NAV price three times a day where I'm going to check these 30 inputs. What does that more importantly do? More importantly for the investor, it actually gives them a more comfortable feeling from risk profile, knowing the actual true representation of that price. And by doing that pricing oracle, you're actually you're removing human error.

Steve: Mm-hmm. And so we talked a little bit about pricing. Talk some about how real-world asset tokens can be traded, particularly let's touch a little bit on the decentralized finance world now.

John: Yeah, you know, I love to, as I mentioned earlier, I like to use analogies. So hypothetically, let's say I want to have an Italian dinner. I want I need a new set of tires. And I need to bring some flowers to my mom. Okay. I can actually go down to Costco, get all those items, but the items are kind of maybe mediocre, nothing against them, but they're not the best of breed, best of product, or whatever.

The same concept applies to blockchain. No blockchain's the same. So if you think of somebody that's in the medical field, a gamer, or somebody that's in finance, the medical field might be interested in massive amounts of data for record keeping. The gamer might be concerned about what's the player experience about. And then you know what? The finance might be have certain retention records where they might have to maintain for a certain amount of period of time. And that's another certain piece. So when you think about it, every chain actually serves in a sense a specific demand or requirement for the industry. You don't want to actually have one that can take all. So thinking about it, if you have the optionality to go to Costco for your Italian dinner. Or I could go to Il Mulino and have a fresh Italian dinner. I'm going with Il Molino every day. If I have the chance to buy Birds of Paradise and Tropical Flowers for my mom at a local floor, I'm gonna choose that over the twenty dollar bouquet at Costco. Nothing wrong with shopping at Costco, but if I have the choice to get best-of-breed, I'm choosing best-of-breed.

Steve: Right, right. The other thing, by the way, that's attractive about tokens, particularly of financial instruments, is they can be deposited And into liquidity pools, because there's a there's an almost insatiable demand for different types of tokens that can provide liquidity into those pools. And there you can get returns that kind of add to your yield. So another kind of nice sort of side benefit to having tokenized assets, particularly tokenized financial assets. So talk a little bit about this. This is one of the things that is most fascinating for me, having been in-house at more than one financial institution: how tokens, whether they're tokenized deposits, stable coins, et cetera, can improve the experience of a corporate treasury? How can they make that faster, better, more certain, more susceptible to better planning?

John: Steve, it's a great question. Something that's really important to the industry and I think is it's really going to be a growing sector for us, which is what is it being able to do? Think about it from this way. If you have, let's say I am going to build a new building, picking Miami again, and I decide I found my lot of land and I'm gonna put part of my parcel land, I'm gonna put a high rise there, an apartment building. It's gonna take me from the point that I see that land there, maybe four years between permits and architects and building the building and so forth. So let's say day one, I raise a hundred million dollars for that project. It's a hundred million dollars. It's in this essence, I like to call it "dead capital" in the sense that it's not generating yield. What can this do? This industry now, with being able to have these stablecoins with yield, I could park that capital and quickly withdraw it at any time, generate that yield, get that alpha on that product, and slowly withdraw as needed. And I'm actually still trying to make some money on the on the transaction as well from the capital.

Steve: Yeah, that's by the way, a great point because one of the things that's always vexing for corporate treasurers is capital of any form that's just sitting around. Because if it's sitting around, it's not working for you or the company or the company shareholders. So being able to put it in motion, you mentioned the term "velocity of capital" earlier is a key consideration. As a matter of fact, one of the things I'll just mention as an aside, and when people are thinking about tokenization and its use cases, it really is it's very helpful. We've been talking mostly about financial instruments. And certain types of real world assets that we're all familiar with. But if you sort of really open the aperture, one of the things that is fascinating is AI, for example, has again insatiable demand for computing power. One of the, an asset that literally is sitting on my computer and your computer, is unused GPU capacity. How can that be accessed by the AI world? And the answer is tokenization, because through tokenization, you can tokenize your GPU into something called a decentralized physical infrastructure network. That network can sell that power, that GPU power, to the two AI companies that need it. And it's a tremendous efficiency because rather than that power sitting around, in essence, even though it's on a hard drive, gathering dust, it's actually put to use for something that's beneficial. And guess what? The person that has the GPU power gets paid for it.

John: So hey Steve, just to kind of add to that, it almost reminds you of like a collective. You think of these farm collectives where the groups of farmers actually join together to help kind of normalize the cost. It's the same thing with GPU power. Maybe I don't need it at this time of day. I can donate it back into the system. And then get rewarded, just like you're saying.

Steve: Sure. And then the one other thing I want to touch on, because it's an underlying thing that affects all of tokenization, is security around tokenization. How can we be sure that real-world assets that are being put on chain are going to be secure, that they're always going to be there. and that they're not gonna be susceptible to the extent possible to hacking?

John: Steve, I'm gonna, thank you for that. I'm gonna introduce two concepts to the audience here, which is proof of work and proof of stake. What is proof of work? Proof of work is really what Bitcoin is about, and that is you have miners that are all working to solve a very complex equation. And whoever responds to that equation either gets one of two things. Either they're gonna solve the equation and get the next round of Bitcoin for the having, or they're gonna get approved for the a transaction that's happening on the chain there. So it goes in both ways.

Now proof of stake, really about if you think about Ethereum, it's about having a node, and a node is taking 32 ETH and putting them together, and it's giving you the power to make decisions. So hypothetically, let's say I'm on customer service and I need to check if a customer is an accredited investor. I could go on chain and the information or that request will go to that node, and that node is going to have one responsibility: Yes or no, is that an accredited investor?

It's going to do the checks and come back. Yes, it is an accredited investor and go back. And what happens in the background? By performing that transaction, those that node will receive a razor-thin piece of Ethereum. And the goal being it's about transaction turnover. Because the more times that question is asked, it starts to actually have a compounding effect.

Steve: Excellent. So this is a very quick for our audience, this is a very quick run-through of some of the more recent and fascinating use cases for tokenization. John and his company could...this conversation we were joking earlier when we were getting ready could go on for two hours because this is a very, very powerful financial tool that's being put to use right now and it and we're seeing different types of financial instruments literally being innovated and created almost as we speak, which makes this field so fascinating. And John, I can't thank you enough for spending the time with us this morning so you can get us a little bit deeper under the surface of tokenization and get a deeper and better understanding. And I know that that you and your company are all about education and bringing more clarity into the marketplace.

John: Steve, thank you for this opportunity and really appreciate the opportunity to speak with your audience. As I mentioned earlier, we've done a fantastic report where we reached out to 100 fund managers. And that report is the "tokenization gaining altitude survey" report, where we interviewed 100 different managers and it gives some great insights to what those managers are thinking about tokenization and real-world assets.

Steve: Very good.

John: And one last thing, and to get a hold of me, johndenza@apexgroup.com. Appreciate the opportunity, Steve.

Steve: Very good. Thank you, John.

John: Thanks.