Signals Through the Noise: Exposure, Not Ownership

[00:00:04] This is the Crypto Hipster Podcast. This is not a traditional interview show. These are perspective-driven conversations with founders, builders, and independent creators shaping what comes next.

[00:00:26] We go beyond headlines, beyond hype, and beyond price to explore ownership, freedom, and opportunity in the digital economy where builders talk freedom, not price.

[00:00:49] Everyone in this space talks about tokenizing assets. It's inevitable. It's got private credit. Everything is coming on-chain. The world's coming on-chain. But the real question is not, can you tokenize it? It's what happens when something goes wrong? Today, I have to talk about that with me. I have Alan Qureshi with BlackLake.

[00:01:12] You know, BlackLake's bringing traditional liquid assets on-chain. And I'll go to the first question. When people say tokenizing real-world assets, what are they getting wrong? Building a foundation of trust, of scalability, and understanding what problems are solved with tokenization, that's at the crux of it all.

[00:01:36] So when we say people are getting different things wrong, it's not right now. It's not about, hey, I'm going to tokenize an asset pool, and magically this huge stream of buyers is going to come in and buy those assets. That's not where we are today. There are some necessary steps that we all need to embrace in order to get to point B, which is where everybody wants to get.

[00:02:01] Okay. What I mean by that is an ability for end users to trust what they're buying, because that's really what we're looking to solve, is end users need to be able to trust and verify, to use that well-heeled phrase, the assets that they are buying.

[00:02:25] That's sort of the crux of the matter. What can I trust on-chain? How do I understand who's actually behind it or what's behind that asset? That's key. And that's something we're working on. It's not about what chain you're on. It's not about how you're accessing the tokens. It's not about how much liquidity you can provide or you can't provide.

[00:02:50] It's about how do I get access to the best possible framework as far as trust and verification capability. We say tokenizing. What part is actually new? And what part is just repackaged good old traditional finance with a blockchain wrapper?

[00:03:13] Unlike sort of regular way TradFi, where you have an originator who makes stuff for assets, loans, equities, etc. An investor on the other side with a series of sort of middlemen in the middle around broker dealers or third party review.

[00:03:37] tokenization is supposed to offer us better access scale and the ability to verify those assets without going through the litany of middlemen. tokenization is supposed to offer us better access to the tokenization. When I take an asset and funnel that asset into a tokenized pool. So today, a lot of people, to your point, are taking the veritable horse and painting stripes on it and calling it a zebra. That's not going to help. Right?

[00:04:05] We leverage the tokenization framework to drive scale, to drive trust and create rails such that all that friction in the middle isn't there anymore. So are you really, are you building a new market or just a faster version of the old one?

[00:04:27] There's a TradFi system and TradFi rails that is, you know, in many ways meant to extract a ton of juice from the middle. And that leaves you or I as investors or originators sort of picking up the pieces on other side.

[00:04:47] In other words, if we didn't have this sort of block in the middle of middlemen and we had ways for investors, whether it's retail, whether it's offshore, whether it's banks who want access to assets at scale.

[00:05:07] If we didn't have a way to funnel that product through tokens, we'd be left in a world back to TradFi where there's all of these economics being extracted from the middle. And on the front end is less good execution, higher borrowing rates, a much more stringent lending criteria, etc. So from a community perspective, we all benefit from tokenization.

[00:05:37] Let's go from days, weeks, months for a given asset or tokenized distribution, otherwise known in TradFi as prioritization. Let's make that into days or hours. That's where everybody wants to go. That's the gold standard. That's what we're looking to solve. Okay. So ownership verification in practice to you looks like what?

[00:06:01] I like to think of it as baking a cake, right? So if I manufacture an asset pool as part of that process, there's an underwriting process. Hey, somebody comes in, they want to get a loan or have some sort of participation. Out of that, there's an application process. That's on the front end. Investors on the other end, they want to purchase assets that have been verified and reviewed.

[00:06:28] And they want to trust that the process around making those assets, going back to the example we just talked about, is consistent, accurate and has a degree of quality associated with it. With regard to tokenization, verify the quality of the input assets. Let's make sure they're there. Let's make sure they're in order. Make sure they're complete. With regard to sort of the next two steps, I buy a token. What does it represent?

[00:06:54] How do I verify that that asset pool is in fact complete and it says what the token issuer says it is? And then more importantly, or perhaps just as importantly, how do I make sure that that asset is manufactured with regard to a set of guidelines that I as an investor can verify?

[00:07:16] We spent a lot of time in that space creating a set of cryptographic solutions to make it so any tokenized investor can purchase a tokenized asset, verify the payload and verify the eligibility using cryptographic third party means. And by the way, none of that entails sharing any NPII. I have to have access to the asset.

[00:07:43] I have to have access to the rules and I have a way now to verify as a third party investor that those assets and that asset token pool is exactly what I'm offering. So I want to ask about like tokenizing mortgages. Sure. Okay. If I own a token tied to a mortgage, what do I actually own?

[00:08:13] So if you own a token that's tied to a mortgage pool, I own a pool of a package of individual loans that have been assembled and have been to an SPV. So I have an ownership interest in a fractionalized pool of mortgage assets.

[00:08:32] So I've also heard that as an investor might as an investor might not necessarily want exposure to one geographic location, but they might want exposure to a whole broad range of different borrowers all over, say, a geographic area with different features of different FICO's, credit scores, different loan balances, etc. and leverage the benefit of diversification.

[00:08:59] So as an owner of that token, I have exposure in a pool of assets that have been manufactured in good delivery with a degree of trust, as I just alluded to, in a somewhat homogenized pool. And what I'll get is a reference pool summary that will define all of the key features that I, as an investor, care about. And I can participate in that pool and the underlying loans

[00:09:27] and have a fractionalized interest in that pool. That means if you have an interest in the loans, you have an ownership interest in the property. So that means that, remember, with a loan, you have ownership interest in the cash flows associated with the loans as they're paying, not necessarily the underlying real estate debt. We want to separate physical ownership of a house or houses

[00:09:55] from the loans that are tied to them. And more importantly, the cash flows, right? A lot of investors don't want to be licensed as a servicer or a mortgage originator, obviously, but they want the access to the juicy returns behind it. And that's the problem that this solves. So what you're redoing is you're really redoing the credit default swaps of 2008. No, that would be sort of a,

[00:10:25] that would be a different part of the overall credit spectrum, if that makes sense. Maybe not the same structure, but it's still abstraction on top of debt. And that's where things tend to break. Think of it as residential mortgage assets tied to a regular way,

[00:10:53] conventional loans, a regular way, home equity loans. And ultimately what we're doing is we're providing asset ownership capability to investors who don't have licenses, who don't have servicers, and do it in a very, very efficient and transparent way. God, okay. So you're not tied to the default risk. You're not tied to the asset. You just own the cash flows. You own the cash.

[00:11:23] Okay, I understand. So, so let's be, let's be precise here, right? You're not tokenizing ownership. You're tokenizing exposure. And that's a, that's a, that's a very different risk profile than what most people think. Okay. Yeah. So that's a really important distinction. I'm glad you brought that up. Yeah. I mean, I, I just wondering like what,

[00:11:50] who enforces the ownership when something in, when, and if something breaks. The, the SPV that issues, the tokens are effectively trustees that represent the, the token investors interests. And so their angle is to make sure that to the extent that there is a lack of performance from the servicer, that's the person collecting the payments and remitting the cash flows to the tokenized trust, or to the extent that they're the,

[00:12:21] so the servicers, the originators in terms of asset quality and asset surveillance, that's the job of the SPV. And the intent of the SPV is to ensure good delivery, timely payment of cash flows, and they have appointment rights. One of the servicers just decides they come into work one day and like, I'm out. There's a way to move those assets to another servicer. And so they have what's called servicer appointment rights.

[00:12:51] The system still depends on humans, intermediaries, and legal structures. So where exactly does, did blockchain remove the risk versus just moving it? So what would you say is the weakest point in your system right now? I think right now, the weakest point, and this goes back to where you,

[00:13:20] you asked the original question, particularly around tokenization, not just my system, every system is liquidity. It's all about the financing markets. If an investor can get liquidity, there's two different ways to get liquidity. One is I make an asset, I sell an asset, right? Distribution, right? I'm buying and selling. The alternative is sort of financing markets. I buy an asset,

[00:13:48] I put it on chain. I have investors who are washed with crypto cash, finance that asset, and create ostensibly an alternative way for me to finance assets that are attractive and have scale. I've addressed the potential for lack of liquidity in the regular way banking system. Because in 2008,

[00:14:16] we ran into a situation where a lot of risk was concentrated in just one sector of the economy. I think one of the great things around crypto is the fact that we can bring in multiple players and distribute risk very efficiently, but it's got to start with the financing market. So if I were to point to the problems to solve, we spent a lot of time on trusting assets, building the most efficient way to do so, but the other piece is liquidity. Yeah? Yeah. I'm with you so far.

[00:14:47] Awesome. I just had a real concern coming into this conversation. Okay. And I'll tell you what it is, and I'll ask you what you think about it. Sure. Say I bought a home. Okay. And say it's a house, and I say, you know, Jamil House is tokenized. Okay? Yeah. And Lazarus Group comes along and hacks the blockchain and takes the token away. Okay. Do they own my house? No. Absolutely not.

[00:15:16] Absolutely not. Right? Right? So if the chain is compromised and ownership still lives off chain, then what exactly did the blockchain remove? The how matters. In other words, what we spent a lot of time on is this concept of tokenizing cash flows, not tokenizing the actual real estate into the title of those assets.

[00:15:45] I share your concern on that. I think it's a problem that needs to be solved, but the how matters, and we've spent a lot of time thinking about it. Got it. So you're, you're, you're, so I'm going to talk about liquidity. I want to talk about liquidity versus illusion. Right? So you, is it, are you, what you're offering is real liquidity or is it just the appearance of liquidity? So look, depending upon how you, you look at it,

[00:16:15] liquidity can be a mine yours outcome. Meaning, hey, you sell me an asset and I show you pricing roughly around where we both think it should trade. And I might charge you a bid or an offer. Right? And we think about liquidity as being a high when the difference between what, where I'm willing to buy and sell your assets is very tight. Okay. As we know through various market cycles,

[00:16:43] those bid offers can go wide in, in periods of distress and vanish. And in periods of stability, they can tighten very well. Right? So what tokenization doesn't solve is the oscillation between sort of your traditional fear and greed in the market. What tokenization, from what I, I've, what I can see is, what it solves is the ability to create

[00:17:13] additional sources of liquidity. And that's important because if I think of sort of the world without tokenization, I think of TradFi rails where we're exactly back to the same sort of world, which is bid offer matters, market depth matters. But if it's just a single market, if I look at the enormity of crypto cash, sort of away from TradFi, I'm sort of missing out, aren't I? I'm saying you and I,

[00:17:42] with regard to being borrowers, where we want the best possible home loan rate or the best possible student loan rate or the best possible consumer loan rate, we don't benefit. In fact, we, we, we are harmed by a lack of liquidity. Right? So liquidity, as you, as you and I both point out, is a really good thing. Opening up the doors to as many potential investors and as many potential modalities, whether they're

[00:18:11] TradFi securitizations, whether they're ETFs or whether they're tokens, creates more liquidity, which is ostensibly a really good thing for users of, of debt, for users of equity. Follow me? Yep. Probably. So say, we had some issues in the past week with like DeFi markets, but say, you know, say overall the whole entire market is, is, is dramatically stressed. Right? And everybody wants out

[00:18:40] at the same time. Who's the buyer in that case? Who's the buyer of last resort in a, in a, um, a period of, uh, instability? Tokenization isn't going to solve that problem, but what tokenization is going to do is create more market depth. In other words, just TradFi, you know, the, uh, the participants in the ivory towers and, and, and some financial center sort of run the game.

[00:19:10] Right? What, what creates additional market depth, additional liquidity is the fact that ultimately retail investors who've created enormous depth and liquidity, um, uh, can ultimately join in a number of these assets that are frankly very hard for them to get access to. So, the good news is with that market depth creates, uh, deeper, more liquid markets.

[00:19:39] And I think it comes back to the fundamental sort of, uh, trading concept, Jamil, of no bad bonds, just bad prices. In other words, in periods of, uh, duress, savvy investors, retail or otherwise, uh, can step in and say, hey, uh, uh, X, Y, Z, uh, asset is, is yielding double digits. Gosh, I'd love to put that into my 401k. That's a stabilizing force, right? Um, that doesn't exist

[00:20:08] currently for a number of these assets. And, and, uh, rather than it being a government or a taxpayer having the ability for retail to participate in, in, in, uh, these periods of duress creates enormous stability and, uh, creates opportunities for that. Let me just make sure I understand you fully. Tokenization does not solve liquidity. It just delays the moment that really hits,

[00:20:37] but tokenization cause a deep, causes a deeper market so that moment is, is, takes longer to get at because that's the part people don't say out loud. More access doesn't mean more stability, right? It just means that, you know, more participants when things go wrong. So, when we're talking about that moment, right,

[00:21:07] if we look at some of the 2008, uh, GFC pools, they widened out a ton. A number of the investors that bought some of that product did really, really well. Unfortunately, a number of retail investors, a number of, uh, non-sort of clued-in investors were able, uh, uh, to participate. Wouldn't it have been great for that collection that,

[00:21:37] you know, that class of investors that had been essentially frozen out because they didn't have the inside when spreads widened? Wouldn't it have been great for them to get access? So, it's, it's, look, in a functioning market, my expectation is that, uh, prices will settle at where, uh, investors of different types are willing to, uh, buy or sell, right? That's ultimately the, the fundamental

[00:22:06] sort of, um, uh, way that, that, that a market works in a stable market. In an unstable market, we see, uh, spreads widened and we see duress in financial assets. Um, is it always the case that, um, that, uh, that asset, uh, asset price is correct? No, that's not the case, but that's what makes, you know, uh, to, to borrow a, uh, a tired phrase, that's what makes a market,

[00:22:36] right? And that oscillation between fear and greed. That makes sense. So, what would you say was the biggest constraint you face building this and, and how have you made, how have you battle tested it? Yeah, look, I think it comes back to the fact that, um, there are people right now, Jamil, who are literally, uh, sort of calling tokenization, tokenization, but they're literally taking their assets, putting them into an SPV, tokenizing and putting them back on their balance sheet.

[00:23:05] That's great. I don't find that interesting, right? So, we're all about creating real financing and real resale opportunities with a vision on sort of the long run while also providing and supporting some of the key problems that need to be solved. So, I'll give you a great example. In, uh, a number of, uh, residential mortgage asset classes, as I said, you or I can't get access to it. Or, investors, if they want to have access to those assets,

[00:23:34] they have to pay millions of dollars in legal to get access to those same assets. Through tokenization, we can create standardized ways for investors to access those assets, any kind of investor, that breaks down those barriers. So, tokenization, one, right out of the gate, creates sort of this standardized way to get access to various assets, to get, uh, a way to select different pools they want to participate in, get the benefit of diversification by, uh,

[00:24:04] buying pools with many different borrowers behind them. And that creates a huge opportunity for, um, for investors that otherwise wouldn't have access to the same assets. On the other hand, people who make stuff, I'll call them originators, need liquidity. They need a way to, uh, to offer their assets. With all of the frictions and middlemen in the, in the middle, uh, Jamil, um, their pricing

[00:24:33] is not nearly where it could be, right? What does that mean for you or I? Uh, if we, if we're on the other side as somebody who wants to take a student loan out or a home loan out or, uh, you know, do that remodel, that means that we're not getting the best possible rates, right? So, there are a number of key problems to solve. And by the way, that's not just Al's problem or Al's company's problem. Uh, that's sort of a problem for the community. How do we make these markets, uh, uh, as,

[00:25:03] as close to frictionless as possible? And that's where we're focused. So I would think that you have been testing the friction. Um, have, have you modeled, have you modeled failure and friction? And if so, you know, what broke when you, when you try to scale it and model it? A lot of what we've been focused on, uh, in sort of our Trad5 business, and that's where we really sort of cut our teeth is around asset manufacturer. In other words, how do I make sure a loan is complete?

[00:25:32] A loan file is complete. Meaning, uh, somebody goes in, uh, uh, asks for, uh, access to residential credit, fills out an application. Um, there might be a set of guidelines around how that loan is manufactured. Uh, once that loan package is created, remember, it used to be paper, all paper. Now it's somewhat digital, but it still needs to be verified, right? So to your question, a lot of what we focused on is making sure we have good delivery. And we've seen it

[00:26:02] ourselves through our different trading platforms and conduits and asset aggregation engines, where an originator who comes onto our platform might have a defect rate of 20%. And as they use our technology, their, uh, uh, quality goes up dramatically because they can see the errors they get, they're getting real-time feedback through our technology and they're starting to make better quality loans. That's a direct benefit of leveraging technology, integrating solutions

[00:26:31] around, uh, obviously OCR, rule-based engineering and, uh, clarity around asset manufacture that provides feedback. Before, before, like, before we get into vision, I want to stay on tension for a second because all of this works as long as every layer holds.

[00:27:02] Like, why do you feel that what you're building a black light must exist? Why does it need to exist? And what's your vision for why it for the future? Homeowners, students, um, uh, people who are looking to create value in the economy, find a home, get that auto loan, um, they're all consumers of technology

[00:27:31] that we engage in from day to day. The, the world is full of friction and, uh, sort of a web two framework in terms of creating real efficiency and real clarity. But there are things that are missing. And the things that are missing in sort of the regular TradFi world is the fact that if I want to, if I want to buy a loan as an investor, right, I'm passing through a price to an originator who's making

[00:28:00] you or I a loan. So, um, that is a good thing that, um, if you or I want the best possible price or that person who wants to, uh, buy an auto loan, um, gets the best possible rate. If we can solve a number of the key trust problems for an investor, make that process more streamlined, make it more efficient, there'll be an uptick in pricing. And what that fundamentally means is lower interest rates, lower borrowing costs

[00:28:30] for you and I. So the system benefits just naturally in terms of these activities. The, the, the other piece of this is that investor, a lot of the times isn't necessarily, you know, um, as I said, the, uh, the, the, the high roller, uh, uh, fat cat, they might represent a 401k, uh, or an RRSP in, um, that's tied to, to somebody's, uh, retirement account, right?

[00:29:00] Um, their fiduciary on behalf of that retiree or URI in terms of where we're doling our money, uh, every couple of weeks in terms of our 401k. So we trust these fiduciaries to do the best job they can to verify the assets, to review the assets and buy them in the most efficient way possible. So the system on both sides benefits from more streamlined, more efficient solutions and it also benefits

[00:29:30] from uh, greater liquidity. That's been a subject of this conversation right from the get go. And I think tokenization will get there. You talked about vision. Uh, I think it gets us there from the point of view of creating real scale, right? It's got to start with financing, right? Because if we look at any market, the deeper the financing markets, the deeper the fundamental market is. Why is that? Without leverage, uh, investor returns are otherwise lower. Where does the leverage come from? It comes from financing

[00:30:00] markets. So as we build out and roll out financing markets, we create opportunities to drive leverage, which causes spread compression, which causes better interest rates and passes that through the system. Remember, at the end of the day, um, it's not like there's a tokenization market and there's a tradfire market. it's all the same market. So creating a way to drive liquidity, uh, from a global market,

[00:30:29] uh, context is a good thing. Creator, creating, um, uh, better pricing and, uh, uh, more stable outcomes is a good thing because it's all one system. Make sense? Makes sense. So at the end of the day, you are looking to transform the global finance market so that everybody, not just crypto people, but everybody outside of crypto benefits. You got it. I think you nailed it. Makes sense.

[00:31:00] Now, the question is what if, what if it doesn't work and what's the cost if it doesn't work? Yeah, so the cost, when you say it doesn't work, the way I look at it is, um, is a financing market that's incomplete. In other words, uh, uh, a customer, uh, originator, um, who makes a bunch of loans, makes them and can't get, um, uh, financing execution, uh,

[00:31:30] and, and, and, and therefore has to go the TradFi route. Nothing venture, nothing gain in that state of the world. Yeah? And, and look, from, from the point of how we work, we work on a, on a, on a, on a success fee basis. In other words, we build that technology, we deliver to our customers, and we really partner with them on the success of, uh, of, uh, their financing, their token resale, and their distribution. So, when we talk about failure, we talk about

[00:32:00] the fact that we're partners, certainly in my business, we're partners with our customers in terms of getting them the best possible execution. If the execution's not there, in your example, then we all sort of suffer. And so we're all aligned to make sure that we drive the best possible outcome for everybody. And as we talked about, driving great execution for an originator means lower borrowing rates. Uh, driving best execution for investor means a trusted asset at scale

[00:32:30] with diversification, uh, that solves a number of sort of, uh, access barriers that exist in sort of the world, but create a more streamlined set of outcomes. Got it. I want to, I want to ask, I have one last question really, and I want to figure out how to fit our phrases properly. So a lot of people today, you know, they, they have misconceptions about tokenized assets, how they work, what they do, you know, some of their thoughts are

[00:32:59] completely wrong. So what's the, what's the one takeaway you think people should know about tokenized assets that they are currently think is wrong that, you know, to, to fix, to help them understand better? Yeah, look, I think you pointed out a number of sort of, uh, what ifs, right? Uh, one around the fact that, hey, if, if somebody tokenizes my, my home, uh, home loan, uh, can some, uh, you know, uh, crypto pirate

[00:33:29] steal my house? That's not a thing, right? Um, the whole intent of tokenization is to create, uh, stable, trusted, streamlined rails for end investors to gather assets, breaking down barriers of, uh, investor participation, and then for originators to better liquidity. Those are the problems that are solved by tokenization if done correctly. And, uh, for end users,

[00:33:59] the person in the 401k or, uh, investing, uh, in, in tokenized assets or the person who's looking to borrow a home loan, the, the, the system is trending towards more efficient, trusted, and scalable access to assets on both sides. Money on the one side, assets on the other. So this, this system works as long as a chain holds, right? The legal layer holds,

[00:34:29] the services perform, and liquidity is there when you need it. that's a lot of things that have to go right.