Grayscale and Chainlink on Transforming Global Markets | The Future Is On Spotlight Series

Hello and welcome to the latest episode of The Future Is On, presented by Global Custodian in partnership with Chainlink, the series where we track the evolution of financial services through blockchain technology. Today we're exploring how blockchain is shaping the next phase of market structure from tokenized assets and onchain finance to the continued growth of institutional participation in crypto. We'll look at how global markets are evolving right now, what lessons emerged from recent adoption, and what leaders should be planning for as digital assets move deeper into the mainstream. And joining us on this episode are Fernando Vazquez from Chainlink Labs and Ray Sheriff Ascarry from Gray Scale. Good to be talking with you both today. — So good for having us. — Great to be on. Thanks Looking forward to it. So um just to kick things off and Fernando if I come to you first just want to start by asking what you think are the forces that are now driving the wider adoption of blockchain across global markets I guess beyond the early tokenization pilots we saw a few years ago. — So there are three main factors. Um the first one and I would argue the most important is increased regulatory clarity in the US and the fact that central banks, regulators and politicians in the US, Europe, ASEAN and other key markets are engaging with the industry in the constructive way is telling me that this factor is here to stay. The second factor which is related to the first one is the recognition that without the tamoki sword of regulation by enforcement the business models of crypto exchanges blockchain savvy neo brokers and neo banks are viable long term and that turned the spotlight on the innovation that made this company successful in the first place. And the third factor which is in a way byproduct or the first two factor I just described is the financial institutions moving their blockchain and create initiatives under profit centers where success is measured by revenue KPIs. AUM KPIs basically meaningful KPIs that create the right incentives for fian institutions to do with something meaningful with blockchain. Long story short, basically something as simple as the biggest economy in the world regulatory clarity made it possible to have the right incentives for banks as a manager and other stakeholders to do the right thing. — Yeah. Truly a landmark moment as you say. And Ray, any thoughts on from your point of view, why you see financial institutions accelerating the work of blockchain at the moment? Um, you know, modernizing AM structure and essentially, I guess, creating new products and opportunities. — So, I think there's a few things. First, it's, you know, Bitcoin has been around now since 2009. We've seen, as Fernando says, uh, meaningfully increased regulatory clarity. It's clear that the asset class is here to stay. And then on the infrastructure level there there's really you know three main reasons. One is that there's just meaningful efficiency gains. Uh you know tokenizing assets on blockchains enables cost savings, faster settlement than a lot of traditional infrastructure. Um and composability is another big piece. Capital can become more productive. Uh when you tokenize something, DeFi enables it to become a productive asset. You can borrow against it. You can reuse it. it can be put to work across a broader range of financial applications. — Brilliant. And um yes, so I guess if we could stay with you a on this one, you know, have you seen the evolution of that institutional demand for digital asset investment products and you kind of touched on it a little bit there, but you see them becoming part of the mainstream investment strategy as well. — Okay. So we've I joined the space in 2018 and the conversation has changed so dramatically in terms of how it has evolved. Back then we were doing a lot of Bitcoin 101, you know, should I be looking at this asset? People were still talking about tulip bubbles and now the question has changed so dramatically. It's how should I invest? What's the right allocation? How do I think about diversification? So you are seeing adoption from wealth managers, raas, institutions and

corporates and they want exposure in familiar rappers with the clear regulatory guard rails. And when it comes to the exposure investors are looking, you know, they're looking at other assets. So maybe a lot of them have wrapped their head around Bitcoin and maybe they are kind of starting to understand what a smart contract is and what Ethereum is. But the problem they face now is that it's a vast and noisy market. Um, you know, they figured out that there's, you know, 50 million other tokens out there and the bad news is that every month there's like 2 to 5 million new tokens and so they'd understand portfolio diversification and the efficient frontier. But it's hard for them to cut through the noise. Um, and that's the good news is that that's the problem we're here to solve by creating tools and frameworks and research uh and in creating analoges for traditional finance that helps them think about value for these blockchains and their tokens like you know how does a smart contract platform generate value? What is financial um what does onchain financial infrastructure look like and where does you know where do AI data and tokenization fit into a portfolio? Yeah, that's really interesting and you know, you bring up the milestones that have occurred and what happened in 2018 and you know something I think of a lot in recent years is obviously the launch of uh ETF. So Fernando if I can come to you just we've obviously seen this growth in digital asset investment vehicles including those ETFs. What do you think this trend uh and these milestones tell us about market maturity and the way institutions actually want to access blockchain exposure? Yes, absolutely. I think that as blockchain start to make inroads in finance as an infrastructure play there's been a change in perception. I would argue that until very recently as recent as you know the launch of the Bitcoin keyfrock, people associated blockchain just with Bitcoin and people start to realize that actually blockchain can become the new rails or the new plumbing for financial markets and payments. And people want to get exposure to that. They want to share on the upside or potential upside of, you know, blockchain actually becoming the def factor standard. And ETFs are the cheapest and more efficient way of getting that kind of exposure to this tech that Ray and I would argue we revolutionize uh finance. From my perspective, I think we had some big changes last year on the regulatory front. And one of those things in the fall was the introduction of the generic listing standards for ETFs. And when those were approved, that opened the door to altcoin ETFs beyond Bitcoin, beyond Ethereum. The other thing that the generic listing standards did is that they allowed staking in these ETF structures. And that's really important because with proof ofstake assets, we live in a world now where crypto is an income generating asset class. And for us, it's been important to create products that give investors access to this incremental revenue stream. The other piece for me is that the proliferation of ETFs have kind of changed the ethos a little bit in the industry. When I joined, there used to be a lot more tribalism. Everyone had, you know, tokens had armies. Everybody had tokens that they were really aligned with. It was almost like sports teams. And you know crypto has become one of the fastest growing de assets of the last decade. And so before when you pick the token now as it's become something that investors are focused on from a long-term portfolio allocation perspective, they're picking an allocation. So in a way ETFs rewired how exposure works and now you know you have one button in your brokerage account that's giving you that access to all these different tokens. So you know what I think used to be more ideological loyalty is becoming exposure management with the proliferation of ETFs. — Yeah. And you obviously mentioned the integration there. Do you think this investor perception has changed as it's just become more mature and also more transparent as well? Correct. — More transparent, more accessible, more liquid, available in the rails um that investors are used to accessing in their brokerage accounts. — Yeah. With such a big element and Fernand, if I can come to uh you know the concept of tokenization, I mean it's well it's no longer just a future concept. It is operating at real scale.

what you think were the key I guess unlocks that made this possible um and you know what should we be looking out and paying attention to next? Yeah, in terms of unlocks, I think that for I would argue too long people were selling blockchain as something disrupted, something that would disintermediate traditional financial institutions. But I would argue that blockchain will just be one of the drivers of the next wave of data transformation in finance. And I think that we at in partnership with the likes of Swift, JP Morgan, UBS and others have proven that you can organically grow into a blockchain powered future. You don't need to drop all your main frames and core backing systems to do something meaningful with blockchain. You can actually initiate an onchain transaction uh using your legacy systems. That was a I would argue a key technical unlock on the business side. Um, we're also moving beyond just trying to realize operational efficiencies and try to bring value to token holders. If they cannot holders, how do you incentivize an investor to buy an asset in a tokenized form factor? Looks scary. Some people might feel this only downside. Why would I bother? But if you tell someone, look, you buy this asset in this new super cool form factor now, you can use that asset class as collateral to borrow stable coins against it. or we can connect you to PM broker that will allow to use some of those tokens as you know variable margining to trade R features at the CE. I like that's a big business unlock. We beyond just selling uh theoretical efficiencies to bringing value and I would argue that um you know the digital natives have certain expectations in terms of user experience, access and value and I think gave me those you know expectations. I got to admit I find this fascinating and as a topic but also the pace of change and Ray what do you think in terms of where do you see tokenization fit with the broader transformation of market infrastructure and how do you think we should think about its role relative to other forms of blockchain adoption. — So I think it's a core piece you're bringing financial assets onto rails that are very efficient and transparent. I think the opportunity before us is still huge. Um, you know, it could be a market worth hundreds and trillions of dollars. Today, only about 0. 01% of assets that can be tokenized are actually to they're actually on chain today. Um, and I think we can think about this in terms of bringing legacy finance and Wall Street onto these blockchain rails and acrewing value to the blockchain infrastructure tokens. So when I think about value, when we think about investors and how they um invest in the space, we do think that a lot of the value that occurs from tokenization happens on that base level um layer 1 chain and then of course uh you know projects like chain link are playing a very critical role in enabling the tokenization. I do think that a lot of the tokenization we're seeing is crypto theater and that it only really works when it reduces friction um versus when it's being used for um branding or decoration. So I like to just always take a step back and remember that tokenization is important and it creates the rails but it doesn't create the demand. — Yeah. Could I add to that jump? Yeah, I think um kind of the beauty of tokenization is that for the first time ever, you don't need to have a ledger for the payments leg and a separate ledger for securities. Everything can sit on the same ledger and that enables

something that Ray alluded to which is composability. Everything sits on the same ledger. You have a smart contracts and that allows you to offer services that you could not implement in the past. — Yeah, agreed. And but Fernando, what you know there must be some challenges remaining for this large scale implementation uh across jurisdictions and asset classes. What do you see as those challenges? — Yeah, I would call that um the interoperability problem. Erh Here it's important to take a step back and make it clear that there are at least two different types of interpretability. In many cases when you use that term people think you're talking about technical interpretability at the protocol level. Can I connect chain A with chain B? Can I connect my coreback assistant to a chain to do something meaningful at all? That's a problem that um Chile has already solved. Uh we pioneer data oracles that connected the offchain world with the onchain world and we can also connect different chains. But uh when we're talking about financial products, different countries, different jurisdictions have different taxonomies for securities, funds, you name it. the way you do the reporting might be completely different taxation regime is also likely to be different. So when me Fernando a Japan tax resident was to send a token security to Ry tax resident maybe the perspectives of the tokas fund that I I'm holding does not allow that to happen maybe tax resident should not own that. So there has to be some business logic somewhere that can detect that and prevent it from happening. because the issuer or the distribution channel that could be new broker might be held liable where that assession allowed be allowed to go through. So and as you have mentioned before I think the what's going to happen in the next one or two years will be that there's going to be increasing focus on the compliance side of things. uh we need uh compliance engines that can abstract all these complexities of transacting cross border cross jurisdiction and that's what is that we at develop a product called ACE which is the automated compliance engine as part of that effort uh we are working with regulators globally uh to identify the right taxonomy in each country and see how we can help map it out and also identify what are the legal rappers that in the example that I just presented would allow me to send this tokenized fund to rate without breaking any rules. I think the tech is ready uh but uh we need to find uh the right legal framework uh to take care of all those jurisdictional challenges. Yeah. It's very accurate uh state of play right now. Ray, where do you where would you say we are on the adoption curve of blockchain based market infrastructure? — I think that adoption is still really early and I think that product market fit is still being discovered. What we've seen broadly in crypto for me since I've been in the space is that product market fit has really lagged narrative and pricing sentiment and I think that that's changing but the reality is that the modern financial system is already fairly efficient in a lot of areas and not every asset um benefits from be being brought on chain. So it's important for the you know assets that um where it does make sense and I think that we are also seeing you know again as assets are increasingly coming on chain interoperability layers like chain link are becoming increasingly important. — Yeah thanks and I guess a couple of questions in conclusion to summarize a little bit. Um and I come to you both on this. Uh Ray, perhaps I can start with you, stick with you for this question. What do you think the next wave of tokenization looks like and how do you see it actually differing from the early solutions? — So I think that a lot of the earlier tokenization efforts were bespoke and siloed and kind of difficult to

integrate with existing systems, which is why I tend to evoke this idea of crypto theater. um and that the next wave is going to focus more on shared infrastructure more so than one-off implementation and tokenizational efforts um you know are going to increasingly converge with common platforms that enable interoperability across chains and markets and we're seeing that we're seeing cryptonatives partnering with um you know traditional financial firms incumbents in the space and as scale materializes network effects are going to emerge as more assets Let's move into common infrastructure. — Well, thanks. And Fernando, what are your thoughts? — Yeah. I I'll like to add to that. Um actually in my previous role, uh I was the CEO of SBI detail asset in Japan. And as part of that um I was part of the initial core team of project guardian which was sponsored by the MAS the central bank in Singapore and back then when we got started in our tokenization journey I wanted to move beyond the crypto theater as you say right that's not actually meaningful and doesn't move the needle that And when you try to do an actual light transaction, you realize that you need to start implementing risk controls within your bank because this might break and you need to be able to tell your CFO that it did a transaction. Well, it gets compromised. This is how we are going to reflect that on the balance sheet. This is how we are going to be fixing things off chain. We need to do the same with the chief risk officer, head of compliance, the board because the again uh people see this as not part of your karma day and they only see the downside. So I think that's going to be the big change. John um as um you know this initiatives blockchain move under profit centers there will be many more stakeholders because those guys who are now working you know under a global head of cash management for example he wants to be tokenized money market fund oh wow now I need to convince the CFO the head of compliance the chief risk officer I need to get board approval for that we need a new governance model We need a cyber set controls, different ways of managing market risk. All of that will be an area of focus and I would argue also a lot of innovation and we are at uh we are pretty opinionated. Uh we built some of those controls in some of the solutions that we provide uh within ACE our compliance engine. But I think it's going to be the boring part, the nonsexy side of the business, right? That is going to move the needle and will be the focus of the next wave into well I covered global custody. All of that business is unsexy as as you say Fernando, but uh um if I know if we can bring all this together and certainly apply it to our audience and kind of like to conclude here and Ray if I can start with you just asking how should you know if we can call them all financial leaders how should they be thinking today to stay competitive in this world where tokenized finance and blockchain native applications are becoming mainstream. Yeah, I think we need to move away from this world where a lot of it is a solution looking for a problem. And we need to focus on solving real operational problems rather than one-off implementations. We want to make sure there's interoperability so that assets aren't locked on siloed systems. And we want to standardize things on, you know, robust global settlement infrastructure. — Fantastic. And Fernando, final word for you. I would encourage um you know financial leaders actually anyone working you know in the financial industry that to recognize that in the end game traditional finance and decentralized finance or blockchain power finance will uh converge and that when we use the word blockchain disassociation with disruption and disintermediation will also go away. I think Chinink having done a number of pilots with the likes of Sup JP Morgan and UBS has proven that this convergence can will happen organically. This is not a

scary you can keep your systems and as part of the journey you will basically clear your footprint in the blockchain space. I also like to make it clear that for fishes have a very rare and valuable asset. That as it is trust and having a critical mass of trusted parties participate in the governance of blockchain is necessary condition for its mainstreaming and as such financial institutions started with custodians will be key enablers for blockchain and those who engage early will be really well positioned to be not just relevant but to thrive. So again, that's my call to action and get involved in the governance of blockchain and job position right to be one of the pioneers and yeah, one of the winners. — Yeah. Excellent. What a fascinating conversation. Really enjoyed talking to you both. Um great combination of kind of farreaching and really insightful conversation. So Ray Fernando, thanks so much for your time and thoughts today. — Thanks for having us. Great conversation.