[00:00:15] Seamus: Welcome to Episode 25 of METACO Talks, a series of live conversations with people at the forefront of the innovation around decentralized finance. Today, the title of episode is capitalizing on tokenization. To discuss this, we have a special guest, Rajeev Tummala, Product Director in the Digital and Data team at HSBC’s Markets & Security Services Business in Singapore. He’s engaged with financial markets, infrastructure providers on implications of DLL for security issuance associated asset servicing.
Rajeev has worked with broker dealers and secure service technology providers for 20 years in India, Japan and Singapore. Prior to HSBC, he was with Bank of America, Merrill Lynch, for 10 years. Since 2015, Rajeev has focused on innovation, applications on artificial intelligence (AI), distributed ledger technology on security services, and has had responsibility for engaging with FinTech startups related to AI DLT.
Rajeev, Great to have you here. Welcome to METACO Talks.
[00:01:11] Rajeev: Thanks a lot for having me. I’m looking forward to having a great conversation.
[00:01:17] Seamus: Well, let’s kick off. A great way to start would be, how did you personally get involved in the digital asset space?
[00:01:24] Rajeev: It’s a very interesting story. I used to head Reconciliations Technology when I was at BAML (Bank of America Merrill Lynch). As a pure technologist, one would think that if technology was in place you should not be doing any reconciliations in the first place, instead of having reconciliation systems and probably a few hundred staff performing reconciliation.
One of the primary reasons for having a reconciliations was multiple ledgers. I was just on a quest to see what else is available in the market. What are the emerging trends? This was the early days of me looking into the new trends and innovations that are happening in the capital market space. One thing led to another, and I was introduced to the concept of distributed ledger technology, and Bitcoin that was powering DLT. I was exposed to the technology because I was trying to solve a capital markets problem, in the 2014-2015 timeframe. Then once you get in as a technologist, as a domain expert in capital markets, it’s the digital assets space is super fascinating. You can’t leave. You find so many applications. That’s how I got into the digital asset space.
[00:02:39] Seamus: Down the rabbit hole, as they say. We’ve had so many discussions when we go to clients with the blockchain and how you reconcile. There’s only one source of truth here. What about HSBC, how do they see the potential of a digital assets?
[00:02:58] Rajeev: That’s a very pertinent question. How does a institution like HSBC, that is probably one of the world’s largest custodians, look at digital assets? For us, digital assets is much more than crypto assets. It’s a bigger play. We also look at it as simply transforming the way assets are represented. We have been custodian for many years, so we knew and we managed assets when they were represented as bare assets in physical paper form and were stored in vaults inside the bankers.
From there in the early 1980s to all the way to early 2000s, the great transformation of asset representation happened. This is not the first time. That’s what I want to tell the audience; asset representation is being transformed. There was another before where assets presented on papers were dematerialized and converted to electronic forms. That’s how you own shares or stocks today. An Apple stock is an entry in a ledger or in a database somewhere, in your name, and someone is managing that.
We see this as a natural program or asset representation. Digital assets are natural progression of asset representation. We are very interested in this field; we have a lot of work that is going on. One thing we also know, what happens when the assets moved from paper to electronic or dematerialized, there was an explosion of issuance. There was an explosion on ownership, so trading exploded. We have some numbers, and when the assets moved from paper to dematerialized the volume in the US grew 80 times and ownership went through the roof.
More importantly, innovations like ETF were made possible. You’ve got to basically look at what happens when the asset representation changes. I think that it’s exactly the same, and if any, it is going to be even more impactful because we are a lot more connected today. The world has internet and everybody talks to everybody talks more than in the late 1990s. Connectivity has increased many folds. Digital assets will have a significant impact on how capital markets work, what it means for inclusion, and more importantly, how many more innovative products are going to come out on top of tokenization and digital assets.
[00:05:39] Seamus: It’s a great view to define the relevance. I think it’s underappreciated, what we’ve seen before and how it’s impacted exponentially more this time around. As HSBC looks at the space, is the move here beyond what you’ve described, as also being driven by customer demand?
[00:05:59] Rajeev: There’s a lot of interest from customers. In 2016, 2017, 2018, you could dismiss this as a fad. Then there was a winter, then it came back up again. Survey after survey, only one thing is very certain: the interest from the institutional investors is only increasing. That means we’ll have to pay attention. There’s a lot of customer interest on digital assets and what it means.
One of the things that digital assets bring along is the power of smart contracts. In today’s world, DeFi is not possible without smart contracts, and smart contracts would not be possible without tokenizing. What tokenization simply does, is it standardizes how an asset is represented. Most of the inefficiencies in capital markets today exist because amongst the participants there is no standard way of representing an asset. Now, is that standardization ERC 20, SC 1400, or something new that comes along the way? That’s fine, we will sort it out as time progresses, and the best standards tend to win.
To draw parallels from the existing world, the main efficiencies during the paper-based assets was how information was exchanged. We came up with standard messaging, like SWIFT and fixed, to address those things. Now, if you extend that, the inefficiencies exist, not because of lack of messaging standards, but primarily due to lack of standard asset representation. Even in a larger organization like HSBC, how the front office represents the security is different what a middle office does and what back office asset servicing does. That yields a lot of inefficiencies.
Through DLT and public blockchain, what you are bringing out is a global standard for representing assets, no matter which institution you are and what function you perform. That’s fascinating to me, because tokenization yields smart contracts. Software is composable, so you make a lot more innovations by composing a lot of other smart contracts. A lot of DeFi smart contracts are relying on the fact that underneath them, there is more code that someone else has returned, which they can use and create something more useful to the ecosystem. That’s where I think a lot of institutional interest comes from. First, it becomes a lot more efficient. Secondly, you’re removing risk because a lot more automation is coming through.
Now, can you represent different kinds of assets? Can you make illiquid assets liquid? All of these are positive externalities of standardization, smart contracts and automation.
[00:09:00] Seamus: Super interesting. I don’t think people outside the industry probably aware of just how fragmented things are internally in the firms. Why don’t we dive into that a little bit of the tokenization side? You mentioned around the different types of asset-backed tokens. How would you see those now and maybe looking forward?
[00:09:23] Rajeev: Like everything, you’ve got to familiarize yourself with the concept of tokenization. There’ll be two types of institutions: the new entrants that would come and try to tokenize something that was not tokenized before. The watches, the exotic assets, the formula one cars – you try to bring on a new type of asset class. That I think is firmly in the realm of the new entrants, they experiment.
The traditional institutions or the incumbents, would try to tokenize stuff that they understand well, which would be your traditional asset securities, securitization, maybe derivatives and structured products. But the underlying tech is the same whether you’re talking about crypto, DeFi-enabled crypto, or new exotic assets or traditional assets. It’s just incumbents and new entrants all come from a place where they are comfortable with. That’s what’s going to come through.
Let me take the asset-backed token example of the traditional security. This is where you will need a bit of regulatory clarity, there needs to be some kind of regulatory collaboration across different jurisdictions, because you need transfer value that is represented in tokens, maybe sometimes cross border, you need financial market infrastructure. There are a lot of moving parts. We know that SGX in Singapore has done market node, ASX is doing their huge replacement of deposit technology, Hong Kong exchange is doing a Project Synapse for T-0 settlements.
In Europe, SDX is coming up, and SIX is one of the main sponsors. We’ve seen the Deutsche Borse is coming up with T-7. There’s a lot of activity going on. I would say this is an installation period. everyone’s trying to install something into the ecosystem, bringing together that minimum viable ecosystems.
I do believe that in the next one or two years, we will see a lot more progress. But compared to the traditional way of representing assets, it’s still on-ramp. The ecosystem is ramping up. Looking into the future, maybe some time 2024 onwards, you will see mass adoption. Efficiencies will come to the fore, and then that should incentivize enough traditional players to adopt. I wouldn’t say they would start them. Everybody has started. If somebody says that you have not started the digital asset, tokenization journey, and you’re not thinking about tokenization as a service, I would be really surprised. All large institutions are along that curve.
It’s about a lot of us realizing as well, what is the underlying protocol that can be mutualized and what are the things that we can do unique using our balance sheets? I think there is some way to go there. You don’t want to be writing an equivalent of an email system or a browser inside a bank for digital assets. You’ve got to let that ecosystem come through. Your job is to write using your own unique strategy, aligning UPR strategy, building out products that can ride on those rails. I do think there is work to be done. Today I think a lot of institutions are trying to do the same thing internally. This is where the public blockchain is a wonderful example. They are showing how things can be mutualized and how you can write better things on top of existing infrastructure.
[00:13:00] Seamus: I think you alluded to some very interesting points. Let’s talk a bit about networks. What are the critical success factors around tokenize assets use cases? My takeaway, from what I’m hearing, collaboration is a critical element. Is that right?
[00:13:16] Rajeev: Collaboration is a critical element, and governance comes through collaboration. How do you ensure that the quality of assets is consistent in your asset? At the end of the day, the participants and the asset quality is critical for a network success or failure. For asset networks, you need to have quality assets that attract both issuers and investors. The participants in that particular network are there to facilitate and increase the credibility of that network.
One defining factor of the new age asset networks is going to be the quality of assets. The higher the quality of assets, the faster they can scale. It is up to the network participants to source and distribute assets that can be shared on that particular network. The quality of the assets will determine success or failure. How is the quality of the assets related to the participants? This is where I think there’s a bit of a chicken-and-egg problem. The quality of the assets would not be there if you don’t have quality incumbents, and if you don’t have quality incumbents you will not get quality of assets.
There is a bit of a cold start problem sometimes in some asset networks. That’s where I think the minimum viable ecosystems, the kind of work that we did with the Everyday SGX and Temasek comes into play. You need a few participants to come together and try to pull in a use case or two, and then contribute to its scaling.
[00:15:00] Seamus: Great. The chicken-and-egg problem of tokenization is you need liquid secondary markets to attract issuers and investors. It’s a very circular story.
On that, can you define a little more around the quality of the asset market networks? Will we see emergence of new types of asset networks as well?
[00:15:25] Rajeev: I’ll take your second question first. I have no doubts on the emergence of new types of asset networks. One thing that tokenization contributes to, is fractionalization. There are assets today, and everybody talks about bonds because bonds have huge ticket sizes in the traditional world, and a lot of people can’t own them. You go through fund structures and similar. The fact that you can own any assets in a tiniest form is going to be responsible for creation of asset networks.
One of the other things also, the barrier to entry in the crypto world is somewhat low. It’s not high. You can call it out because of there’s no regulatory oversight yet. This is where newer types of assets would definitely evolve. There is a self-governance element in this world as well, but that is where I think the challenge is. The self-governing mechanisms should trump low quality. If the self-governing works, then the low quality assets will not come.
By quality of assets, going back to your first question, what we are talking about is, does the asset yield what it promises to yield? Most of the assets are nothing but promises of cash flow in the future, promises of capital appreciation in the future. Those assets come from an issuer that is in need of finance. That’s how there’s going to be a bit of friction, if I may say so, in attracting or not attracting. But there is also a balancing factor of self-governing within the crypto ecosystem.
It’s going to be a fascinating time to watch. The traditional asset networks will definitely modernize over a period of time. the quality of assets is not a question. It’s more about transformation there. In the new entrance plan it’s going to be self-governance, versus what are you going to do to manage quality? There’s a lot of automation and transparency that smart contracts and DeFi bring. Some parts are automatically addressed because of transparency around ownership and the quality of the assets. That’s why immediately you see things like, minus the software bugs and everything else, working relatively quickly. Lending is working relatively smoothly, because there is the transparency and automation that smart contracts bring.
But what happens when you try to bring on tokens presenting physical assets in the real world? You need a governance, you need a specialist function to take care of the underlying assets and automatically say the underlying assets is in a good shape. Now, how do you govern that? If I have to order a piece of the formula one car from last year – and I’m a formula one car fan – that’s the self-governing structure that you need to get in place.
I don’t think there are straight answers there. But, as with everything else, it will all iterate and improve.
[00:19:05] Seamus: That’s an exciting view of where we’re going. With that view of mine, who do you think the winners and losers will be?
[00:19:12] Rajeev: It’s very hard to say. Some of the large financial institutions have survived hundreds of years. One thing is that the mature financial institutions will come in and adopt a new tech after the frenzy period is over. When there is a maturity there, that’s when the adoption will happen. That’s what’s going to happen on the financial market infrastructure and the incumbent in the capital market space.
But one thing is for sure – all of the entities that we can term as losing, will have one defining attribute about them. That is, they are the ones that are either too late to adapt and adopt, or they decide there is no need to change. One thing that I say is that functions will always be relevant, but how do you perform those functions is what’s going to change, because of tokenization and DLT. You need a different kind of expertise to perform the same function. You cannot perform the same function in another way.
Most organizations I believe have already realized that, now it’s about execution. How do I perform the same function with the different kinds of expertise? That is a change, and we all know that the only thing that is constant is change. Yet change it is the only thing that is consistently hard. That’s where I think the success and the failure of organizations will emanate from.
[00:20:50] Seamus: Why don’t we talk a little bit about your experience driving digital asset adoption, specifically at HSBC? How difficult has it been to get buy in from what is one of the largest financial organizations in the world?
[00:21:07] Rajeev: It all starts with, how do you want to frame the opportunity? What is the threat and what is the opportunity? In larger organizations like ourselves, I don’t think you start off with threats and opportunities. It’s not going to work that way. You have to start with engagement. That’s how you begin. You spend some time in engagement and education – the two E’s that are very important to large organizations. Don’t get into, why should we be doing it? Start off with, what is it? That is the two E’s, educate and engage.
Then we can get into why we should be doing it. The opportunities and threats address why we should be doing that. You’ve got to give it some time, because it goes through different business units.
One of the other things, they will be friends and allies in different business units of a large group thinking along the same line. The education and engagement phase will bring out like-minded working group partners and alliances. Then you realize that, especially for a large organization, there will be some anchor products that absolutely need it, because they are the ones that have a significant threat or opportunity. This is where the expertise of how you perform a function is going to greatly differ. I would pick custody for digital assets. Custody as a function I don’t think is going anywhere, but how you perform? You need a different kinds of expertise to deal with custody of digital assets and the traditional world. You build that as an anchor, and then you build your products on top of it.
That’s been the journey. What I’ve just told you in very generic terms is what has happened at HSBC. You start off with some POCs, and you educate. For us, that started 2016, 2017. The more you keep yourself informed, the better you can speak about these aspects with your clients, and the clients can express some interest.
Then you can piece together some consortiums and maybe some collaborative work, like the one that we did with SGX and Temasek, and it continuously proves your capability and credibility in the organization as well. Then you move along the curve. The buy-ins come in, the curve also gets steeper (it never gets easier), then the organization comes along for the journey.
[00:23:54] Seamus: You mentioned a couple of times the POCs. Can you talk a little bit about what you’ve done in the POC space?
[00:24:01] Rajeev: Very early on, we started off with proof of funds assessment. Can this tech survive in the enterprise? Then we did a bit of work on Ethereum, public blockchain, just to see if we can do proxy voting kind of services. We always have use cases. It’s very easy to get use cases for distributed ledger in financial services organization.
The POCs have to be seen as learning experience, capability building exercises within the organization. You then go out and start off, and showcase this capability. You get into parallel production world, where you can do that.
We have now a system called Digital World, where we digitize the age-old paper. There are still paper-baked private assets, we bring that into a DLT world, and try to make it easier or improve customer experience through the usage of DLT. Very innocuous use cases, if I may say so.
Then, can you extend into representing these assets as tokens? That is where are potentially headed. What does it take for our business to manage assets represented as tokens? That is the journey that we are on. But we wouldn’t be here if you had not done that capability building exercises that are called POCs, etc.
[00:25:33] Seamus: As you’re probably aware, we had Kevin Lim from Temasek two weeks ago, and he spoke a little bit of a market node. Can you talk about your involvement with that as well?
[00:25:43] Rajeev: It ties back to the collaboration that we had with SGX and Temasek back in 2019. It started out as trying to answer the exam question of, at the national market infrastructure level can you tokenize fixed income securities that are already there, and what kind of efficiencies do you get? How do the commercial opportunities look like, if the technology proves worthwhile? That was the exam question that we were trying to answer.
It started as a collaboration project between us, Temasek and SGX. The results were so promising, that SGX and Temasek now have a venture to commercialize those opportunities. Recently, they have gone out and made an MOU with about 10 financial institutions to collaborate on different work stream sites. It’s no longer a single work stream, it is multiple work streams. I’m happy to say that we continue to collaborate with them.
[00:26:51] Seamus: We can wrap up a couple of questions. Looking at this space, how do you create optionality for a firm like HSBC, in a fast moving market like this?
[00:27:03] Rajeev: That’s a fantastic question, it’s something that I grappled with all the time. The traditional way of a large organization dealing with change is not suited for fast pacing sometimes. We tend to optimize a lot before we start to execute. In the sense of how an organization deals with change is we do a lot of upstream work before we try to build something else. Fast-moving changes mean we have to execute and optimize. That execution is not a single stream, unfortunately. You need to sow different seeds, look at which is sprouting, and optimize, and then learn from that experience. That’s the approach.
That is the optionality. I don’t think we can bet our firm on one type of DLT tech or one type of approach. It’s going to be several different types. Honestly, it is the capability to do things quickly and then optimizing it as they scale. That’s the need of the hour. This is the challenge. It’s the dichotomy. I’m not saying this is specific to the digital assets or the DeFi world, but it is so fast. Things can so fast, that if you try to optimize in six months, things that you’re optimizing for are no longer existing after six months.
[00:28:48] Seamus: DeFi 2.0 came out a couple of weeks ago, and now we’re talking about 3.0. Absolutely. In wrapping things up, what’s next for you and HSBC?
[00:28:59] Rajeev: we’ll continue to ramp up our efforts. In terms of HSBC, custody will continue to be our anchor product, and we will build our services on top of it. There is no doubt that we absolutely believe in the transformative potential of tokenization and asset representation as software.
A lot of people talk of tokenization as something new, but it’s simply using a lot more software to represent assets and standardizing that asset implementation. We have absolutely no doubt in its potential. I know having people like myself and my team out there to chart the path ahead, we’ll continue to work and ramp up and transform. At the end of the day, we are all there to serve the customers. We see a lot of interest from there. These services being delivered efficiently and at scale is what we will work towards.
[00:30:00] Seamus: That’s fantastic. Rajeev, this has been a real pleasure. Thank you for your time today. Anything else you’d like to comment on to wrap things up?
[00:30:07] Rajeev: No. Thanks a lot for having me, I had a blast with you. I also noted that it is the 25th episode, congratulations for that!
[00:30:22] Seamus: Exactly! Thanks again, Rajeev, and we’ll see you soon. Our next METACO Talks as usual will be in two weeks’ time. Until then, wish you all a great weekend. Stay informed at www.metaco.com/talks.