Episode S6:E7 | Tokenization and Crypto—What’s Happening Now? | Compliance in Context
Welcome back to the Compliance In Context podcast! On today’s show, we will be taking an in-depth look at two of the hottest areas in the investment management space, namely—tokenization and crypto. To help guide us through the conversation, we are very pleased to welcome in two fantastic experts in the space, Louis Froelich and Fizza Khan. In our Headlines section, the SEC is taking a hard look at an electronic delivery rule and the SEC Enforcement Director share details on the Divisions current enforcement approach, and finally, we close up today with another installment of History Has Your Back, where some old quotes from a Stoic philosopher might just give us the push we need to navigate the regulatory filing season.
Show
Headlines
SEC Working on Off-Channel Communications, E-Delivery Rules
SEC Enforcement Director Ryan Details Back-to-Basics Approach
Interview with Fizza Khan and Louis Froelich
What is tokenization?
How is it different from crypto?
What are some examples of things people are tokenizing?
What is the hope with tokenization and also importantly what does tokenization not do?
Who can actually invest in tokens?
How does tokenization impact compliance?
Is this a threat to compliance?
How does AI impact tokenization?
How does the SEC view this type of innovation?
What is one of the biggest things that folks listening to this podcast should keep in mind regarding tokenization?
History Has Your Back
Using the wisdom of Stoic philosopher Seneca to help compliance officers survive the regulatory filing season
Quotes
09:26 – “I think a good way to start to think about tokenization is to focus on what it does, not what it is, right? Tokenization is itself a very technical process. Just like sending an email to someone else is actually very technical, how that all works, right? But everyone knows what it’s like to send and receive an email. Tokenization is not unlike sending and receiving email for digital assets, and digital assets here are legally, and that’s the goal tied to something in the real world. So you can create a tokenized version of something, which is really a digital version of something. It could be a cup, it could be a tape roller…And it could be, or it could be something like a stock, right? You create something that could be transacted digitally. And, as long as we’re going to talk about this today, as long as you take the proper steps, when you create the digital version of it, then what you get is a legally enforceable, standardized version of the thing that can be more easily transferred.” – Louis Froelich
11:55 – “I think the biggest differentiator between crypto and tokenization is crypto is this catch-all term. It’s a catch-all term to define digitalized or digitized assets. And it’s also a catch-all term that these assets, these digital assets, are then transacted on a blockchain. So that in and of itself is something that we can use kind of synonymously when referring to digital assets. I think that’s kind of like the nomenclature people are just reverting back to is saying crypto. And more importantly, I think crypto is, interestingly, the systems on which you transact. So I mentioned the blockchain, but they, you know, everything’s governed by a code as, as what Louis had alluded to with the tokenization process, and it’s all on this blockchain network. Tokenization is actually looking to take advantage of that. So as Louis mentioned, when you tokenize something, it can be that cup in, you know, it can be that piece of furniture as it may be more relevant to your audience members. It can be a security, it can be real estate. But when you take that—when you would normally transact in real estate or in a security, you may not have the efficiencies that are afforded on a blockchain network, that digitalized assets do have the opportunity to be more efficient and faster. And so when you take the process of digitizing a real-world asset, as Louis described, now you’re going that step further and saying, not only am I digitizing this asset, but I’m also allowing for the end users to take advantage of these blockchain systems.” – Fizza Khan
17:18 – “I mean, you can create a digital version of anything, you know? An interesting question is if you have the right to do so? Like, I can create a version of Taj Mahal and send it to you. It doesn’t, you know, do much for anyone. But I think the things that are being tokenized that are getting a lot of momentum in industry fall into two big categories. One is financial assets that are heavily intermediated and have settlement risk, and the other is just straight-up dollars. So the, the first one is you have stocks, futures trading, etc. You have layers upon layers of intermediaries and decades of legal and regulatory guidance and careers and systems, you know, for a futures contract. You have introducing brokers and FCMs and DCMs and DCOs, all to ensure compliance with the law and reducing counterparty and settlement risk.” – Louis Froelich
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